<PAGE>
As filed with the Securities and Exchange Commission on August 22, 1997
Registration No. 333-33453
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PHYSICIAN SALES & SERVICE, INC.
(Exact name of registrant as specified in its charter)
Florida 5047 59-2280364
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of incorporation) Classification Code Number) Identification No.)
4345 Southpoint Boulevard
Jacksonville, Florida 32216
(904) 332-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
PATRICK C. KELLY
Chairman of the Board and
Chief Executive Officer
PHYSICIAN SALES & SERVICE, INC.
4345 Southpoint Boulevard
Jacksonville, Florida 32216
(904) 332-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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<S> <C> <C>
Copies to:
J. VAUGHAN CURTIS, ESQ. FRED ELEFANT, ESQ. JEROME F. CONNELL, JR., ESQ.
KIMBERLY A. KNIGHT, ESQ. General Counsel Kilpatrick Stockton LLP
Alston & Bird Physician Sales & Service, Inc. 1100 Peachtree Street
One Atlantic Center 1650 Prudential Drive Suite 2800
1201 West Peachtree Street Suite 105 Atlanta, Georgia 30309-4530
Atlanta, Georgia 30309-3424 Jacksonville, Florida 32207 (404) 815-6500
(404) 881-7000 (904) 398-2277
</TABLE>
Approximate date of commencement of proposed sale to the public: At the
effective time of the merger of S&W X-Ray, Inc. with and into a wholly-owned
subsidiary of the Registrant, as described in the Proxy Statement-Prospectus
included herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
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CALCULATION OF REGISTRATION FEE
===========================================================================================================================
Title of each class Proposed maximum Proposed maximum Amount of
of securities Amount to be offering price aggregate offering registration
to be registered (1) registered (2) per share (3) price (3) fee (3)
- ---------------------------------------------------------------------------------------------------------------------------
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Common Stock 2,123,558 shares $19.25 $5,073,973 $1,538
===========================================================================================================================
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(1) This Registration Statement relates to the securities of the Registrant
issuable to holders of capital stock of S&W X-Ray, Inc., a New York
corporation ("S&W"), in the proposed merger of S&W with and into a wholly
owned subsidiary of the Registrant (the "Merger").
(2) The amount of common stock of the Registrant, par value $.01 per share
("PSS Common Stock") to be registered has been determined on the basis of
the maximum aggregate number of shares of PSS Common Stock that may be
issued in connection with the Merger.
(3) Pursuant to Rule 457(f)(2), the registration fee was computed on the basis
of the aggregate book value of the common stock of S&W, par value $.04 per
share ("S&W Common Stock") to be exchanged in the Merger.
----------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
S&W X-RAY, INC.
Cornerstone Center
2300 Buffalo Road
Rochester, New York 14824
August 25, 1997
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders
("Special Meeting") of S&W X-Ray, Inc. ("S&W") to be held at S&W's executive
office, located at Cornerstone Center, 2300 Buffalo Road, Rochester, New York
14824, at 10:00 a.m., Eastern Standard Time, on September 5, 1997.
At this important meeting, you will be asked to consider and vote upon
the approval of the Amended and Restated Agreement and Plan of Merger dated
August 22, 1997 (the "Merger Agreement"), which provides for the merger of S&W
with and into an indirect wholly owned subsidiary of Physician Sales & Service,
Inc. ("PSS") which operates the diagnostic and imaging division of PSS. If the
proposed merger (the "Merger") is consummated, each outstanding share of common
stock of S&W, $.04 par value per share ("S&W Common Stock") and each share of
S&W Common Stock to be issued pursuant to the S&W Supplemental Executive
Retirement Plan (other than shares held by stockholders who perfect their
dissenter's rights) will be converted into and exchanged for the right to
receive that number of shares of PSS Common Stock and the contingent right to
receive that number of shares of common stock of PSS, $.01 par value per share
("PSS Common Stock"), which combined are equal to (i) $26,000,000, subject to
adjustment as provided in the Merger Agreement, (ii) divided by the number of
shares of S&W Common Stock outstanding on a fully-diluted basis (the "Common
Stock Per Share Purchase Price"), (iii) divided by the Base Period Trading Price
(the "Common Stock Exchange Ratio"). Subject to an upper limit of $14.9644 and a
lower limit of $12.2436, the "Base Period Trading Price" is the average of the
daily closing prices for the shares of PSS Common Stock for the ten (10)
consecutive trading days on which such shares are actually traded as
over-the-counter securities and quoted on the Nasdaq National Market ending at
the close of trading on the second trading day immediately prior to the date the
Merger becomes effective.
As part of the same proposal, you will also be asked to consider and
vote upon the approval of an Escrow Agreement, and the appointment of
stockholder representatives pursuant to such Escrow Agreement.
The affirmative vote of the holders of a majority of the votes entitled
to be cast by the holders of record of S&W Common Stock is required for approval
of the Merger Agreement, the Escrow Agreement and the appointment of the
stockholder representatives. Holders of approximately 66% of the outstanding
votes represented by the S&W Common Stock have agreed to vote in favor of the
Merger Agreement, the Escrow Agreement and the appointment of the stockholder
representatives, and, therefore, approval of such matters is assured.
Enclosed are the (i) Notice of Special Meeting, (ii) Proxy
Statement-Prospectus, and (iii) Proxy for the Special Meeting. The Proxy
Statement-Prospectus describes in more detail the Merger Agreement and the
proposed Merger, including a description of the conditions to consummation of
the Merger and the effects of the Merger on the rights of S&W stockholders. It
also describes the Escrow Agreement, the appointment of the stockholder
representatives, and financial and other information pertaining to PSS and S&W.
Please give this information your careful attention.
The Board of Directors has unanimously approved and adopted the Merger
Agreement, the Escrow Agreement and consummation of the transactions
contemplated therein, including the appointment of the stockholder
representatives, and unanimously recommends that you vote FOR approval of the
Merger Agreement, the Escrow Agreement and consummation of the transactions
contemplated therein, including the appointment of the stockholder
representatives.
In view of the importance of the action to be taken, we urge you to
complete, sign, and date the enclosed Proxy and to return it promptly in the
enclosed envelope, whether or not you plan to attend the Special Meeting (if you
attend the Special Meeting, you may vote in person, even if you previously
returned your Proxy).
We look forward to seeing you at the Special Meeting.
Sincerely,
Joseph E. Miller, Jr.
President
<PAGE>
S&W X-RAY, INC.
Cornerstone Center
Rochester, New York 14824
------------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held at 10:00 a.m. on September 5, 1997
------------------------------------------------
August 25, 1997
To the Stockholders of S&W X-Ray, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders ("Special
Meeting") of S&W X-Ray, Inc. ("S&W") will be held at S&W's executive office,
located at Cornerstone Center, 2300 Buffalo Road, Rochester, New York 14824, on
September 5, 1997, at 10:00 a.m., Eastern Standard Time, for the following
purposes:
1. THE MERGER. To consider and vote upon a proposal to: (i) approve the
Amended and Restated Agreement and Plan of Merger, dated as of August
22, 1997 (the "Merger Agreement"), by and among S&W, Physician Sales &
Service, Inc. ("PSS"), Diagnostic Imaging, Inc., a wholly owned
subsidiary of PSS ("DI"), and PSS Merger Corp., a wholly owned
subsidiary of DI ("Merger Corp."), pursuant to which, among other
matters, (a) Merger Corp. will merge with and into S&W (the "Merger")
and (b) the outstanding shares of common stock of S&W, $.04 par value
per share ("S&W Common Stock"), and shares of S&W Common Stock to be
issued pursuant to the S&W Supplemental Executive Retirement Plan will
be converted into the right to receive shares of common stock of PSS,
$.01 par value per share, and the contingent right to receive shares of
common stock of PSS all on the terms set forth in the Merger Agreement;
(ii) approve the form of Escrow Agreement (the "Escrow Agreement") by
and between PSS and the stockholder representatives set forth therein;
and (iii) appoint Joseph E. Miller, Jr., Bruce P. Ashby and the S&W
X-Ray, Inc. Employee Stock Ownership Plan and Trust as the "Stockholder
Representatives" in accordance with the Escrow Agreement, all as more
fully described in the accompanying Proxy Statement-Prospectus. Copies
of the Merger Agreement and the Escrow Agreement are set forth in Annex
A and Annex B, respectively, to the accompanying Proxy Statement-
Prospectus and are hereby incorporated by reference herein.
2. OTHER BUSINESS. To transact such other business as may properly come
before the Special Meeting or any adjournments or postponements of the
Special Meeting.
Only stockholders of record at the close of business on August 10,
1997, are entitled to receive notice of and to vote at the Special Meeting or
any adjournments or postponements thereof. Approval of the Merger Agreement, the
Escrow Agreement and the consummation of the transactions contemplated thereby,
including the appointment of Joseph E. Miller, Jr., Bruce P. Ashby and the S&W
X-Ray, Inc. Employee Stock Ownership Trust as the Stockholder Representatives,
requires the affirmative vote of the holders of a majority of the shares of S&W
Common Stock entitled to vote at the Special Meeting, voting as a single class.
Holders of approximately 66% of the outstanding votes represented by shares of
S&W Common Stock have agreed to vote in favor of the Merger Agreement, the
Escrow Agreement and the consummation of the transactions contemplated thereby,
including the appointment of the Stockholder Representatives, and, therefore,
approval of such matters is assured.
THE BOARD OF DIRECTORS OF S&W UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE FOR APPROVAL OF THE MERGER AGREEMENT, THE ESCROW AGREEMENT AND CONSUMMATION
OF THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE APPOINTMENT OF THE
STOCKHOLDER REPRESENTATIVES.
Each stockholder has the right to dissent from the Merger Agreement and
demand payment of the fair value of his shares if the Merger is consummated. The
right of any stockholder to receive such payment is contingent upon strict
compliance with the requirements of Sections 623 and 910 of the New York
Business Corporation Law. The full text of Sections 623 and 910 is set forth in
ANNEX C to the Proxy Statement-Prospectus and is incorporated herein by
reference. For a summary of the requirements of Sections 623 and 910, see "THE
MERGER--Dissenters' Rights" in the accompanying Proxy Statement-Prospectus.
BY ORDER OF THE BOARD OF DIRECTORS
Joseph E. Miller, Jr.
President
<PAGE>
Proxy Statement-Prospectus
PROXY STATEMENT
OF
S&W X-RAY, INC.
Special Meeting of Stockholders to be Held
on September 5, 1997
------------------
PROSPECTUS
OF
PHYSICIAN SALES & SERVICE, INC.
Common Stock
Par Value $.01 Per Share
This Prospectus relates to up to 2,123,558 shares of the Common Stock,
par value $.01 per share (the "PSS Common Stock"), of Physician Sales & Service,
Inc. ("PSS" or the "Company") issuable to the stockholders of S&W X-Ray, Inc.
("S&W") upon consummation of the Merger (as defined below). Such number of
shares represents the maximum number of shares that may be issued, assuming that
the Base Period Trading Price (as defined below) is equal to or less than
$12.2436. This Prospectus also serves as the Proxy Statement of S&W for its
special meeting of stockholders to be held on September 5, 1997, and any
adjournments and postponements thereof (the "Special Meeting"). See "GENERAL
INFORMATION."
--------------------------
This Proxy Statement-Prospectus describes the terms of a proposed
business combination between PSS and S&W, pursuant to which PSS will acquire S&W
by means of the merger (the "Merger") of PSS Merger Corp., a wholly owned
indirect subsidiary of PSS ("Merger Corp.") with and into S&W, with S&W being
the surviving corporation. After the Merger, the combined operations of DI and
S&W are expected to be conducted with DI as a wholly-owned subsidiary of PSS and
S&W as a wholly owned subsidiary of DI. The Merger will be effective pursuant to
the terms and conditions of the Amended and Restated Agreement and Plan of
Merger dated August 22, 1997, among PSS, DI and S&W (the "Merger Agreement").
The Merger Agreement is attached to this Proxy Statement-Prospectus as ANNEX A
and is incorporated herein by reference.
Upon consummation of the Merger, except as described herein, each
outstanding share of Common Stock of S&W, par value $.04 per share (the "S&W
Common Stock") and each share of S&W Common Stock to be issued pursuant to the
S&W Supplemental Executive Retirement Plan will be canceled and the holders of
such S&W Common Stock will be entitled to receive a number of shares of PSS
Common Stock for each share of S&W Common Stock so held. The number of shares of
PSS Common Stock to be received by each such holder of S&W Common Stock will be
determined as set forth in the Merger Agreement. See "MERGER AGREEMENT Exchange
Ratio."
This Proxy Statement-Prospectus and the form of Proxy are first being
mailed to stockholders of S&W on or about August 25, 1997.
PSS Common Stock is traded in the over-the-counter market and is quoted
on the Nasdaq National Market System. On August 12, 1997, the last trading day
prior to public announcement that S&W and PSS had executed a merger agreement,
the last reported sale price per share of PSS Common Stock on the Nasdaq
National Market was $18.125. On August 21, 1997, the last reported sale price
per share of PSS Common Stock on the Nasdaq National Market was $17.75.
The PSS Common Stock offered hereby involves a high degree of risk. See
"RISK FACTORS," beginning on page 16.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------
The date of this Proxy Statement-Prospectus is August 25, 1997
<PAGE>
AVAILABLE INFORMATION
This Proxy Statement-Prospectus does not contain all of the information
set forth in the Registration Statement on Form S-4, of which this Proxy
Statement-Prospectus is a part, and exhibits thereto (together with any
amendments thereto, the "Registration Statement"), which has been filed with the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended, and the rules and regulations thereunder (the "Securities Act"),
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC and to which portions reference is hereby made for
further information. Statements contained in this Proxy Statement-Prospectus
concerning the provisions of certain documents filed as exhibits to the
Registration Statement are necessarily brief descriptions thereof, and are not
necessarily complete and each such statement is qualified in its entirety by
reference to the full text of such document.
PSS is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the SEC relating to its business, financial statements and other matters.
Copies of the Registration Statement, as well as such reports, proxy
statements and other information of PSS, may be inspected, without charge, at
the principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and should be available at the
Commission's Regional Offices at Seven World Trade Center, New York, New York
10007, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material also may be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov. PSS' Common Stock is traded on the Nasdaq National Market
System and such reports, proxy statements and other information may also be
inspected at the office of the National Association of Securities Dealers, Inc.,
1735 K Street, N.W., Washington, D.C. 20006.
All information contained in this Proxy Statement-Prospectus with
respect to PSS was supplied by PSS, and all information contained in this Proxy
Statement-Prospectus with respect to S&W was supplied by S&W.
No person has been authorized to give any information or to make any
representation other than those contained in this Proxy Statement-Prospectus
and, if given or made, such information or representation should not be relied
upon as having been authorized by PSS or S&W. Neither the delivery of this Proxy
Statement-Prospectus nor any distribution of the securities to which this Proxy
Statement-Prospectus relates shall, under any circumstances, create any
implication that there has been no change in the affairs of PSS, S&W, or any of
their respective subsidiaries since the date hereof or that the information
contained herein is correct as of any time subsequent to its date. This Proxy
Statement-Prospectus does not constitute an offer to sell, or a solicitation of
an offer to purchase, any securities other than the securities to which it
relates or an offer to sell or a solicitation of an offer to purchase the
securities offered by this Proxy Statement-Prospectus in any jurisdiction in
which such an offer or solicitation is not lawful.
SPECIAL CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS
All statements contained herein that are not historical facts,
including, but not limited to, statements regarding anticipated growth in
revenue, gross margins and earnings, statements regarding PSS's current business
strategy, PSS's projected sources and uses of cash, and PSS's plans for future
development and operations, are based upon current expectations. These
statements are forward-looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause results to differ materially are the following: the availability of
sufficient capital to finance PSS's business plans on terms satisfactory to it;
competitive factors; changes in labor, equipment and capital costs; changes in
regulations affecting PSS's business; future acquisitions or strategic
partnerships; general business and economic conditions; and other factors
described from time to time in PSS's reports filed with the SEC. PSS wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
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<PAGE>
TABLE OF CONTENTS
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AVAILABLE INFORMATION..................................................................................... 2
SPECIAL CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS................................................ 2
SUMMARY................................................................................................... 6
Parties to the Merger................................................................................ 6
The Special Meeting.................................................................................. 6
The Merger........................................................................................... 7
Market and Market Price.............................................................................. 12
Dividends............................................................................................ 13
Comparative Per Share Information.................................................................... 13
Summary Unaudited Pro Forma Condensed Combined Financial Information of PSS and S&W.................. 15
RISK FACTORS.............................................................................................. 16
Integration of Operations............................................................................ 16
Acquisition Strategy................................................................................. 16
Opening of Start-Up Service Centers.................................................................. 16
Expansion into New Lines of Business................................................................. 16
Management of International Business................................................................. 17
Dependence on Vendor Relationships................................................................... 17
Dependence on Key Management......................................................................... 17
Dependence on Sales Representatives and Service Specialists.......................................... 17
Imaging Business Technology.......................................................................... 18
Regulation of and Change in Practice of Medicine..................................................... 18
Dependence on Third-Party Reimbursement.............................................................. 18
Two-Tier Pricing..................................................................................... 18
Competition.......................................................................................... 19
Quarterly Fluctuations in Operating Results.......................................................... 19
Liability Exposure................................................................................... 19
Reliance on Data Processing.......................................................................... 19
Environmental Liabilities and Regulations............................................................ 20
Anti-Takeover Provisions; Possible Issuance of Preferred Stock....................................... 20
GENERAL INFORMATION....................................................................................... 21
Special Meeting...................................................................................... 21
Record Date and Quorum............................................................................... 21
Solicitation of Proxies.............................................................................. 21
Voting and Revocability of Proxies................................................................... 21
Vote Required........................................................................................ 22
THE MERGER................................................................................................ 23
General.............................................................................................. 23
Background of the Merger............................................................................. 23
Reasons for the Merger............................................................................... 25
Exchange Ratio....................................................................................... 25
Escrow Agreement..................................................................................... 26
Covenants Not to Compete............................................................................. 27
Fractional Shares.................................................................................... 27
Effective Time....................................................................................... 27
Distribution of PSS Certificates..................................................................... 27
Certain Federal Income Tax Consequences.............................................................. 28
Management and Operations After the Merger........................................................... 29
Interests of Certain Persons in the Merger........................................................... 30
Conditions to Consummation........................................................................... 30
Amendment, Waiver and Termination.................................................................... 31
</TABLE>
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Page
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Conduct of Business Pending the Merger............................................................... 31
Stockholders Agreements.............................................................................. 32
Expenses and Fees.................................................................................... 33
Accounting Treatment................................................................................. 33
Resales of PSS Common Stock.......................................................................... 33
Dissenters' Rights................................................................................... 34
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............................................... 36
SELECTED FINANCIAL DATA OF PSS............................................................................ 45
PSS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 46
Company Overview..................................................................................... 46
Recent Acquisitions.................................................................................. 46
Company Growth....................................................................................... 46
Acquisition Program.................................................................................. 48
Sales Mix............................................................................................ 49
Exclusive Distribution Agreements.................................................................... 50
Other Marketing Programs............................................................................. 50
Imaging Business..................................................................................... 50
International Business............................................................................... 51
Results of Operations................................................................................ 51
Three Months Ended June 30, 1997 Versus Three Months Ended June 30, 1996............................. 51
Fiscal Year Ended March 28 1997 Versus Fiscal Year Ended March 29, 1996.............................. 53
Fiscal Year Ended March 29 1996 Versus Fiscal Year Ended March 30, 1995.............................. 55
Quarterly Results of Operations (Unaudited).......................................................... 57
Liquidity and Capital Resources...................................................................... 57
Inflation and General Economic Conditions............................................................ 59
BUSINESS OF PSS........................................................................................... 60
General.............................................................................................. 60
Industry............................................................................................. 60
Company Strategy..................................................................................... 61
Sales and Distribution............................................................................... 62
Products............................................................................................. 63
Recruitment and Development.......................................................................... 64
Information Systems.................................................................................. 65
Purchasing and Vendor Relationships.................................................................. 66
Acquisitions......................................................................................... 67
Properties........................................................................................... 68
Competition.......................................................................................... 70
Regulatory Matters................................................................................... 70
Legal Proceedings.................................................................................... 71
MANAGEMENT OF PSS......................................................................................... 72
Directors and Executive Officers..................................................................... 72
Compensation Committee Interlocks and Insider Participation.......................................... 74
Executive Compensation............................................................................... 74
Option Grants in Fiscal Year 1997.................................................................... 76
Option Exercises and Holdings as of March 28, 1997................................................... 76
Employment Agreements................................................................................ 77
PSS CERTAIN TRANSACTIONS.................................................................................. 78
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PSS..................................... 79
SELECTED FINANCIAL DATA OF S&W............................................................................ 80
S&W MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 81
General.............................................................................................. 81
</TABLE>
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Page
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Results of Operations................................................................................ 81
Three Months Ended June 30, 1997 versus June 30, 1996................................................ 81
Fiscal Year Ended March 31, 1997 versus March 31, 1996............................................... 82
Fiscal Year Ended March 31, 1996 versus March 31, 1995............................................... 82
Liquidity and Capital Resources...................................................................... 83
BUSINESS OF S&W........................................................................................... 85
General.............................................................................................. 85
Consumables/Accessories and Sales.................................................................... 85
Imaging Equipment Sales.............................................................................. 86
Multi-Vendor Imaging Equipment Service............................................................... 87
Competition.......................................................................................... 87
Facilities........................................................................................... 87
Employees............................................................................................ 88
Insurance............................................................................................ 88
Legal Proceedings.................................................................................... 88
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF S&W..................................... 89
DESCRIPTION OF PSS CAPITAL STOCK.......................................................................... 90
PSS Common Stock..................................................................................... 90
PSS Preferred Stock.................................................................................. 90
Certain Articles of Incorporation and Bylaw Provisions of PSS........................................ 90
Transfer Agent and Registrar......................................................................... 93
CERTAIN DIFFERENCES IN THE RIGHTS OF PSS AND S&W STOCKHOLDERS............................................. 93
Authorized Capital Stock............................................................................. 93
Size and Classification of Board of Directors........................................................ 94
Amendment of Articles or Certificate of Incorporation and Bylaws..................................... 94
Special Meetings of Stockholders..................................................................... 94
Removal of Directors................................................................................. 94
Director Liability................................................................................... 95
Indemnification...................................................................................... 95
Dissenters' Rights................................................................................... 96
Dividends and Other Distributions.................................................................... 96
Mergers and Consolidations........................................................................... 97
Fair Price Provision................................................................................. 97
Control Share Acquisition Statute.................................................................... 97
EXPERTS................................................................................................... 98
LEGAL MATTERS............................................................................................. 98
OTHER MATTERS............................................................................................. 98
INDEX TO PSS CONSOLIDATED FINANCIAL STATEMENTS............................................................ 99
INDEX TO S&W FINANCIAL STATEMENTS......................................................................... 130
ANNEXES:
ANNEX A - Amended and Restated Agreement and Plan of Merger
ANNEX B - Form of Escrow Agreement
ANNEX C - Sections 623 and 910 of the New York Business Corporation Law Relating to Appraisal Rights
</TABLE>
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<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement-Prospectus. This summary is not intended to be a
complete description of the matters covered in this Proxy Statement-Prospectus
and is subject to and qualified in its entirety by reference to the more
detailed information and consolidated financial statements contained elsewhere
in this Proxy Statement-Prospectus, including the Annexes hereto. Stockholders
are urged to read carefully the entire Proxy Statement-Prospectus, including the
Annexes. As used in this Proxy Statement-Prospectus, the terms "PSS" and "S&W"
refer to such corporations, respectively, and where the context requires, such
corporations and their respective subsidiaries. In addition, except where
otherwise indicated, all information in this Proxy Statement-Prospectus assumes
(i) no adjustment to the Aggregate Purchase Price (as defined below) and (ii)
the distribution of all shares of PSS Common Stock subject to the Escrow
Agreement.
Parties to the Merger
PSS. PSS is a 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, serving over 103,000 physician offices
(representing approximately 54% of all physician offices) in all 50 states (the
"Physician Supply Business"). The Company is the second-largest distributor of
imaging supplies and equipment in the United States, serving over 8,000 customer
sites in 17 states (the "Imaging Business"). PSS also distributes medical
supplies and equipment to hospitals and physician offices in five European
countries (the "International Business").
For the fiscal year ended March 28, 1997, PSS reported net revenues of
approximately $691.0 million and net income of approximately $4.4 million. As of
March 28, 1997, PSS had total assets of approximately $298.3 million.
PSS was incorporated under the laws of the State of Florida in April
1983. The principal executive offices of PSS are located at 4345 Southpoint
Boulevard, Jacksonville, Florida 32216, and its telephone number is (904)
332-3000. For additional information regarding PSS and its business, see
"Selected Financial Data," "RISK FACTORS," "PSS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS OF PSS,"
"MANAGEMENT OF PSS," and "FINANCIAL STATEMENTS."
S&W. S&W was incorporated under the laws of the State of New York in
April 1973. S&W's principal executive offices are located at Cornerstone Center,
2300 Buffalo Road, Rochester, New York 14824, and its telephone number is (716)
429-5480. For additional information regarding S&W and its business, see
"Selected Financial Data," "S&W MANAGEMENT'S DISCUSSION AND ANALYSIS," "BUSINESS
OF S&W," "MANAGEMENT OF S&W" and "FINANCIAL STATEMENTS."
DI. DI is a wholly owned subsidiary of PSS which operates the
diagnostic imaging and x-ray equipment division of PSS. DI's principal executive
offices are located at 4345 Southpoint Boulevard, Jacksonville, Florida 32216,
and its telephone number is (904) 332-3000.
Merger Corp. Merger Corp. was organized by PSS and DI solely for the
purpose of facilitating the Merger. Pursuant to the Merger Agreement, Merger
Corp. will merge with and into S&W, with S&W remaining as the surviving
corporation and a wholly owned subsidiary of DI. Merger Corp.'s principal
executive offices are located at 4345 Southpoint Boulevard, Jacksonville,
Florida 32216, and its telephone number is (904) 332-3000. See "THE MERGER."
The Special Meeting
The Special Meeting of S&W's stockholders to consider and vote on the
Merger Agreement (the "S&W Special Meeting") will be held at 10:00 a.m., Eastern
Standard Time, at S&W's principal executive office, located at Cornerstone
Center, 2300 Buffalo Road, Rochester, New York, 14824 on September 5, 1997. At
the S&W
- 6 -
<PAGE>
Special Meeting, S&W's stockholders will consider and vote upon approval of the
Merger Agreement, the Escrow Agreement and the consummation of the transactions
contemplated therein, including the appointment of the Stockholder
Representatives. Only holders of record of S&W Common Stock at the close of
business on August 10, 1997 (the "S&W Record Date"), will be entitled to notice
of and to vote at the S&W Special Meeting. As of such date, there were 259,574
shares of S&W Common Stock issued and outstanding which were entitled to be
voted at the S&W Special Meeting and 4,009 shares of S&W Common Stock to be
issued on the Closing Date pursuant to the S&W Supplemental Executive Retirement
Plan. Holders of approximately 66% of the outstanding votes represented by the
S&W Common Stock have agreed to vote in favor of the Merger Agreement, the
Escrow Agreement and the consummation of the transactions contemplated therein,
including the appointment of the Stockholder Representatives, and therefore
approval of such matters is assured. For additional information with respect to
the Special Meeting, including the S&W Record Date and votes required for
approval, see "GENERAL INFORMATION."
The Merger
General. The Merger Agreement provides that Merger Corp., a wholly
owned indirect subsidiary of PSS, shall be merged with and into S&W. S&W shall
be the surviving corporation of the Merger and as a result shall become a wholly
owned subsidiary of DI, which is a wholly owned subsidiary of PSS, and shall
continue to be governed by the laws of the State of New York. At the time the
Merger becomes effective, each outstanding share of S&W Common Stock (excluding
shares held by stockholders who perfect their dissenters' rights) shall cease to
be outstanding and shall be converted into and exchanged for the right to
receive shares of PSS Common Stock and the contingent right to receive
additional shares of PSS Common Stock on the "Final Settlement Date," as
provided in the Escrow Agreement. If the Merger Agreement is approved at the
Special Meeting, all required consents and approvals are obtained, and all of
the other conditions to the obligations of the parties to consummate the Merger
are either satisfied or waived (as permitted), the Merger will be consummated. A
copy of the Merger Agreement is set forth in ANNEX A to this Proxy
Statement-Prospectus and a copy of the Escrow Agreement is set forth in ANNEX B.
See "THE Merger."
Exchange Ratio. The Merger Agreement provides that at the effective
time of the Merger each outstanding share of S&W Common Stock and each share of
S&W Common Stock to be issued pursuant to the S&W Supplemental Executive
Retirement Plan (excluding shares held by stockholders who perfect their
dissenter's rights) shall cease to be outstanding and shall be converted into
and exchanged for (i) the right to receive that number of shares of PSS Common
Stock equal to the Aggregate Purchase Price (as defined below) minus the Escrow
Dollar Amount (as defined below), and the contingent right to receive that
number of shares equal to the Escrow Dollar Amount; (ii) divided by the sum of
all shares of S&W Common Stock issued and outstanding or issuable upon the
conversion of all convertible securities or rights of any nature with respect to
S&W Common Stock; (iii) which amount is divided by the Base Period Trading Price
(as defined below) (the "Common Stock Exchange Ratio").
Pursuant to the Merger Agreement, the "Aggregate Purchase Price" is
defined to be $26,000,000, minus any legal, accounting, consulting and
investment advisory expenses in excess of $350,000 incurred by S&W or on S&W's
behalf in connection with the transactions contemplated under the Merger
Agreement; provided that such adjustment shall not exceed $200,000. In the event
that the foregoing adjustment would result in a decrease to the Aggregate
Purchase Price of more than $200,000 but for the foregoing provision, PSS shall
have the right to terminate the Merger Agreement. Pursuant to the Merger
Agreement, the "Escrow Dollar Amount" is defined to be $1,015,000 plus five
percent of the Aggregate Purchase Price.
The term "Base Period Trading Price" is defined in the Merger Agreement
as the average of the daily closing prices for the shares of PSS Common Stock
for the ten (10) consecutive trading days on which such shares are actually
traded as over-the-counter securities and quoted on the Nasdaq National Market
ending at the close of trading on the second trading day immediately prior to
the Closing Date, provided, however, that for purposes of such calculation, the
Base Period Trading Price shall be deemed to equal (i) $14.9644 in the event the
Base Period Trading Price is greater than $14.9644 or (ii) $12.2436 in the event
the Base Period Trading Price is less than $12.2436 (collectively, the "Base
Period Trading Price Limitations").
- 7 -
<PAGE>
The following table shows the resulting exchange ratio for each share
of S&W Common Stock representing that number of shares of PSS Common Stock to be
received in respect of each share of S&W Common Stock (including shares to be
issued pursuant to the S&W Supplemental Executive Retirement Plan), (i) assuming
that the Aggregate Purchase Price is equal to $26,000,000, and (ii) assuming
that all shares subject to the Escrow Agreement are distributed to the holders
of shares of S&W Common Stock:
<TABLE>
<CAPTION>
Base Period Trading Price(1) Common Stock Exchange Ratio
---------------------------- ---------------------------
<S> <C>
$11.00 8.0565
12.00 8.0565
13.00 7.5877
14.00 7.0458
15.00 6.5917
18.00 6.5917
20.00 6.5917
</TABLE>
- ---------
(1) The Base Period Trading Price is the average of the daily closing
prices for the shares of PSS Common Stock for the ten (10) consecutive trading
days on which such shares are actually traded and quoted on the Nasdaq National
Market System ending at the close of trading on the second trading day
immediately prior to the Closing Date, subject to the Base Period Trading Price
Limitations. The per share purchase price for the shares of S&W Common Stock is
divided by the Base Period Trading Price to obtain the respective exchange
ratios.
The following table shows the exchange ratio for each share of S&W
Common Stock representing that number of shares of PSS Common Stock to be
received in respect of each share of S&W Common Stock (including shares to be
issued pursuant to the S&W Supplemental Executive Retirement Plan), (i) assuming
that the Aggregate Purchase Price is equal to $25,800,000 (reflecting the
maximum adjustment to the Aggregate Purchase Price of $200,000), and (ii)
assuming that no shares subject to the Escrow Agreement are distributed to the
holders of shares of S&W Common Stock:
<TABLE>
<CAPTION>
Base Period Trading Price(1) Common Stock Exchange Ratio
---------------------------- ---------------------------
<S> <C>
$11.00 7.2803
12.00 7.2803
13.00 6.8567
14.00 6.3669
15.00 5.9566
18.00 5.9566
20.00 5.9566
</TABLE>
- ---------
(1) The Base Period Trading Price is the average of the daily closing
prices for the shares of PSS Common Stock for the ten (10) consecutive trading
days on which such shares are actually traded and quoted on the Nasdaq National
Market System ending at the close of trading on the second trading day
immediately prior to the Closing Date, subject to the Base Period Trading Price
Limitations. The per share purchase price for the shares of S&W Common Stock is
divided by the Base Period Trading Price to obtain the respective exchange
ratios.
See "THE MERGER -- Exchange Ratio" and "--Escrow Agreement."
Votes Required. Approval of the Merger Agreement, the Escrow Agreement
and consummation of the transactions contemplated therein, including the
appointment of the Stockholder Representatives, requires the affirmative vote of
the holders of a majority of the outstanding S&W Common Stock entitled to vote
at the Special Meeting. The S&W X-Ray, Inc. Employee Stock Ownership Plan and
Trust ("ESOP") owns 32.96% of the outstanding shares of S&W Common Stock. The
ESOP has retained Consulting Fiduciaries, Inc. for the purposes of (i)
determining what action the ESOP should take with respect to the Merger; (ii)
administering any pass-
- 8 -
<PAGE>
through voting process with respect to any such proposal and receiving the
directions of the participants and beneficiaries entitled to vote under the
ESOP; (iii) with respect to any shares of Company stock held in the ESOP for
which voting directions are not received from any participant or beneficiary,
determining how such shares should be voted; and (iv) taking whatever action it
shall deem appropriate, including directing the Trustee of the Trust regarding
voting of shares of S&W Common Stock.
As of the S&W Record Date, S&W directors and executive officers, and
their affiliates, held approximately 33% of the outstanding votes represented by
the S&W Common Stock entitled to vote at the Special Meeting. Holders of
approximately 66% of the outstanding votes represented by the S&W Common Stock
have agreed to vote in favor of the Merger Agreement, the Escrow Agreement and
the consummation of the transactions contemplated therein, including the
appointment of the Stockholder Representatives, and therefore approval of such
matters is assured. As of the S&W Record Date, PSS's directors and executive
officers, and their affiliates, held no S&W Shares. See "GENERAL
INFORMATION--Votes Required," "THE MERGER--Stockholders Agreement" and
"OWNERSHIP OF EQUITY SECURITIES--S&W."
Recommendations of the Board of Directors. The Board of Directors of
S&W has approved the Merger Agreement and has recommended a vote FOR the Merger
Agreement. The Board of Directors believes the Merger Agreement is fair to and
in the best interest of the stockholders of S&W. In addition, the Board of
Directors of S&W has approved the Escrow Agreement and has recommended a vote
FOR approval of the Escrow Agreement and the consummation of the transactions
contemplated therein, including the appointment of the Stockholder
Representatives.
The Board of Directors of S&W believes that the Merger is in the best
interest of the S&W stockholders based on a number of factors, including: (i)
the value of the consideration to be received by the S&W stockholders, the fact
that as PSS stockholders, the S&W stockholders would have more liquidity, and
the fact that the Merger is expected to be treated as a tax-free reorganization;
(ii) the opportunity for the S&W stockholders to continue to share in the
potential for long-term gain in S&W through the ownership of PSS Common Stock
after the Merger; (iii) the business reputation and capabilities of PSS and its
management, the financial strength, prospects, market position and strategic
objectives of PSS; and (iv) the perceived strengths of the combined entity, the
belief that PSS and S&W are strategically complementary, and the belief that the
combined companies will be able to compete more effectively in the marketplace.
See "THE MERGER--Reasons for the Merger."
Effective Time. If the Merger is approved by the requisite vote of the
S&W stockholders, all required consents and approvals are obtained, and the
other conditions to the obligations of the parties to consummate the Merger are
either satisfied or waived (as permitted), the Merger will be consummated and
will become effective on the date and at the time that Articles of Merger,
reflecting the Merger, are filed with the Secretary of State of the State of New
York (the "Effective Time"). See "THE MERGER--Effective Time."
Delivery of PSS Certificates. Promptly after the Effective Time, each
record holder of S&W Common Stock outstanding at the Effective Time will be
mailed a transmittal letter (with instructions) to use in effecting the
surrender and cancellation of those certificates in exchange for PSS Common
Stock. PSS shall not be obligated to deliver the consideration to which any
former holder of S&W Common Stock is entitled until such holder surrenders such
holder's certificate or certificates representing such holder's shares for
exchange. The certificate or certificates so surrendered shall be duly endorsed
as PSS may require. See "THE MERGER--Distribution of PSS Certificates."
Certain Federal Income Tax Consequences. The Merger is intended to be a
tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Generally, no gain or loss should
be recognized for federal income tax purposes by S&W stockholders as a result of
the Merger, except that gain or loss will be recognized with respect to cash
received by dissenters, if any, or cash received in lieu of fractional shares.
See "THE MERGER--Certain Federal Income Tax Consequences."
- 9 -
<PAGE>
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON
THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER AND OTHER FACTORS, EACH HOLDER
OF S&W COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISER TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER
(INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX
LAWS).
Interests of Certain Persons in the Merger. Joseph E. Miller, Jr. and
Bruce P. Ashby will receive aggregate cash payments of $1,900,000 and
$1,4000,000, respectively, as additional consideration for his Covenant Not to
Compete upon consummation of the Merger, payable in installments over the
fifteen-year term of such agreements. In addition, George Privitera and Ron
Cronin will receive aggregate payments of $700,000 each as additional
consideration for his Covenant Not to Compete upon consummation of the Merger,
payable in installments over the eight-year term of such agreements. See "THE
MERGER--Covenants Not to Compete" and "--Interests of Certain Persons in the
Merger."
Conditions to Consummation of the Merger. The obligation of PSS to
consummate the Merger is subject to, among others, the following conditions: (i)
the representations and warranties of S&W set forth in the Merger Agreement
shall be true and correct in all material respects as of the Effective Time;
(ii) S&W shall have performed all of its agreements and covenants prior to the
Effective Time as contemplated by the Merger Agreement; (iii) the S&W sales
force shall not have decreased in number to less than 18 full-time sales persons
and 70 full-time service technicians; (iv) there shall have been no material
adverse change in the business, assets or results of operations of S&W between
March 31, 1997 and the Closing Date; (v) the Escrow Agreement shall have been
executed and delivered by a national bank as the Escrow Agent, (vi) PSS shall
have received a letter from Arthur Andersen LLP to the effect that the Merger
will qualify for pooling-of-interests accounting treatment; (vii) PSS shall have
received the consent of its senior lender; (viii) PSS shall have received
evidence that all indebtedness owed by the S&W X-Ray, Inc. Employee Stock
Ownership Trust has been repaid or forgiven; and (ix) receipt by PSS of executed
investment agreements, employment agreements and non-compete agreements from
certain affiliates and employees of S&W.
The obligation of S&W to consummate the Merger is subject to, among
others, the following conditions: (i) the representations and warranties of PSS
set forth in the Merger Agreement shall be true and correct in all material
respects as of the Effective Time; (ii) PSS shall have performed all of its
agreements and covenants prior to the Effective Time as contemplated by the
Merger Agreement; (iii) there shall have been no material adverse change in the
business, assets or results of operations of PSS between March 31, 1997 and the
Closing Date; and (iv) the Escrow Agreement shall have been executed and
delivered by a national bank as the Escrow Agent.
The obligation of each of PSS, DI and S&W to consummate the Merger is
subject to certain additional conditions, including the following: (i) the
shareholders of S&W shall have approved the Merger Agreement; (ii) all consents
and notifications to any regulatory authorities required for consummation of the
Merger shall have been obtained or made; (iii) no court or governmental
authority shall have enacted any law or order or taken any action which
prohibits the transactions contemplated by the Merger Agreement; (iv) the
Registration Statement shall have been declared effective under the Securities
Act of 1933 and no stop orders suspending the effectiveness of the Registration
Statement shall have been issued; and (v) at Closing, PSS shall have repaid the
outstanding notes and bank and long-term debt of S&W.
Regulatory Approvals. The Hart Scott Rodino Antitrust Improvements Act
of 1974, as amended (the "HSR Act") provides that certain business mergers
(including the Merger) may not be consummated until certain information has been
furnished to the Department of Justice (the "DOJ") and the Federal Trade
Commission (the "FTC") and certain waiting period requirements have been
satisfied. On July 18, 1997, PSS and S&W made their respective filings with the
DOJ and the FTC with respect to the Merger Agreement. On July 28, 1997, PSS
received notification from the FTC that early termination of the waiting period
required under the HSR Act had been granted.
- 10 -
<PAGE>
Conduct of Business Pending the Merger. Each of PSS and S&W has agreed
in the Merger Agreement to, among other things, operate their respective
businesses substantially as presently operated and only in the ordinary course,
provided that with respect to PSS, any business acquisition or incurrence of
additional debt or issuance or sale of equity securities is deemed to be in the
ordinary course.
Termination. The Merger Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, notwithstanding approval of
the Merger Agreement by the stockholders of S&W: (i) by mutual consent of the
Boards of Directors of S&W and PSS, (ii) by either party in the event of certain
breaches by the other party of any representation or warranty; (iii) by either
party in the event that a consent or regulatory approval required by the Merger
Agreement has been denied by final nonappealable action; (iv) by either party if
the Merger is not consummated by October 31, 1997, if such failure is not caused
by any breach of the Merger Agreement by the party electing to terminate; (v) by
either party in the event that the Merger is not consummated by November 30,
1997; (vi) by either party, if any of the conditions precedent to the
obligations of such party to consummate the Merger cannot be satisfied or
fulfilled, if such failure is not caused by the party electing to terminate;
(vii) by either party if the Base Period Trading Price is less than $10.8832 or
greater than $16.3248 (in each case, calculated without regard to the Base
Period Trading Price Limitations); and (viii) by PSS if the sum of all proposed
adjustments to the Aggregate Purchase Price pursuant to the Merger Agreement
would result in a decrease of the Aggregate Purchase Price by more than
$200,000, but for the proviso that the adjustments may not exceed $200,000. See
"THE MERGER--Amendment, Waiver, and Termination."
Accounting Treatment. It is anticipated that the Merger will qualify as
a "pooling of interests" for financial reporting purposes. It is a condition to
the obligation of PSS to consummate the Merger that PSS shall have received from
Arthur Andersen LLP a letter dated the closing date to the effect that the
Merger may be accounted for as a pooling of interests by PSS for financial
reporting purposes. See "THE MERGER--Conditions to Consummation" and
"--Accounting Treatment."
Dissenters' Rights. In order for the Merger to qualify as a
pooling-of-interests, which is a condition to the consummation of the Merger, no
more than ten percent (10%) of the aggregate outstanding shares of S&W Common
Stock shall have exercised dissenters' rights. Each holder of S&W Common Stock
who dissents from the Merger is entitled to the rights and remedies of
dissenting stockholders set forth in Sections 623 and 910 of the New York
Business Corporation Law (the "NYBCL"), subject to compliance with the
procedures set forth therein. Among other things, a dissenting stockholder is
entitled to receive an amount in cash equal to the "fair value" of such holder's
shares. A copy of Sections 623 and 910 is set forth in ANNEX C to this Proxy
Statement-Prospectus, and a summary thereof is included under "THE
MERGER--Dissenters' Rights." To perfect dissenters' rights, a stockholder must
comply with Sections 623 and 910 of the NYBCL which requires, among other
things, that the stockholder give S&W notice of such holder's intention to
dissent from the Merger Agreement prior to the vote of the stockholders of S&W
at the Special Meeting and that such stockholder not vote such holder's shares
in favor of the Merger Agreement. Any S&W stockholder who returns a signed proxy
but fails to provide instructions as to the manner in which such holder's shares
are to be voted will be deemed to have voted in favor of the Merger Agreement
and thus will not be entitled to assert dissenters' rights.
Nasdaq National Market Quotation. PSS Common Stock is traded in the
over-the-counter market and is quoted on the Nasdaq National Market. An
application will be filed with the NASD to include for quotation the shares of
PSS Common Stock to be issued to the holders of S&W Common Stock in the Merger.
See "THE MERGER--Nasdaq National Market Quotation."
- 11 -
<PAGE>
Market and Market Price
PSS Common Stock is traded in the over-the-counter market and is quoted
on the Nasdaq National Market under the symbol PSSI. Set forth below are the
closing prices per share of PSS Common Stock on the Nasdaq National Market on
(i) August 12, 1997, the last business day preceding public announcement of the
Merger, and (ii) August 21, 1997:
<TABLE>
<CAPTION>
Closing Price Per Share
Date of PSS Common Stock
---- -------------------
<S> <C>
August 12, 1997 $18.125
August 21, 1997 $17.75
</TABLE>
The following table sets forth the high and low closing prices per
share of PSS Common Stock on the Nasdaq National Market since it began trading
in May 1994.
<TABLE>
<CAPTION>
Sales Price Per Share of PSS Common Stock(1)
--------------------------------------------
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C>
Fiscal 1995:
- -----------
June 30, 1994(2) $ 5.08 $ 4.42
September 30, 1994 6.00 5.08
December 31, 1994 6.08 5.04
March 30, 1995 10.67 5.58
Fiscal 1996:
- -----------
June 30, 1995 13.83 10.33
September 30, 1995 18.67 13.50
December 31, 1995 28.50 13.92
March 29, 1996 30.75 21.00
Fiscal 1997:
- -----------
June 30, 1996 33.00 22.75
September 30, 1996 25.63 15.00
December 31, 1996 26.88 13.75
March 28, 1997 19.75 13.00
Fiscal 1998:
- -----------
June 30, 1997 19.00 12.00
September 30, 1997(3) 19.38 16.75
</TABLE>
- ------------
(1) Adjusted to give effect to a three-for-one stock split in fiscal year 1996.
(2) Represents trading from May 4, 1994, the date of the Company's initial
public offering, through June 30, 1994.
(3) Represents trading from July 1, 1997 through August 21, 1997.
Stockholders are advised to obtain current market quotations for PSS
Common Stock. No assurance can be given as to the market price of PSS Common
Stock at the Effective Time or at any other time. As of June 16, 1997, there
were approximately 1,065 record holders of PSS Common Stock.
There is no established public trading market for the shares of S&W
Common Stock. As of the S&W Record Date, there were approximately five record
holders of S&W Common Stock.
- 12 -
<PAGE>
Dividends
It is the policy of both the Board of Directors of PSS and the Board of
Directors of S&W to retain earnings to support operations and to finance
continued growth of their respective businesses rather than to pay dividends.
Neither PSS nor S&W has ever paid dividends on its capital stock and neither
anticipates the payment of dividends in the near future. Any future payment of
cash dividends of PSS or S&W would be determined by the their respective Boards
of Directors in light of circumstances then existing, including the growth,
profitability, financial condition and results of operations of their respective
companies, and such other factors as each Board deems relevant. The ability of
each of PSS and S&W to declare and pay dividends is limited by certain
restrictive covenants contained in each of their long-term debt agreements.
Comparative Per Share Information
The following summary presents selected comparative per share
information on a historical basis for (i) PSS and S&W, (ii) on a pro forma
combined basis per share of PSS Common Stock giving effect to the Merger on a
pooling-of-interests basis assuming in one scenario the distribution to S&W
stockholders of all shares of PSS Common Stock subject to the Escrow Agreement
and in another scenario no distribution to S&W stockholders of the shares of PSS
Common Stock subject to the Escrow Agreement, (iii) on a pro forma combined
basis per share of S&W Common Stock giving effect to the Merger on a
pooling-of-interests basis assuming in one scenario the distribution to S&W
stockholders of all shares of PSS Common Stock subject to the Escrow Agreement
and in another scenario no distribution to S&W stockholders of the shares of PSS
Common Stock subject to the Escrow Agreement. Each calculation has also been
made assuming that the exchange ratios are calculated at a maximum Base Period
Trading Price of $14.9644 and that the exchange ratios are calculated at a
minimum Base Period Trading Price of $12.2436.
Neither PSS nor S&W has paid cash dividends on its respective common
stock since inception. It is anticipated that PSS will retain all earnings for
use in the expansion of the business and therefore does not anticipate paying
any cash dividends in the foreseeable future. The payment of future dividends
will be at the discretion of the Board of Directors of PSS and will depend,
among other things, upon PSS' earnings, capital requirements and financial
condition.
The information shown below is not necessarily indicative of the
combined results of operations or combined financial position that would have
resulted had the Merger been consummated at the beginning of the periods
indicated, nor is it necessarily indicative of the combined results of
operations in future periods or future combined financial position. This
information should be read in conjunction with the historical consolidated
financial statements of PSS and S&W, including the respective notes thereto, and
the pro forma financial information appearing elsewhere in this Proxy
Statement-Prospectus. See "PRO FORMA CONDENSED COMBINED FINANCIAL DATA" and
"FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
Year Ended(1) Three Months Ended June 30,
-------------------------- ---------------------------
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) per common share:
PSS
Historical........................................ 0.12 0.04 (0.04) 0.12 (0.04)
Pro forma combined, assuming distribution of
all escrow shares(2)......................... 0.12 0.06 0.00 0.12 (0.04)
Pro forma combined, assuming distribution of
no escrow shares(2).......................... 0.12 0.06 0.00 0.12 (0.04)
S&W
Historical........................................ 0.23 3.65 4.43 0.90 0.80
Pro forma equivalent, assuming minimum exchange ratio
and distribution of no escrow shares(3)...... 0.70 0.39 0.01 0.70 (0.22)
Pro forma equivalent, assuming minimum exchange ratio
and distribution of all escrow shares(4)..... 0.77 0.43 0.02 0.77 (0.25)
Pro forma equivalent, assuming maximum exchange ratio
and distribution of no escrow shares(5)...... 0.84 0.47 0.02 0.85 (0.27)
Pro forma equivalent, assuming maximum exchange ratio
and distribution of all escrow shares(6)..... 0.93 0.52 0.02 0.94 (0.30)
</TABLE>
- 13 -
<PAGE>
<TABLE>
<CAPTION>
At March 28, 1997 At June 30, 1997
----------------- ----------------
<S> <C> <C>
Shareholders' equity per common share:
PSS
Historical........................................ 5.55 5.63
Pro forma combined (7)............................ 5.37 5.46
S&W
Historical........................................ 18.80 19.83
Pro forma equivalent, assuming minimum exchange ratio and
distribution of no escrow shares(3).......... 32.39 32.93
Pro forma equivalent, assuming minimum exchange ratio and
distribution of all escrow shares(4)......... 35.69 36.28
Pro forma equivalent, assuming maximum exchange ratio and
distribution of no escrow shares(5).......... 39.23 39.88
Pro forma equivalent, assuming maximum exchange ratio and
distribution of all escrow shares(6)......... 43.19 43.91
</TABLE>
- ----------------
(1) PSS' fiscal year ends on the Friday closest to March 31 of each year.
(2) Assumes no acquisition or restructuring costs or synergies associated with
the Merger.
(3) For comparative purposes, S&W pro forma equivalent per share data have been
calculated by multiplying the pro forma PSS amounts by an assumed exchange
ratio of 5.9566, which is the minimum exchange ratio, assuming the maximum
adjustment of $200,000 to the Aggregate Purchase Price and no distribution
to S&W shareholders of the shares of PSS Common Stock subject to the Escrow
Agreement. See SUMMARY - The Merger--Exchange Ratio.
(4) For comparative purposes, S&W pro forma equivalent per share data have been
calculated by multiplying the pro forma PSS amounts by an assumed exchange
ratio of 6.5917, which is the minimum exchange ratio, assuming no
adjustment to the Aggregate Purchase Price and distribution to S&W
shareholders of all shares of PSS Common Stock subject to the Escrow
Agreement. See SUMMARY - The Merger--Exchange Ratio.
(5) For comparative purposes, S&W pro forma equivalent per share data have been
calculated by multiplying the pro forma PSS amounts by an assumed exchange
ratio of 7.2803, which is the maximum exchange ratio, assuming the maximum
adjustment of $200,000 to the Aggregate Purchase Price and no distribution
to S&W shareholders of the shares of PSS Common Stock subject to the Escrow
Agreement. See SUMMARY - The Merger--Exchange Ratio.
(6) For comparative purposes, S&W pro forma equivalent per share data have been
calculated by multiplying the pro forma PSS amounts by an assumed exchange
ratio of 8.0565, which is the maximum exchange ratio, assuming no
adjustment to the Aggregate Purchase Price and distribution to S&W
shareholders of all shares of PSS Common Stock subject to the Escrow
Agreement. See SUMMARY - The Merger--Exchange Ratio.
(7) For comparative purposes, PSS pro forma combined per share data have been
calculated by multiplying the pro forma PSS amounts by an assumed exchange
ratio of 8.0565, which is the maximum exchange ratio, assuming distribution
to S&W shareholders of all shares of PSS Common Stock subject to the Escrow
Agreement. See SUMMARY -The Merger--Exchange Ratio.
- 14 -
<PAGE>
Summary Unaudited Pro Forma Condensed Combined Financial Information of PSS and
S&W
The following table sets forth unaudited selected pro forma condensed
combined financial data of PSS and S&W assuming the Merger is consummated and
accounted for under the pooling-of-interests method reflecting the distribution
to S&W stockholders of all shares held pursuant to the Escrow Agreement. See
"THE MERGER--Accounting Treatment." The pro forma financial data is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have occurred if the Merger
had been consummated on the dates indicated, nor is it necessarily indicative of
future operating results or financial position. The pro forma financial data has
been derived from and should be read in conjunction with the pro forma financial
data, including the notes thereto, appearing elsewhere in this Proxy
Statement-Prospectus. See "PRO FORMA CONDENSED COMBINED FINANCIAL DATA."
<TABLE>
<CAPTION>
Year Ended March Three months ended June 30,
------------------------------------- -----------------------------
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Information (unaudited):
Net sales...................................... $763,054 $589,120 $471,985 $233,583 169,257
Gross profit................................... 204,890 162,590 132,315 60,013 45,529
Income (loss) from operations.................. 3,874 4,848 5,686 7,062 (2,552)
Other income (expense)......................... 2,768 (794) (2,588) 656 789
Net income (loss) ............................. 4,426 2,129 60 4,580 (1,367)
Net income (loss) per common and common
equivalent share............................. 0.12 0.06 0.00 0.12 (0.04)
Weighted average shares outstanding............ 38,392 33,198 25,412 39,393 36,933
<CAPTION>
At March 28, 1997 At June 30, 1997
----------------------- ----------------------
(In thousands)
<S> <C> <C>
Balance Sheet Information (unaudited):
Working capital...................................... $172,228 $174,162
Intangible assets, net of accumulated amortization... 22,084 22,706
Total assets......................................... 321,270 328,391
Total long-term liabilities.......................... 9,590 10,137
Total shareholders' equity........................... 210,055 215,107
</TABLE>
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<PAGE>
RISK FACTORS
In addition to the other information in this Proxy Statement-
Prospectus, the following factors should be considered carefully in evaluating
an investment in the shares of PSS Common Stock offered by this Proxy Statement-
Prospectus.
Integration of Operations
The success of the Merger will be determined by various factors,
including management's ability to integrate effectively the operations of DI and
S&W and the financial performance of the companies' operations after the Merger.
Factors which will affect management's ability to integrate successfully the
operations of DI and S&W include the ability to implement management systems
that take advantage of marketing and cost saving opportunities and to minimize
the financial impact or expenses associated with the integration of the centers.
That can be no assurance that the Merger will not adversely affect the future
operating results of DI or PSS. See "THE MERGER," "BUSINESS OF PSS," "S&W
MANAGEMENT'S DISCUSSION AND ANALYSIS" and "BUSINESS OF S&W."
Acquisition Strategy
The Company's Physician Supply Business has grown through, and the
Company anticipates that it will continue to grow through, the acquisition of
medical supply distributors. The Company has also added the Imaging Business and
the International Business through acquisitions and may enter new lines of
business and new geographic areas through acquisitions. Acquisitions may expose
the Company to particular risks, including, without limitation, diversion of
management's attention, the inability to integrate acquired companies into the
Company's operations, assumption of liabilities and amortization of goodwill and
other acquired intangible assets, some or all of which could have a material
adverse effect on the financial condition or results of operations of the
Company. Depending on the value and nature of the consideration paid by the
Company for acquisitions, such acquisitions may adversely affect the Company's
liquidity. In making acquisitions in the future, the Company anticipates that it
may compete for acquisition targets with other companies, many of which are
larger and have greater financial resources than the Company. There can be no
assurance that the Company will be successful in consummating acquisitions and
integrating them into the Company's operations. See "PSS Business --
Acquisitions." The Company has financed acquisitions, and anticipates that it
will finance future acquisitions, through cash on hand, the issuance of common
stock and borrowings. The Company's credit facility limits acquisitions and
requires that acquisitions be financed through certain permitted sources. In
addition, the financial covenants contained in the Company's credit facility may
limit the Company's ability to make acquisitions. See "PSS Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources", and "PSS Business."
Opening of Start-Up Service Centers
The Company has grown through, and the Company anticipates that it will
continue to grow through, the opening of start-up service centers. The Company
anticipates that each start-up service center opened will generally incur
operating losses for a period of time which has historically been 18 months.
Accordingly, the Company's planned expansion creates numerous risks, including
the risk that the expansion may have an adverse effect on working capital and
earnings during the expansion period, and that substantial indebtedness may be
incurred in connection with, and significant losses could result from,
unsuccessful start-ups.
Expansion into New Lines of Business
The Company recently has expanded into new product areas, including
imaging equipment, chemicals, supplies and technical service to physician
offices, other alternate site providers and hospitals through its Imaging
Division. The integration and operation of this new business may place
significant demands on the Company's management and other resources. There can
be no assurance that there will be any operating efficiencies between the
Company's Physician Supply Business and the Imaging Business or that the Imaging
Business can be operated profitably. The Company has pursued, and anticipates
that it will continue to aggressively pursue, expansion
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<PAGE>
opportunities in this market, however, there can be no assurance that the
Company will be successful in acquiring, operating or integrating additional
operations. The Company may in the future, enter into other lines of business,
which may have the same or additional risks as its existing businesses. There
can be no assurance that if the Company were to enter into any additional lines
of business that it would be able to operate such businesses successfully.
Management of International Business
Through its WorldMed International, Inc. subsidiary, the Company has
recently acquired medical supply distributors serving physicians in Belgium,
France, Germany, Luxembourg and the Netherlands and plans to increase its
presence in European markets. As the Company expands internationally, it will
need to hire, train and retain qualified personnel in countries where language,
cultural or regulatory impediments may exist. The Company has encountered and
expects to encounter significant expense and delay in expanding its
international operations because of language and cultural differences, and
staffing, communications and related issues. There can be no assurance that the
Company's services and business practices will be accepted by vendors,
physicians or other involved parties in foreign markets. The cost of medical
care in many European countries is funded by the government, which may
significantly impact spending budgets in certain markets. International revenues
are subject to inherent risks, including political and economic instability,
difficulties in staffing and managing foreign operations and in accounts
receivable collection, fluctuating currency exchange rates, costs associated
with localizing service offerings in foreign countries, unexpected changes in
regulatory requirements, difficulties in the repatriation of earnings and
burdens of complying with a wide variety of foreign laws and labor practices.
Dependence on Vendor Relationships
The Company distributes over 40,000 products manufactured by
approximately 3,200 vendors and is dependent on these vendors for the
manufacture and supply of product. Additionally, the Company has entered into a
significant contract with Abbott, which accounted for approximately 16% and 18%
of the Company's revenues in fiscal years 1996 and 1997, respectively, and which
may be terminated by Abbott if the Company does not meet certain sales levels.
Sales pursuant to a distribution agreement with Roche Diagnostics, Inc.
accounted for approximately five percent of the Company's sales in fiscal year
1997. In addition, the Company has entered into other separate exclusive
distribution agreements, including agreements for certain products manufactured
by Siemens Medical Systems, Inc., Hologic, Inc., Bard Diagnostic Services, Inc.,
Tanita Corporation of America, Inc. and HumaScan, Inc. The Company's ability to
maintain good relations with these vendors will affect the profitability of its
business. The Company's ability to maintain good relations with these vendors
will affect the profitability of its business. Currently, the Company relies on
vendors to provide (i) field sales representatives' technical and selling
support, (ii) agreeable purchasing and delivery terms, (iii) sales performance
incentives, (iv) financial support of sales and marketing programs, and
(v) promotional materials. There can be no assurance that the Company will
maintain its good relations with its vendors.
Dependence on Key Management
The success of the Company is dependent upon the efforts and abilities
of its senior management. The loss of one or more of such individuals may
adversely affect the Company's business. Because of the Company's decentralized
operating structure, the Company is also dependent upon its operations and sales
managers for each of its service areas. There can be no assurance that the
Company will be able to retain such key personnel or attract qualified personnel
in the future.
Dependence on Sales Representatives and Service Specialists
The Company believes that to be successful it must continue to hire,
train and retain highly qualified sales representatives and service specialists.
The Company's sales growth has resulted to a significant degree from hiring and
developing new sales representatives and adding, through acquisitions,
established sales representatives whose existing customers generally have become
customers of the Company. Due to the relationship developed between the
Company's sales representatives and its customers, upon the departure of a sales
representative the
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<PAGE>
Company faces the risk of losing the representative's customers, especially if
the representative were to act as a representative of the Company's competitors.
In addition, the radiology and imaging equipment market served by the Company's
Imaging Business is heavily reliant on the hiring and retention of skilled
service specialists to maintain such equipment. There is a current shortage of
these skilled specialists, which may result in intense competition and
increasing salaries. Any inability of the Company to hire or retain such skilled
specialists could limit the Company's ability to expand its Imaging Business and
adversely affect its business, financial condition and results of operations.
The Company generally requires its sales representatives and service specialists
to execute a non-competition agreement as a condition of their employment,
however the Company has not obtained non-competition agreements from certain of
the sales representatives hired through acquisitions. Although courts have
generally upheld the terms of the Company's non-competition agreements in the
past, there can be no assurance that such agreements will be upheld in the
future. There can be no assurance that the Company will be able to retain such
key personnel or attract qualified personnel in the future.
Imaging Business Technology
The development of new technology may change the manner in which
diagnostic imaging services are provided. Recently, certain manufacturers have
developed digital radiology equipment that does not rely on film and film
products, which currently constitute a substantial percentage of the products
distributed by the Company's Imaging Business. No assurance can be given that
the introduction and proliferation of digital radiology or other technological
changes will not result in a material adverse change in the Company's Imaging
Business. While the Company anticipates that it will distribute new imaging
technology, there can be no assurance that the Company will obtain distribution
agreements or develop vendor relationships to distribute such new technology. In
addition, there can be no assurance that the Company would be able to distribute
any such new technology on a profitable basis.
Regulation of and Change in Practice of Medicine
The health care industry, including the practice of medicine by
physicians, is subject to extensive government regulation, licensure and
operating procedures. The Company cannot predict the impact that present or
future regulations may have on operations of the Company or on its plan to
expand its business activities. In addition, as consolidation among physician
provider groups continues and provider networks are created, purchasing
decisions may shift to individuals with whom the Company has not had prior
selling relationships. The Company is increasingly focusing on national accounts
where the purchasing decision may not be made by the Company's traditional
physician customers. There can be no assurance that the Company will be able to
maintain its customer relationships in such circumstances or that such national
accounts will not result in reduced operating margins. See "Business --
Regulatory Matters."
Dependence on Third-Party Reimbursement
The cost of a significant portion of medical care in the United States
is funded by government and private insurance programs, such as Medicare,
Medicaid and corporate health insurance plans. In recent years,
government-imposed limits on reimbursement of hospitals and other health care
providers have significantly impacted spending budgets in certain markets within
the medical supply and equipment industry. Private third-party reimbursement
plans are also developing increasingly sophisticated methods of controlling
health care costs through redesign of benefits and exploration of more
cost-effective methods of delivering health care. Accordingly, there can be no
assurance that reimbursement for purchase and use of medical equipment and
supplies by physicians' offices will not be limited or reduced and thereby
adversely affect future sales by the Company.
Two-Tier Pricing
As a result of the Non-Profit Act of 1944, the medical supplies and
equipment industry is subject to a two-tier pricing structure. Under this
structure, certain institutions, originally limited to non-profit hospitals, can
obtain more favorable prices for medical supplies and equipment than the
Company. The two-tiered pricing
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<PAGE>
structure continues to expand as many large integrated health care providers and
others with significant purchasing power demand more favorable pricing terms.
Although the Company is seeking to obtain similar terms from its manufacturers,
there can be no assurance that such terms can be obtained. Such a pricing
structure, should it persist, may put the Company at a competitive disadvantage.
Competition
The distribution and marketing of medical products is highly
competitive. The Company's competitors include full-line, full-service medical
supply companies, some of which are national in scope, local and regional
distributors and manufacturers who distribute their products directly to users.
These companies have sales representatives competing directly with the Company.
There are also several mail order firms which distribute medical products on a
national or regional basis. Some of the Company's competitors are substantially
larger in size and have substantially greater financial resources than the
Company. The Company could encounter additional competition because many of the
products it sells are readily obtainable by others from various sources of
supply and such competitors could consolidate into regional or national
networks. In addition, a competitor of the Company could obtain exclusive rights
to market a certain product to the exclusion of the Company. There can be no
assurance that the Company will not face increased competition in the future.
Quarterly Fluctuations in Operating Results
Net sales and operating results may fluctuate quarterly as a result of
demand for the Company's products and services, the introduction of new products
and services by the Company and its competitors, acquisitions or investments,
changes in manufacturers' prices or pricing policies, changes in the level of
operating expenses, product supply shortages, inventory adjustments, changes in
product mix and general competitive and economic conditions. In additional, a
substantial portion of the Company's net sales in each quarter result from
orders booked in such quarter. Accordingly, the Company believes that
period-to-period comparisons of its operating results should not be relied upon
as an indication of future performance. It is possible that in certain future
periods, the Company's operating results may be below the expectations of
analysts and investors, which could materially and adversely affect the trading
price of the Common Stock. The Company anticipates taking a charge for the
quarter ended September 30, 1997 of approximately $8.0 million to $10.0 million
due to mergers completed in such quarter. See "PSS Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."
Liability Exposure
Although the Company is not a manufacturer, the distribution of medical
supplies and equipment entails risks of product liability. Despite the fact that
the Company has not to date experienced any significant product liability claims
and currently maintains liability insurance coverage, such insurance is
expensive, difficult to obtain and may be unobtainable in the future on
acceptable terms, if at all. The Company operates approximately 620 vans to
deliver medical supplies and equipment on a same-day delivery basis. The Company
has experienced various claims regarding motor vehicle accidents, all of which
have been covered by insurance, subject to applicable retentions and
deductibles. The Company believes that it maintains adequate insurance coverage
for such claims. Nevertheless, the amount and scope of any coverage may be
inadequate in the event that a product liability or motor vehicle accident claim
is successfully asserted against the Company.
Reliance on Data Processing
The Company's business is dependent upon its ongoing ability to obtain,
process, analyze and manage data, and to maintain and upgrade its data
processing capabilities. The Company typically receives rebates for the purchase
of certain products for its Imaging Division and needs sophisticated systems to
carefully track and submit for such rebates in order to make a profit on the
sale of such equipment. Interruption of data processing capabilities for any
extended length of time, the failure to upgrade data services, the inability of
the Company's data processing system to support the expanded scope of the
Company's business or to adequately track the Imaging Division rebates,
difficulties in converting data and information systems after acquisitions, loss
of stored
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<PAGE>
data, programming errors or other computer problems could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Environmental Liabilities and Regulations
The past and present business operations of the Company and the past
and present ownership and leasing of real property by the Company are subject to
extensive and changing federal, state, local and foreign environmental laws and
regulations, including those relating to the use, handling, storage, discharge
and disposal of hazardous substances. Certain of the products distributed and
serviced by the Imaging Business contain chemicals and byproducts that required
proper disposal under applicable environmental law. The Company cannot predict
what environmental legislation or regulations will be enacted in the future, how
existing or future laws or regulations will be administered or interpreted or
what environmental conditions may be found to exist on its properties.
Compliance with more stringent laws or regulations, as well as more vigorous
enforcement policies of applicable regulatory agencies or stricter
interpretations of existing laws, and discovery of new conditions, may require
additional expenditures by the Company, some of which may be material.
Anti-Takeover Provisions; Possible Issuance of Preferred Stock
The Company's Amended and Restated Articles of Incorporation and Bylaws
contain various provisions that may make it more difficult for a third party to
acquire, or may discourage acquisition bids for, the Company and could limit the
price that certain investors might be willing to pay in the future for shares of
the Common Stock. In addition, the rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of any holders of
Preferred Stock that may be issued in the future and that may be senior to the
rights of the holders of Common Stock. Furthermore, the Company has not opted
out of certain provisions of the Florida Business Corporation Act, including the
provisions relating to control-share acquisitions, which could have the effect
of delaying, deferring or preventing a change in control of the Company without
further action by its shareholders. See "DESCRIPTION OF PSS CAPITAL STOCK."
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<PAGE>
GENERAL INFORMATION
Special Meeting
This Proxy Statement-Prospectus is being furnished by S&W to its
stockholders in connection with the solicitation of proxies by the Board of
Directors of S&W from holders of the outstanding shares of S&W Common Stock for
use at the S&W Special Meeting and at any adjournments and postponements
thereof, to consider and vote upon a proposal to approve the Merger Agreement,
the Escrow Agreement and consummation of the transactions contemplated therein,
including appointment of the Stockholder Representatives, and to transact such
other business as may properly come before the S&W Special Meeting.
This Proxy Statement-Prospectus is also being furnished by PSS to
holders of S&W Common Stock as a Prospectus in connection with the issuance by
PSS to them of shares of PSS Common Stock upon consummation of the Merger.
The Merger Agreement provides for a transaction whereby Merger Corp., a
wholly owned indirect subsidiary of PSS, will merge with and into S&W. S&W shall
be the surviving corporation of the Merger and as a result shall become a wholly
owned subsidiary of DI, which is a wholly owned subsidiary of PSS, and continue
to be governed by the laws of the State of New York. At the Effective Time, each
issued and outstanding share of S&W Common Stock shall cease to be outstanding
and shall be converted into and exchanged for the right to receive shares of PSS
Common Stock and a contingent right to receive additional PSS Common Stock, as
provided in the Escrow Agreement. See "THE MERGER--Exchange Ratio."
If the Merger Agreement is approved at the Special Meeting, any
required regulatory approvals are obtained, and all of the other conditions to
the obligations of the parties to consummate the Merger are either satisfied or
waived (as permitted), the Merger will be consummated. See "THE MERGER--
Effective Time."
Record Date and Quorum
The S&W Board of Directors has fixed the close of business on
August 10, 1997, as the record date for determining the S&W stockholders
entitled to receive notice of and to vote at the Special Meeting. The presence,
in person or by Proxy, of the holders of shares of S&W Common Stock entitled to
cast a majority of the votes entitled to be cast at the S&W Special Meeting will
constitute a quorum at the S&W Special Meeting.
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees
of S&W, who will not be specifically compensated for such services, may solicit
proxies from the stockholders of S&W, personally or by telephone or telegram or
other forms of communication. Brokerage houses, nominees, fiduciaries and other
custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses incurred in doing
so.
Voting and Revocability of Proxies
Shares of S&W Common Stock represented by a properly executed proxy, if
such proxy is received in time and is not subsequently revoked, will be voted in
accordance with the instructions indicated on such proxy. If a proxy is properly
executed and returned without indicating any voting instructions, shares of S&W
Common Stock represented by such proxy will be voted FOR approval of the Merger
Agreement, the Escrow Agreement and consummation of the transactions
contemplated therein, including appointment of the Stockholder Representatives
as provided in the Escrow Agreement.
Any proxy given may be revoked by the person giving it at any time
prior to its exercise at the Special Meeting by (i) giving written notice of
revocation to the Secretary of S&W, (ii) properly submitting to S&W a duly
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<PAGE>
executed proxy bearing a later date, or (iii) voting in person at the Special
Meeting. All written notices of revocation and other communications with respect
to revocation of S&W proxies should be addressed to S&W as follows: S&W X-Ray,
Inc., Cornerstone Center, 2300 Buffalo Road, Rochester, New York 14824,
Attention: George R. Privitera.
Vote Required
As of the S&W Record Date, there were 259,574 shares of S&W Common
Stock issued and outstanding and held by approximately five record holders and
4,009 shares of S&W Common Stock to be issued on the Closing Date pursuant to
the S&W Supplemental Executive Retirement Plan. Each share of S&W Common Stock
is entitled to one vote. Approval of the Merger Agreement, the Escrow Agreement
and consummation of the transactions contemplated therein, including the
appointment of the Stockholder Representatives, requires the affirmative vote of
the holders of a majority of the outstanding shares of S&W Common Stock entitled
to vote thereon at the Special Meeting. Accordingly, approval of the Merger
Agreement will require the affirmative vote of the holders of shares of PSS
Common Stock entitled to cast a minimum of 131,792 votes.
The S&W X-Ray, Inc. Employee Stock Ownership Plan and Trust ("ESOP")
owns 32.96% of the outstanding shares of S&W Common Stock. The ESOP has retained
Consulting Fiduciaries, Inc. for the purposes of (i) determining what action the
ESOP should take with respect to the Merger; (ii) administering any pass-through
voting process with respect to any such proposal and receiving the directions of
the participants and beneficiaries entitled to vote under the ESOP; (iii) with
respect to any shares of S&W stock held in the ESOP for which voting directions
are not received from any participant or beneficiary, determining how such
shares should be voted; and (iv) taking whatever action it shall deem
appropriate, including directing the Trustee of the Trust regarding voting of
shares of S&W Common Stock.
As of the S&W Record Date, S&W directors and executive officers, and
their affiliates, held approximately 33% of the votes entitled to vote at the
Special Meeting. Holders of approximately 66% of the outstanding votes
represented by the S&W Common Stock have agreed to vote in favor of the Merger
Agreement, the Escrow Agreement and the consummation of the transactions
contemplated therein, including the appointment of the Stockholder
Representatives, and, therefore, approval of such matters is assured. As of the
S&W Record Date, PSS directors and executive officers, and their affiliates,
held no S&W Shares.
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<PAGE>
THE MERGER
The following information describes certain information pertaining to
the Merger. This description does not purport to be complete and is qualified in
its entirety by reference to the ANNEXES hereto, including the Merger Agreement
and the Escrow Agreement, copies of which are set forth in ANNEX A and ANNEX B,
respectively, to this Proxy Statement-Prospectus and are incorporated herein by
reference. All stockholders are urged to read each ANNEX in its entirety.
General
The Merger Agreement provides that Merger Corp., a wholly owned
indirect subsidiary of PSS, shall merge with and into S&W. S&W shall be the
surviving corporation of the Merger and as a result shall become a wholly owned
subsidiary of DI, which is a wholly owned subsidiary of PSS, and continue to be
governed by the laws of the State of New York. At the time the Merger becomes
effective, each share of issued and outstanding S&W Common Stock and each share
of S&W Common Stock to be issued pursuant to the S&W Supplemental Executive
Retirement Plan (excluding shares held by stockholders who perfect their
dissenters' rights) shall cease to be outstanding and shall be converted into
and exchanged for the right to receive shares of PSS Common Stock and a
contingent right to receive additional PSS Common Stock, as provided in the
Escrow Agreement. If the Merger Agreement is approved at the Special Meeting,
all required consents and approvals are obtained, and all other conditions to
the obligations of the parties to consummate the Merger are either satisfied or
waived (as permitted), the Merger will be consummated. A copy of the Merger
Agreement is set forth in ANNEX A of this Proxy Statement-Prospectus and a copy
of the Escrow Agreement is set forth in ANNEX B. See "Exchange Ratio."
Background of the Merger
On January 7 and 8, 1997, the Board of Directors of S&W held meetings
to discuss various strategic alternatives for S&W, including the viability of
leading an industry consolidation effort or the possible sale of the business.
In its discussions, the Board noted that several of the companies it intended to
consolidate had recently been acquired or entered into agreements with a new
industry company named as a subsidiary of PSS. The general consensus was there a
sale of S&W would be in the best interest of the shareholders and employees. The
Board authorized the retention of Steve Cook of Fieldstone Partners, Inc. as
financial advisor to assist in the potential sale of the business. The Board of
Directors believed that they could receive the best value for the Company from
PSS or its subsidiary based on such companies' prior acquisition costs. Mr. Cook
had represented other companies in their respective sales to PSS.
In January 1997, S&W retained Steve Cook as financial advisor in
connection with the potential sale of the business. Based on the advice of
Mr. Cook, it was decided that S&W would develop a presentation of its past and
future financial performance.
On February 4 and 5, 1997, a representative of DI, Rutherford Deas,
Vice President, visited the Syracuse location of S&W for the purpose of
explaining the DI strategy and goals. The meeting was with S&W representatives
Joe Miller, George Privitera and Ron Cronin.
On February 25, 1997 an S&W Board of Directors meeting included
discussions of S&W's sale progress and presentations by the DI representative.
The Board authorized a visit to the DI corporate offices to make a presentation
of S&W and to learn more about DI.
On March 8 through 11, 1997, Joe Miller, Bruce Ashby, George Privitera,
Ron Cronin and Steve Cook visited and presented S&W to David Smith, Gene Dell,
Rutherford Deas, Glenn Green and Bruce Treadway of PSS and DI. PSS and DI
representatives gave a presentation of the past performance and future
strategies of PSS and DI.
On March 17, 1997, Bruce Ashby, at the direction of the S&W Board of
Directors, contacted telephonically another national x-ray distributor regarding
their interest in purchasing S&W.
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<PAGE>
On April 10, 1997, S&W received an offer for the merger of S&W and DI
and the receipt of shares of PSS common stock. Also on April 10, 1997, Joe
Miller received a telephone call from the other national distributor that was
contacted by Bruce Ashby. The discussions with the other national distributor
did not result in an offer.
On April 15 and 16, 1997, the S&W Board of Directors met to discuss the
offer from PSS. The Board concluded that further conversations were necessary
before a decision was warranted. In addition, the Board authorized S&W to hire
David Heald and Fiduciary Consultants, Inc. from discussions and recommendations
from S&W's benefits counsel, Menke and Associates.
In mid-April 1997, David Heald and Fiduciary Consultants, Inc. were
engaged to consult with the Company regarding its ESOP.
On April 17, 1997, Joe Miller, Bruce Ashby, George Privitera and Ron
Cronin telephonically responded to David Smith at PSS regarding the merger
offer. It was agreed that additional financial information of S&W would be sent
to PSS.
On April 20, 1997, David Smith and Gene Dell of PSS and DI met at the
Rochester location of S&W with Joe Miller, George Privitera, Bruce Ashby, Ron
Cronin and Steve Cook for due diligence and merger discussions. On April 21,
1997, George Privitera sent additional financial information to PSS.
On April 29, 1997, S&W received a second offer of merger from PSS. Also
on April 29, 1997, the executive committee of the PSS Board of Directors met
telephonically to discuss the S&W merger offer. The executive committee
authorized David Smith to extend the second offer of merger.
On May 1, 1997, the S&W Board of Directors met to discuss the PSS offer
and concluded that further discussions were necessary before a decision was
warranted.
In mid-May 1997, Joe Miller and Bruce Ashby telephonically responded to
the PSS offer. During this call, Joe Miller suggested that David Smith and
Patrick Kelly visit the Rochester location of S&W for further discussions and
due diligence.
On May 23, 1997, Patrick Kelly, David Smith and Kathy Fehling visited
the Syracuse location of S&W for additional due diligence and merger
discussions.
On May 29, 1997, PSS issued its final offer of merger.
On May 29, 1997, the S&W Board of Directors met to discuss the PSS
offer and decided after discussion that it was in the best interests of
shareholders and employees to accept this offer.
On May 29, 1997, the executive committee of the PSS Board of Directors
met telephonically to discuss the S&W merger offer. The executive committee
authorized David Smith to extend the final offer of merger.
On June 14, 1997, the PSS Board of Directors met to discuss the S&W
transaction, and on July 22, 1997, the PSS Board of Directors discussed and
approved the merger offer to S&W.
On July 29, 1997, the parties met telephonically to discuss due
diligence findings and adjusted the offer of merger to reflect the same. On
July 30, 1997, the S&W Board of Directors met and accepted the adjustments to
the offer based on these findings.
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Reasons for the Merger
PSS. The PSS Board of Directors, after consideration of relevant
business, financial, legal and market factors, including the compatibility of
the operations and management of S&W and PSS, and the future prospects of S&W
and PSS, has concluded that the Merger is in the best interests of PSS. The PSS
Board believes that the Merger is desirable for the following reasons, among
others: (i) S&W has distribution centers in desirable locations and will expand
the distribution area for PSS' Diagnostic Imaging, Inc. medical diagnostic
imaging division; (ii) S&W's existing business relationships will be enhanced by
affiliation with the distribution networks of PSS and DI; and (iii) S&W has a
strong management team and sales and service force, which is knowledgeable and
experienced in the industry.
S&W. The S&W Board of Directors, after consideration of relevant
business, financial, legal and market factors, including the compatibility of
the operations and management of S&W and PSS, and the financial condition,
results of operations and future prospects of S&W and PSS, has concluded that
the Merger is in the best interests of S&W and its stockholders. In reaching its
decision to enter into the Merger Agreement and to recommend that the
stockholders of S&W vote for the approval and adoption of the Merger Agreement,
the Board of Directors considered a number of factors, including, without
limitation and without assigning relative weights thereto, the following:
(i) the terms and conditions of the proposed Merger, including the
value of the consideration to be received by the stockholders of S&W, the fact
that as PSS stockholders the S&W stockholders would have more liquidity, and the
fact that the Merger is expected to be treated as a tax-free reorganization;
(ii) the opportunity for holders of S&W shares to continue to share in
the potential for long-term gains in S&W through the ownership of PSS Common
Stock following the Merger;
(iii) the business reputation and capabilities of PSS and DI and their
management, and the financial strength, prospects, market position and strategic
objectives of PSS and DI; and
(iv) the perceived strengths of DI and S&W combined, the belief that DI
and S&W are strategically complementary and that the combined companies will be
able to compete more effectively in the marketplace.
THE BOARD OF DIRECTORS OF S&W UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE MERGER AGREEMENT, THE ESCROW AGREEMENT AND CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING THE APPOINTMENT OF THE STOCKHOLDER
REPRESENTATIVES.
Exchange Ratio
The Merger Agreement provides that at the effective time of the Merger,
each outstanding share of S&W Common Stock and each share of S&W Common Stock to
be issued pursuant to the S&W Supplemental Executive Retirement Plan (excluding
shares held by stockholders who perfect their dissenter's rights) shall cease to
be outstanding and shall be converted into and exchanged for (i) the right to
receive that number of shares of PSS Common Stock equal to the Aggregate
Purchase Price (as defined below) minus the Escrow Dollar Amount (as defined
below) and the contingent right to receive that number of shares equal to the
Escrow Dollar Amount; (ii) divided by the sum of all shares of S&W Common Stock
issued and outstanding or issuable upon the conversion of all convertible
securities or rights of any nature with respect to S&W Common Stock; (iii) which
amount is divided by the Base Period Trading Price (as defined below) (the
"Common Stock Exchange Ratio").
Pursuant to the Merger Agreement, the "Aggregate Purchase Price" is
defined to be $26,000,000, minus any legal, accounting, consulting and
investment advisory expenses in excess of $350,000 incurred by S&W or on S&W's
behalf in connection with the transactions contemplated under the Merger
Agreement; provided that such adjustment shall not exceed $200,000. In the event
that the foregoing adjustments would result in a decrease to the
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Aggregate Purchase Price of more than $200,000 but for the foregoing proviso,
PSS shall have the right to terminate the Merger Agreement. Pursuant to the
Merger Agreement, the "Escrow Dollar Amount" is defined to be $1,015,000 plus
five percent of the Aggregate Purchase Price.
The term "Base Period Trading Price" is defined in the Merger Agreement
as the average of the daily closing prices for the shares of PSS Common Stock
for the ten (10) consecutive trading days on which such shares are actually
traded as over-the-counter securities and quoted on the Nasdaq National Market
ending at the close of trading on the second trading day immediately prior to
the Closing Date, provided, however, that for purposes of such calculation, the
Base Period Trading Price shall be deemed to equal (i) $14.9644 in the event the
Base Period Trading Price is greater than $14.9644 or (ii) $12.2436 in the event
the Base Period Trading Price is less than $12.2436 (collectively, the "Base
Period Trading Price Limitations").
In the event S&W or PSS changes the number of shares of S&W Common
Stock or PSS Common Stock, or other common stock equivalents, on a fully diluted
basis, issued and outstanding prior to the Effective Time, or declares any stock
split, stock dividend or similar recapitalization with respect to such stock and
the record date therefor shall be prior to the Effective Time, the Exchange
Ratio shall be proportionately adjusted; provided, however, that no such
adjustment shall occur as a result of the conversion at or prior to the
Effective Time of shares of PSS Series Preferred Stock into shares of PSS Common
Stock or the exercise of any presently outstanding options or warrants of PSS or
S&W.
Escrow Agreement
The aggregate number of shares of PSS Common Stock issuable by PSS
under all contingent rights to receive PSS Common Stock (the "Escrow Shares")
shall be issued and held by The Bank of New York, as Escrow Agent following the
Effective Time pursuant to the terms of the Escrow Agreement. The aggregate
number of Escrow Shares shall equal $1,015,000 plus five percent of the
Aggregate Purchase Price, which amount is divided by the Base Period Trading
Price. Subject to the terms of the Escrow Agreement, the Escrow Shares shall be
used, if necessary, to indemnify PSS, DI and S&W (the "indemnitees") for
(i) losses incurred by DI or PSS by reason of the failure of DI to receive by
the first anniversary of the Closing Date the accounts receivable of S&W due to
S&W as of the Closing Date in excess of $180,000; (ii) expenses up to $10,000
incurred by PSS or DI on behalf of the Representatives in connection with the
performance of their obligations thereunder; (iii) one-half of expenses incurred
by PSS or DI on behalf of the Escrow Agent in connection with the performance of
its obligations thereunder in an amount up to $5,000 (collectively (i), (ii) and
(iii), the "specific claims"); and (iv) losses incurred by DI or PSS as a result
of a breach of any of the representations and warranties or covenants and
agreements of S&W (the "general claims"). The time period for the general claims
is until (i) the first publication by PSS of audited consolidated financial
statements covering an accounting period after the Closing Date with respect to
those items that would be discoverable in an audit, and (ii) one year with
respect to all other claims, except to the extent that certain specific claims
remain pending at the time the Escrow Agreement would otherwise terminate. For
the duration of the escrow, all Escrow Shares may be used to satisfy a claim by
the indemnitees, regardless of whether the claim is based upon specific or
general claims.
If a dispute about whether a particular loss is indemnifiable under the
Escrow Agreement is unable to be resolved by the Stockholder Representatives and
the indemnitee(s), such dispute is to be submitted to binding arbitration on an
informal basis as provided in the Escrow Agreement. All cash dividends or other
cash income with respect to the Escrow Shares shall also be held in escrow with
the Escrow Shares pursuant to the terms of the Escrow Agreement. Each
stockholder has the right to direct the voting of the Escrow Shares. In the
event of any stock split or stock dividend with respect to PSS Common Stock that
becomes effective during the term of the Escrow Agreement, the additional shares
issued with respect to the Escrow Shares shall be added to the Escrow Shares and
the terms of the Escrow Agreement will be adjusted accordingly to account for
such additional shares. The Stockholder Representatives will have full power and
authority to represent the S&W stockholders with respect to all matters arising
under the Escrow Agreement and all action taken by the Stockholder
Representatives under the Escrow Agreement shall be binding upon the S&W
stockholders. Joseph E. Miller, Jr., Bruce P. Ashby and the S&W X-Ray, Inc.
Employee Stock Ownership Trust are proposed to be the Stockholder
Representatives.
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Covenants Not to Compete
It is a condition to the obligation of PSS to close the Merger that
Joseph E. Miller, Jr. and Bruce P. Ashby shall enter into fifteen-year Covenants
Not to Compete and George Privitera and Ron Cronin shall enter into eight-year
Covenants Not to Compete pursuant to which, for the duration of such agreements,
such person covenants and agrees not to (i) own, operate or be associated with a
diagnostic imaging medical supply distribution company which competes with DI in
the states of New York, New Jersey, Pennsylvania and Connecticut (a "Prohibited
Business"), (ii) become financially interested in any person or entity engaged
in a Prohibited Business, or (iii) solicit or attempt to solicit any employee or
contractor away from PSS or DI. Each shareholder will also covenant (i) not to
solicit or attempt to solicit any customer of S&W as of the date of Closing or
any prospective customer to which a written or specific oral proposal was
submitted during the twelve (12) month period prior to Closing, and (ii) not to
copy, remove or disclose any confidential or proprietary information relating to
the businesses of S&W, PSS, DI or their affiliates. Remedies for violation of
any provision of the Covenant Not to Compete include injunctive relief and
monetary damages.
Joseph E. Miller, Jr. and Bruce P. Ashby will receive aggregate cash
payments of $1,900,000 and $1,400,000, respectively, as additional
consideration for his Covenant Not to Compete upon consummation of the Merger,
payable in installments over the fifteen-year term of such agreements. In
addition, George Privitera and Ron Cronin will receive aggregate payments of
$700,000 each as additional consideration for his Covenant Not to Compete upon
consummation of the Merger, payable in installments over the eight-year term of
such agreements.
Fractional Shares
Pursuant to the terms of the Merger Agreement, each holder of shares of
S&W Common Stock and each holder of S&W Common Stock to be issued pursuant to
the S&W Supplemental Executive Retirement Plan exchanged pursuant to the Merger,
who would otherwise have been entitled to receive a fraction of a share of PSS
Common Stock shall receive, in lieu thereof, a cash payment equal to the
fractional amount due multiplied by the Base Period Trading Price, and each
holder of shares of S&W Common Stock exchanged pursuant to the Merger, who would
otherwise have been entitled to receive a contingent right to receive a fraction
of a share of PSS Common Stock on the Final Settlement Date shall receive, in
lieu thereof, a contingent right to receive one additional share of PSS Common
Stock on the Final Settlement Date if such fraction is 0.5 or more and nothing
if such fraction is less than 0.5.
Effective Time
If the Merger Agreement is approved by the requisite vote of the S&W
stockholders, and all other required consents and approvals are received, and if
the other conditions to the Merger are satisfied or waived (as permitted), the
Merger will be consummated and effected on the date and at the time the Articles
of Merger, reflecting the Merger, are filed with the Secretary of State of the
State of New York (the "Effective Time"). See "Conditions to Consummation."
Distribution of PSS Certificates
Promptly after the Effective Time, PSS shall distribute appropriate
transmittal materials to use in effecting the surrender and cancellation of
those certificates in exchange for PSS Common Stock (which shall contain an
affidavit for lost or stolen stock certificates and which shall specify that
delivery shall be effected, and risk of loss and title to the certificates
theretofore representing shares of S&W Common Stock shall pass, only upon proper
delivery of such certificates of PSS by the former stockholders of S&W). After
the Effective Time, each holder of shares of S&W Common Stock issued and
outstanding and each holder of S&W Common Stock to be issued pursuant to the S&W
Supplemental Executive Retirement Plan at the Effective Time (other than shares
as to which dissenters' rights have been perfected) shall surrender the
certificate or certificates representing such shares to PSS, and the
certificates thus surrendered will be canceled. PSS shall not be obligated to
deliver the consideration to which any former holder of shares of S&W Common
Stock is entitled until such holder surrenders such holder's certificate or
certificates representing such holder's shares for exchange. The certificate or
certificates so
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surrendered shall be duly endorsed as PSS may require. No party shall be liable
to a holder of shares of S&W Common Stock for any property delivered in good
faith to a public official pursuant to any applicable abandoned property law.
After the Effective Time, holders of certificates will have no rights
with respect to the shares of S&W Common Stock represented thereby other than
the right to surrender such certificates and receive in exchange therefor the
shares of PSS Common Stock, if any, to which such holders are entitled, as
described above, or the right to perfect their dissenters' rights. In addition,
no dividend or other distribution payable to holders of record of PSS Common
Stock will be paid to the holder of any S&W certificates until such holder
surrenders such certificates for exchange as instructed. Subject to applicable
law, upon surrender of the certificates, such holder will receive the
certificates representing the shares of PSS Common Stock issuable upon the
exchange or conversion of such shares of S&W Common Stock, all withheld
dividends or other distributions (without interest), and any withheld cash
payments (without interest) to which such stockholder is entitled.
If any certificate for PSS Common Stock is to be issued in a name other
than that in which the S&W certificate surrendered for exchange is issued, the
S&W certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer, and the person requesting such exchange shall affix
any requisite stock transfer tax stamps to the certificates surrendered, shall
provide funds for their purchase, or shall establish to the exchange agent's
satisfaction that such taxes are not payable.
Certain Federal Income Tax Consequences
The following is a discussion of certain federal income tax
consequences of the Merger. This discussion is based on the provisions of the
Code, the Treasury Regulations thereunder and rulings and court decisions as of
the date hereof, all of which are subject to change, possibly retroactively. The
discussion is included for general information purposes only, applies only to
S&W stockholders, if any, who hold their stock as a capital asset, and may not
apply to S&W stockholders, if any, who received S&W stock upon the exercise of
employee stock options or otherwise as compensation. PSS, DI, Merger Corp. and
S&W have not requested a ruling from the Internal Revenue Service (the
"Service") or a tax opinion from legal counsel in connection with the proposed
transactions.
The Merger is intended to be a tax-free reorganization within the
meaning of Section 368(a) of the Code. Among other things, the following
discussion is based on S&W stockholders maintaining sufficient equity ownership
interest in PSS after the Merger. The Service takes the position for purposes of
issuing an advance ruling on reorganizations, that the stockholders of an
acquired corporation (i.e., S&W) must maintain a continuing equity ownership
interest in the corporation controlling the acquiring corporation (i.e., PSS)
equal, in terms of value, to at least 50 percent of their interest in such
acquired corporation. Pursuant to this requirement, the management of S&W it
believes that there is no plan or intention by any of the S&W stockholders who
own one percent or more of the outstanding S&W Common Stock and, to the best
knowledge of the management of S&W, the remaining S&W stockholders have no plan
or intention to sell, exchange or otherwise dispose of a number of the shares of
PSS Common Stock that they will receive in the Merger that would reduce on the
part of S&W stockholders such stockholders' ownership to a number of shares of
PSS Common Stock having an aggregate value as of the Effective Time of less than
50 percent of the aggregate value of all of the outstanding shares of S&W Common
Stock immediately prior to such time. For this purpose, shares of S&W Common
Stock exchanged for cash or other property, surrendered by dissenters or
exchanged for cash in lieu of fractional shares of PSS Common Stock will be
treated as outstanding S&W Common Stock at the Effective Time. Moreover, shares
of S&W Capital Stock and PSS Common Stock held by S&W stockholders and otherwise
sold, redeemed or disposed of prior or subsequent to such time are taken into
account. In addition, management of PSS has no plan or intention to cause PSS to
redeem or otherwise reacquire the shares of PSS Common Stock issued in the
Merger. Furthermore, management of S&W has advised PSS it believes that in the
Merger, the S&W stockholders will exchange an amount of stock representing
"control" of S&W (meaning the ownership of stock possessing at least 80 percent
of the total combined voting power of all classes of stock entitled to vote and
at least 80 percent of the total number of shares of all other classes of stock
of the corporation) solely for PSS Common Stock. In addition to the foregoing
requirements certain additional matters must be true with respect to the Merger.
PSS and S&W believe that these additional factual matters will be satisfied.
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Assuming the Merger is treated as a reorganization as defined in
Section 368(a) of the Code, the following should be the material federal income
tax consequences to the S&W stockholders:
(i) Except for those shareholders who dissent to the proposed
transaction and those who receive cash instead of a fractional share of PSS
Common Stock, no gain or loss will be recognized for federal income tax
purposes by S&W stockholders upon the exchange of their shares of S&W
Common Stock for shares of PSS Common Stock.
(ii) The basis of the shares of PSS Common Stock to be received by S&W
stockholders will be the same as the basis of the shares of S&W Common
Stock surrendered in exchange therefor.
(iii) The holding period of the PSS Common Stock to be received by S&W
stockholders will include the period during which the shares of S&W Common
Stock surrendered in exchange therefor had been held, provided such shares
were held by such stockholders as a capital asset at the Effective Time.
(iv) Dissenting S&W stockholders who receive solely cash from S&W in
exchange for their stock will be treated as having received such payments
as distributions in redemption of their shares of such stock, subject to
certain limitations. After such distribution, if a former S&W stockholder
neither owns PSS capital stock nor is deemed to own PSS capital stock under
constructive ownership rules, the redemption will be a complete termination
of interest and will be treated as distribution in full payment in exchange
for the shares of S&W Common Stock. Accordingly, such stockholder will
recognize gain or loss measured by the difference between the amount of
cash received and such stockholder's adjusted basis in stock surrendered.
S&W stockholders electing to exercise dissenters' rights should consult
their own tax advisers as to the tax treatment in their particular
circumstances.
(v) The payment of cash in lieu of fractional shares of PSS Common
Stock will be treated as if the fractional shares were issued as part of
the exchange and then redeemed by PSS. These cash payments will be treated
as having been received as distributions in full payment in exchange for
the fractional shares of PSS Common Stock redeemed as provided in Section
302(a) of the Code. Generally, any gain or loss recognized upon such
exchange will be capital gain or loss, provided the fractional share would
constitute a capital asset in the hands of the exchanging stockholder.
Pursuant to the Merger Agreement, PSS has agreed to bear and pay
reasonable expenses of S&W in connection with the negotiation and consummation
of the transactions contemplated by the Merger Agreement, in an amount not to
exceed $350,000 in the aggregate. The above discussion is based on the belief of
management that all such expenses are properly expenses of S&W. If it is
determined that some of these expenses are actually expenses of S&W
stockholders, payment of such expenses could constitute constructive dividends
to such stockholders.
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON
THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER AND OTHER FACTORS, EACH HOLDER
OF S&W COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISER TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER
(INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX
LAWS).
Management and Operations After the Merger
S&W shall be the surviving corporation resulting from the Merger and as
a result shall become a wholly owned subsidiary of DI, which is a wholly owned
subsidiary of PSS. S&W shall continue to be governed by the laws of the State of
New York, and shall operate in accordance with its Articles and Bylaws as in
effect on the date of the Merger Agreement until otherwise amended or repealed
after the Effective Time.
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Interests of Certain Persons in the Merger
Joseph E. Miller, Jr. and Bruce P. Ashby will receive aggregate cash
payments of $1,900,000 and $1,400,000, respectively, as additional
consideration under a Covenant Not to Compete upon consummation of the Merger,
payable in installments over the fifteen-year term of such agreements. In
addition, George Privitera and Ron Cronin will receive aggregate payments of
$700,000 each as additional consideration under a Covenant Not to Compete upon
consummation of the Merger, payable in installments over the eight-year term of
such agreements.
As of the date hereof, no director or executive officer of PSS or S&W
has any substantial interest, direct or indirect, in the Merger, other than an
interest arising from the ownership of S&W Common Stock, in which case the
director or officer receives no extra or special benefit not shared on a pro
rata basis by all other holders of S&W Common Stock. For information as to the
ownership of S&W Common Stock by those directors and executive officers, see
"OWNERSHIP OF EQUITY SECURITIES--S&W."
Conditions to Consummation
The obligation of PSS to consummate the Merger is subject to, among
others, the following conditions: (i) the representations and warranties of S&W
set forth in the Merger Agreement shall be true and correct in all material
respects as of the Effective Time; (ii) S&W shall have performed all of its
agreements and covenants prior to the Effective Time as contemplated by the
Merger Agreement; (iii) the S&W sales force shall not have decreased in number
to less than 18 full-time sales persons and 70 full-time service technicians;
(iv) there shall have been no material adverse change in the business, assets or
results of operations of S&W between March 31, 1997 and the Closing Date; (v)
the Escrow Agreement shall have been executed and delivered by a national bank
as the Escrow Agent, (vi) PSS shall have received a letter from Arthur Andersen
LLP to the effect that the Merger will qualify for pooling-of-interests
accounting treatment; (vii) PSS shall have received the consent of its senior
lender; (viii) PSS shall have received evidence that all indebtedness owed by
the S&W X-Ray, Inc. Employee Stock Ownership Trust has been repaid or forgiven;
and (ix) receipt by PSS of executed investment agreements, employment agreements
and non-compete agreements from certain affiliates and employees of S&W.
The obligation of S&W to consummate the Merger is subject to, among
others, the following conditions: (i) the representations and warranties of PSS
set forth in the Merger Agreement shall be true and correct in all material
respects as of the Effective Time; (ii) PSS shall have performed all of its
agreements and covenants prior to the Effective Time as contemplated by the
Merger Agreement; (iii) there shall have been no material adverse change in the
business, assets or results of operations of PSS between March 31, 1997 and the
Closing Date; and (iv) the Escrow Agreement shall have been executed and
delivered by a national bank as the Escrow Agent.
The obligation of each of PSS, DI and S&W to consummate the Merger is
subject to certain additional conditions, including the following: (i) the
shareholders of S&W shall have approved the Merger Agreement; (ii) all consents
and notifications to any regulatory authorities required for consummation of the
Merger shall have been obtained or made; (iii) no court or governmental
authority shall have enacted any law or order or taken any action which
prohibits the transactions contemplated by the Merger Agreement; (iv) the
Registration Statement shall have been declared effective under the Securities
Act of 1933 and no stop orders suspending the effectiveness of the Registration
Statement shall have been issued; and (v) at Closing, PSS shall have repaid the
outstanding notes and bank and long-term debt of S&W as provided in the Merger
Agreement.
No assurances can be provided as to when or if all of the conditions
precedent to the Merger can or will be satisfied or waived by the appropriate
party. As of the date of this Proxy Statement-Prospectus, the parties know of no
reason to believe that any of the conditions set forth above will not be
satisfied.
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The conditions to consummation of the Merger may be waived, in whole or in
part, to the extent permissible under applicable law, by the party for whose
benefit the condition has been imposed, without the approval of the PSS or S&W
stockholders. See "Amendment, Waiver and Termination."
Amendment, Waiver and Termination
To the extent permitted by law, S&W and PSS, with the approval of their
respective Boards of Directors, may amend the Merger Agreement by written
agreement at any time without the approval of the stockholders of S&W, provided
that after the approval of the Merger by S&W's stockholders, no amendment may
alter the amount or type of consideration into which the S&W Common Stock will
be exchanged without the requisite approval of S&W stockholders, and provided
further that no amendment may alter the provisions requiring regulatory approval
of the Merger.
Prior to or at the Effective Time, either S&W or PSS, acting through
its respective Board of Directors or its Chairman of the Board or President, may
waive any default in the performance of any term of the Merger Agreement by the
other party, may waive or extend the time for the fulfillment by the other party
of any of its obligations under the Merger Agreement, and may waive any of the
conditions precedent to the obligations of such party under the Merger
Agreement, except any condition that, if not satisfied, would result in the
violation of an applicable law or governmental regulation.
The Merger Agreement may be terminated, and the Merger abandoned, at
any time prior to the Effective Time, notwithstanding approval of the Merger
Agreement by the stockholders of S&W: (i) by mutual consent of the Boards of
Directors of S&W and PSS, (ii) by either party in the event of certain breaches
by the other party of any representation or warranty; (iii) by either party in
the event that a consent or regulatory approval required by the Merger Agreement
has been denied by final nonappealable action; (iv) by either party if the
Merger is not consummated by October 31, 1997, if such failure is not caused by
any breach of the Merger Agreement by the party electing to terminate; (v) by
either party in the event that the Merger is not consummated by November 30,
1997; (vi) by either party, if any of the conditions precedent to the
obligations of such party to consummate the Merger cannot be satisfied or
fulfilled, if such failure is not caused by the party electing to terminate;
(vii) by either party if the Base Period Trading Price is less than $10.8832 or
greater than $16.3248 (in each case, calculated without regard to the Base
Period Trading Price Limitations); and (viii) by PSS if the sum of all proposed
adjustments to the Aggregate Purchase Price pursuant to the Merger Agreement
would result in a decrease of the Aggregate Purchase Price by more than
$200,000, but for the proviso that the adjustments may not exceed $200,000.
If the Merger Agreement is terminated as described above, PSS shall pay
the costs and expenses incurred by it in connection with the Merger Agreement
and up to $350,000 of the reasonable costs and expenses incurred by S&W in
connection with the Merger Agreement. S&W expenses in excess of $350,000 shall
be paid by the S&W stockholders. Other than as set forth above, no party (or any
of its officers, directors, employees, agents, representatives, or stockholders)
shall be liable to the other party or parties for any costs, expenses, damages
(direct or indirect) or loss of anticipated profits; provided, however, that the
foregoing shall not apply if the Merger Agreement is terminated because one
party has breached a representation or warranty, or a covenant or agreement
contained in the Merger Agreement. See "Expenses."
Conduct of Business Pending the Merger
Pursuant to the Merger Agreement, prior to the Closing Date, S&W and
PSS have agreed that S&W shall restrict certain of its activities, except with
the prior written consent of PSS and except as necessary to effect the
transactions contemplated in the Merger Agreement. To this end, and without
limitation, S&W shall: (i) conduct its business in substantially the same manner
as it is presently being conducted and, except with respect to certain agreed
matters, refrain from entering into any transaction or contract other than in
the ordinary course of business and not make any material change in its methods
of management, marketing or operations; (ii) consult with PSS prior to
undertaking any material new business opportunity outside the ordinary course of
business and, except with respect to certain agreed matters, not undertake such
new business opportunity without the prior consent of
- 31 -
<PAGE>
PSS, which consent will not be unreasonably withheld; (iii) confer on a regular
basis with one or more designated representatives of PSS to report material
operational matters and to report the general status of ongoing business
operations; (iv) notify PSS of certain activities or events; (v) other than as
disclosed by S&W to PSS, not enter into any new employment contract or, except
in the ordinary course of business, any commitment to employees; (vi) not
increase the compensation (including fringe benefits) payable or to become
payable to any officer, director, employee, agent or independent contractor of
either such company except general hourly rate increases and normal merit
increases for employees other than officers made in the ordinary course of
business and consistent with past practice; (vii) except in the ordinary course
of business not create or incur any indebtedness, enter into or terminate any
lease of real estate or release or create any liens of any nature; (viii) except
in the ordinary course of business and except with respect to certain agreed
matters and, even if in the ordinary course of business, then not in an amount
to exceed $50,000 in the aggregate, make or commit to make any capital
expenditure, or enter into any lease of capital equipment as lessee or lessor;
(ix) not sell any material asset or make any material commitment relating to its
assets other than in the ordinary course of business; (x) not amend the
Certificate of Incorporation, Bylaws or other governing instruments of S&W; (xi)
not make any changes in its accounting methods or practices, except for changes
in its tax accounting methods or practices that may be necessitated by changes
in generally accepted accounting principles or applicable tax laws; (xii) except
for the Merger Agreement and 4,009 shares of S&W Common Stock to be issued
simultaneously with the Closing of the Merger pursuant to the S&W Supplemental
Executive Retirement Plan, issue, sell, pledge, encumber, authorize the issuance
of, or otherwise permit to become outstanding, any additional shares of S&W
capital stock or any other capital stock of its subsidiaries, or any stock
appreciation rights, or any option, warrant, conversion, or other right to
acquire any such stock, or any security convertible into any such stock, or pay
or declare or agree to pay or declare any dividend with respect to any S&W
capital stock; (xiii) other than in the ordinary course of business, not take
any action, or omit to take any action, which would cause its representations
and warranties under the Merger Agreement to be untrue or incorrect; (xiv) not
make any loan to any person or increase the aggregate amount of any loan
currently outstanding to any person, except for usual and customary advances to
employees made in the ordinary course of business; and (xv) not make any
agreement or commitment which will result in or cause to occur a violation of
any of the foregoing items.
Additionally, pursuant to the Merger Agreement, S&W and PSS have agreed
prior to the Closing Date that PSS shall restrict certain of its activities
except with the prior written consent of S&W. To this end, PSS has agreed (i) to
operate its business substantially as presently operated and only in the
ordinary course, except that any business acquisition by PSS or the incurrence
of additional debt or the issuance or sale of equity securities shall be deemed
to be in the ordinary course and (ii) except as previously disclosed in writing
by PSS to S&W, it will not, and will not permit DI to, amend its Articles of
Incorporation or Bylaws, and it will cause each of its subsidiaries to maintain
its corporate existence and corporate powers.
Stockholders Agreements
Simultaneous with the execution of the Merger Agreement, Joseph E.
Miller, Jr. and Bruce P. Ashby, each a stockholder of S&W, entered into
Stockholders Agreements with PSS (each a "Stockholders Agreement"). Each
Stockholders Agreement provides that each party thereto (a "Stockholder") will
vote such Stockholder's S&W Shares in favor of the Merger, the execution and
delivery by S&W of the Merger Agreement and the approval of the terms thereof
and each of the other transactions contemplated by the Merger Agreement,
including approval of the Escrow Agreement and appointment of the Stockholder
Representatives, provided that the terms of the Merger Agreement shall not have
been amended to reduce the consideration payable in the Merger to a lesser
amount of PSS Common Stock. Each Stockholders Agreement also provides that the
Stockholder will vote such Stockholder's S&W Shares against any of the following
(each a "Competing Transaction"): any merger agreement or merger (other than the
Merger Agreement and the Merger), consolidation, combination, sale of
substantially all of the assets, reorganization, recapitalization, dissolution,
liquidation or winding up of or by S&W or any amendment of S&W's Charter or
Bylaws or other proposal or transaction involving S&W or any of its subsidiaries
which amendment or other proposal or transaction would in any manner impede,
frustrate, prevent or nullify the Merger, the Merger Agreement or any of the
other transactions contemplated by the Merger Agreement. Each Stockholder has
granted an irrevocable proxy to PSS and Patrick C. Kelly, Chief Executive
Officer and Chairman of the Board of PSS, and David A. Smith, Executive Vice
President and Chief Financial Officer of PSS, in their respective
- 32 -
<PAGE>
capacities as officers of PSS, and any individual who shall succeed to any such
office of PSS, to vote such Stockholder's shares of S&W Common Stock consistent
with the foregoing agreements. Each Stockholder has also agreed not to, and not
to permit any of its representatives to, directly or indirectly, solicit,
initiate or encourage the submission of, any takeover proposal or participate in
any discussions or negotiations regarding, or furnish to any person any
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any takeover proposal.
Each Stockholders Agreement will terminate upon the earlier of the
Effective Time or the date upon which the Merger Agreement is terminated in
accordance with its terms. Notwithstanding the foregoing, if an "Extension
Event" occurs as of or prior to the termination of the Merger Agreement, then
for a period of one year following such termination, (i) each Stockholder's
agreement to vote against any Competing Transaction, the irrevocable proxy
granted by each Stockholder to vote against any Competing Transaction, and each
Stockholder's agreement not to facilitate any takeover proposal will continue in
effect and (ii) no Stockholder will be permitted to transfer any of such
Stockholder's S&W Shares in connection with any Competing Transaction or
takeover proposal. "Extension Event" is defined to mean any of the following
events: (A) the meeting of S&W stockholders to approve the Merger Agreement
shall not have been held or the approval of the Merger at such meeting shall not
have been obtained; or (B) any person (other than PSS or any subsidiary of PSS)
shall have made, or disclosed an intention to make, a takeover proposal or
proposal for a Competing Transaction
See "GENERAL INFORMATION--Votes Required."
Expenses and Fees
The Merger Agreement provides that PSS shall be responsible for its own
costs and expenses incurred in connection with the negotiation and consummation
of the transactions contemplated by the Merger Agreement. PSS further agrees to
bear and pay reasonable costs and expenses incurred by S&W on S&W's behalf in
connection with the transactions contemplated by the Merger Agreement in an
amount not to exceed $350,000 in the aggregate. S&W expenses in excess of
$350,000 shall be paid by the S&W stockholders through an adjustment to the
Aggregate Purchase Price. See "Amendment, Waiver, and Termination."
Accounting Treatment
Consummation of the Merger is conditioned on the Merger being accounted
for on a pooling-of-interests accounting basis and the receipt by PSS of a
letter from Arthur Andersen LLP with respect thereto. See "Conditions to
Consummation." Under this method of accounting, as of the Effective Time, the
assets and liabilities of S&W would be added to those of PSS at their recorded
book values and the stockholders' equity accounts of PSS and S&W would be
combined on PSS's consolidated balance sheet. On a pooling-of-interests
accounting basis, income and other financial statements of PSS issued after
consummation of the Merger would be restated retroactively, if necessary, to
reflect the combined consolidated financial position and results of operations
of PSS and S&W as if the Merger had taken place prior to the periods covered by
such consolidated financial statements and to reflect the accounting policies of
PSS.
The unaudited pro forma financial information contained in this Proxy
Statement-Prospectus has been prepared using the pooling-of-interests accounting
basis to account for the Merger. See "SUMMARY" and "PRO FORMA CONDENSED COMBINED
FINANCIAL DATA."
Resales of PSS Common Stock
The shares of PSS Common Stock issued in connection with the Merger
will be freely transferable under the Securities Act, except for shares issued
to any stockholder who may be deemed to be an "affiliate" (generally including,
without limitation, directors, certain executive officers and beneficial owners
of 10% or more of any class of capital stock) of S&W for purposes of Rule 145
under the Securities Act as of the date of the Special Meeting or for purposes
of applicable interpretations regarding pooling-of-interests accounting
treatment. Such affiliates may not sell their shares of PSS Common Stock
acquired in connection with the Merger except pursuant
- 33 -
<PAGE>
to an effective registration statement under the Securities Act or other
applicable exemption from the registration requirements of the Securities Act
and until such time as financial results covering at least 30 days of combined
operations of PSS and S&W after the Merger have been published. PSS may place
restrictive legends on certificates representing PSS Common Stock issued to all
persons who are deemed to be "affiliates" of S&W under Rule 145. In addition,
S&W has agreed to use its reasonable efforts to cause each person or entity that
is an "affiliate" to enter into a written agreement in substantially the form
attached to the Merger Agreement relating to such restrictions on sale or other
transfer. This Proxy Statement-Prospectus does not cover resales of PSS Common
Stock received by any person who may be deemed to be an affiliate of S&W.
Dissenters' Rights
The proposed Merger is a transaction which entitles stockholders of S&W
who comply with the provisions of Sections 623 and 910 of the NYBCL (the
"Dissenters Statute") to dissent from the Merger and to receive payment of the
fair value of their shares of S&W Common Stock ("S&W Shares") as of the
Effective Time, excluding any appreciation or depreciation in anticipation of
the Merger. The Notice of the Special Meeting of S&W states that S&W
stockholders are entitled to assert dissenters' rights under the Dissenters
Statute and that the Dissenters Statute is set forth in ANNEX C to this Proxy
Statement-Prospectus. The following summary does not purport to be a complete
statement of dissenters' rights under Sections 623 and 910 of NYBCL.
Following consummation of the Merger, a stockholder of record on the
Record Date who has followed the procedures set forth under Sections 623 and 910
will be entitled to a proceeding in the supreme court in the judicial district
in which the office of the corporation is located to determine the rights of
dissenting stockholders and to fix the fair value of such stockholder's
securities. Persons who are beneficial owners of S&W Shares but whose securities
are held of record by another person, such as a broker, bank or nominee, should
timely instruct the record holder to follow the procedures outlined below if
such persons desire to seek appraisal with respect to any or all of their
securities. Failure to take any necessary step may result in the termination or
waiver of appraisal rights under Sections 623 and 910.
Holders of S&W Shares who do not vote for approval of the Merger
Agreement and who follow certain other procedures summarized below will have the
right to dissent from and obtain payment in cash of the fair value of their
shares in the event of the consummation of the Merger. The following is a
summary of the procedures which must be followed by any S&W stockholder who
wishes to dissent and demand payment for such holder's shares in the event of
consummation of the Merger. Holders receiving cash upon exercise of dissenters'
rights will recognize a gain or loss for federal income tax purposes. See
"Certain Federal Income Tax Consequences."
To exercise the right of dissent, a stockholder (i) must deliver to
S&W, before the vote is taken at the Special Meeting, a written notice of such
stockholder's objection to the action, including notice of his election to
dissent, his name and residence address, the number and classes of shares as to
which he dissents (which must be all shares he owns) and a demand for payment of
the fair value of his shares if the Merger is effectuated, and (ii) must not
vote such stockholder's shares (in person or by proxy) in favor of the Merger
Agreement. Neither a vote against the Merger Agreement nor a specification in a
proxy to vote against the Merger Agreement will in and of itself constitute the
necessary notice of intent to dissent to the Merger Agreement. Moreover, by
voting in favor of the Merger Agreement, or by returning the enclosed proxy
without instructing the proxyholders to vote against the Merger Agreement, a
stockholder waives the right to dissent under the Dissenters Statute.
Following the filing of a notice of election to dissent, the surviving
corporation shall make a written offer to such stockholder to pay for his shares
at a specified price which the corporation considers to be their fair value.
Once the corporation action has been consummated, the offer shall be accompanied
or followed by an advance payment in an amount equal to eighty percent of the
amount of such offer. If the corporation fails to make such written offer within
a specified time period or if the corporation and the stockholder fail to agree
within thirty days thereafter of the price to be paid for the shares, the
corporation shall institute the special proceeding to fix the fair value in the
supreme court of the appropriate judicial district.
- 34 -
<PAGE>
Dissenting stockholders of S&W should direct any communications
regarding their rights to S&W X-Ray, Inc., Cornerstone Center, 2300 Buffalo
Road, Rochester, New York 14824, Attention: Corporate Secretary. All such
communications should be signed by or on behalf of the dissenting stockholder in
the form in which such stockholder's shares are registered on the books of S&W,
except that a beneficial stockholder may assert dissenter's rights as to shares
held on such stockholder's behalf only if such beneficial holder submits to S&W
the record stockholder's written consent to the dissent by the time such
beneficial holder asserts his rights.
The foregoing summary of Sections 623 and 910 of the NYBCL is
necessarily incomplete and is qualified in its entirety by reference to those
Sections as set forth herein as ANNEX C. Because exercise of dissenters' rights
requires strict adherence to the statutory provisions referred to above, each
stockholder who may desire to exercise such rights should adhere to the
provisions of such laws and consult with such stockholder's legal and financial
advisors.
- 35 -
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial
statements are presented assuming the Merger has been consummated and accounted
for as a pooling of interests. The unaudited pro forma condensed combined
balance sheets as of June 30, 1997 and March 28, 1997 have been prepared as if
the Merger took place on that date. The unaudited pro forma condensed combined
statements of operations for the three months ended June 30, 1997 and 1996 and
three years ended March 28, 1997 have been prepared as if the Merger and other
transactions requiring pro forma adjustments had occurred on April 1, 1994. The
unaudited pro forma condensed combined financial statements are based on the
separate historical condensed financial statements of PSS and S&W giving effect
to the transactions under the assumptions and adjustments outlined in the
accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements. The unaudited pro forma condensed combined financial statements are
provided for comparative purposes only and are not necessarily indicative of the
actual results that would have been obtained had the Merger occurred on the
dates indicated or that may be achieved in the future.
For all applicable periods presented in the unaudited pro forma
condensed combined statements of operations, shares used in the computation of
net income per common and common equivalent share give effect to the maximum
exchange ratio for the S&W Common Stock, assuming distribution to S&W
shareholders of all shares of PSS Common Stock subject to the Escrow Agreement
and no adjustment to the Aggregate Purchase Price.
The unaudited pro forma condensed combined financial statements should
be read in conjunction with the separate audited consolidated financial
statements and unaudited condensed consolidated financial statements and
unaudited condensed consolidated financial statements, including the notes
thereto, of PSS and S&W, appearing elsewhere in this Proxy Statement-Prospectus.
See "PSS CONSOLIDATED FINANCIAL STATEMENTS" and "S&W FINANCIAL STATEMENTS."
- 36 -
<PAGE>
Pro Forma Condensed Combined Balance Sheet
June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
PSS S&W Adjustments Combined
(In thousands)
ASSETS
<S> <C> <C> <C> <C>
Current Assets
Cash and Cash Equivalents............... $ 48,172 $ 1 $ 48,173
Marketable securities................... 520 -- 520
Accounts receivable, net................ 121,593 10,331 131,924
Inventories............................. 68,477 5,772 74,249
Prepaid expenses and other.............. 20,502 1,941 22,443
---------- -------- ----------
Total current assets.............. 259,264 18,045 277,309
Property and equipment, net................ 21,318 1,358 22,676
Intangibles, net........................... 22,248 458 22,706
Other assets............................... 5,371 329 5,700
---------- -------- ----------
Total Assets............................ $ 308,201 $ 20,190 $ 328,391
========== ======== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable...................... $ 69,700 $ 3,968 $ 73,668
Accrued expenses...................... 13,764 825 $500(4) 15,089
Notes payable to bank, notes payable
to related parties, and current
maturities of long-term debt..... -- 5,435 5,435
Other................................. 7,684 1,271 8,955
---------- -------- ------ ----------
Total current liabilities....... 91,148 11,499 500 103,147
Long term debt and capital lease
obligations, net of current maturities 1,609 3,464 5,073
Other liabilities....................... 5,064 -- 5,064
---------- -------- ------ ----------
Total liabilities.............. 97,821 14,963 500 113,284
---------- -------- ------ ----------
Shareholders' Equity:
Common stock.......................... 373 10 12(3) 395
Additional paid-in capital............ 207,651 173 (12)(3) 207,812
Retained Earnings .................... 2,016 6,350 (500)(4) 7,866
Cumulative foreign currency
translation adjustment............ 340 -- 340
---------- -------- ------ ----------
210,380 6,533 (500) 216,413
Loan to employee stock ownership plan. -- (1,306) -- (1,306)
---------- -------- ------ ----------
Total shareholders' equity..... 210,380 5,227 (500) 215,107
---------- -------- ------ ----------
Total liabilities and shareholders'
equity.................... $ 308,201 $ 20,190 $ $ 328,391
========== ======== ====== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
- 37 -
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ -------------------------
PSS S&W Adjustments Combined
--- --- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales................................. $203,543 $ 20,040 $223,583
Cost of goods sold........................ 148,100 15,470 163,570
-------
Gross profit.......................... 55,443 4,570 60,013
Selling, general and administrative
expenses.............................. 48,912 4,039 52,951
Income from operations............ 6,531 531 7,062
-------- ------- --------
Other income (expense):
Interest expense...................... -- (181) (181)
Interest and investment income........ 248 7 255
Other income.......................... 582 -- 582
-------- ------- --------
830 (174) 656
-------- ------- --------
Income before income taxes........ 7,361 357 7,718
Provision for income taxes................ (2,991) (147) (3,138)
Net income ............................... $ 4,370 $ 210 $ 4,580
======= ======= ========
Net income per common and
common equivalent share............... $ 0.12 $ 0.90 $ 0.12
======= ====== =======
Weighted average shares................... 37,502 235 1,656(3) 39,393
====== ====== ======== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
- 38 -
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ -------------------------
PSS S&W Adjustments Combined
--- --- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales.................................. $151,568 $17,689 $169,257
Cost of goods sold......................... 109,733 13,995 123,728
-------- ------- --------
Gross profit........................... 41,835 3,694 45,529
Selling, general and administrative
expenses............................... 37,913 3,234 41,147
Merger costs and expenses.............. 6,934 -- 6,934
-------- ------- --------
Income (loss) from operations...... (3,012) 460 (2,552)
-------- ------- --------
Other income (expense):
Interest expense....................... -- (145) (145)
Interest and investment income......... 528 2 530
Other income........................... 404 -- 404
-------- ------- --------
932 (143) 789
-------- ------- --------
Income (loss) before income taxes.. (2,080) 317 (1,763)
(Provision) Benefit for income taxes....... 540 (144) 396
-------- ------- --------
Net income (loss)......................... $ (1,540) $ 173 $ (1,367)
======== ======= ========
Net income (loss) per common and
common equivalent share................ $ (0.04) $ 0.80 $ (0.04)
======== ======= ========
Pro forma tax adjustment on pooled S-
corporation income..................... (142) (142)
-------- --------
Pro forma net income (loss)................ $ (1,682) $ (1,509)
======== ========
Pro forma tax adjustment per common
and common equivalent share on
pooled S-corporation income............ $ (0.01) $ --
-------- --------
Pro forma net income (loss) per
common and common equivalent
share.................................. $ (0.05) $ (0.04)
======== ========
Weighted average shares.................... 35,189 216 1,528(3) 36,933
======== ======= ===== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
- 39 -
<PAGE>
Pro Forma Condensed Combined Balance Sheet
March 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ ------------------------
PSS S&W Adjustments Combined
--- --- ----------- --------
(In thousands)
ASSETS
<S> <C> <C> <C> <C>
Current Assets
Cash and Cash Equivalents...................... $ 28,740 $ 335 $ 29,075
Marketable securities.......................... 15,045 -- 15,045
Accounts receivable, net....................... 119,293 11,133 130,426
Inventories.................................... 67,895 7,291 75,186
Prepaid expenses and other..................... 21,972 2,149 24,121
-------- -------- -----------
Total current assets..................... 252,945 20,908 273,853
Property and equipment, net....................... 18,812 1,391 20,203
Intangibles, net.................................. 21,617 467 22,084
Other assets...................................... 4,912 218 5,130
-------- -------- ----------
Total Assets................................... $298,286 $ 22,984 $ 321,270
======== ======== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................. $ 64,064 $4,948 $ 69,012
Accrued expenses............................. 18,263 1,750 $500(4) 20,513
Notes payable to bank, notes payable
to related parties, and current......... -- 6,297 6,297
maturities of long-term debt............
Other........................................ 5,165 638 5,803
------ ------ ----- ----------
Total current liabilities.............. 87,492 13,633 500 101,625
Long term debt and capital lease obligations,
net of current maturities.................... 560 4,396 4,956
Other liabilities.............................. 4,634 -- 4,634
------ ------ ----- ----------
Total liabilities...................... 92,686 18,029 500 111,215
------ ------ ----- ----------
Shareholders' Equity:
Common stock................................. 370 10 12(3) 392
Additional paid-in capital................... 207,509 173 (12)(3) 207,670
(Accumulated Deficit) Retained Earnings...... (2,372) 6,140 (500)(4) 3,268
Cumulative foreign currency
translation adjustment................... 93 -- 93
------ ------ ----- -------
205,600 6,323 (500) 211,423
Loan to employee stock ownership plan........ -- (1,368) -- (1,368)
-------- --------- ----- -------
Total shareholders' equity............ 205,600 4,955 (500) 210,055
-------- ------ ------ -------
Total liabilities and shareholders'
equity........................... $ 298,286 $ 22,984 $ -- $ 321,270
========== ======== ======== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
- 40 -
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the Year Ended March 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ ----------------------------
PSS S&W Adjustments Combined
--- --- ----------- --------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Net sales.......................... $691,020 $72,034 $763,054
Cost of goods sold................. 502,904 55,260 558,164
-------- ------ --------
Gross profit................... 188,116 16,774 204,890
Selling, general and administrative
expenses....................... 173,114 15,774 188,888
Merger costs and expenses...... 12,128 -- 12,128
-------- ------ --------
Income from operations..... 2,874 1,000 3,874
-------- ------ --------
Other income (expense):
Interest expense............... (324) (865) (1,189)
Interest and investment income. 2,406 14 2,420
Other income................... 1,537 -- 1,537
-------- ------ --------
3,619 (851) 2,768
-------- ------ --------
Income before income taxes. 6,493 149 6,642
Provision for income taxes......... (2,120) (96) (2,216)
-------- ------ --------
Net income ........................ $ 4,373 $ 53 $ 4,426
======== ====== ========
Net income per common and
common equivalent share....... $ 0.12 $ 0.23 $ 0.12
===== ===== =====
Pro forma tax adjustment on pooled
S-corporation income............ (357) (357)
-------- --------
Pro forma net income .............. $ 4,016 $ 4,069
======== ========
Pro forma tax adjustment per common
and common equivalent share on
pooled S-corporation income.... $ (0.01) $ (0.01)
------- -------
Pro forma net income per
common and common equivalent
share......................... $ 0.11 $ 0.11
===== ======
Weighted average shares............ 36,501 235 1,656(3) 38,392
====== ======= ===== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined
Financial Statements.
- 41 -
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the Year Ended March 29, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ ----------------------------
PSS S&W Adjustments Combined
--- --- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales.......................... $529,024 $60,096 $589,120
Cost of goods sold................. 379,360 47,170 426,530
------- ------ -------
Gross profit................... 149,664 12,926 162,590
Selling, general and administrative
expenses....................... 130,966 11,044 142,010
Merger costs and expenses...... 15,732 -- 15,732
------- ------ -------
Income from operations..... 2,966 1,882 4,848
------- ------ -------
Other income (expense):
Interest expense............... (3,068) (500) (3,568)
Interest and investment income. 1,180 8 1,188
Other income................... 1,585 1 1,586
------- ------ -------
(303) (491) (794)
------- ------ -------
Income before income taxes. 2,663 1,391 4,054
Provision for income taxes......... (1,324) (601) (1,925)
------- ------ -------
Net income ........................ $ 1,339 $ 790 $ 2,129
======= ====== =======
Net income per common and
common equivalent share....... $ 0.04 $ 3.65 $ 0.06
===== ===== =====
Pro forma tax adjustment on pooled
S-corporation income............ (438) (438)
------- -------
Pro forma net income .............. $ 901 $ 1,691
======= =======
Pro forma tax adjustment per common
and common equivalent share on
pooled S-corporation income.... $ (0.01) $ (0.01)
------- -------
Pro forma net income per
common and common equivalent
share......................... $ 0.03 $ 0.05
===== =====
Weighted average shares............ 31,454 216 1,528(3) 33,198
======= ======== ====== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined
Financial Statements.
- 42 -
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the Year Ended March 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ -----------------------------
PSS S&W Adjustments Combined
--- --- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales.......................... $413,301 $58,684 $471,985
Cost of goods sold................. 293,688 45,982 339,670
-------- ------- --------
Gross profit................... 119,613 12,702 132,315
Selling, general and administrative
expenses....................... 111,493 10,748 122,241
Restructuring charge........... 4,388 -- 4,388
-------- ------- --------
Income from operations..... 3,732 1,954 5,686
-------- ------- --------
Other income (expense):
Interest expense............... (4,064) (441) (4,505)
Interest and investment income. -- 5 5
Other income................... 1,906 6 1,912
-------- ------- --------
(2,158) (430) (2,588)
-------- ------- --------
Income before income taxes. 1,574 1,524 3,098
Provision for income taxes......... (2,421) (617) (3,038)
-------- ------- --------
Net income (loss).................. $ (847) $ 907 $ 60
======== ======= ========
Net income (loss) per common and
common equivalent share....... $ (0.04) $ 4.43 $ --
======== ======= ========
Pro forma tax adjustment on pooled
S-corporation income............ (23) (23)
-------- --------
Pro forma net income (loss)........ $ (870) $ 37
======== ========
Pro forma tax adjustment per common
and common equivalent share on
pooled S-corporation income.... -- --
-------- --------
Pro forma net income (loss) per
common and common
equivalent share.............. $ (0.04) $ --
======== ========
Weighted average shares............ 23,762 205 1,445(3) 25,412
======== ======= ====== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined
Financial Statements.
- 43 -
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(In Thousands)
The unaudited pro forma condensed combined financial statements have
been prepared by combining the historical balances of PSS and the historical
balances of S&W as recast to a conforming March year end. The following notes
describe the pro forma adjustments and other items relevant to such statements.
(1) Purchase Business Combinations
PSS completed certain immaterial acquisitions during fiscal years 1997,
1996, and 1995. The aggregate terms of these acquisitions have been disclosed in
the PSS consolidated financial statements included elsewhere in this Proxy
Statement-Prospectus. Pro forma information for the acquisitions is not
presented in the pro forma financial statements because the impact on PSS'
results of operations would not be material.
S&W completed one immaterial acquisition in fiscal year 1996 which was
accounted for as a purchase.
(2) Merger Costs and Expenses and Anticipated Cost Savings
Significant expenses are expected to be incurred in connection with the
consolidation and restructuring of PSS and S&W. Such activities will include
restructuring regional and corporate functions, consolidating information
systems and reducing personnel. The expenses associated with these activities
cannot be currently estimated with a reasonable degree of accuracy, but
preliminary estimates indicate that these expenses may range between $8,000 and
$10,000. Income tax benefits at the statutory rate resulting from these charges
range between $2,700 and $3,400. The estimated costs associated with the
restructuring activities will be expensed in the period in which the companies
complete the restructuring plan.
Efficiencies and net cost savings are expected to result from the
consolidation and restructuring. The unaudited pro forma condensed combined
financial statements do not reflect such savings.
(3) Shareholders' Equity and Earnings Per Share
The weighted average common share amounts represent the aggregate
weighted average shares of PSS after the pooling, adjusted to reflect the
maximum exchange ratio of 8.0565 for the S&W Common Stock, which includes all
shares to be held in escrow.
(4) Transaction Fees
Under the pooling of interests accounting method, direct transaction
costs are expensed in the period in which the transaction is consummated. Such
costs are not currently estimable with a reasonable degree of accuracy, but
preliminary estimates indicate that these expenses may range between $400 to
$500 and include investment banking, legal, accounting, printing, solicitation,
filing fees and similar expenses. The March 28, 1997 and June 30, 1997 unaudited
pro forma condensed combined balance sheets reflect $500 of such expenses. These
expenses have not been reflected in the unaudited pro forma condensed combined
income statements.
- 44 -
<PAGE>
SELECTED FINANCIAL DATA OF PSS
The following selected financial data of PSS for fiscal years 1994
through 1997 has been derived from PSS' audited consolidated financial
statements incorporated herein by reference which give retroactive effect to the
mergers with Taylor Medical, Inc. ("Taylor") and X-ray of Georgia ("X-ray GA").
The selected financial data of PSS for fiscal year 1993 has been derived from
the Company's unaudited consolidated financial statements incorporated herein by
reference which give retroactive effect to the merger with Taylor and X-ray GA.
See "BUSINESS OF PSS - GENERAL," "PSS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "PSS CONSOLIDATED FINANCIAL
STATEMENTS."
<TABLE>
<CAPTION>
Fiscal Year Ended Three Months Ended
---------------------------------------------------------------------------
April 2, April 1, March 30, March 29, March 28, June 30, June 30,
------- -------
1993 1994 1995 1996 1997 1996 1997
---------------------------------------------------------------------------
(dollars in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales............................................. $268,473 $351,203 $413,301 $529,024 $691,020 $151,568 $203,543
Gross profit.......................................... 83,294 105,968 119,613 149,664 188,116 41,835 55,443
Selling, general and administrative expenses....... 78,961 99,147 111,492 130,966 173,113 37,913 48,912
Restructuring charges(1).............................. 303 308 4,389 -- -- -- --
Merger costs and expenses(2).......................... -- -- -- 15,732 12,128 6,934 --
Net income (loss) before extraordinary item........... 692 1,487 (847) 1,339 4,373 (1,540) $ 4,370
Extraordinary loss, net of tax(3)..................... -- 327 -- -- -- --
Net income (loss)..................................... $ 692 $ 1,160 $ (847) $ 1,339 $ 4,373 $(1,540) $ 4,370
Net income (loss) before extraordinary item per
share(4).............................................. $ 0.04 $ 0.08 $ (0.04) $ 0.04 $ 0.12 $ (0.04) $ 0.12
Extraordinary loss per share, net of tax(4).......... -- $ (0.02) -- -- -- -- --
Net income (loss) per share(4)........................ $ 0.04 $ 0.06 $ (0.04) $ 0.04 $ 0.12 $ (0.04) $ 0.12
Unaudited pro forma net income including pro forma tax
adjustment on pooled s-corporation income and
excluding merger costs and expenses, restructuring
charges, and fiscal year 1997 other operating
charges (1)(2)(5)................................. $ 878 $ 1,276 $ 2,018 $ 12,307 $ 15,078 $ 3,135 $ 4,370
Unaudited pro form net income per share including pro
forma tax adjustment on pooled S-corporation
income and excluding merger costs and expenses,
restructuring charges, and fiscal year 1997 other
operating charges(1)(2)(4)(5)..................... $ 0.05 $ 0.07 $ 0.08 $ 0.39 $ 0.41 $ 0.09 $ 0.12
Weighted average shares outstanding(4)................ 16,731 17,772 23,762 31,454 36,501 35,189 37,502
Balance Sheet Data at End of Period:
Working capital..................................... $37,777 $ 46,148 $ 53,626 $172,696 $165,454 $168,117
Total assets........................................ 93,962 125,545 134,426 278,958 298,286 308,201
Long-term liabilities............................... 42,901 55,026 33,869 4,132 5,194 6,673
Total shareholders' equity.......................... 18,897 23,588 46,326 199,550 205,600 210,380
Service centers (6)................................. 41 46 55 65 77 67 80
</TABLE>
- -------------
(1) The fiscal 1995 restructuring charge of $4,389 reflects Taylor management's
assessment of the under-realization of future benefits related to certain
intangible assets. The fiscal 1994 restructuring charge of $308 resulted
from Taylor's consolidation of an acquisition. The fiscal 1993 restructuring
charge of $303 resulted from Taylor management's writedown of capitalized
software costs.
(2) Merger costs and expenses reflect direct merger expenses incurred in
connection with mergers accounted for as poolings-of-interests.
(3) The extraordinary item in fiscal 1994 resulted from early extinguishment of
debt by Taylor.
(4) Adjusted to give effect to a three-for-one stock split in fiscal 1996.
(5) Fiscal 1997 other operating charges represent write-offs of inventory of
$4,090 and accounts receivable of $500 at branches involved in mergers.
(6) Fiscal years 1993 through 1995 exclude Taylor service centers and the
Imaging Business.
- 45 -
<PAGE>
PSS 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 PSS Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Proxy
Statement-Prospectus.
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, serving over 103,000 physician offices
(representing approximately 54% of all physician offices) in all 50 states (the
"Physician Supply Business"). The Company is the second-largest distributor of
imaging supplies and equipment in the United States, serving over 8,000 customer
sites in 17 states (the "Imaging Business"). PSS also distributes medical
supplies and equipment to hospitals and physician offices in five European
countries (the "International Business").
Recent Acquisitions
On July 21, 1997, PSS completed the acquisition of General X-Ray, Inc.,
General Med Ventures, Inc. and General Med Ventures International, Inc.
(collectively, "General X-Ray"), a distributor of radiology and imaging
equipment, chemicals and supplies and a provider or technical service to
physician offices, other alternate site providers and hospitals. General X-Ray
operated seven sites in seven states, primarily in the Midwest. General X-Ray
had approximately $76 million in revenues for the twelve months ended
December 31, 1996.
Company Growth
PSS has grown rapidly in recent years through acquisitions, same-center
growth and new center development. During the fiscal years 1992 through 1997,
the Company and its subsidiaries' net sales, excluding the pre-acquisition
revenues of Taylor and X-ray GA, grew at a compound annual rate of approximately
49%, and including pre-acquisition revenues of Taylor and X-ray GA, the
Company's net sales grew at a compound annual rate of approximately 27%. The
number of company service centers has grown from two at the end of fiscal 1984
to 84 currently, including 61 Physician Supply Business service centers, 20
Imaging Business services 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
supply and equipment distributors, (ii) acquiring local and regional diagnostic
imaging equipment and supply distributors, (iii) increasing sales from existing
service centers, and (iv) opening start-up service centers.
The following table depicts the number of service centers, sales
representatives and states served by the Company for the period indicated. The
table excludes the three European service centers acquired during fiscal year
1997, two of which were merged and one European service center acquired
subsequent to fiscal year 1997. See "Properties" for a list of the Physician
Supply Business, Imaging Business and International Business service centers.
- 46 -
<PAGE>
<TABLE>
<CAPTION>
Fiscal year ended Quarter ended
---------------------------------------------------- June 30,
1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
The Company:
Service centers(1) 44 46 55 65 75 77
Sales representatives 324 371 465 702 773 780
States served 33 44 48 50 50 50
Physician Supply Business:
Service centers(1) 40 45 54 64 61 61
Sales representatives 315 362 455 692 720 720
States served 33 44 48 50 50 50
Imaging Business
Service centers 1 1 1 1 14 16
Sales representatives 9 9 10 10 53 60
Service specialists 30 32 34 35 145 160
States served 2 2 2 2 6 19
International Business
Service centers -- -- -- -- 2 3
Sales representatives -- -- -- -- 24 25
Countries served -- -- -- -- 5 5
</TABLE>
- -------------
(1) Excludes Taylor service centers prior to their acquisition.
Of the Company's 61 Physician Supply Business service centers, 31 were
opened as start-ups and 30 resulted from acquisitions. A significant portion of
the Company's growth occurred with the merger of Taylor in fiscal 1996. In
connection with the integration of Taylor into PSS, the Company closed or merged
into existing PSS service centers the majority of the Taylor locations.
Additionally, the Company merged eight PSS service centers into the eight
remaining Taylor locations and established two additional service centers.
In addition to the opening of new service centers and the acquisition
of local medical supply and equipment distributors, PSS sales growth is largely
attributable to high levels of same center sales growth. PSS quantifies same
center sales by aggregating the sales for service centers which have been in
operation for at least two consecutive 12-month periods.
The following table sets forth the same center sales growth of the
Physician Supply Business for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------
1993(1) 1994(1) 1995(1) 1996 1997
------- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Number of centers per period 25 29 40 45 53
Same center sale growth 18.5% 27.7% 23.3% 26.8% 18.2%
</TABLE>
- --------------
(1) Excludes Taylor centers.
This same center sales growth has been accomplished by (i) focusing on
diagnostic equipment which produces residual sales of reagents, (ii)
productivity gains of its maturing sales force, (iii) pursuing customer reach
and penetration, and (iv) accessing new products not previously distributed.
Historically,
- 47 -
<PAGE>
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 1994, 1995 and 1996 with additional emphasis on new products manufactured
by Abbott Laboratories, Roche Diagnostics and SmithKline Beecham not previously
distributed by the Company. The Company had same store sales growth of
approximately 13% for the first quarter of fiscal year 1998 which is higher than
the estimated physician supply market growth of approximately six percent.
Acquisition Program
The Company views the acquisition of medical products distributors as
an integral part of its growth strategy. The Company's Physician Supply Business
has grown from one service center located in Jacksonville, Florida in 1983 to 61
service centers currently. The Company's Imaging Business and International
Business began with acquisitions in fiscal year 1997 and have 20 and three
service centers, respectively, to date. Since fiscal 1994 the Company has
accelerated its acquisition of medical products distributors both in number and
in materiality of the operations acquired.
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 Quarter ended
---------------------------------------------------
1993 1994 1995 1996 1997 June 30, 1997
---- ---- ---- ---- ---- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Number of acquisitions 3 4 9 11 10 3
Prior year revenues for acquired
companies(1) $8,200 $26,300 $37,600 $167,600 $241,700 $17,700
Aggregate consideration paid for
acquired companies $1,200 $4,800 $9,700 $73,100 $83,100 $5,400
</TABLE>
(1) This 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.
The Company anticipates taking a charge for the quarter ended
September 30, 1997 of approximately $8.0 million to $10.0 million due to mergers
completed in such quarter. See "Risk Factors -- Quarterly Fluctuations in
Operating Results."
- 48 -
<PAGE>
Sales Mix
The following table sets forth information regarding the Company's net
sales mix and gross profit percentages by significant product category for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
------------------
Fiscal Year Ended March, June 30,
-------------------------------- --------
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales:
Total Company:
Physician supply business $362,648 $416,910 $597,280 $138,635 $153,242
Imaging business na na na 11,480 42,004
International business na na na -- 4,152
Service and other na na na 1,453 4,145
Physician Supply Business
Supplies $151,588 $297,058 $404,859 $96,762 $107,665
Equipment 51,127 76,144 125,994 28,036 30,290
Pharmaceuticals 29,836 43,708 66,427 13,837 15,287
Other 3,637 3,845 4,030 1,068 1,197
Taylor (1) 130,097 62,539 -- -- --
-------- -------- -------- -------- --------
Physician Supply Business total $366,285 $483,294 $601,310 $139,703 $154,439
Imaging Business:
Imaging supplies na na na $10,517 $36,333
Equipment na na na 963 5,671
Service na na na 388 2,948
Imaging Business total 47,016 45,730 74,003 11,865 44,952
-------- -------- -------- -------- --------
European Business na na 15,707 na 4,152
Company total $413,301 $529,024 $691,020 $151,568 $203,543
======== ======== ======== ======== ========
Percentage of net sales:
Total Company:
Physician supply business 100% 100% 100% 91.5% 75.3%
Imaging business na na na 7.6% 20.6%
International business na na na -- 2.1%
Service and other na na na 0.9% 2.0%
-------- -------- -------- -------- --------
Total Company total 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
Physician Supply Business
Supplies 64.2% 70.6% 67.3% 69.3% 69.7%
Equipment 21.7 18.1 21.0 20.1 19.6
Pharmaceuticals 12.6 10.4 11.0 9.9 9.9
Other 1.5 0.9 0.7 0.7 0.8
-------- -------- -------- -------- --------
Physician Supply Business Total 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
Imaging Business:
Imaging supplies na na na 88.6% 80.8%
Equipment na na na 8.1 12.6
Service na na na 3.2 6.6
Imaging Business total na na na 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.
(2) Excludes fiscal 1997 operating write-offs of inventory of branches involved
in mergers of approximately $4.1 million.
- 49 -
<PAGE>
Exclusive Distribution Agreements
The Company has focused on a comprehensive and consultative sales
approach with an emphasis on diagnostic products, which includes sophisticated
diagnostic equipment and supplies related to the use of such equipment. As a
result, the Company has been able to expand and increase its diagnostic products
sales in periods of uncertainty in the health care market. Additionally, as
manufacturers search for means to reduce sales and marketing expenses, PSS has
used its expertise and market reach to distribute products to physicians as
evidenced by the increase in total sales dollars of diagnostic equipment and
pharmaceuticals.
The Company recently completed the second year of a Distributorship
Agreement (the "Abbott Agreement") with Abbott Laboratories providing for the
exclusive distribution of certain Abbott diagnostic products. Gross profits for
products previously sold by Abbott are generally substantially less than
standard PSS margins. When the Company began the Distribution Agreement, average
gross profit on sales of Abbott products were 16.7% The average gross profit on
sales of Abbott products by the Company's Physician Supply Division improved to
18.0% and 22.2% for fiscal 1996 and 1997, respectively. Gross profits on these
products have gradually improved over the term of the relationship. The Abbott
Agreement has positioned PSS as the sole distributor for, among other products,
the CELL DYN(R) 1400, 1600 and 1700 hematology products, Abbott Vision(R)
products, IMx(R) and AXyM(R) immuno assay analyzers and reagents, and the Abbott
Testpack(R) line of rapid tests sold to physician offices with 24 or fewer
physicians per physician office site and has also enabled the Company to
cross-sell its other products to Abbott customers. PSS and Abbott are currently
negotiating fiscal 1998 performance goals and related acquisition cost of
product.
The Company has entered into other exclusive distribution agreements
for certain products manufactured by Roche Diagnostics, Inc., Siemens Medical
Systems, Inc., Hologic, Inc., Bard Diagnostic Sciences, Inc., Tanita Corporation
of America, Inc. and HumaScan, Inc. These strategic alliances should continue to
broaden the Company's 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
Plus(SM), a comprehensive savings plan for physicians in which PSS offers
special group purchasing contract pricing and provides periodic cost analyses to
help manage the supply needs of each physician. Under this program, when a
physician office guarantees at least 80% of its purchase volume to PSS, the
Company will guarantee the lowest purchase prices on certain products as well as
certain service guarantees. In addition to this program, the Company has
recently signed distribution agreements with several national and regional
integrated and managed care groups.
In order to reduce the number of SKUs stocked by the Company, 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.
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 field service specialists. Currently,
the Imaging Division provides service to approximately 8,000 physician offices,
other alternate site providers and hospitals through 20 service centers, 75
sales representatives and 252 field service specialists. The field service
- 50 -
<PAGE>
specialists service products ranging from processors to radiographic equipment.
While Imaging Business gross margins are lower than the Physician Supply
Business gross margins, general and administrative expenses are also lower than
the Physician Supply Business due in part to fewer products distributed, larger
average order size, less frequent deliveries and fewer personnel.
International Business
The Company also distributes medical supplies and equipment in Belgium,
France, Germany, Luxembourg and the Netherlands through its WorldMed
International, Inc. subsidiary. This division began operations in April 1996
with the acquisition of its service center in Leuven, Belgium. The Company
currently has three International Division service centers employing
approximately 25 sales representatives who distribute to office based physicians
and hospitals.
Results of Operations
The table below sets forth for each of the fiscal years 1995 through
1997 certain financial information as a percentage of net sales. The following
financial information includes the pre-acquisition financial information of
Taylor and X-ray GA.
<TABLE>
<CAPTION>
Three months
------------
Fiscal year ended March, ended June 30,
------------------------- --------------
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales 100% 100% 100% 100% 100%
Gross Profit 28.9 28.3 27.2 27.6 27.2
Selling expenses 10.0 9.2 9.1 9.9 8.3
General and administrative expenses 17.0 15.6 16.0 15.1 15.8
Restructuring charges(1) 1.1 -- -- -- --
Merger costs and expenses(2) -- 3.0 1.8 4.6 --
Net income (loss) (0.2) 0.3 0.6 (1.0) 2.2
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(3) 0.5 2.3 2.2 2.0 2.2
</TABLE>
- ------------
(1) The fiscal year 1995 restructuring charge of $4,389 reflects Taylor
management's assessment of the under-realization of future benefits related
to certain intangible assets.
(2) Merger costs and expenses reflect direct merger expenses incurred in
connection with mergers accounted for as poolings-of-interests.
(3) Fiscal year 1997 other operating charges represent write-offs of inventory
of $4,090 and accounts receivable of $500 at branches involved in mergers.
Three Months Ended June 30, 1997 Versus Three Months Ended June 30, 1996
Net Sales. Net sales for the three months ended June 30, 1997 totaled
$203.5 million, an increase of $52.0 million or 34.3% over net sales of $151.6
million for the three months ended June 30, 1996. Net sales from the Imaging
Business increased to $44.9 million for the three months ended June 30, 1997
from $11.9 million for the three months ended June 30, 1996. In order of
contribution to the increase, net sales increased as the result of (i) net sales
of the Imaging Business centers acquired during the last nine months of fiscal
year 1997, (ii) internal sales growth of Physician Supply Business centers
operating at least two years, and (iii) net sales of Physician Supply Business
centers recently acquired.
- 51 -
<PAGE>
The Company's Physician Supply Business service centers that are
expected to be operating for at least 24 consecutive months as of fiscal year
ended 1998 generated same center sales growth of 13% for the three months ended
June 30, 1997. The sales growth resulted from the continued development of PSS's
sales force, further market penetration, increased emphasis on diagnostic
equipment and supplies and products not previously distributed, and expansion of
existing territories served by individual service centers.
Gross Profit. Gross profit for the three months ended June 30, 1997
totaled $55.4 million, an increase of $13.6 million or 32.5% over the three
months ended June 30, 1996 total of $41.8 million. Gross profit as a percentage
of net sales decreased to 27.2% for the three months ended June 30, 1997 from
27.6% for the three months ended June 30, 1996. The decrease in gross profit
percentage is attributable to lower margins of the recently acquired Imaging
Business operations, which had an average gross profit of 20.5% for the three
months ended June 30, 1997. The Company is currently in the third year of a five
year exclusive distributorship agreement with Abbott Laboratories. For the three
months ended June 30, 1997 and 1996, gross profit on sales of Abbott products
were 22.0% and 20.8%, respectively.
General and Administrative Expenses. General and administrative
expenses for the three months ended June 30, 1997 totaled $32.1 million, an
increase of $9.2 million or 40.4% over the three months ended June 30, 1996
total of $22.9 million. As a percentage of sales, general and administrative
expenses increased to 15.8% for the three months ended June 30, 1997 from 15.1%
for the three months ended June 30, 1996. Contributing to the increase in
general and administrative expenses as a percentage of net sales was the
Company's strategy to focus its Physician Supply Business sales efforts on
penetration of more profitable areas of the market, which resulted in lower but
more profitable growth in sales. The increase in general and administrative
expenses is also attributable to continuing investment in resources to respond
to a changing health care market, including increased training and resources to
sell diagnostic equipment to office based physicians and penetrate national
accounts.
Selling Expenses. Selling expenses for the three months ended June 30,
1997 totaled $16.8 million, an increase of $1.8 million or 11.7% over the three
months ended June 30, 1996 total of $15.1 million. As a percentage of sales,
selling expenses decreased to 8.2% for the three months ended June 30, 1997 from
9.9% for the three months ended June 30, 1996. The decrease in selling expense
as a percentage of sales was primarily a result of the operations of the new
Imaging Business which incurs significantly lower selling expense as a
percentage of net sales than the Physician Supply Business.
Merger Costs and Expenses. During the three months ended June 30, 1997,
the Company did not incur any non-recurring merger costs and expenses related to
the acquisitions. During the three months ended June 30, 1996, the Company
recorded non-recurring merger costs and expenses of approximately $6.9 million
associated with the mergers of PSS and four medical supply and equipment
distributors. Such costs included direct merger costs primarily consisting of
investment banking, legal, accounting and filing fees as well as consolidation
costs from the closing of duplicate service center locations and reducing
personnel.
Operating Income (Loss). The Company recorded operating income of $6.5
million for the three months ended June 30, 1997 as compared to an operating
loss of $3.0 million for the three months ended June 30, 1996. The operating
results for the three months ended June 30, 1996 include non-recurring merger
costs and expenses of approximately $6.9 million. Excluding the effect of these
non-recurring costs, operating income would have increased $2.6 million or 67%
to $6.5 million for the three months ended June 30, 1997 from $3.9 million for
the three months ended June 30, 1996.
Interest Income. The Company recorded interest income from short-term
investments of approximately $0.3 million during the three months ended June 30,
1997. Interest expense for the three months ended June 30, 1997 was
approximately $0.1 million. Interest expense was related to debt of companies
acquired which was repaid upon acquisition.
- 52 -
<PAGE>
Other Income. The Company's other income totaled $0.6 million and $0.4
million, an increase of $0.2 million or 43.9%, for the three months ended June
30, 1997 and 1996, respectively. Other income primarily represents finance
charges on customer accounts.
(Provision) Benefit For Income Taxes. The income tax provision totaled
$3.0 million for the three months ended June 30, 1997 as compared to the income
tax benefit of $0.5 million for the three months ended June 30, 1996. The income
tax computation is affected by the non-deductible nature of certain
non-recurring merger costs and expenses in the period in which they were
incurred.
Net Income (Loss). Net income totaled $4.4 million for the three months
ended June 30, 1997 as compared to a net loss of $1.5 million for the three
months ended June 30, 1996. The net loss for the three months ended June 30,
1996 includes approximately $6.9 million of non-recurring merger costs and
expenses. Pro-forma net income including a pro forma tax adjustment on pooled
S-corporation income and excluding non-recurring merger costs and expenses
and the related tax effects would have been $4.4 million for the three months
ended June 30, 1997, compared to $3.1 million for the three months ended June
30, 1996.
Fiscal Year Ended March 28, 1997 Versus Fiscal Year Ended March 29, 1996
Net Sales. Net sales increased $162.0 million to $691.0 million, or
30.6% for fiscal year 1997 compared to fiscal year 1996 sales of $529.0 million.
The increase in net sales was attributable to (i) internal sales growth of
centers operating at least two years, (ii) the Company's focus on diagnostic
equipment sales, (iii) incremental sales generated in connection with the Abbott
Agreement, (iv) net sales of Physician Supply Business centers and International
Business acquired during fiscal year 1997, and (v) 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. Physician Supply Business same store sales growth
approximated 18% for fiscal year 1997.
Fiscal year 1997 sales resulting from the acquisitions of the Imaging
Business totaled $74.0 million, an increase of $28.3 million over the fiscal
year 1996 X-ray GA revenues. Net sales of the Imaging Business totaled $33.2
million for the three months ended March 28, 1997. Fiscal year 1997 sales
resulting from the acquisition of two Physician Supply Business medical supply
companies and three European medical supply companies totaled approximately
$25.5 million and $15.7 million, respectively.
Gross Profit. Gross profit increased $38.5 million, or 25.7%, for
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 27.2% and 28.3% 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) lower
gross profit as a percent of sales of the Imaging Business 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 $27.8 million, or 33.7%, for fiscal year 1997 compared to the
fiscal year ended 1996. General and administrative expenses as a percentage of
net sales, increased to 16.0% for fiscal year 1997 from
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<PAGE>
15.6% 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 cost of mature service center operations.
Selling Expenses. Selling expenses increased $14.4 million, or 29.6%,
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 9.1% and 9.2% for
fiscal years 1997 and 1996, respectively. The decrease in selling expense as a
percentage of net sales is due to leveraging of existing service centers' fixed
selling expenses, such as salaries paid to sales representatives during the
conversion period from a guaranteed salary to a commission compensation
arrangement and the leveraging of sales management salaries. The decrease in
selling expenses as a percentage of net sales is also due to the variable
commission plan of the Company, which pays commissions based on gross profit as
a percentage of net sales.
Merger Costs and Expenses. During fiscal year 1997, the Company
recorded merger costs and expenses of $12.1 million incurred in connection with
mergers accounted for as poolings. Such costs include direct merger costs
consisting primarily of investment banking, legal, accounting, and filing fees
as well as consolidation costs from the closing of duplicate service center
locations, realigning regional and corporate functions, and reducing personnel.
Operating Income. Operating income decreased $0.1 million, or 3.1%, for
fiscal year 1997 compared to fiscal year 1996. As a percentage of net sales,
operating income for fiscal year 1997 decreased to 0.4% from 0.6% 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 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 $19.6 million from $18.7 million for fiscal year 1996.
Interest Expense. Interest expense for fiscal year 1997 decreased
approximately $2.7 million, or 89.4%, 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
represents interest expense from the accounting restatement for the operations
of X-ray GA.
Interest and Investment Income. Interest and investment income for
fiscal year 1997 increased approximately $1.2 million, or 104.0%, 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 decreased approximately $0.05 million, or 3.0%,
for the fiscal year ended 1997 compared to fiscal year 1996.
Provision for Income Taxes. Provision for income taxes increased $0.8
million, or 60.1%, for fiscal year 1997 compared to fiscal year 1996 due to
higher pretax income of $6.5 million in fiscal year 1997 compared to $2.7
million in fiscal year 1996 as a result of the factors discussed above, 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 32.7% 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 $3.0 million, or 226.6%, for fiscal
year 1997 compared to fiscal year 1996 for the reasons discussed above. As a
percentage of net sales, net income increased for fiscal year 1997 to 0.6% from
net income of 0.3% 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
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<PAGE>
costs and expenses and 1997 other operating charges for write-offs of inventory
of $4.1 million and receivables of $0.5 million at branches involved in mergers,
pro forma net income would have increased 22.8% to $15.1 million for fiscal year
1997 compared to $12.3 million for fiscal year 1996.
Fiscal Year Ended March 29, 1996 Versus Fiscal Year Ended March 30, 1995
Net Sales. Net sales increased $115.7 million to $529.0 million, or
28.0%, for fiscal year 1996 compared to fiscal year 1995 sales of $413.3
million. The increase in net sales was attributable to (i) internal sales growth
of centers operating at least two years, (ii) incremental sales generated in
connection with the Abbott Agreement, (iii) net sales of centers acquired during
fiscal year 1996, and (iv) net sales of fiscal year 1996 company start-up
service centers.
Physician Supply Business same store sales growth approximated 27% for
fiscal year 1996. The first year performance goals as set forth in the Abbott
Agreement were met with PSS realizing approximately $55.0 million in incremental
net sales of Abbott products during fiscal year 1996. Excluding Taylor and X-ray
GA, Company acquisitions and start-ups added to the growth in fiscal year 1996,
with approximately $14.5 million of net sales resulting from the acquisition of
nine local and regional medical suppliers and $9.2 million of net sales
generated by four company start-ups, one of which was merged into an acquired
Taylor location during fiscal year 1996.
Gross Profit. Gross profit increased $30.1 million, or 25.1%, for
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 28.3% and 28.9% for fiscal years 1996 and 1995,
respectively. The decrease in gross profit percentage as a percentage of net
sales is attributable to the penetration by the Company's Physician Supply
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 million of
Abbott products with a gross profit percentage of 18.0%. Also the Company's
gross profits include first year reimbursements by Abbott for gross profit on
direct sales by Abbott to PSS customers as set forth in the Abbott Agreement.
These reimbursements totaled $1.7 million during fiscal year 1996, effectively
raising gross profit by 0.4%. The Abbott sales, net of reimbursements,
negatively impacted the Company's gross profit percentage by 1.7%.
Also positively impacting gross profits are vendor performance
incentives, in addition to the Abbott direct sales reimbursements, earned by PSS
through the achievement of certain predetermined company purchase and sales
levels. These performance incentives totaled $6.4 million and $4.2 million for
fiscal years 1996 and 1995, respectively. These vendor incentives effectively
raised the gross profit percentage by 1.3% and 1.1% during fiscal years 1996 and
1995, respectively. Although the Company plans and expects to continue to
negotiate vendor performance incentives, there is no assurance that vendor
performance incentives will continue to positively impact gross profit at the
historical levels.
General and Administrative Expenses. General and administrative
expenses increased $12.4 million, or 17.6%, for fiscal year 1996 compared to
fiscal year 1995. General and administrative expenses as a percentage of net
sales, however, decreased to 15.6% for fiscal year 1996 from 17.0% 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
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<PAGE>
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 $7.1 million, or 17.2%,
for fiscal year 1996 compared to fiscal year 1995. Selling expense as a
percentage of net sales was 9.2% and 10.0% for fiscal years 1996 and 1995,
respectively. The decrease in selling expense as a percentage of net sales is
due to improved leveraging of existing Physician Supply 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. The
decrease in selling expenses as a percentage of net sales is also due to the
variable commission plan of the Company which pays a lower commission on Abbott
products due to the lower gross profit as a percentage of net sales on those
products.
Merger Costs and Expenses. During fiscal year 1996, the Company
recorded merger costs and expenses of $15.7 million associated with the merger
of PSS and Taylor and the other immaterial poolings. Such costs include direct
merger costs consisting primarily of investment banking, legal, accounting, and
filing fees as well as consolidation costs from the closing of duplicate service
center locations, realigning regional and corporate functions, and reducing
personnel.
Operating Income. Operating income decreased $0.8 million, or 20.5%,
for fiscal year 1996 compared to 1995. As a percentage of net sales, operating
income for fiscal year 1996 decreased to 0.6% from 0.9% 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,
operating income for the fiscal year ended 1996 would have increased 130.9% to
$18.7 million from $8.1 million for the fiscal year ended 1995 due to the
factors discussed above.
Interest Expense. Interest expense for fiscal year 1996 decreased
approximately $1.0 million, or 24.5%, 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 Taylor debt assumed by PSS. The decrease
in average indebtedness for fiscal year 1996 compared to fiscal year 1995 is due
to the use of the net proceeds from the secondary offering of common stock of
approximately $58.2 million of the total net proceeds of $142.9 million to repay
all outstanding debt, other than capital lease obligations, on November 20,
1995.
Interest Income. The Company earned interest income of $1.2 million
from the short-term investment of the remaining net proceeds from the secondary
offering in fiscal year 1996.
Other Income. Other income decreased approximately $0.3 million, or
16.9%, 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 45.3%, 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 $2.2 million, or 258.1%, for fiscal
year 1996 compared to fiscal year 1995 for the reasons discussed above. As a
percentage of net sales, net income increased for the fiscal year ended 1996 to
0.3% from the net loss of 0.2% for fiscal year 1995. Excluding the effect of
merger costs and expenses in fiscal year 1996 and the restructuring charge in
fiscal year 1995, pro
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<PAGE>
forma net income would have increased 515.0% to $12.3 million for fiscal year
1996 compared to $2.0 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, including
pre-acquisition financial information of Taylor and X-ray GA. The Company
believes all necessary adjustments have been included in the amounts stated
below to present fairly the following selected information when read in
conjunction with the Consolidated Financial Statements of the Company and notes
thereto included elsewhere in this Offering Memorandum. Future quarterly
operating results may fluctuate depending on a number of factors, including the
timing of acquisitions of service centers, the timing of the opening of start-up
service centers, and changes in physicians' buying patterns of supplies,
diagnostic equipment and pharmaceuticals. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full year or any other quarter. See "Risk Factors -- Quarterly Fluctuations in
Operating Results."
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
------------------------------------------- -------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------ ------ ------ ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............. $151,568 $172,359 $179,612 $187,481 $116,082 $132,040 $137,600 $143,302
Gross profit.......... 41,835 46,768 51,054 48,459 33,575 36,093 39,140 40,856
Merger costs and
expenses............. 6,934 -- 317 4,877 -- 12,095 3,484 153
Net income (loss)..... $ (1,540) $ 4,152 $ 4,465 $ (2,704) $ 1,317 $ (7,180) $ 1,318 $ 5,884
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss)
per share............ $ (0.04) $ 0.11 $ 0.12 $ (0.07) $ 0.04 $ (0.23) $ 0.04 $ 0.16
======== ======== ======== ======== ======== ======== ======== ========
Pro forma net income
(loss), excluding
merger costs and
expenses............. $ 3,135 $ 4,105 $ 4,652 $ 732 $ 1,317 $ 2,052 $ 3,366 $ 6,011
======== ======== ======== ======== ======== ======== ======== ========
Pro forma net income
(loss) per share,
excluding merger
costs and expenses... $ 0.09 $ 0.11 $ 0.13 $ 0.02 $ 0.04 $ 0.07 $ 0.11 $ 0.16
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The fourth quarter of fiscal 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.
The Company had working capital of $168.1 million and $165.4 million as
of June 30, 1997 and March 28, 1997, respectively. Accounts receivable, net of
allowances, were $121.6 million and $119.3 million at June 30, 1997 and March
28, 1997, respectively. The average number of days sales in accounts receivable
outstanding was approximately 53 days for the three months ended June 30, 1997
and 56 days for the year ended March 28, 1997. Inventories were $68.5 million
and $67.9 million as of June 30, 1997 and March 28, 1997, respectively. The
Company had annualized inventory turnover of
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8.7 times for the three months ended June 30, 1997 and 8.1 times for the fiscal
year ended March 28, 1997.
Net cash provided by operating activities was $10.3 million for the
three months ended June 30, 1997 compared to net cash used in operating
activities of $2.6 million for the three months ended June 30, 1996 which
resulted from improved operating results for the three months ended June 30,
1997. Net cash used in operating activities was $0.2 million, $21.0 million, and
$7.4 million in fiscal years 1997, 1996, and 1995, respectively. 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 the
mergers.
Net cash provided by investing activities of $9.6 million for the three
months ended June 30, 1997 consisted primarily of the proceeds from sales of
marketable securities offset by capital expenditures, payment for purchase of
net assets from business acquisitions, and the payment of noncompete agreements.
Net cash used in investing activities was $10.1 million, $30.5 million, and $1.3
million in fiscal years 1997, 1996, and 1995, respectively. These funds were
primarily utilized to finance the acquisition of new service centers and capital
expenditures including the use of the net proceeds from sales and maturities of
marketable securities.
Net cash used in financing activities was $0.5 million for the three
months ended June 30, 1997, which consisted primarily of repayments of
outstanding debt on companies acquired. Net cash (used in) provided by financing
activities was $(26.5) million, $115.8 million, and $8.8 million for fiscal
years 1997, 1996, and 1995, respectively. Net cash used in financing activities
is the result of the use of a part of the remaining net proceeds of an equity
offering in fiscal year 1996 to pay off debt assumed through fiscal year 1997
acquisitions.
The Company completed ten acquisitions in fiscal year 1997. In
connection with the mergers accounted for as poolings, the Company incurred
merger costs and expenses of $12.1 million in fiscal year 1997. The Company
incurred significant expenses in fiscal year 1997 for the process of
consolidating service centers or converting acquired centers to the Company's
service center model through information systems conversion, personnel
development and training, and service and product expansion, as appropriate.
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 million with the
option, on the part of the Company, to increase such availability to $75
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 of the
total net proceeds of $142.9 million to repay debt in fiscal year 1996.
Management used approximately $50.0 million in connection with acquisitions for
the Imaging Business, Physician Supply Business, 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. Current
anticipated cash payments under non-compete agreements for the remainder of
fiscal 1998 are estimated to be approximately $2.8 million.
Inventory financing has historically been achieved through negotiating
extended payment terms from suppliers. The Company believes that the expected
cash flows from operations, bank borrowings, capital markets, and vendor credit
should be adequate to meet the Company's anticipated future
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<PAGE>
requirements for working capital, capital expenditures and scheduled payments of
interest on its debts for the foreseeable future. As of June 30, 1997, the
Company had no outstanding debt under its credit facility.
PSS intends, subject to market and other conditions, to raise $125.0
million through a private offering of debt securities within the United States
to qualified institutional investors and outside the United States to non-U.S.
investors. PSS intends to use the net proceeds of the offering for general
corporate purposes, including possible future acquisitions of medical products
distributors, capital expenditures and working capital.
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 litigations
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
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
Inflation and General Economic Conditions
Although the Company cannot anticipate future inflation, it does not
believe that inflation has had, or is likely in the foreseeable future to have,
a material impact on its results of operations. The Company does not have a
significant number of fixed price service contracts where the Company bears the
risk of costs increases. The Company's operating results could be adversely
affected by increases in interest rates which would result in higher interest
payments by the Company under its variable rate Credit Facility. The Company has
not historically entered into hedging transactions with respect to its variable
rate debt, but may do so in the future.
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<PAGE>
BUSINESS OF PSS
General
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, serving over 103,000 physician offices
(representing approximately 54% of all physician offices) in all 50 states (the
"Physician Supply Business"). The Company is the second-largest distributor of
imaging supplies and equipment in the United States, serving over 8,000 customer
sites in 17 states (the "Imaging Business"). PSS also distributes medical
supplies and equipment to hospitals and physician offices in five European
countries (the "International Business").
PSS employs over 800 highly trained physician-supply and imaging sales
representatives, approximately 700 of which are focused on the physician-office
market, and approximately 160 imaging service specialists. This large sales and
service organization enables PSS to market medical products on a national basis
and has positioned the Company as the distributor of choice for manufacturers
whose products require consultative selling. PSS has established exclusive or
semi-exclusive distribution arrangements for certain products with such leading
manufacturers of Abbott Laboratories, Siemens AG, Hologic, Inc., C.R. Bard,
Inc., HumaScan Inc. and F. Hoffman-La Roche Ltd. PSS distributes over 40,000
medical products from 84 service centers, 64 of which are focused on the
physician-office market, located throughout the United States and in Europe,
enabling the Company to be highly responsive to local market needs, including
providing same-day delivery service on a regular basis.
Industry
The medical-products distribution industry aggregates approximately
$30.2 billion in annual revenues in the United States, of which approximately
$6.6 billion represents the physician-office market (of which $5.5 billion is
non-imaging related medical products) and the balance represents the hospital,
ambulatory surgery center, long term care and home health care markets. The
imaging-supply market is approximately a $4.1 billion component of the overall
medical-products distribution industry, encompassing each of the hospital,
physician and other provider segments. Revenues of the medical-products
distribution industry are estimated to be growing as a result of a growing and
aging population, increasing health care awareness, and expanding third-party
insurance coverage. In addition, the physician market is benefiting from the
shift of procedures and diagnostic testing from hospitals to alternate sites,
particularly physician offices.
In the United States, the Company estimates that there are
approximately 300 companies serving the non-imaging physician-supply market and
approximately 400 companies serving the imaging-supply market. The
physician-supply market has experienced rapid consolidation of the distributors
serving this market for several years. The Company believes that the imaging
supply market is in the early states of consolidation. The Company believes that
consolidation in the physician-supply and imaging-supply markets is occurring
due to local and regional distributors experiencing: (i) a lack of purchasing
and administrative economies of scale; (ii) reduced access to medical equipment
lines as manufacturers seek to reduce marketing costs by minimizing the number
of distributors; (iii) purchase medical products; (iv) a lack of resources for
continued development and training of personnel for maintenance, expansion or
replacement of existing business; and (v) a lack of resources to develop new
distribution system technologies and services.
Through WorldMed International, Inc., the Company operates three
European service centers distributing medical products to the physician office
and hospital markets in Belgium, France, Germany, Luxembourg and the Netherlands
Government and industry estimates indicate that the medical product segment of
the health care industry of these countries represents an $11.9 billion market.
This industry is highly fragmented with over 1,800 distributors serving these
countries.
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<PAGE>
Company Strategy
The Company's primary objectives are to be the leading specialty
marketer and distributor of medical products to physicians, other alternate site
providers and hospital in the United States, to expand its European medical
supplies and equipment business and to enhance its United States operating
performance. The key components of the Company's strategy to achieve these
objectives are to:
. Pursue Strategic Acquisitions. The Company has made 40, eight and four
acquisitions to date in its Physician Supply Business, Imaging Business and
International Business, respectively. Recently, the Company acquired
General X-Ray, which had approximately $76.0 million in revenues for the
twelve months ended December 31, 1996. After consummating an acquisition,
the Company begins an intense process of converting the acquired company to
PSS' model through information systems conversion, personnel development
and training, and service and product expansion, as appropriate. The
Company intends to continue to acquire local, regional and other
distributors in new and existing markets in the United States where it can
leverage its distribution infrastructure, expand its geographic coverage
and gain market share.
. Enhance Selling Capabilities. The Company believes its sales force and
managers are its most valuable corporate assets. PSS focuses not only on
the recruitment of sales personnel with superior sales aptitude, but also
on the initial and continued development of its sales force through
training at PSS University, its in-house educational center. The Company
believes that its investment in personnel and training enables PSS to
provide higher-quality service to its customers, offer a more sophisticated
product line, and attract manufacturers that desire a means of rapidly
bringing new products and technology to market.
. Offer a Broad Product Line that Emphasizes Exclusive Products. PSS seeks to
meet all of the medical products needs of office-based physicians and
providers or imaging services. The Company currently stocks over 35,000
SKUs in its physician supply business and over 3,500 SKUs in its imaging
business. PSS also seeks to establish exclusive distribution and marketing
arrangements for selected products. In the United States, the Company
currently has five exclusive marketing arrangements for certain products
with Abbott Laboratories, Siemens Medical Systems, Inc., C.R. Bard, Inc.,
Hologic, Inc. and HumaScan, Inc. and a semi-exclusive agreement with F.
Hoffman La Roche, Ltd. The Company believes that its sophisticated selling
efforts, highly trained sales force and large customer base provide
manufacturers with a unique sales channel through which to distribute new
and existing products that require consultative selling.
. Provide Differentiated, High-Quality Service. The Company believes its
success to date has been based largely on its ability to provide superior
customer service, including same-day delivery and "no-hassle" returns.
Unlike its competitors, which generally ship products via common carrier,
the Company operates its own fleet of approximately 620 delivery vans, thus
enabling the Company to provide same-day delivery to virtually all of its
customers. In addition, the Company believes its consultative selling
approach enables it to understand and anticipate customer needs and that
its superior information systems simplify and expedite the ordering
process.
. Develop Sophisticated Information Systems. In 1994, the Company implemented
ICON(SM), a customer tracking system, with all its physician supply sales
representatives. ICON(SM) has increased time available to sales
representatives for selling, decreased operating expenses, and enhanced
PSS' ability to provide same-day delivery. The Company is currently
developing and test marketing CustomerLink/DIAL, an Internet-based system
for inventory management and purchasing. PSS is also currently developing a
separate hardware and software system for the imaging business that will
incorporate CustomerLink/DIAL and ICON(SM). The Company intends to continue
to develop high-quality information technology, which it believes is
essential to its continued success in integrating acquired businesses and
increasing sales and profitability.
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. Expand Operating Margins. The Company is pursuing several initiatives to
enhance its operating margins. With respect to sales, PSS is focusing its
efforts on higher-margin accounts and on sales of equipment that involve
ongoing sales of high-margin diagnostic reagents. With respect to its
product line, PSS seeks to drive high volumes of selected products and to
obtain such products on a discounted basis from manufacturers.
Additionally, PSS has developed a private-label product line, Penny Saver,
that involves lower product-acquisition costs. Finally, with respect to the
Company's service center expansion program, PSS intends in the future to
emphasize acquisitions over new-center development, avoiding the
substantial start-up losses associated with new-center development.
Sales and Distribution
PSS focuses on complete customer satisfaction, which it characterizes
to its customers as "no hassle" service. Consistent with this approach, the
Company generally offers its customers same-day delivery service on a regular
basis, highly trained, consultative sales professionals, a broad product line
including medical supplies, sophisticated diagnostic equipment and reagents, and
pharmaceuticals, no minimum order size or shipping charges, and permits returns
of unused, saleable products for instant credit.
The Company has increased its emphasis on national customer accounts,
including large physician group practices, physician practice management
companies, physician-hospital organizations, physician management service
organizations and group purchasing organizations. In selling to these national
accounts, the Company emphasizes its core strengths of same-day service, which
permits stockless inventory, competitive pricing and high service levels,
including inventory maintenance. See "Risk Factors -- Regulation of and Change
in the Practice of Medicine."
The Physician Supply Business of PSS maintains a highly decentralized
distribution network of 61 service centers operating over 550 delivery vans
throughout the United States. This distribution network, along with the
Company's Instant Customer Order Network ("ICON(SM)"), has enabled PSS to
generally provide same-day delivery service. Customer orders received by 10:30
a.m. at the local service center are delivered the same day within a 100 mile
radius. Within a 30 mile radius, orders received by noon are delivered the same
day.
Through its over 720 sales representatives in its Physician Supply
Business, PSS distributes medical supplies and equipment to physicians in
approximately 103,000 office sites nationally. Generally, each sales
representative is responsible for calling on approximately 150 to 200 physician
offices, with a minimum goal of visiting each office once every one to two
weeks.
The Company's Imaging Business operates in a similar decentralized
format with 20 service centers operating a total of over 70 delivery vans
throughout 17 states. The Imaging Business has over 75 sales representatives and
252 field service specialists who service customer equipment ranging from
processors to radiographic equipment. This division has approximately 8,000
customers including 1,750 acute sites and 6,250 alternate care sites.
The Company's International Business operates three European service
centers, located in Belgium, Germany, and the Netherlands, employing
approximately 25 sales representatives and approximately 65 total employees.
All of the Company's service centers operate as a profit center led by
a management team that typically includes a sales manager and an operations
manager. Each service center employs sales representatives and staff, including
purchasing agents, customer service representatives, and warehouse and delivery
personnel. Employees are compensated based upon both individual and service
center
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performance. Both management and employee bonuses are based largely upon
asset management, attainment of goals and operating profit performance.
Products
The Company carries a significant investment in inventory to meet the
rapid delivery requirements of its customers. The Company distributes over
40,000 different products manufactured by approximately 3,200 manufacturers.
During the twelve months ended March 28, 1997, Abbott was the only vendor which
accounted for more than 10% of the Company's inventory purchases.
Physician Supply Business
Through its Physician Supply Business, the Company distributes medical
products consisting of medical supplies, diagnostic equipment, and
pharmaceuticals. The following is a discussion of the types of products offered
by the Company's Physician Supply Business.
Medical Supplies. The Physician Supply Business sells a broad range of
medical supplies, including various types and sizes of paper goods, needles and
syringes, gauze and wound dressings, sutures, latex gloves, orthopedic soft
goods and casting products, wood tongue blades and applicators, sterilization
and intravenous solutions, specimen containers, diagnostic equipment reagents,
and diagnostic rapid test kits for pregnancy, strep, mononucleosis, chlamydia,
H-Pylori, and bladder cancer. The Physician Supply Business offers an aggregate
of over 35,000 SKUs.
In order to reduced the number of SKUs stocked by the Company, 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.
PSS plans to continue to focus on providing products and services to
the primary care physician market whether the physician is a single practitioner
or a member of a large group practice. In that effort, PSS developed Network
Plus(SM), a comprehensive savings plan for physicians in which PSS offers
special group purchasing contract pricing and provides periodic cost analyses to
help manage the supply needs of each physician. Under this program, when a
physician office guarantees 80% of its purchase volume to PSS, the Company will
guarantee the lowest purchase prices on certain products as well as certain
service guarantees. The Company has recently signed distribution agreements with
several national and regional integrated network systems and managed care
groups.
Medical Equipment. The Company's Physician Supply Business equipment
lines include blood chemistry analyzers, automated cell and differential
counters, immunoassay analyzers, bone densitometers, exam tables and furniture,
electrocardiograph monitors and defibrillators, cardiac stress systems, holter
monitors, flexible sigmoidoscopy scopes, autoclaves, spirometers, pulse
oximeters, tympanometers, and microscopes. Demand for diagnostic equipment has
increased recently, reflecting in part, technological advances which enable
increasingly sophisticated diagnostic tests to be performed in the physician's
office. Sales of diagnostic equipment, while generally lower in gross margin
than supplies, normally entail the ongoing reordering of disposable diagnostic
reagents which generally yield higher margins.
The Company recently entered into four separate exclusive distribution
agreements for certain products manufactured by Siemens Medical Systems, Inc.,
Hologic, Inc., Bard Diagnostic Sciences, Inc., and Tanita Corporation of
America, Inc. These supplement the Company's existing exclusive distribution
agreements for certain products with Abbot Laboratories and HumaScan, Inc. and a
semi-exclusive
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distribution agreement with Roche Diagnostics, Inc. The Company believes these
strategic alliances will continue to broaden the Company's product offerings to
the Physician Supply Business customers.
Pharmaceuticals. The Company's pharmaceutical sales include vaccines,
injectables and ointments. As a result of the changing dynamics in the
pharmaceutical industry, particularly the reduction in sales personnel focused
on physicians' offices, pharmaceutical manufacturers are increasingly seeking
alternative means of distribution. The Company believes that its consultative
sales approach and its emphasis on training have allowed PSS to be highly
effective in selling pharmaceuticals to the physician-office market. The Company
has recently entered into a three-year primary distribution agreement for
certain pharmaceuticals and related products of Cardinal Health, Inc. The
Company believes this agreement will allow it to reduce its pharmaceutical
acquisition costs.
Imaging Business
Through its Imaging Business, the Company distributes a broad range of
imaging equipment and supplies. Equipment distributed includes general
radiographic and mammography systems, fluoroscopic and electrophysiologic
systems, angiographic equipment, medical resonance imaging (MRI), cath lab and
mobil vascular labs, C-arm and ultrasound equipment. The Imaging Business also
distributes consumable and accessory products, including film and film handling
products, barium, lead and lead apparel and darkroom cabinets. See "Risk
Factors -- Imaging Business Technology" and "-- Environmental Liabilities and
Regulation."
International Business
Through its International Business, the Company distributes medical
supplies, equipment and pharmaceuticals similar to those provided by its
Physician Supply Business to five European countries. The International Business
offers products to the European physician office and hospital market. See "Risk
Factors -- Management of International Business."
Recruitment and Development
The Company believes its managers and sales force are its most valuable
corporate assets. Accordingly, the Company invests significant resources in
recruiting, training and developing these employees. PSS spent approximately
$2.6 million for training and development in fiscal year 1997. Over the past ten
years, the Company has refined its recruitment practices and development
procedures for its Physician Supply Business and the Company is currently
developing a similar training program for the sales representatives and service
specialists of its Imaging Business. The Company's comprehensive program for its
Physician Supply Business includes the following:
Recruitment. The Company has developed a recruitment program to help
provide it with a source of mobile and committed sales representatives. The
Company believes that it is a leader in its industry in recruiting sales
representatives on college and university campuses. The Company's recruiters use
state-of-the-art marketing materials to attract candidates who demonstrate
superior sales aptitude. The Company also recruits college graduates with up to
five years experience in business, government or the military as operational
management trainees.
Initial Development. Each trainee is initially assigned to a service
center. Under the supervision of local managers, training consists of a
combination of self-study, individual instruction and interaction with customers
and vendors. Such training includes 16 one-week courses providing instruction on
products, procedures and selling skills. During this development program, the
trainee attends the Jacksonville, Florida training center known as "PSS
University" for additional training. Individual progress is measured weekly
through formal testing and role playing, resulting in continued advancement to
graduation, usually within 20 weeks. The Company designs the program to be
strenuous and only approximately 70% of the trainees successfully complete the
program. Upon graduation, the newly
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appointed sales representative assumes responsibility for the first available
sales territory, within a preferred region regardless of location. The Company
typically has approximately 30 sales candidates at various stages of the
training process. The Company believes that the level of its expenditures in
developing new sales representatives and its ability to place new sales
representatives quickly in a new region is unique within the industry. The new
sales graduate is placed on a 15 month salary-to-commission conversion program.
Presently, approximately 95% of the Company's sales force is compensated on a
straight commission basis.
Operations Management. The Company's development program for its
operational management trainees consists of approximately twelve months of
intensive training and development. After recruitment, the operations management
trainee is transferred to at least three service centers and is given various
and gradually increasing levels of responsibility. The trainee is assigned to an
operations management position when it becomes available at a service center,
regardless of location. The Company has available approximately five operations
management trainees to support its growth.
Continued Development. The Company provides several programs to
continue development of its sales and management organization. The programs
provided by PSS University include a leadership program for management
candidates, senior sales representatives and general managers, a program
emphasizing creativity and innovation for first-year managers, and a management
development program. In addition, the Company encourages its sales
representatives to participate in industry-accredited self-study programs. Every
sales representative routinely attends local sales meetings, annual sales and
marketing meetings, key vendor product conferences and continuing education
programs at PSS University. Additionally, the Company is developing training
programs on customer service, purchasing and other field operations.
As of June 30, 1997, the Company had approximately 800 sales
representatives, 160 service specialists and approximately 2,600 total
employees. The Company considers its current employee relations to be excellent.
See "Risk Factors -- Dependence on Key Management" and "-- Dependence on Sales
Representatives and Service Technicians."
Information Systems
PSS' Physician Supply Business maintains a decentralized information
system with data acquisition at the local service centers and a central
corporate data base that is accessible from all of the service centers. The
information systems were designed to allow the service center to have both the
hardware and software to conduct operations independently. The failure of a
computer system at a service center would not affect the operations of any other
service center or the corporate system. Likewise, the short-term failure of the
corporate system would not affect the operations of any service center. See
"Risk Factors -- Reliance on Data Processing."
ICON(SM) is a sales force automation tool which allows the PSS
Physician Supply Business sales representatives to access critical customer
information and place orders from any location using a pen-based, hand-held
computer system. ICON(SM) provides the sales representatives with customer
pricing, contracts, backorders, inventory levels, account status and on the spot
ordering. The customer's order is transmitted via radio to the corporate system
and then transmitted from the corporate system to the local service center in
less than two minutes. ICON(SM) has increased time available for selling,
decreased operating expenses in the service centers and increased the Company's
ability to provide same-day delivery to customers. Utilizing ICON(SM), sales
representatives can give product demonstrations, provide equipment feasibility
studies and perform revenue and return on investment analyses for specific
equipment. ICON(SM) also gives the sales representative the ability to provide
quotes and bids to the larger accounts.
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To enable the Company to maintain high customer order fill rates on a
consistent basis, the Company utilizes its Back-Order Eliminator and Allocator
of Resources ("BEAR") system. Each service center reports its inventory
quantities on a daily basis. The separate service center reports are combined
into one company-wide inventory report containing product number, quantity on
hand and historical usage. This systems reduces back-orders to customers and
reduces the Company's total inventory through increased inventory efficiencies.
BEAR also displays the on-hand usage quantities of neighboring service centers
that are within one commercial shipping day of the service center.
During fiscal year 1997, PSS developed and test marketed the
CustomerLink system (previously known as DIAL). The Company believes this system
is the first Internet-based health care information system designed and used
specifically for inventory management and purchasing for the medical practice.
Company customers can access CustomerLink through the internet at
http://www.pssd.com after receiving their personal password from the Company.
All company customers, regardless of size, with access to the Internet, will be
given access to services and on-line information including: (i) on-line order
placement and confirmation; (ii) customer-specific pricing, product
availability, back orders and utilization reports; (iii) working capital
management reports; and (iv) practice compliance assistance for OSHA and CLIA,
including a database of medical safety sheets.
The Company is implementing a delivery automation system that is
expected to be completed in fiscal year 1998. The system will provide electronic
signature recognition and delivery routing which the Company believes will
improve the Company's distribution efficiency.
The Company is currently in the process of developing and implementing
separate systems for its Imaging Business which will include the ICON(SM) and
CustomerLink systems. The Company expects the Imaging Business system to be
implemented in fiscal year 1998.
Purchasing and Vendor Relationships
The Company aggressively seeks to purchase the medical supplies and
equipment it distributes at the lowest possible price through volume discounts,
rebates and product line consolidation. The Company's corporate materials
management department negotiates all of its contract terms with vendors.
Individual orders are placed by the Company's purchasing agents, located at the
Company's service centers, who are responsible for purchasing and maintaining
the inventory. Supplies and equipment are delivered directly from vendors to the
service centers.
The Company aggressively pursues the opportunity to market and sell
medical equipment and supplies on an exclusive basis. Manufacturers of medical
diagnostic equipment and supplies typically offer distribution rights only to a
selected group of distributors and are increasingly seeking to reduce the number
of distributors selling their products to end users in an effort to reduce the
cost associated with marketing and field support. The Company has been
successful in assisting manufacturers in their development and marketing plans
and in obtaining the exclusive right to sell certain products. The Company
believes that its ability to capture such distribution rights represents a
significant barrier to the entry of competitors.
The Company recently completed the second year of a Distributorship
Agreement (the "Abbott Agreement") with Abbott Laboratories providing for the
exclusive distribution of certain Abbott diagnostic products. The Abbott
Agreement has positioned PSS as the sole distributor for, among other products,
the CELL DYN(R) 1400, 1600 and 1700 hematology products, Abbott Vision(R)
products, IMx(R) and AXyM(R) immuno assay analyzers and reAGENTS, and the Abbott
Testpack(R) line of rapid tests sold to physician offices with 24 or fewer
physicians per physician office site and has also enableD the Company to
cross-sell its other products to Abbott customers. Abbott may terminate the
Abbott Agreement if the Company fails to meet certain sales levels. PSS and
Abbott are currently negotiating fiscal 1998 performance goals and related
acquisition cost of product. Abbott products constituted approximately
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16% and 18% of the Company's sales in fiscal years 1996 and 1997, respectively.
See "Risk Factors -- Dependence on Vendor Relationships."
Currently, the Company has contractual alliances with many vendors
including Roche Diagnostic Systems. These alliances provide the Company volume
incentives, dedicated field support, and relationships with leading
manufacturers. As a result of the Company's performance in selling their
products, these entities participate with the Company in relationships ranging
from exclusivity to shared market resources. In the office-based physician
market, the Company is the United States leader of sales of hematology and
chemistry products for Roche Diagnostic Systems. Roche Diagnostic Systems
constituted approximately five percent of the Company's sales in fiscal year
1997.
The Company recently entered into other exclusive distribution
agreements for certain products manufactured by Siemens Medical Systems, Inc.
(cardiology and OB/GYN ultrasound equipment), Hologic, Inc. (bone densitometry
analyzer), Bard Diagnostic Sciences, Inc. (bladder cancer diagnostic test) and
Tanita Corporation of America, Inc. (body weight and fat analyzer). In addition,
the Company has entered into an exclusive distribution agreement with HumaScan,
Inc. (non-invasive breast tumor detection screen). These strategic alliances
should continue to broaden the Company's product offerings. See "Risk Factors --
Dependence on Vendor Relationships."
Acquisitions
The Company's Physician Supply Business has grown from one service
center located in Jacksonville, Florida in 1983 to 61 service centers currently.
Historically, the Company's growth has been accomplished through both the
start-up of service centers and the acquisition of local and regional medical
supply and equipment distributors. Since fiscal year 1994 the Company has
accelerated its acquisition of medical supply and equipment distributors both in
number and in materiality of the operations acquired. See "Risk Factors --
Acquisition Strategy" and "-- Opening of Start-Up Service Centers."
With the November 1996 acquisition of a medical diagnostic imaging
supply and equipment distributor, the Company began the operations of its
Imaging Business. Subsequent acquisitions have resulted in 20 Imaging Business
service centers operating throughout 17 states. The Company's objectives for the
Imaging Business during fiscal year 1998 are to: (i) continue geographic
expansion with acquisitions of local and regional imaging distributors to
leverage existing infrastructure; (ii) develop and implement a separate hardware
and software system for the business utilizing the Physician Supply Business'
ICON(SM) and CustomerLink systems; (iii) expand the products and services
currently provided; (iv) implement same-day delivery; and (v) develop a PSS
university training program specifically tailored for the division. See "Risk
Factors -- Expansion into New Lines of Business."
PSS views the acquisition of medical and imaging supplies and equipment
distributors as an integral part of its growth strategy. The Company intends to
continue to acquire local and regional distributors especially in existing
markets where it can leverage its distribution infrastructure, gain market
share, and expand geographically. PSS believes that local and regional
distributors are finding competition increasingly difficult as a result of:
(i) a lack of purchasing and administrative economies of scale; (ii) reduced
access to medical equipment lines as manufacturers seek to reduce marketing
costs by minimizing the number of distributors to which they must provide field
support; (iii) consolidation among providers, who are increasingly seeking to
reduce the number of suppliers from which they purchase medical products; (iv) a
lack of resources for continued development and training of personnel for
maintenance, expansion or replacement of existing business; and (iv) a lack of
resources to develop new distribution system technologies and services.
PSS has completed four acquisitions to date in fiscal year 1998. For
example, in July 1997, the Company completed the acquisition of General X-Ray,
Inc. and certain affiliated entities, distributors of radiology and imaging
equipment which operated seven distribution centers and distributed to seven
states, primarily in the Midwest.
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The Company completed ten acquisitions in fiscal year 1997, including
the acquisition of Diagnostic Imaging, Inc., a distributor based in
Jacksonville, Florida which began the operations of its Imaging Business.
Diagnostic Imaging, Inc. operated eight distribution centers with 24 sales
representatives and 75 field service specialists. In fiscal year 1997, the
Company expanded its Imaging Business through the acquisitions of X-Ray of
Georgia, Inc. and Rad-Tech X-Ray, Inc., both based in the Atlanta, Georgia area,
which collectively served six states in the Southeast with 13 sales
representatives and 51 field service specialists and the acquisition of
Chesapeake X-Ray Corporation based in Roanoke, Virginia, which served four
states in the Southeast with five sales representatives and 15 field service
specialists.
The Company acquired Taylor Medical, Inc. ("Taylor") in August 1995. A
significant portion of the Company's growth occurred with the merger of Taylor.
In connection with the integration of Taylor into PSS, the Company closed or
merged into existing PSS service centers the majority of the Taylor locations.
Additionally, the Company merged eight PSS service centers into the eight
remaining Taylor locations and established two additional service centers.
Properties
The Company maintains 84 service centers providing service to 50 states
throughout the United States, as well as Belgium, France, Germany, Luxembourg
and the Netherlands. All service center locations are leased by the Company,
with the exception of the service centers located in Leuven, Belgium and
Beaumont, Texas. The following tables set forth the service center locations and
areas which they service for the Physician Supply Business, Imaging Business and
International Business.
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<TABLE>
<CAPTION>
Physician Supply Business
Location States Served Location States Served
-------- ------------- -------- -------------
<S> <C> <C> <C>
Albany, NY NY, CT, VT Louisville, KY IN, KY
Albuquerque, NM NM, CO, TX Lubbock, TX TX
Atlanta, GA GA, AL Memphis, TN AR, MS, TN
Baltimore, MD MD, PA, VA, WV Milwaukee, WI WI
Beaumont, TX TX Minneapolis, MN IA, MN, MT, ND, SD, WI
Birmingham, AL AL, MS Mobile, AL AL, FL, MS
Boise, ID ID, MT Nashville, TN IL, KY, TN
Charlotte, NC NC, SC, VA, TN New Orleans, LA LA, MS, TX
Chattanooga, TN AL, GA, TN Norfolk, VA NC, VA, WV
Chicago, IL IL, IN, WI Omaha, NE CO, NE, IA, WY
Cincinnati, OH KY, IN, OH, WV Orlando, FL FL
Cleveland, OH OH Philadelphia, PA DE, NJ, NY, PA
Columbia, SC SC, GA Phoenix, AZ AZ
Dallas, TX TX, OK Pittsburgh, PA PA, WV, MD, OH, NY
Davenport, IA IA, IL Portland, OR CA, OR, WA
Deerfield Beach, FL FL Raleigh, NC NC, VA
Denver, CO CO, NM, WY Richmond, VA VA
Detroit, MI MI Roanoke, VA TN, VA
Honolulu, HI HI Rochester, NY NY
Houston, TX TX, OK Salt Lake City, UT CO, NV, UT
Indianapolis, IN IN, IL San Antonio, TX TX
Jackson, MS MS, LA San Diego, CA CA
Jacksonville, FL FL, GA, SC San Francisco, CA CA
Kansas City, KS IL, IA, KS, MO Seattle, WA WA, AK
Knoxville, TN KY, NC, TN St. Louis, MO IL, MO
Lafayette, LA LA St. Petersburg, FL FL
Las Vegas, NV NV Tallahassee, FL AL, FL, GA
Little Rock, AR TX, AR Tulsa, OK AK, OK, MO
Long Island, NY CT, NJ, NY Union, NJ NJ, NY
Los Angeles, CA (North) CA Wareham, MA RI, CT, ME, MA, NH
Los Angeles, CA (South) CA
Imaging Business
Location States Served Location States Served
-------- ------------- -------- -------------
Atlanta, GA GA Mobile, AL AL, FL, MS
Birmingham, AL AL, MS Nashville, TN(1) KY, TN
Charlotte, NC NC Raleigh, NC NC, VA
Columbia, SC SC, GA Richmond, VA VA
Pompano Beach, FL FL Roanoke, VA TN, VA, WV
Jacksonville, FL FL, GA Tallahassee, FL FL, GA
Gainesville, FL FL Savannah, GA FL, GA, SC
Memphis, TN AR, KY, TN Winston Salem, NC NC, VA
Tampa, FL FL Chicago, IL IL, IN, IA, WI
St. Louis, MO MO, IL, IA, AR Indianapolis, IN IN, OH, KY
</TABLE>
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<TABLE>
<CAPTION>
International Business
Location Countries Served
-------- ----------------
<S> <C>
Leuven, Belgium Belgium, France, Germany
Dusseldorf, Germany Germany
Utrecht, Netherlands(1) Netherlands
</TABLE>
-----------------
(1) Acquired subsequent to March 28, 1997.
In the aggregate, the Company's service centers consist of
approximately 875,000 square feet, of which all is leased, with the exception of
the distribution center in Leuven, Belgium and a building in Beaumont, Texas,
under lease agreements with expiration dates ranging through 2001. The Company's
service centers range in size from 4,800 square feet to 51,000 square feet.
The corporate offices of PSS consist of approximately 50,000 square
feet of leased office space located at 4345 Southpoint Boulevard, Jacksonville,
Florida 32216. The lease for this space expires in April 2002.
At June 30, 1997, the Company's facilities provided adequate space for
the Company's operations. Throughout the Company's history of growth, the
Company has been able to secure the required facilities.
Competition
PSS operates in a highly competitive environment. The Company's
principal competitors are multi-market medical distributors that are full-line,
full-service medical supply companies, some of which are national in scope.
These national companies have sales representatives and service specialists
competing directly with PSS, are substantially larger in size, and have
substantially greater financial resources than PSS. There are also numerous
local dealers and mail order firms that distribute medical supplies and
equipment within the same market as the Company. Most local dealers are
privately owned and operate with limited product lines. There are several mail
order firms which distribute medical supplies on a national or regional basis.
The Company also competes with certain manufacturers that sell their products
both to distributors and directly to users, including office-based physicians.
See "Risk Factors -- Competition."
Regulatory Matters
The Company's business is subject to regulation under the Federal Food,
Drug, and Cosmetic Act, the Prescription Drug Marketing Act of 1987, the
Controlled Substances Act and other regulation by the U.S. Food and Drug
Administration and state laws applicable to the distribution and manufacture of
medical devices and over-the-counter pharmaceutical products as well as the
distribution of prescription pharmaceutical products.
The Federal Food, Drug, and Cosmetic Act generally regulates the
manufacture of drug and medical devices shipped in interstate commerce,
including such matters as labeling, packaging, storage and handling of such
products. The Prescription Drug Marketing Act of 1987, which amended the Federal
Food, Drug and Cosmetic Act, establishes certain requirements applicable to the
wholesale distribution of prescription drugs, including the requirements that
wholesale drug distributors be registered with the Secretary of Health and Human
Services or be licensed in each state in which they conduct business in
accordance with federally established guidelines on storage, handling, and
records maintenance. Under the Controlled Substances Act, the Company, as a
distributor of controlled substances, is required to obtain annually a
registration from the Attorney General in accordance with specified rules and
regulations and is subject to inspection by the Drug Enforcement Administration
acting on behalf of the
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Attorney General. The Company is required to maintain licenses and permits for
the distribution of pharmaceutical products and medical devices under the laws
of the states in which it operates. In addition, the Company's physician
customers are subject to significant federal and state regulation. There can be
no assurance that regulations that impact the physicians' practices will not
have a material adverse impact on the Company's business.
The Company is also subject to regulation in the European countries
where its Belgian subsidiary, WorldMed, N.V., markets its products. Many of the
regulations applicable in such countries are similar to those of the U.S. Food
and Drug Administration. The national health or social security organizations of
certain countries require the products distributed by the Company to be
qualified before they can be marketed in those countries.
Federal, state and foreign regulations regarding the sale and
distribution of medical supplies, equipment and devices by the Company are
subject to change. The Company cannot predict what impact, if any, such changes
might have on its business. See "Risk Factors -- Regulation of and Change in the
Practice of Medicine" and "--Environmental Liabilities and Regulations."
Legal Proceedings
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability. The
Company has not experienced any significant product liability claims and
maintains product liability insurance coverage. In addition, the Company is
party to various legal and administrative proceedings and claims arising in the
normal course of business. While any litigation contains an element of
uncertainty, the Company 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 business, financial condition or results of
operations.
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MANAGEMENT OF PSS
<TABLE>
<CAPTION>
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
<S> <C> <C>
Patrick C. Kelly (1)............................... 50 Chairman of the Board, Chief Executive
Officer and Director
John F. Sasen, Sr.................................. 55 President and Director
David A. Smith..................................... 37 Executive Vice President, Chief
Financial Officer and Director
James B. Stallings, Jr............................. 42 Chief Operating Officer
Frederick E. Dell.................................. 36 Executive Vice President; President of
Diagnostic Imaging, Inc.
Edward D. Dienes................................... 36 Vice President - Central Region
Delmer W. Dallas(3)................................ 66 Director
T. O'Neal Douglas(1)(2)............................ 61 Director
Fred Elefant(1)(3)................................. 50 General Counsel, Secretary and Director
Delores Kesler(2).................................. 56 Director
William C. Mason(2)................................ 59 Director
James L.L. Tullis(3)............................... 50 Director
</TABLE>
- ------------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Patrick C. Kelly, a co-founder of the Company, has served as Chairman
of the Board and Chief Executive Officer of the Company since its inception in
May 1983 and as President of the Company from May 1983 to August 1995. Prior to
founding the Company, from August 1976 to February 1983, Mr. Kelly served as
Sales Manager, General Manager and Vice President of Intermedco, Inc., a
Houston-based medical supply company.
John F. Sasen, Sr. has served on the Board of Directors of the Company
since July 1993 and as President of the Company since August 1995 and as Chief
Executive Officer of the Physician Supply Business since April 1997. Mr. Sasen
served as Chief Operating Officer of the Company from December 1993 to March
1997 and served as Executive Vice President of the Company from December 1993 to
August 1995. From August 1990 to December 1992, he served the Company as Vice
President-Sales and Marketing; from January 1993 to July 1993, as Regional Vice
President, and from August 1993 to December 1993 as Executive Vice President.
Prior to joining the Company, Mr. Sasen was Vice President-Sales, Marketing and
Distributor Relations for a division of Becton Dickinson & Company ("Becton
Dickinson"), a manufacturer of health care products. In that position, Mr. Sasen
directed product development and marketing efforts, technical services, product
services and customer service. Mr. Sasen was with Becton Dickinson for over 20
years. In addition, Mr. Sasen serves as a director of Humascan, Inc., a
manufacturer of a breast thermal detection device.
David A. Smith has served on the Board of Directors of the Company
since July 1993 and as Executive Vice President since April 1996 and Chief
Financial Officer of the Company since April 1992. Mr. Smith served as a Vice
President of the Company from April 1992 to April 1996. Prior to serving as Vice
President and Chief Financial Officer, Mr. Smith served the Company as a
Regional Manager,
- 72 -
<PAGE>
General Manager, Sales Manager and Operations Manager from July 1987 to June
1993. Prior to joining the Company, Mr. Smith was employed by Coopers & Lybrand
from October 1985 through June 1987, and by Smoak, Davis and Nixon, C.P.A., from
May 1983 through September 1985.
James Stallings has served as Chief Operating Officer since July 1997.
Prior to this position, Mr. Stallings served as Executive Vice President -
Southern Region since March 1997 and Executive Vice President - Sales and
Marketing from April 1996 to March 1997. From 1988 to 1996, Mr. Stallings held
several positions with IBM Corporation, including Director of Worldwide Sales -
AS/400 Division, Director of Business Re-engineering and General Manager. From
1984 to 1987, Mr. Stallings served as a manager of Rohm Corporation. In addition
to his responsibilities with the Company, Mr. Stallings serves on the Board of
Directors for Sun Bank of Northeast Florida.
Frederick E. Dell has served as Executive Vice President of the Company
and as President of Diagnostic Imaging, Inc. since November 1996. Prior to these
positions, Mr. Dell served as Senior Vice President - Southern Region of the
Company from April 1996 to November 1996 and served as Vice President - Southern
Region from January 1994 to March 1996. Mr. Dell also served as director of the
Company from July 1991 through July 1992. He served as Regional Manager and Vice
President of the Company's Western Region from December 1989 to January 1994.
From April 1984 through November 1989, Mr. Dell served the Company in various
sales and management positions.
Delmer W. Dallas has served on the Board of Directors of the Company since
October 1989. Since 1984, Mr. Dallas has been the Chairman of the Board of
Acosta Sales Co., Inc. ("Acosta"), a food brokerage company operating in the
Southeastern United States. He has also served on the Board of Directors of
Acosta since 1966.
T. O'Neal Douglas has served on the Board of Directors of the Company
since July 1993. Mr. Douglas is the Chairman and Chief Executive Officer of
American Heritage Life Insurance Co. and American Heritage Life Investment
Company (collectively, "AHL"). He has been with AHL since 1983, serving as
President since 1986 and Chief Executive Officer since 1990. In addition, Mr.
Douglas serves as a director of Barnett Bank of Jacksonville, N.A.
Fred Elefant has served on the Board of Directors of the Company and as
Secretary of the Company since 1984. Mr. Elefant has been engaged in the private
practice of law in Jacksonville, Florida since 1973. Since January 1989, he has
practiced as Fred Elefant, P.A. He was a member of the law firm of Mahoney,
Adams, Milam, Surface & Grimsley, P.A., now Mahoney Adams & Criser, P.A., from
1983 to 1989.
Delores P. Kesler has served on the Board of Directors of the Company
since July 1993. Ms. Kesler has been Chairman and CEO of Kesler, Pass &
Associates, Inc. since 1996. Prior to that, Ms. Kesler was Chairman of Accustaff
Incorporated ("AccuStaff"), the successor to ATS Services, Inc. ("ATS"), a
franchisor of temporary employment operations from January until June 1996. She
founded ATS in May 1978 and served as its Chairman and Chief Executive Officer
until its merger with three other temporary employment agencies in May 1992. Ms.
Kesler is a past member of an executive committee with the National Association
of Temporary Services and serves on the Board of Directors of Accustaff and Clay
County Bank in Orange Park, Florida.
William C. Mason has served on the Board of Directors of the Company
since April 1996. Mr. Mason is Vice Chairman and Chief Executive Officer of
Baptist/St. Vincent's Health System, Inc. located in Jacksonville, Florida and
has served in various positions throughout the organization since 1984.
James L. L. Tullis has served on the Board of Directors of the Company
since November 1989. Mr. Tullis was nominated to serve on the Board of Directors
of the Company for a three year term beginning in 1994 pursuant to an agreement
with the Company. Since September 1987, Mr. Tullis has been a general partner of
Tullis-Dickerson Partners, the general partner of Tullis-Dickerson Capital
- 73 -
<PAGE>
Focus, L.P., a venture capital fund that invests in the health care industry and
a shareholder of the Company. Mr. Tullis has served as Chairman of the Board of
Directors and Chief Executive Officer of Tullis-Dickerson & Co., Inc., a venture
capital company which acts as a management company for Tullis-Dickerson Capital
Focus, L.P., since July 1986. Mr. Tullis also serves on the Board of Directors
of American Consolidated Laboratories, Inc., a manufacturer of contact lenses,
Scandipharm, Inc., a developer and manufacturer of pharmaceutical products and
services, and Acme United, Inc., a manufacturer of scissors and other medical
products.
Executive officers of the Company are elected annually and serve at the
discretion of the Board. There are no family relationships between or among any
of the Company's directors or executive officers.
Compensation Committee Interlocks and Insider Participation
The Company's compensation committee for the fiscal year ended March
28, 1997 was comprised of Messrs. Dallas, Elefant and Tullis. Mr. Elefant
provides legal services as general counsel to the Company. Fees for such legal
services were approximately $132,000 in fiscal year 1997.
Executive Compensation
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company, for services rendered in all
capacities for the fiscal years 1995 through 1997, for its Chief Executive
Officer and the four other most highly compensated officers.
- 74 -
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
----------------------------------------- ----------------------------------
Securities
Underlying All Other
Name and Principal Position Year Salary(1) Bonus(2) Options(3) Compensation(4)
--------------------------- ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Patrick C. Kelly..................... 1997 $475,000 $76,000 -- $58,001
Chairman of the Board and Chief 1996 360,000 154,800 290,462 30,434
Executive Officer 1995 324,996 128,100 150,000 12,017
John F. Sasen, Sr.................... 1997 300,000 36,000 13,157 46,693
President 1996 212,083 69,300 54,282 4,427
1995 175,008 48,027 30,000 4,424
David A. Smith....................... 1997 235,000 28,200 9,045 7,785
Executive Vice President and Chief 1996 145,799 47,850 31,251 2,628
Financial Officer 1995 135,000 37,049 15,000 2,622
Frederick E. Dell.................... 1997 170,000 21,591 4,217 9,114
Executive Vice President; President 1996 138,000 15,660 21,084 2,630
of Diagnostic Imaging, Inc. 1995 132,000 50,108 15,000 2,596
James B. Stallings, Jr.(5)........... 1997 160,417 17,500 20,000 11,528
Executive Vice President - Southern
Region
</TABLE>
- ------------------------------
(1) Total base salary earned during the fiscal years presented. The Company has
established base salaries for its fiscal year ending March 27, 1998 as
follows: Mr. Kelly, $535,000; Mr. Sasen, $330,000; Mr. Smith, $255,000; Mr.
Dell, $200,000; and Mr. Stallings, $190,000.
(2) Annual incentive award paid for results achieved during the fiscal years
presented. Any amounts deferred at the election of the executive are
included in the reported amounts.
(3) Grants of stock options made during the fiscal years presented. These
awards were made under the Company's 1994 Long Term Incentive Plan and 1994
Long Term Stock Plan.
(4) All other compensation which is not included in the aforementioned
categories. Amounts shown in this column include the following payments for
fiscal year 1997: (i) for Mr. Kelly, $506 for PSS contributions to the
Employee Stock Ownership Plan (the "ESOP"), $27,765 for total premiums
under a ten year term life insurance policy and $29,730 for total premiums
under a key-man life insurance policy; (ii) for Mr. Sasen, $493 for PSS
contributions to the ESOP and $46,200 for total premiums under a split
dollar life insurance policy; (iii) for Mr. Smith, $500 for PSS
contributions to the ESOP and $7,285 for total premiums under a split
dollar life insurance policy; (iv) for Mr. Dell, $319 for PSS contributions
to the ESOP and $3,795 for total premiums under a split dollar life
insurance policy; and (v) for Mr. Stallings, $11,528 for total premiums
under a split dollar life insurance policy.
(5) Mr. Stallings has served the newly created position of Chief Operating
Officer since July 1977 and has been employed by the Company since April
1996.
- 75 -
<PAGE>
Option Grants in Fiscal Year 1997
The following table sets forth information concerning the grant of stock
options made during fiscal year 1997 pursuant to the Company's 1994 Long Term
Incentive Plan and 1994 Long Term Stock Plan:
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------
Percentage Potential Realized Value
Number of of Total Options at Assumed Actuarial Rates
Securities Granted to of Stock Price
Underlying Employees Exercise Appreciation
Options in Fiscal Price Expiration For Option Term (3)
-------------------
Name Granted (1) Year 1997 ($/Sh)(2) Date 5% 10%
- ---- ----------- --------- --------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Patrick C. Kelly....... -- --% -- -- -- --
John F. Sasen, Sr...... 13,157 4.8 $23.94 7/8/06 $198,088 $501,995
David A. Smith......... 9,045 3.3 23.94 7/8/06 136,179 345,105
Frederick E. Dell...... 4,217 1.6 23.94 7/8/06 63,490 160,896
James B. Stallings, Jr. 20,000 7.4 23.94 7/8/06 301,115 763,084
</TABLE>
- -----------------------
(1) Issued from the Long Term Incentive Plan and the Long Term Stock Plan, each
of which became effective in March 1994. The options issued in fiscal year
1997 to the named executive officers are nonqualified stock options for
federal income tax purposes and accordingly are not entitled to special tax
treatment under Section 422 of the Internal Revenue Code of 1986, as
amended. The options granted in fiscal year 1997 to the named executive
officers are exercisable immediately and expire ten years from the date of
grant.
(2) In fiscal year 1997, the named executive officers were granted options to
acquire an aggregate of 46,419 shares of Common Stock at an exercise price
of fair market value as of the date of grant.
(3) The dollar amount under the columns assumes that the market price of the
Common Stock from the date of the option grant appreciates at cumulative
annual rates of 5% and 10%, respectively, over the term of each option
granted in fiscal year 1997. The assumed rates of 5% and 10% were
established by the Securities and Exchange Commission and therefore are not
intended to forecast possible future appreciation, if any, of the price or
value of the Common Stock.
Option Exercises and Holdings as of March 28, 1997
The following tables set forth information regarding stock options
exercised in fiscal year 1997 by each of the named executive officers and the
value of the unexercised options held by these individuals as of March 28, 1997,
based on the market value of the Common Stock on that date:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal Year 1997
and Option Values as of March 28, 1997
----------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Shares Underlying Options at In-the-Money Options
Acquired Value March 28, 1997 at March 28, 1997(2)
Name on Exercise Realized Exercisable(1) Exercisable(1)
---- ----------- -------- -------------- --------------
<S> <C> <C> <C> <C>
Patrick C. Kelly....... 110,000 $2,105,625 630,462 $3,190,750
John F. Sasen, Sr ..... 36,000 777,750 67,439 --(3)
David A. Smith......... 15,000 296,250 40,296 --(3)
Frederick E. Dell...... 6,000 192,000 40,301 139,995
James B. Stallings, Jr. -- -- 20,000 --(3)
</TABLE>
- -----------------------
(1) All options held by the named executive officers are currently exercisable.
(2) Based upon the closing price of $13.00 of the Common Stock on the Nasdaq
National Market on March 27, 1997.
- 76 -
<PAGE>
(3) Based upon the closing price of $13.00 of the Common Stock on the Nasdaq
National Market on March 27, 1997, the exercise prices for the options held
by these officers exceed the closing price on such date.
<TABLE>
<CAPTION>
Long Term Incentive Plans - Awards in Last Fiscal Year
-----------------------------------------------------------------------
Number of Estimated Future Payouts Under
Performance Period Until Non-Stock Price-Based Plan
---------------------------------------
Name Units (1) Payout Threshold(2) Target(3) Maximum(4)
- ---- ------------- ------------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Patrick C. Kelly............ 238 1/1/97 - 12/31/99 $119,000 $238,000 $714,000
John F. Sasen, Sr........... 150 1/1/97 - 12/31/99 75,000 150,000 450,000
David A. Smith.............. 118 1/1/97 - 12/31/99 59,000 118,000 354,000
Frederick E. Dell........... 85 1/1/97 - 12/31/99 42,500 85,000 255,000
James B. Stallings, Jr...... 80 1/1/97 - 12/31/99 40,000 80,000 240,000
</TABLE>
- ------------------------
(1) Under the Company's 1994 Long Term Incentive Plan, officers of the Company
may be awarded a certain number of Performance Units each year equal to a
percentage of the officer's salary. Each Performance Unit granted has a
target value of $1,000 assuming the Company's total shareholder return
result is in the 60th percentile of peer group companies. The actual value
of each Performance Unit depends on the Company's performance over a period
of three fiscal years, beginning on the effective date of the award.
(2) The threshold amounts shown are based upon the Company achieving a total
shareholder return result in the 50th percentile of peer group companies, at
which point each Unit granted will have a value of $500.
(3) The target amounts shown are based upon the Company achieving a total
shareholder return result in the 60th percentile of peer group companies, at
which point each Unit granted will have a value of $1,000.
(4) The maximum amounts shown are based upon the Company achieving a total
shareholder return result in the 90th percentile or greater of peer group
companies, at which point each Unit granted will have a value of three times
the target value, or $3,000.
Employment Agreements
The Company has entered into employment agreements with each of its
named executive officers, which include the terms described below:
Term. Mr. Kelly's employment agreement was for an initial period of
five years expiring June 1, 1997, was renewed for a five-year period ending June
1, 2002, and is automatically renewable for additional five year terms. The
other executive officers' employment agreements are for terms of two years and
are automatically renewable for additional two year terms.
Covenants Not to Compete. Each executive officer has agreed not to
compete with the Company for a period of 18 months following the termination of
his employment within the territory in which the Company is then operating.
The covenants not to compete are not valid upon the occurrence of
certain events. In Mr. Kelly's employment agreement, such events include either
Mr. Kelly not being re-elected to or resigning his position as a director of the
Company or the acquisition of a voting majority of the issued and outstanding
capital stock of the Company by an outside entity. In the other executive
officers' employment agreements, such events include, in addition to those set
forth in the previous sentence, Mr. Kelly no longer being employed by or
resigning his employment with the Company or, following Mr. Kelly's death or
disability, Fred Elefant being removed as a director of the Company.
- 77 -
<PAGE>
Termination. Each employment agreement includes several provisions
requiring the Company to make certain payments upon the occurrence of certain
events.
Following Mr. Kelly's termination by the Company for any reason except
for good cause or if Mr. Kelly resigns from the Company for good cause, the
Company is required to pay Mr. Kelly's full salary for 24 months following such
termination or resignation, and to provide Mr. Kelly with insurance coverage
during that period. In addition, the Company is required to repurchase up to 50%
of the Common Stock owned by Mr. Kelly at its market value within 30 days of
demand by Mr. Kelly at any time during the 24 month period. During that period,
Mr. Kelly is entitled to have his shares of Common Stock registered in the event
that securities held by any persons who are at such time members of Board of
Directors are registered. The other executive officers have similar rights as to
payment of salary, provision of insurance benefits, repurchase of up to 20% of
their Common Stock and registration of Common Stock for a period of six months.
Upon a change in control of the Company, if the Company then terminates
Mr. Kelly's employment or if Mr. Kelly resigns, the Company is required to pay
Mr. Kelly's salary and provide Mr. Kelly with insurance coverage for a period of
three years and to repurchase all of Mr. Kelly's Common Stock at its market
value upon demand. A change in control of the Company is defined as the
resignation, removal or failure to re-elect Mr. Kelly as a director of the
Company, or following Mr. Kelly's death or disability, the resignation, removal
or failure to re-elect Fred Elefant as a director of the Company. Mr. Kelly is
also entitled to reimbursement of up to $100,000 per year for office,
secretarial, and related expenses. In this case, Mr. Kelly also has registration
rights as described above during such three year period. The other executive
officers have similar rights for a period of one year in the event of their
termination or resignation following a change in control of the Company.
If the Company terminates Mr. Kelly for cause, or if Mr. Kelly resigns
from the Company without good reason, Mr. Kelly is entitled to receive his
salary and full insurance coverage for a period of 12 months or, if earlier,
until his employment with another company. The other executive officers have
similar rights for a period of three months or, if earlier, until their
employment with another company.
PSS CERTAIN TRANSACTIONS
Fred Elefant, a member of the Board of Directors and Secretary of the
Company, provides legal services as general counsel to the Company. Fees for
such legal services were approximately $132,000, $136,000 and $124,000 in fiscal
years 1997, 1996 and 1995, respectively.
T. O'Neal Douglas, a director of the Company, 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 insurance 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.
- 78 -
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF PSS
The following table reflects the number of shares of common stock, $.01
par value per share, of PSS, beneficially owned as of June 30, 1997, by (i) each
person who is known by the Company to beneficially own more than five percent of
the outstanding Common Stock, (ii) each of the executive officers named in the
Summary Compensation Table, (iii) each director, and (iv) all of the Company's
executive officers and directors as a group. Unless otherwise noted, all shares
are owned directly with sole voting and dispositive powers.
<TABLE>
<CAPTION>
Number of Percent of
Name Shares Total(1)
---- ------ --------
<S> <C> <C>
Putnam Investments Management(2)....................................... 4,166,268 11.2%
Edgemont Asset Management Corp.(2)..................................... 3,765,000 10.1%
Pilgrim Baxter & Associates, Ltd. (2).................................. 2,736,900 7.3
Patrick C. Kelly (3)(4)................................................ 1,438,708 3.8
John F. Sasen, Sr. (3)................................................. 229,844 *
Frederick E. Dell (3).................................................. 239,449 *
David A. Smith (3)..................................................... 209,494 *
James B. Stallings, Jr.(3)............................................. 47,566 *
Delmer W. Dallas (3)................................................... 131,144 *
T. O'Neal Douglas...................................................... 18,000 *
Fred Elefant (3)(5).................................................... 702,616 1.9
Delores P. Kesler (3).................................................. 1,500 *
James L.L. Tullis (6).................................................. 217,860 *
William C. Mason....................................................... -- --
All Executive Officers and Directors as a group (11 persons)(3)........ 3,236,181 8.4
</TABLE>
- --------------------
* Less than 1%
(1) Based upon 37,345,515 shares of Common Stock outstanding as of June 30,
1997.
(2) The addresses for holders of five percent or more of the Common Stock
outstanding are as follows: Putnam Investments, Inc., One Post Office
Square, Boston, MA 02109; Edgemont Asset Management Corp., 140 East 45th
Street, New York, New York 10017 and Pilgrim Baxter & Associates, Ltd. is
1255 Drummers Lane, Suite 300, Wayne Pennsylvania 19087-1590. Information
regarding Pilgram Baxter & Associates, Ltd. is as of March 31, 1997.
(3) Included in such beneficial ownership are shares of Common Stock issuable
upon the exercise of certain options exercisable immediately or within 60
days of March 28, 1997 as follows: Mr. Kelly, 733,704 shares; Mr. Sasen,
110,106 shares; Mr. Dell, 66,160 shares; Mr. Smith, 73,266 shares; Mr.
Stallings, 44,566 shares; Mr. Elefant, 17,539 shares; Mr. Tullis, 14,296
shares; and executive officers and directors as a group, 1,059,637 shares.
Also included in such beneficial ownership are shares held for the account
of certain individuals by the ESOP as follows: Mr. Kelly, 154,974 shares;
Mr. Sasen, 18,872 shares; Mr. Smith, 25,959 shares; Mr. Dell, 96,420
shares; and all executive officers and directors as a group, 386,830
shares.
(4) Excludes 600,000 shares held in trust for Mr. Kelly's daughters.
(5) Includes 600,000 shares held in trust for Mr. Kelly's daughters for which
Mr. Elefant serves as co-trustee.
(6) Includes 127,881 shares owned by Tullis Dickerson Capital Focus, L.P. and
11,200 shares owned by Tullis Dickerson Partners. Mr. Tullis is the general
partner of Tullis-Dickerson Partners, the sole general partner of
Tullis-Dickerson Capital Focus, L.P.
- 79 -
<PAGE>
SELECTED FINANCIAL DATA OF S&W
The selected financial data of S&W presented as of and for the periods
ended March 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the
audited and/or reviewed financial statements of S&W. See "BUSINESS OF S&W --
General," "S&W MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS" and "S&W FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
Three Months Ended
Fiscal Years Ended March 31, June 30,
------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1996 1997
------- ----- ------ ----- ------ ------ -------
Statements of Income Data: (In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue 50,042 54,332 58,684 60,096 72,034 17,689 20,040
Gross profit 10,590 10,895 12,702 12,926 16,774 3,694 4,570
General and administrative expenses 9,025 9,099 10,748 11,044 15,773 3,234 4,039
Depreciation and amortization 103 140 182 202 295 61 78
Earnings before interest and taxes 1,582 1,789 1,965 1,891 1,014 462 537
Net income 775 849 907 790 53 173 210
Net income per share $3.10 $4.40 $4.43 $3.65 $0.23 $0.80 $0.90
Dividends per common share None None None None None None None
Working capital 2,759 3,468 4,230 4,567 6,145 6,546
Total assets 11,383 12,440 14,398 16,912 22,984 20,190
Long-term indebtedness 578 4,163 3,508 2,966 4,348 4,171
Retained earnings and common stock 3,236 4,399 5,307 6,097 6,150 6,360
Less: Unearned ESOP shares 0 3,638 3,021 2,516 1,368 1,306
Add: Paid in capital 0 0 0 0 173 173
Total equity 3,236 761 2,286 3,581 4,955 5,227
</TABLE>
- 80 -
<PAGE>
S&W MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of S&W's financial condition and results of
operations should be read in conjunction with the more detailed information and
the S&W Financial Statements and notes thereto appearing elsewhere in this Proxy
Statement-Prospectus.
General
S&W is a leading distributor of x-ray chemicals, film, equipment and
related medical products in hospitals, imaging centers, MRI offices,
orthopedics, chiropractic, veterinary, and dental facilities. Founded in 1973,
S&W has grown primarily through expanded sales territories with significant and
growing equipment sales and service.
S&W distributes products to its customers through five regional
distribution centers located in Buffalo, Rochester, Syracuse, Albany and
Newburgh, New York and three sales/service offices located in Erie and Scranton,
Pennsylvania and Hartford, Connecticut. S&W's 94-person sales and service force
calls on 3,000 hospital-physician customers in six states. S&W offers over
15,000 medical products, related supplies and diagnostic imaging equipment.
Results of Operations
The following table represents certain consolidated statements of
operations data as a percentage of such items to revenues:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31, Three Months Ended June 30,
------------------------------------ -------------------------------
1995 1996 1997 1996 1997
-------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Statements of Income Data:
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of Goods Sold 78.4 78.5 76.7 79.1 77.2
General Administration 18.3 18.4 21.9 18.3 20.2
Depreciation and Amortization 0.3 0.3 0.4 0.3 0.4
Interest 0.8 0.8 1.2 0.8 0.9
Income Before Income Taxes 2.5 2.3 0.2 1.8 1.8
Income Taxes 1.0 1.0 0.1 0.8 0.7
Net Income 1.5 1.3 0.0 1.0 1.0
</TABLE>
Three Months Ended June 30, 1997 Versus June 30, 1996
Revenues. Revenues for the three months ended June 30, 1997 increased by
13.3% to $20 million, compared to $17.7 million for the three months ended June
30, 1996. The increase is attributed to normal sales growth.
Cost of Goods Sold. Cost of goods sold as a percent of revenues decreased
slightly to 77.2% for the three months ended June 30, 1997 from 79.1% for the
three months ended June 30, 1996.
General and Administrative Expenses. General and administrative expenses as
a percent of revenues for the three months ended June 30, 1997 increased to
20.2% from 18.3% for the three months ended June 30, 1996.
- 81 -
<PAGE>
Depreciation and Amortization. Depreciation and amortization for the three
months ended June 30, 1997 increased to $78,000 from $61,000 for the three
months ended June 30, 1996. The increase is primarily due to the purchase of
computer equipment and software.
Interest Expense. Interest expense increased to $181,000 in the three
months ended June 30, 1997 compared to $146,000 in the three months ended June
30, 1996. The increase was primarily due to the increased use of borrowed funds
to fund working capital requirements.
Income Tax Expense. Income taxes for the three months ended June 30, 1997
were $147,000 as compared to $144,000 for the three months ended June 30, 1996.
Net Income. Net income for the three months ended June 30, 1997 was
$210,000 as compared to $173,000 for the three months ended June 30, 1996.
Fiscal Year Ended March 31, 1997 Versus March 31, 1996
Revenues. Revenues for the fiscal year ended March 31, 1997 increased by
19.9% to $72 million, compared to $60 million for the fiscal year ended March
31, 1996. The increase is due to a full year effect of an acquisition and
continued market penetration resulting in branch sales growth.
Cost of Goods Sold. Cost of goods sold as a percent of revenues decreased
slightly to 76.7% for the fiscal year ended March 31, 1997 from 78.5% for the
fiscal year ended March 31, 1996.
General and Administrative Expenses. General and administrative expenses as
a percent of revenues for the fiscal year ended March 31, 1997 increased to
21.9% from 18.4% for the fiscal year ended March 31, 1996. The increase
reflected an addition of 25 sales, service and support personnel during the most
recent acquisition.
Depreciation and Amortization. Depreciation and amortization for the fiscal
year ended March 31, 1997 increased slightly to $295,000 from $202,000 for the
fiscal year ended March 31, 1996. The increase is primarily due to the goodwill
amortization resulting from an acquisition that occurred in March 1996 and the
purchase of computer equipment and software.
Interest Expense. Interest expense increased to $865,000 in the fiscal year
ended March 31, 1997 compared to $500,000 in the fiscal year ended March 31,
1996. The increase was primarily due to the increased use of borrowed funds to
fund working capital requirements.
Income Tax Expense. Income taxes for the fiscal year ended March 31, 1997
were $95,900 as compared to $601,100 for the fiscal year ended March 31, 1996.
Net Income. Net income for the fiscal year ended March 31, 1997 was $53,275
as compared to $790,000 for the fiscal year ended March 31, 1996.
Fiscal Year Ended March 31, 1996 Versus March 31, 1995
Revenues. Revenues for the fiscal year ended March 31, 1996 grew slightly
to $60 million as compared to $58.7 million for the fiscal year ended March 31,
1995.
Cost of Goods Sold. Cost of goods sold as a percent of revenues increased
slightly to 78.5% for the fiscal year ended March 31, 1996 from 78.4% for the
fiscal year ended March 31, 1995.
General and Administrative Expenses. General and administrative expenses as
a percent of revenues increased slightly to 18.4% for the fiscal year ended
March 31, 1996 from 18.3% for the fiscal year ended March 31, 1995.
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<PAGE>
Depreciation and Amortization. Depreciation and amortization for the fiscal
year ended March 31, 1996 increased slightly to $202,000 from $182,000 for the
fiscal year ended March 31, 1995.
Interest Expense. Interest expense as a percent of revenues remained
unchanged at approximately 0.8% for the fiscal years ended March 31, 1996 and
1995.
Income Tax Expense. Income taxes for the fiscal year ended March 31, 1996
were $601,100 as compared to $616,582 for the fiscal year ended March 31, 1995.
Net Income. Net income for the fiscal year ended March 31, 1996 was
$790,000 as compared to $907,019 for the fiscal year ended March 31, 1995.
Liquidity and Capital Resources
As of June 30, 1997, total current assets were $18 million and total
current liabilities were $11.5 million, resulting in working capital of $6.5
million. As of March 31, 1997, total current assets were $20.9 million and total
current liabilities were $14.7 million, resulting in working capital of $6.2
million, compared to $15.2 million in current assets and $10.6 million in
current liabilities ($4.6 million in working capital) at March 31, 1996. The
current ratio was 1.6 to 1 at June 30, 1997 and 1.4 to 1 at March 31, 1997 and
1996.
Operating Activities. Net cash provided by operating activities was $1.4
million for the three months ended June 30, 1997 as compared to net cash used
for operating activities of $149,000 for the three months ended June 30, 1996.
Net cash used in operating activities was $438,000, $1.0 million, and $944,000
in fiscal years ended March 31, 1997, 1996, and 1995, respectively. Net cash
provided by operating activities for the three months ended June 30, 1997 was
primarily a result of decreases in accounts receivables due to collections and
reductions of inventory balances, which were offset by decreases of accounts
payable. The net cash used in fiscal 1996 and 1995 operating activities was a
result of increasing inventories in anticipation of a manufacturer price
increase and an increase in accounts receivable. Fiscal year ended March 31,
1997 operating activities were offset by increased accounts payables.
Investing Activities. Net cash used in investing activities was $36,000 for
the three months ended June 30, 1997 and $475,000, $585,000, and $247,000 in
fiscal years ended March 31, 1997, 1996, and 1995, respectively. These funds
were primarily used for fixed asset purchases in fiscal years ended 1997 and
1995 and an acquisition in fiscal year ended March 31, 1996.
Financing Activities. Net cash used for financing activities for the three
months ended June 30, 1997 was $1.7 million as compared to net cash provided by
financing activities of $76,000 for the three months ended June 30, 1996. Net
cash provided by financing activities was $1.1 million, $1.6 million, and $1.1
million in fiscal years ended 1997, 1996, and 1995, respectively. For the three
months ended June 30, 1997, net cash used for financing activities primarily
resulted from pay downs of short-term borrowings. For fiscal 1997, 1996, and
1995, net cash provided by financing activities resulted from increased short
and long-term borrowings, and borrowings from related parties, which were offset
by pay downs of short-term borrowings and payments to related parties.
As of March 31, 1997, S&W had two working capital line of credit agreements
and an equipment line of credit agreement with a local bank in the aggregate
amount of $10,000,000. The revolving lines of credit are secured by S&W's
accounts receivable, equipment and inventory, along with the personal guarantee
of one of the shareholders. In addition, the agreements require S&W to maintain
certain financial covenants and specified ratios.
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The primary credit line is available up to $3,500,000 for working capital
requirements and bears interest at the prime rate (an effective rate of 8.5% at
March 31, 1997). At March 31, 1997, there was $1,714,550 outstanding against
this line.
The equipment credit line is available for purchases of equipment for
resale up to $500,000 and bears interest at the prime rate plus 1-1/4%. No
amounts were outstanding under this credit line at March 31, 1997.
S&W estimates that existing line of credit availability, working capital
and cash from operations will be sufficient to fund operations for the next
twelve months.
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<PAGE>
BUSINESS OF S&W
General
S&W offers imaging products and services to health care providers with
the objective of satisfying technical imaging needs. S&W's headquarters is
located in Rochester, New York and S&W maintains branch offices in Buffalo,
Syracuse, Albany and Newburgh, New York. S&W also has sales/service satellite
facilities in Erie, Pennsylvania, Scranton, Pennsylvania and Hartford,
Connecticut. S&W services over 4,000 customers, including over 250 hospitals,
700 radiographic and imaging centers, and other industrial, alternate care and
dental accounts. S&W serves customers throughout New York State (excluding Long
Island), Northern Pennsylvania, Northern New Jersey and Western New England.
S&W's sales representatives meet daily with health care professionals
to provide solutions for a wide spectrum of needs. In the acute care market, S&W
representatives interact with imaging and materials management department heads,
as well as physicians and hospital administrators. Due to the pressure of health
care reform, down sizing, managed care and capitated provider contracts, S&W
sales representatives work with hospital administration staff to increase
efficiency and reduce the cost of the products and services consumed by the
facilities. S&W sales representatives also assist customers in complying with
health department quality assurance policies and meeting EPA film processor
effluent discharge regulations. In addition, S&W maintains relationships with
Group Purchasing Organizations and Integrated Delivery Networks. These
organizations and networks make decisions for as few as three to as many as
1,800 hospitals. S&W considers these organizations and networks to be very
effective resources.
Each S&W branch office consists of three teams: consumables/accessories
sales, imaging equipment sales, and multi-vendor imaging equipment service. The
team approach allows for a comprehensive understanding of customer goals.
Frequent interaction among these teams allows S&W to service a variety of
customer needs.
Consumables/Accessories and Sales
Film sales account for approximately 50% of S&W's revenues. Nearly half
of the film sold by S&W is manufactured by Kodak. S&W distributes film and
services film handling equipment manufactured by the world's major manufacturers
- - Kodak, Sterling, Imation, Konica, Fuji and Agfa.
S&W provides its acute care and larger alternate care customers with
pre-mixed developer and fixer solution. In addition to selling products to these
customers, S&W assumes responsibility for ordering, inventory maintenance, and
delivery, which saves its customers the time and cost associated with these
processes and allows them to focus on providing health care services.
All S&W processor service personnel must matriculate through the Kodak
Imagewatch certification program, which includes general processing, mammography
and silver management. Continuing technical education courses offered by other
film handling manufacturers also are attended.
In addition to film and film handling products, S&W offers thousands of
imaging accessory products manufactured by hundreds of large and small
companies, and include such products as paper filing envelopes, barium, lead and
lead apparel, darkroom cabinets, grids, buckles, mew boxes, shelving, cassettes
and markers.
S&W offers three inventory management distribution programs: a
stockless inventory program, a JIT program and a conventional program. S&W's
inventory management programs are designed to increase efficiencies and decrease
costs for customers through outsourcing the order procurement process to S&W. By
integrating the entire inventory ordering and maintenance process, S&W helps
customers
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<PAGE>
identify and eliminate duplicative and unnecessary costs, thus allowing imaging
department managers to focus on patient care.
S&W is EDT capable and utilizes an ANSI-X12 P.C. platform on-call
system to further reduce ordering costs.
S&W sells film, film handling products and accessories through a
telemarketing division in its Rochester branch. This division services over
2,200 dental customers nationally and abroad, and accounted for approximately
$1.3 million in revenue in fiscal 1997.
Imaging Equipment Sales
S&W distributes specialty lines of imaging equipment for several
manufacturers, including Camtronics, Comdisco, CompuRad, Shimadzu, Infimed and
Trex Medical Products. Trex distributes products through four subsidiaries:
Bennett, Continental X-Ray, Lorad and XRE. Below is a brief description of these
companies and certain of their products.
Trex Medical Products - A leading manufacturer of mammography and
stereotactic needle biopsy systems, and quality radiographic systems.
Trex is an innovator with the new fill breast digital technology which
is expected to be available in 1998.
Bennett - Manufactures mammography (Contour) and general radiographic
systems. The Contour product is a market leader in mammography due to
its tilt feature which visualizes additional breast tissue. Bennett
also manufactures stereotactic equipment.
Continental X-Ray - Designs, manufactures and markets general purpose
and specialty X-Ray systems, including radiographic/fluoroscopic and
electrophysiologic systems. Continental's new flagship product, the
DigiSpot R&F room, provides high quality imaging with low radiation to
the patient.
Lorad - Its breast imaging systems are regarded in the industry as the
most technically advanced available, and provide the highest image
resolution available. Products include M-IV & M-III Mammography
Systems, StereoGuide prone stereotactic breast biopsy systems, DSM and
StereoLoc II. Together with U.S. Surgical, Lorad developed the ABBI
System, a minimally invasive breast biopsy instrument which decreases
provider costs by eliminating certain surgical procedures.
XRE - Through dealer organizations and private label agreements with
several global medical imaging companies (including Philips, G.E. and
Picker), XRE has become a leading designer and manufacturer of
angiographic equipment. XRE's patented parallelogram positioner offers
virtually unlimited angulations for complex cardiac imaging.
Camtronics - Manufactures digital imaging systems for R/F, angio and
cardiac applications. Its VP System includes a direct to disk
technology that is new in the industry and allows for increased image
storage and faster image review. Camtronics' products are distributed
through an exclusive dealer network as well as OEM arrangements.
Comdisco - Remanufactures state-of-the art diagnostic imaging equipment
and specializes in high-end ISO-9002 certified MRI, CT, angio, cath
lab, R&F and mobil vascular labs.
CompuRad - Manufactures equipment for affordable image transmission to
increase service levels and imaging efficiencies for the referring
physician and the patient. CompuRad's non-
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proprietary Windows NT software complies with industry dicom standards
and is upgradable and user friendly.
Shimadzu - Manufactures high tech imaging equipment such as general
X-ray, angio, CT and MRI.
Infimed - Manufactures digital imaging systems for R/F, angio and
cardiac applications. Infimed's products are based on Microsoft's
Windows 95, and are primarily sold as "add on" systems through a
dealership network.
Multi-Vendor Imaging Equipment Service
S&W's customers utilize equipment from a wide variety of vendors and
S&W's multi-vendor service provides a cost efficient alternative to these
customers who would otherwise be required to contract with a large number of
servicing companies.
S&W has 28 imaging equipment service personnel with various backgrounds
and expertise. S&W's imaging equipment service personnel service all makes and
models available from the manufacturers represented by S&W and from most other
manufacturers. S&W personnel have the skill to repair a wide variety of
equipment with a set of schematics and with the resources of second source
vendors who assist S&W by supplying cost effective part and component
alternatives.
S&W provides multi-vendor service for the following types of imaging
equipment: radiographic, portables, fluoroscopic, CT, tomographic, C-arm,
special procedures and ultrasound.
Competition
The imaging equipment and services businesses are highly competitive.
Many large, multi-national companies, such as G.E., Phillips, Siemens, Picker
and Toshiba, compete with S&W in the imaging equipment marketplace and utilize a
spectrum of resources ranging from designated equipment specialists to creative
financial arrangements.
S&W differentiates itself from large, original equipment manufacturers
by offering a higher level of local customer service and lower delivered cost.
S&W's local, decentralized structure allows flexibility to address customer
needs and to create opportunities for future sales and services.
S&W also encounters heavy competition in the area of consumable and
accessory sales from Picker and from locally based firms. E. G. Baldwin Co., L.
M. Goodyear X-Ray Co., and Buffalo X-Ray Co. compete in the Buffalo market; L.
M. Goodyear X-Ray Co., V-Med, and Buffalo X-Ray Co. compete in the Rochester
market; V-Med, Reliance X-Ray, and North Central X-Ray compete in the Syracuse
market; Associated X-Ray, E. M. Parker Co., and Schiring Radiographic Imaging
compete in the Albany market; and E. M. Parker Co., Standard Medical Imaging,
and Parker X-Ray Solutions compete in the Newburgh market.
Facilities
S&W distributes products through its seven branch and satellite service
centers, and operates a fleet of approximately 20 leased trucks to service
customers. S&W believes that its facilities are adequate to support its current
and anticipated business for the foreseeable future. The following table lists
S&W's facilities by center, all of which are leased except for the Syracuse, New
York center:
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<PAGE>
<TABLE>
<CAPTION>
Approximate
Date -----------
Location Opened Square Feet Service Area
-------- ------ ----------- ------------
<S> <C> <C> <C>
Rochester, NY 1973 12,000 Western and Southern NY, Northern PA
Buffalo, NY 1985 12,000 Western NY and Northern PA
Syracuse, NY 1976 20,000 Central NY and North Central PA
Albany, NY 1984 14,000 Northern and Eastern NY, VT, CT, MA
Hartford, CT 1996 3,000 West and Central CT
Erie, PA 1993 3,000 Western PA
Scranton, PA
Newburgh, NY 1991 12,000 Downstate NY, CT, NJ, Eastern PA
</TABLE>
Employees
S&W employs approximately 175 persons (including 15 part-time
employees), of whom 28 are engaged in management, administration and accounting,
24 are in direct sales, 70 are in equipment services, 25 are in customer
service, and 28 are in warehouse and distribution operations (including
drivers).
Insurance
S&W maintains general liability, product liability and automobile
liability insurance. While S&W believes its insurance is adequate in amount and
coverage, there can be no assurance that the coverage maintained by S&W is
sufficient to cover all future claims or will be available in adequate amounts
or at a reasonable cost.
Legal Proceedings
S&W is involved from time to time in various legal proceedings
incidental to its business. In the opinion of S&W's management, no pending
litigation is likely to have a material effect on S&W's financial position,
results of operations or liquidity.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF S&W
The following table sets forth certain information with respect to the
beneficial ownership of S&W Shares as of August 10, 1997, by (i) each person who
is known by S&W to beneficially own more than 5% of any class of outstanding
capital stock of S&W, (ii) each of the executive officers named in the S&W
Summary Compensation Table above, (iii) each of S&W's directors, and (iv) all of
S&W's executive officers and directors as a group. See "THE MERGER--Exchange
Ratio."
<TABLE>
<CAPTION>
Name Number of Shares Percent Owned
---- ---------------- -------------
<S> <C> <C>
Joseph E. Miller, Jr. 85,200 32.82%
Bruce P. Ashby 85,200 32.82%
William K. Luety, Jr. 1,820 *
James F. Goldner 1,820 *
Employee Stock Ownership Trust 85,534 32.96%
All executive officers and directors
as a group (3 persons)
</TABLE>
- --------------------------------
* Less than one percent.
(1) The named stockholders have sole voting and investment power with respect
to all shares shown as being beneficially owned by them, except as
otherwise indicated.
The addresses of those persons who are known to S&W to be the
beneficial owners of 5% or more of the any outstanding class of S&W capital
stock are as follows: Joseph E. Miller, Jr.: 340 Gateway Park Drive, North
Syracuse, New York 13212; Bruce P. Ashby: 79 Brown Road, Stillwater, New York
12170; and the S&W X-Ray, Inc. Employee Stock Ownership Trust: Cornerstone
Center, 2300 Buffalo Road, Rochester, New York 14824.
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<PAGE>
DESCRIPTION OF PSS CAPITAL STOCK
The authorized capital stock of PSS consists of 60,000,000 shares of
common stock, $0.01 par value ("PSS Common Stock"), of which 37,087,601 shares
were issued and outstanding on June 16, 1997, and 1,000,000 shares of preferred
stock, $0.01 par value (the "PSS Preferred Stock"), of which no shares are
issued and outstanding. There were approximately 1,065 record holders of PSS
Common Stock as of June 16, 1997.
PSS Common Stock
Holders of PSS Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders of PSS and may not cumulate votes
for the election of directors. Holders of PSS Common Stock have the right to
receive dividends when, as, and if declared by the Board of Directors from funds
legally available therefor. Upon the liquidation of PSS, holders of PSS Common
Stock are entitled to share pro rata in any assets available for distribution to
shareholders after payment of all obligations of PSS. Holders of PSS Common
Stock have no preemptive rights and have no rights to convert their PSS Common
Stock into any other securities. All shares of PSS Common Stock have equal
rights and preferences. All shares of PSS Common Stock now outstanding are fully
paid for and non-assessable.
PSS Preferred Stock
There are currently no shares of PSS Preferred Stock outstanding. The
Board of Directors has the authority to establish, by amendment to the Articles
of Incorporation in accordance with the Florida Business Corporation Act (the
"FBCA") law, one or more series of PSS Preferred Stock, to designate each such
series and to establish the variations in rights, preferences and limitations
for each series, without further shareholder approval. Any issuance of PSS
Preferred Stock could be used to dilute the stock ownership of persons seeking
to gain control of PSS and could otherwise have the effect of delaying,
deferring or preventing a change in control of PSS.
Certain Articles of Incorporation and Bylaw Provisions of PSS
The Amended and Restated Articles of Incorporation of PSS (the "PSS
Articles") contain several provisions that may make more difficult the
acquisition of control of PSS by means of a tender offer, open market purchase,
proxy fight or otherwise. The Amended and Restated Bylaws of PSS (the "PSS
Bylaws") also contain provisions that could have an anti-takeover effect.
Classified Board of Directors. The PSS Articles and Bylaws provide for
the Board of Directors to be divided into three classes of directors serving
staggered three-year terms. PSS believes that a classified Board of Directors
will help to assure the continuity and stability of the Board of Directors and
of the business strategies and policies as determined by the Board of Directors.
The classified board provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, and, therefore
discouraging a third party from making a tender offer or otherwise attempting to
obtain control of PSS, even though such an attempt might be beneficial to PSS
and its shareholders. Thus, the classified board provision could increase the
likelihood that incumbent directors will retain their positions.
Number of Directors; Removal; Filling Vacancies. The PSS Articles and
Bylaws provide that the number of directors will be fixed from time to time by
the consent of three-fifths of the Board of Directors. Accordingly, any four
members of the board could prevent a shareholder from obtaining representation
on the board by enlarging the board and filling the new directorships with its
own nominees.
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<PAGE>
Moreover, the PSS Articles provide that directors may be removed with
or without cause only by the affirmative vote of holders of at least four-fifths
of the outstanding shares of the capital stock of PSS entitled to vote on
election of directors at a meeting called for that purpose ("PSS Voting Stock"),
except that if the Board of Directors, by an affirmative vote of at least
three-fifths of the entire Board of Directors recommends removal of a director
to the shareholders, such removal may be effected by the affirmative vote of the
holders of a majority of the PSS Voting Stock. This provision, when coupled with
the provisions of the PSS Articles and the Bylaws authorizing the Board of
Directors to fill vacant directorships only by a vote of three-fifths of the
Board of Directors in office, will preclude shareholders having less than
four-fifths of the PSS Voting Stock from removing incumbent directors with or
without cause and filling the vacancies created by such removal with their own
nominees, without the affirmative vote of three-fifths of the Board of
Directors.
Preferred Stock. As described above, the Board of Directors is
authorized to provide for the issuance of shares of PSS Preferred Stock in one
or more series, and to fix by amendment to the PSS Articles, as provided by the
FBCA, the terms and conditions of each such series. PSS believes that the
availability of the PSS Preferred Stock issuable in series will provide it with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other corporate needs which might arise. Although the Board of
Directors has no present intention of doing so, it could issue a series of PSS
Preferred Stock that could, depending on its terms, either impede or facilitate
the completing of a merger, tender offer or other takeover attempt.
Certain Amendments. The PSS Articles provide that if the shareholders
have adopted or amended a provision of the PSS Articles or the Bylaws that fixes
a greater quorum or voting requirement for shareholders or voting groups of
shareholders than is required by the FBCA law, the adoption or amendment of a
provision in the PSS Articles or Bylaws that adds, changes, or deletes a greater
quorum or voting requirement for shareholders must meet the same quorum
requirement and be adopted by the same vote and voting groups required to take
action under the quorum and voting requirements then in effect or proposed to be
adopted, whichever is greater. The PSS Articles provide that a provision of the
PSS Bylaws which fixes a greater quorum or voting requirement for shareholders
may not be adopted, amended, or repealed by the Board of Directors.
Fair Price Provision. The PSS Articles provide that, in addition to any
affirmative vote required by law or other provisions of the Articles, the
affirmative vote of the holders of at least 80% of the voting power of the PSS
Voting Stock, voting together as a single class, is required for the approval or
authorization of any Business Combination (as defined below) with an Interested
Shareholder (as defined below) . However, the 80% voting requirement is not
applicable if the Business Combination is approved by a two-thirds vote of the
Disinterested Directors (as defined below), and if the Business Combination
meets certain minimum price and procedural requirements. Generally, the
consideration to be received in the Business Combination must not be less than
the higher of (a) the highest per share price paid by the Interested Shareholder
for any shares of PSS Common Stock acquired by it within the two-year period
immediately prior to the first public announcement of the proposed Business
Combination (the 'Announcement Date"), or in the transaction in which the
Interested Shareholder became an interested Shareholder, whichever is higher; or
(b) the fair market value per share of PSS Common Stock on the Announcement Date
or on the date on which the Interested Shareholder became an Interested
Shareholder, whichever is higher. The consideration paid to a particular class
of outstanding PSS Voting Stock shall be in cash or in the same form as the
Interested Shareholder has previously paid for shares of such class of PSS
Voting Stock. After such Interested Shareholder has become an interested
Shareholder and prior to the consummation of the Business Combination, except as
approved by a majority of the Disinterested Directors, there shall have been no
failure to pay quarterly dividends on the outstanding PSS Preferred Stock, if
any, and no reduction in the annual rate of dividends paid on PSS Common Stock
(and an increase in such annual rate of dividends as necessary to reflect any
transaction which has the effect of reducing the number of outstanding shares of
PSS Common Stock); and such Interested Shareholder shall not become the
beneficial owner of any additional shares of PSS Voting Stock except as part of
the transaction which results in such Interested Shareholder becoming an
Interested Shareholder. Such
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<PAGE>
Interested Shareholder, after becoming an Interested Shareholder, shall not have
received the benefit, directly or indirectly (except proportionately as a
shareholder) of any loans, advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages provided by PSS, whether
in anticipation of or in connection with such Business Combination or otherwise.
In the event these and other minimum price criteria and procedural requirements
are met and the requisite approval of the Disinterested Directors Is obtained
with respect to a particular Business Combination, then the requirements of the
FBCA shall apply (which may require a majority vote of the shareholders, or in
some instances, no vote of shareholders).
A "Business Combination" is (a) any merger or consolidation of PSS with
any Interested Shareholder or any other corporation which is or after such
merger or consolidation would be an affiliate of the Interested Shareholder; or
(b) any sale, lease, exchange, mortgage, pledge, transfer or disposition to or
with any interested Shareholder or any affiliate of any Interested Shareholder,
of any assets of PSS or any subsidiary having an aggregate fair market value of
$1 million or more; or (c) the issuance or transfer by PSS or any subsidiary of
any securities of PSS or any subsidiary to any Interested Shareholder or any
affiliate of any Interested Shareholder in exchange for cash, securities or
other property having an aggregate fair market value of $1 million or more; or
(d) the adoption of any plan or proposal for the liquidation or dissolution of
PSS proposed by or on behalf of any Interested Shareholder or any affiliate of
any Interested Shareholder; or (e) any reclassification of securities or
recapitilization of PSS, or any merger or consolidation of PSS with any of its
subsidiaries, or any other transaction which has the effect of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of PSS or any subsidiary directly or indirectly owned by
any Interested Shareholder or any affiliate of any interested Shareholder.
An "Interested Shareholder" shall mean any person (other than PSS, any
of its subsidiaries, PSS or any subsidiary acting as a trustee or in a similar
fiduciary capacity, or any person who would have met the definition of an
interested Shareholder as of March 1, 1994) who or which (a) is the beneficial
owner of more than 10% of the voting power of the outstanding PSS Voting Stock;
or (b) is an affiliate of PSS and at any time within the two-year period
immediately prior to the date in question was the beneficial owner of 10% or
more of the voting power of the then outstanding PSS Voting Stock; or (c) is an
assignee of or has otherwise succeeded to any shares of PSS Voting Stock which
were at any time within the two-year period immediately prior to the date in
question beneficially owned by any Interested Shareholder, if such assignment or
succession shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning of the
Securities Act.
"Disinterested Director" means any member of the Board of Directors who
is unaffiliated with the Interested Shareholder and was a member of the Board of
Directors prior to the time that the Interested Shareholder became an Interested
Shareholder, and any successor of a Disinterested Director who is unaffiliated
with the interested Shareholder and is recommended to succeed a Disinterested
Director by a majority of Disinterested Directors then on the Board of
Directors.
The PSS Articles provide that a vote of the holders of 80% or more of
the voting power of the PSS Voting Stock would be required in order to amend,
alter or repeal, or adopt any provisions inconsistent with, the foregoing fair
price provisions.
Control-Share Acquisition. PSS will be subject to the provisions of
Section 607.0902 of the FBCA. In general, the statute denies voting rights to
shares purchased by an acquiring person who has obtained or anticipates
obtaining a specified level of voting control in shares of an issuing public
corporation as part of a control-share acquisition, except to the extent to
which voting rights are conferred by resolution approved by the shareholders of
the issuing public corporation. A vote of the shareholders to confer voting
power under the statute must meet the criteria set forth in the statute,
including the requirement for approval by a majority of all votes entitled to be
cast in each voting group entitled to vote separately, excluding all interested
shares. For the purpose of the statute, an "issuing public corporation" is a
corporation which has more than 100 shareholders, has its principal office and
place of business or
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<PAGE>
substantial assets in the State of Florida, and either has (a) more than 10% of
its shareholders resident in this state; or (b) more than 10% of its shares
owned by residents of this state; or (c) 1,000 shareholders resident in this
state. Provisions of the statute become effective when a person acquires or
intends to acquire stock which, when added to all other shares owned by such
person or in respect of which such person may exercise or direct voting power,
either alone or as part of a group, would entitle such person to exercise at
least 20% of the voting power of the stock of the issuing public corporation.
The statute, when addressing the acquisition of voting power, makes no
distinction between irrevocable proxies and revocable proxies. Arguably then,
the provisions of the statute could be invoked by the solicitation of revocable
proxies although PSS is unaware of any recorded instance where this has
occurred. The statute is self-operative and, therefore, PSS need not assert the
defense in order for the provisions of the statute to apply.
This provision may have the effect of delaying, deferring or preventing
a change in control of PSS without further action of its shareholders.
Transfer Agent and Registrar
The Transfer Agent and Registrar for PSS Common Stock is Continental
Stock Transfer & Trust Company.
CERTAIN DIFFERENCES IN THE RIGHTS OF PSS AND S&W STOCKHOLDERS
PSS is a Florida corporation subject to the provisions of the Florida
Business Corporation Act ("FBCA"). S&W is a New York corporation subject to the
provisions of the New York Business Corporation Law ("NYBCL"). Stockholders of
S&W whose rights are governed by the Certificate of Incorporation, as amended,
(the "S&W Certificate) and Bylaws, as amended of S&W (the "S&W Bylaws"), and by
the NYBCL will, upon consummation of the Merger, become stockholders of PSS. The
rights of such stockholders as stockholders of PSS will then be governed by
PSS's Articles and Bylaws and by the FBCA .
Except as set forth below, there are no material differences between
the rights of a PSS stockholder under the PSS Articles and Bylaws and under the
FBCA, on the one hand, and the rights of a S&W stockholder under the S&W
Certificate and Bylaws and under the NYBCL, on the other hand. This summary does
not purport to be a complete discussion of, and is qualified in its entirety by
reference to, the governing law and the Articles or Certificate of Incorporation
and Bylaws of each corporation.
Authorized Capital Stock
PSS. The authorized capital stock of PSS consists of 60,000,000 shares
of Common Stock and 1,000,000 shares of Preferred Stock. As of June 16, 1997,
there were 37,087,601 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding. In addition, as of June 30, 1997 there were
outstanding options under PSS stock option plans to purchase an additional
1,704,809 shares of PSS Common Stock. The Board of Directors of PSS has the
authority to issue the PSS Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions for each such series
(including, without limitation, the right to convert the shares of such PSS
Preferred Stock into shares of PSS Common Stock or preferential voting,
dividend, dissolution or other rights), without any further vote or action by
the stockholders. The Board of Directors of PSS has no present intention of
issuing shares of PSS Preferred Stock.
S&W. S&W is authorized by its Certificate to issue up to 500,000 shares
of Common Stock. There are 259,574 shares of S&W Common Stock outstanding and
4,009 shares of S&W Common Stock to be issued on the Closing Date pursuant to
the S&W Supplemental Executive Retirement Plan.
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<PAGE>
Size and Classification of Board of Directors
PSS. The PSS Articles and Bylaws provide that the number of directors
will be fixed from time to time by the consent of three-fifths of the Board of
Directors. The PSS Articles and Bylaws provide for the Board of Directors to be
divided into three classes of directors, with each class consisting, as nearly
as possible, of one-third of the total number of directors constituting the
entire Board. The term of one class of officers expires every year, so that each
director's term is for a period of three years.
S&W. The S&W Bylaws provide that the number of directors which shall
constitute the whole board shall be not less than three. Except for a decrease
in the number of directors, the number of directors are from time to time fixed
and determined by the directors and are to be set forth in the notice of any
meeting of the shareholders held for the purpose of electing directors. The
Board of Directors of S&W is not divided into classes.
Amendment of Articles or Certificate of Incorporation and Bylaws
PSS. The PSS Articles provide that if the shareholders have adopted or
amended a provision of the PSS Articles or Bylaws that fixes a greater quorum or
voting requirement for shareholders or voting groups of shareholders than is
required by the FBCA law, the adoption or amendment of a provision in the PSS
Articles or Bylaws that adds, changes, or deletes a greater quorum or voting
requirement for shareholders must meet the same quorum requirement and be
adopted by the same vote and voting groups required to take action under the
quorum and voting requirements then in effect or proposed to be adopted,
whichever is greater. The PSS Articles provide that a provision of the PSS
Bylaws which fixes a greater quorum or voting requirement for shareholders may
not be adopted, amended or repealed by the Board of Directors.
S&W. The NYBCL provides that a certificate of incorporation may be
amended by the vote of the majority of the shareholders of a corporation
entitled to vote. The NYBCL provides that bylaws may be amended, repealed or
adopted by the vote of the shares of a corporation entitled to vote on the
election of directors. In addition, the NYBCL provides that bylaws may also be
amended, repealed or adopted by the board of directors, provided that such
bylaws may be amended by the shareholders entitled to vote on the election of
directors. The S&W Bylaws do not alter the required vote.
Special Meetings of Stockholders
PSS. The PSS Bylaws provide that special meetings of stockholders may
be called, as provided under the FBCA, by a corporation's board of directors or
any other person as may be authorized by the corporation's articles or bylaws,
or by the holders of not less than ten percent of the shares entitled to vote.
S&W. The S&W Bylaws provide that special meetings of the shareholders
may be called as provided under the NYBCL by a corporation's board of directors
or by any other person authorized by a corporation's certificate of
incorporation or bylaws.
Removal of Directors
PSS. The PSS Articles provide that directors may be removed with or
without cause only by the affirmative vote of holders of at least four-fifths of
the outstanding shares of the capital stock of PSS entitled to vote on election
of directors at a meeting called for that purpose, except that if the Board of
Directors, by an affirmative vote of at least three-fifths of the entire Board
of Directors, recommends removal of a director to the shareholders, such removal
may be effected by the affirmative vote of the holders of a majority of the PSS
Common Stock entitled to vote at such meeting. The PSS Articles provide that the
affirmative vote of the holders of at least four-fifths of the PSS Common Stock
entitled to
- 94 -
<PAGE>
vote at such meeting is required to alter, amend or adopt any provision
inconsistent with, or to repeal, this provision.
S&W. The S&W Bylaws provide that any director may be removed for cause
by vote of the shareholders or by action of the board, and that directors may be
removed without cause by vote of the shareholders.
Director Liability
PSS. Under the FBCA, a director is not personally liable for monetary
damages to PSS or any other person for any statement, vote, decision or failure
to act, regarding corporate management or policy, unless the director breached
or failed to perform his duties as a director and the director's breach of, or
failure to perform those duties constitutes (i) a violation of criminal law,
unless the director had reasonable cause to believe his conduct was lawful or
had no reason to believe his conduct was unlawful, (ii) a transaction from which
the director derived an improper personal benefit, (iii) a violation of Section
607.0834 of the FBCA, which concerns unlawful payment of dividends, (iv) in a
proceeding by or in the right of the corporation or a shareholder, conscious
disregard for the best interest of the corporation, or willful misconduct, or
(v) in a proceeding by or in the right of someone other than the corporation or
a shareholder, recklessness or an act or omission which was committed in bad
faith or with malicious purpose or in a manner exhibiting wanton and willful
disregard of human rights, safety or property.
S&W. Under the NYBCL, a corporation may limit or eliminate the personal
liability of directors to the corporation or its shareholders for damages for
breach of duty in such capacity. This limitation on liability is not available
for acts or omissions by a director which (i) were in bad faith, (ii) involved
intentional misconduct or a knowing violation of law, (iii) involved financial
profit or other advantage to which the director was not entitled, or (iv)
resulted in a violation of Section 719 of the NYBCL, prohibiting certain
dividend declarations, certain payments to shareholders after dissolution and
particular types of loans. The S&W Certificate does not provide for exculpation
of directors for breaches of fiduciary duty.
Indemnification
PSS. The PSS Articles state that PSS shall indemnify officers and
directors to the fullest extent permitted by law. The FBCA provides that a
person who is a party to a legal proceeding by reason of the fact that such
person is or was a director, officer, employee or agent of a corporation shall
be indemnified if such person is successful on the merits in a proceeding giving
rise to the claim for indemnification. According to the FBCA, a director,
officer, employee or agent of the corporation shall be indemnified if such
person shall have acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the corporation and, with respect to
criminal proceedings, shall have no reason to believe his conduct was unlawful.
The FBCA also provides that a person may not be indemnified nor may expenses be
advanced if a judgment or final adjudication establishes that his actions or
omissions to act were material to the cause of action so adjudicated and
constitute: (a) a violation of criminal law, unless such person had reasonable
cause to believe his conduct was lawful or had no reasonable cause to believe
his conduct was unlawful; (b) a transaction from which the director, officer,
employee or agent derived an improper personal benefit; (c) an unlawful
distribution under Florida law; or (d) willful misconduct or conscious disregard
for the best interests of the corporation in a proceeding by or in the right of
the corporation to procure a judgment in its favor or in a proceeding by or in
the right of a shareholder. The PSS bylaws provide that any indemnification or
advance shall be made promptly and in any event within sixty (60) days upon the
written request of the person to be indemnified. In the event the corporation
does not pay such indemnification or advance on the basis that such person has
not met the requisite standard of conduct, the burden of proof of such defense
shall be on the corporation. PSS maintains insurance for PSS and its directors
and officers against such liabilities.
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<PAGE>
S&W. Neither the S&W Certificate nor the S&W Bylaws provide for
indemnification of directors, officers, employees or agents. S&W's directors and
officers are covered by insurance policies providing them with coverage against
any matter asserted against them solely by reason of their being directors and
officers of S&W. Under the NYBCL, a corporation may indemnify any person made,
or threatened to be made, a party to any action or proceeding except for
shareholder derivative suits, by reason of the fact that he or she was a
director or officer of the corporation, provided such director or officer acted
in good faith for a purpose which he or she reasonably believed to be in the
best interests of the corporation and, in criminal proceedings, in addition, had
no reasonable cause to believe his or her conduct was unlawful. In the case of
shareholder derivative suits, the corporation may indemnify any person who was a
director or officer of the corporation if he or she acted in good faith for a
purpose which he or she reasonably believed to be in the best interests of the
corporation, except that no indemnification may be made for (i) a threatened
action, or a pending action which is settled or otherwise disposed of, or (ii)
any claim, issue or matter as to which such person has been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action was brought or, if no action was brought, any court competent
jurisdiction, determines upon application that, in view of all circumstances,
the person is fairly and reasonably entitled to an indemnity for such portion of
the settlement amount and expenses as the court deems proper. The statutory
provisions for indemnification and advancement of expenses are not exclusive of
any other rights to which those seeking indemnification or advancement of
expenses may be entitled independently of the applicable statutory provision.
Dissenters' Rights
PSS. The FBCA sets forth procedures under which shareholders may
dissent from, and receive payment of the fair value of their shares in
connection with most mergers, consolidations and exchanges or sales of
substantially all or all of a corporation's assets. Such dissenter's rights are
not available with respect to a plan of merger, consolidation or sale or
exchange of assets, to the holders of shares of any class or series which were
either registered on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than 2,000
shareholders.
S&W. The NYBCL sets forth procedures under which stockholders may
dissent from, and receive payment in the amount of the fair value of their
shares in connection with, most mergers, consolidations and exchanges or sales
of substantially all or all of a corporation's assets. Such dissenter's rights
are not available with respect to a merger or consolidation if the shares
entitled to receive notice of and to vote on the merger or consolidation are
either listed on a national securities exchange, designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 stockholders
("Public Shares"), or where the corporation is the surviving corporation and no
vote of its stockholders is required for such transaction, unless the holders
thereof are required by the terms of an agreement of merger or consolidation to
accept for their shares anything other than (i) shares of the surviving or
resulting corporation, (ii) Public Shares of any corporation, (iii) cash in lieu
of fractional shares of such corporations or, (iv) any combination of the
consideration described in clauses (i), (ii) and (iii). The rights to dissent
from the Merger under the NYBCL are summarized under "THE MERGER--Dissenters'
Rights" and Sections 623 and 910 of the NYBCL regarding dissenters' rights is
attached to this Proxy Statement-Prospectus as ANNEX C.
Dividends and Other Distributions
PSS. The FBCA provides that distributions may be made unless, after
giving it effect, (i) the corporation would not be able to pay its debts as they
become due in the usual course of business or (ii) the corporation's total
assets would be less than the sum of its total liabilities plus the amount
needed to satisfy the preferential rights of any preferred shareholders of the
company.
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<PAGE>
S&W. The NYBCL generally allows dividends to be paid out of surplus of
the corporation or out of the net profits of the corporation for the current
fiscal year and/or the prior fiscal year. The NYBCL requires a board of
directors to make certain disclosure when paying dividends out of any account
other than earned surplus.
Mergers and Consolidations
PSS. The FBCA provides that a vote of a majority of the shares of each
class of stock outstanding and entitled to vote thereon is required to authorize
a merger or consolidation of a corporation into any other corporation, unless
the articles of incorporation require a greater vote or a vote by classes.
S&W. The NYBCL provides that a vote of two-thirds of the shares
entitled to vote is required to authorize a merger or consolidation of a
corporation into any other corporation.
Fair Price Provision
PSS. The PSS Articles subject PSS to certain restrictions on business
combinations with interested stockholders. See "DESCRIPTION OF PSS CAPITAL STOCK
- - Certain Articles of Incorporation and Bylaw Provisions."
S&W. Although the NYBCL contains a provision limiting certain business
combinations with interested stockholders, such restrictions are not applicable
to S&W in connection with the Merger.
Control Share Acquisition Statute
PSS. As a Florida corporation, PSS is subject to provisions of Section
607.0902 of the FBCA, which denies voting rights to shares purchased by an
acquiring person who has obtained or anticipates obtaining a specified level of
voting control in shares of an issuing public corporation as part of a
control-share acquisition, except to the extent to which voting rights are
conferred by resolution approved by the shareholders of the issuing public
corporation. (See "DESCRIPTION OF PSS CAPITAL STOCK - Certain Article and Bylaw
Provisions.")
S&W. The NYBCL does not have a similar statute.
EXPERTS
The consolidated financial statements and schedule of PSS included
elsewhere in this Proxy Statement-Prospectus as of March 28, 1997 and March 29,
1996, and for each of the three years for the period ended March 28, 1997, have
been audited by Arthur Andersen LLP, independent certified public accountants,
as set forth in their report thereon included therein, and are included herein
in reliance upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of S&W X-Ray, Inc. as of March
31, 1997 and 1996, and each of the three years in the period ended March 31,
1997, included in this Proxy Statement-Prospectus, have been so included in
reliance upon the report of May, Robinson, Gordon & Penta, P.C., independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
The legality of the shares of PSS Common Stock being offered hereby is
being passed upon for PSS by Fred Elefant, P.A., Jacksonville, Florida.
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<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement-Prospectus, S&W's Board of
Directors does not know of any matters that will be presented for consideration
at the Special Meeting other than as described in this Proxy
Statement-Prospectus. However, if any other matter shall come before the Special
Meeting or any adjournments or postponements thereof and shall be voted upon,
the proposed proxy will be deemed to confer authority to the individuals named
as authorized therein to vote the shares represented by such proxy as to any
such matters that fall within the purposes set forth in the Notice of Special
Meeting as determined by a majority of the Board of Directors.
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<PAGE>
INDEX TO PSS CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Interim Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets -- June 30, 1997 and March 28, 1997................ 100
Condensed Consolidated Statements of Operations for the Three Months
Ended June 30, 1997 and 1996......................................................... 101
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 1997 and 1996......................................................... 102
Notes to Condensed Consolidated Financial Statements..................................... 103
Financial Statements:
Report of Independent Certified Public Accountants....................................... 105
Consolidated Balance Sheets -- March 28, 1997 and March 29, 1996......................... 106
Consolidated Statements of Operations for the Years Ended March 28, 1997,
March 29, 1996, and March 30, 1995................................................... 107
Consolidated Statements of Shareholders' Equity for the Years Ended
March 28, 1997, March 29, 1996, and March 30, 1995................................... 108
Consolidated Statements of Cash Flows for the Years Ended March 28, 1997,
March 29, 1996, and March 30, 1995................................................... 109
Notes to Consolidated Financial Statements............................................... 110
Supplemental Schedule:
Schedule II Valuation and Qualifying Accounts for the Years Ended
March 30, 1995, March 29, 1996, and March 28, 1997................................... 129
</TABLE>
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<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1997 and March 28, 1997
<TABLE>
<CAPTION>
June 30, 1997 March 28, 1997
------------- --------------
ASSETS (Unaudited) *
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................... $ 48,172,411 $ 28,740,123
Marketable securities........................................ 520,313 15,045,482
Accounts receivable, net..................................... 121,592,786 119,292,896
Inventories.................................................. 68,477,128 67,895,154
Prepaid expenses and other................................... 20,502,143 21,971,847
------------- -------------
Total current assets................................. 259,264,781 252,945,502
------------- -------------
Property and equipment, net.................................... 21,317,785 18,811,691
Other Assets:
Intangibles, net............................................. 22,248,053 21,616,893
Other........................................................ 5,370,737 4,911,501
------------- -------------
Total assets......................................... $ 308,201,356 $ 298,285,587
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................. $ 69,699,998 $ 64,063,501
Accrued expenses............................................. 13,763,967 18,263,097
Other........................................................ 7,684,222 5,164,751
------------- -------------
Total current liabilities............................ 91,148,187 87,491,349
------------- -------------
Long-term debt and capital lease obligations, net of current
portion...................................................... 1,609,166 559,764
Other.......................................................... 5,063,687 4,634,291
------------- -------------
Total liabilities.................................... 97,821,040 92,685,404
------------- -------------
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, no shares issued and outstanding.............. -- --
Common stock, $.01 par value; 60,000,000 shares
authorized, 37,345,515 and 37,061,615 shares issued and
outstanding at June 30, 1997 and March 28, 1997,
respectively.............................................. 373,455 370,616
Additional paid-in capital................................... 207,651,115 207,509,342
Retained earnings (deficit).................................. 2,015,769 (2,372,463)
Cumulative foreign currency translation adjustment........... 339,977 92,688
------------- -------------
Total shareholders' equity........................... 210,380,316 205,600,183
------------- -------------
Total liabilities and shareholders' equity........... $ 308,201,536 $ 298,285,587
============= =============
</TABLE>
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
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<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 1997 and June 30, 1996
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-------------- -------------
<S> <C> <C>
Net sales....................................... $ 203,542,635 $ 151,567,551
Cost of goods sold.............................. 148,099,587 109,732,401
------------- -------------
Gross profit.......................... 55,443,048 41,835,150
------------- -------------
General and administrative expenses............. 32,090,286 22,857,157
Selling expenses................................ 16,821,599 15,055,949
Merger costs and expenses....................... -- 6,934,000
------------- -------------
Income (loss) from operations......... 6,531,163 (3,011,956)
------------- -------------
Other income:
Interest income............................... 248,145 528,153
Other income.................................. 581,839 404,275
------------- -------------
829,984 932,428
------------- -------------
Income (loss) before provision for income taxes. 7,361,147 (2,079,528)
Income tax (provision) benefit.................. (2,991,054) 540,000
------------- -------------
Net income (loss)............................... $ 4,370,093 $ (1,539,528)
============= =============
Net income (loss) per common and common
equivalent share.............................. $ 0.12 $ (0.04)
============= =============
Pro forma tax adjustment on pooled S-Corporation
income........................................ (142,000)
-------------
Pro forma net loss.............................. $ (1,681,528)
=============
Pro forma tax adjustment per common and common
equivalent share on pooled S-Corporation
income........................................ $ (0.01)
-------------
Pro forma net loss per common and
common equivalent share......................... $ (0.05)
=============
Weighted average number of shares outstanding... 37,502,000 35,189,000
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
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<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30, 1997 and June 30, 1996
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss).......................... $ 4,370,093 $ (1,539,528)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............. 2,034,408 987,148
Provision for doubtful accounts........... 492,778 347,697
Merger costs and expenses................. -- 6,469,506
Foreign currency translation adjustment... 247,289 (2,189)
Changes in operating assets and
liabilities, net of effects from
business acquisitions:
Increase in accounts receivable, net..... (1,300,197) (858,178)
Decrease (increase) in inventories....... 406,802 (3,236,991)
Decrease in prepaid expenses and other
current assets......................... 1,478,273 1,924,557
Increase in other assets................. (1,298,501) (3,548,013)
Increase (decrease) in accounts payable,
accruals, and other liabilities........ 3,879,666 (3,141,719)
----------- ------------
Net cash provided by (used in)
operating activities................. 10,310,611 (2,597,710)
----------- ------------
Cash Flows From Investing Activities:
Net proceeds from sales of marketable
securities................................ 14,525,169 --
Capital expenditures....................... (3,473,293) (1,437,689)
Payment for purchases of net assets from
business acquisitions..................... (350,000) (4,572,740)
Payments on noncompete agreements.......... (1,083,379) (376,486)
----------- ------------
Net cash provided by (used in)
investing activities................ 9,618,497 (6,386,915)
----------- ------------
Cash Flows From Financing Activities:
Net repayments of long-term debt........... (645,661) (8,662,437)
Net proceeds from issuance of common stock. 148,841 880,370
----------- ------------
Net cash used in financing activities.. (496,820) (7,782,067)
----------- ------------
Net increase (decrease) in cash and cash
equivalents................................ 19,432,288 $(16,766,692)
Cash and cash equivalents, beginning of
period..................................... 28,740,123 86,333,789
----------- ------------
Cash and cash equivalents, end of period.... $48,172,411 $ 69,567,097
=========== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
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<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements of Physician Sales &
Service, Inc. ("PSS" or "the Company") reflect, in the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position and results of operations for the periods
indicated. The adjustments include the retroactive adjustment to reflect the
merger with X-Ray Corporation of Georgia ("X-ray GA") effective December 20,
1996, accounted for under the pooling-of-interests method.
The accompanying condensed consolidated financial statements should be
read in conjunction with the financial statements and related notes in the
Company's 1997 Annual Report to Shareholders. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to the
Securities and Exchange Commission rules and regulations.
Financial statements for the Company's subsidiary outside the United
States are translated into U.S. dollars at quarter-end exchange rates for assets
and liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded as a separate component of
shareholders' equity.
The results of operations for the interim periods covered by this
report may not necessarily be indicative of operating results for the full
fiscal year. Certain items have been reclassified to conform to the current year
presentation.
NOTE 2 - BUSINESS ACQUISITIONS
During the three months ended June 30, 1997, the Company acquired a
radiology and imaging distributor in a stock-for-stock merger accounted for
under the pooling-of-interests method by issuing 167,311 shares of common stock.
The acquired company reported $17 million in revenue for the twelve months prior
to acquisition by the Company. The accompanying consolidated financial
statements have not been restated for periods prior to the pooling due to
immateriality. Accordingly, the results of operations of have been reflected in
the consolidated financial statements prospectively from the acquisition date in
June of 1997.
Additionally, during the three months ended June 30, 1997, the Company
acquired the stock of a medical supply and equipment distributor for cash and
the assets of another medical supply and equipment distributor for cash. Pro
forma financial information related to these acquisitions is not presented due
to immateriality.
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<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Following is separate company data of PSS and X-Ray GA for the period
prior to the Merger. X-ray GA was a Subchapter S Corporation for income tax
purposes and, therefore, did not pay U.S. federal income taxes. The table
includes unaudited proforma net (loss) and net (loss) per share amounts which
reflect proforma adjustments to present income taxes of X-ray GA on the basis on
which they will be reported in future periods.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1996
(in thousands)
--------------
<S> <C>
Net Sales
PSS $139,703
X-ray GA 11,865
--------
Total $151,568
Net Income (Loss)
PSS $ (1,914)
X-ray GA 374
--------
Net Loss as Reported (1,540)
Pro forma Tax Provision for X-ray GA (142)
Pro forma Net Loss (1,682)
--------
Net Loss Per Share
As Reported $ (0.4)
Pro forma $ (0.5)
--------
</TABLE>
NOTE 3 SUBSEQUENT EVENTS
On July 20, 1997, the Company acquired an imaging distributor for an
aggregate purchase price of approximately $18.2 million comprised of 868,364
shares of common stock and cash of approximately $2.5 million to be accounted
for as a purchase. The acquired company distributes radiology and imaging
equipment, chemicals and supplies, and provides technical service to the acute
and alternate site markets through seven locations in seven states in the
Midwest. The acquired company reported $76 million in revenues for the latest
twelve month period.
On August 12, 1997, the Company signed a definitive agreement to merge
with S&W X-Ray, Inc. ("S&W"). The Company intends to acquire S&W in a
stock-for-stock merger, to be accounted for as a pooling-of-interests. S&W
reported $73 million in revenues for the latest twelve month period.
- 104 -
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physician Sales & Service, Inc.:
We have audited the accompanying consolidated balance sheets of
Physician Sales & Service, Inc. (a Florida corporation) and subsidiaries as of
March 28, 1997 and March 29, 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended March 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Physician Sales &
Service, Inc. and subsidiaries as of March 28, 1997 and March 29, 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended March 28, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule of Valuation and Qualify
Accounts is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
May 27, 1997 (except with
respect to Note 16, as to which
the date is August 12, 1997)
- 105 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 28, 1997 and March 29, 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 28,740,123 $ 65,566,189
Marketable securities........................................ 15,045,482 20,767,600
Accounts receivable, net..................................... 119,292,896 96,080,135
Inventories.................................................. 67,895,154 55,755,869
Prepaid expenses and other................................... 21,971,847 9,801,631
------------- -------------
Total current assets................................. 252,945,502 247,971,424
Property and equipment, net.................................... 18,811,691 14,764,706
Other Assets:
Intangibles, net............................................. 21,616,893 13,884,322
Other........................................................ 4,911,501 2,337,547
------------- -------------
Total assets......................................... $ 298,285,587 $ 278,957,999
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................. $ 64,063,501 $ 59,307,636
Accrued expenses............................................. 18,263,097 6,115,973
Other........................................................ 5,164,751 9,852,159
------------- -------------
Total current liabilities............................ 87,491,349 75,275,768
Long-term debt and capital lease obligations, net of current
portion...................................................... 559,764 583,900
Other.......................................................... 4,634,291 3,548,168
------------- -------------
Total liabilities.................................... 92,685,404 79,407,836
------------- -------------
Commitments and contingencies (Notes 1, 3, 4, 9, 10, 12, and 13)
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, no shares issued and outstanding.............. -- --
Common stock, $.01 par value; 60,000,000 shares
authorized, 37,061,615 and 35,122,486 shares issued and
outstanding at March 28, 1997 and March 29, 1996,
respectively.............................................. 370,616 351,225
Additional paid-in capital................................... 207,509,342 200,193,475
Accumulated deficit.......................................... (2,372,463) (994,537)
Cumulative foreign currency translation adjustment........... 92,688 --
------------- -------------
Total shareholders' equity........................... 205,600,183 199,550,163
------------- -------------
Total liabilities and shareholders' equity........... $ 298,285,587 $ 278,957,999
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
- 106 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 28, 1997, March 29, 1996, and March 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales....................................... $ 691,019,996 $ 529,023,956 $ 413,301,365
Cost of goods sold.............................. 502,903,993 379,359,624 293,688,246
------------- ------------- -------------
Gross profit.......................... 188,116,003 149,664,332 119,613,119
General and administrative expenses............. 110,316,575 82,527,856 70,174,747
Selling expenses................................ 62,796,860 48,438,162 41,317,526
Restructuring charges........................... -- -- 4,388,592
Merger costs and expenses....................... 12,128,168 15,731,716 --
------------- ------------- -------------
Income from operations................ 2,874,400 2,966,598 3,732,254
------------- ------------- -------------
Other income (expense):
Interest expense.............................. (323,826) (3,068,196) (4,064,454)
Interest and investment income................ 2,406,131 1,179,684 --
Other income.................................. 1,536,636 1,584,909 1,906,508
------------- ------------- -------------
3,618,941 (303,603) (2,157,946)
------------- ------------- -------------
Income before provision for income taxes........ 6,493,341 2,662,995 1,574,308
Provision for income taxes...................... (2,120,000) (1,324,000) (2,421,000)
------------- ------------- -------------
Net income (loss)............................... $ 4,373,341 $ 1,338,995 $ (846,692)
============= ============= =============
Net income (loss) per common and common
equivalent share................................ $ 0.12 $ 0.04 $ (0.04)
============= ============= =============
Pro forma tax adjustment on pooled S-Corporation
income........................................ 357,000 438,000 23,000
------------- ------------- -------------
Pro forma net income (loss)..................... $ 4,016,341 $ 900,995 $ (869,692)
============= ============= =============
Pro forma tax adjustment per common and common
equivalent share on pooled S-Corporation income. $ (0.01) $ (0.01) $ --
------------- ------------- -------------
Pro forma net income (loss) per common and
common equivalent share......................... $ 0.11 $ 0.03 $ (0.04)
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
- 107 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended March 28, 1997, March 29, 1996, and March 30, 1995
<TABLE>
<CAPTION>
Cumulative
Foreign
Common Stock Additional Currency
----------------------- Paid-in Accumulated Translation
Shares Amount Capital Deficit Adjustment Total
----------- --------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994.... 18,053,326 $ 180,533 $ 25,190,215 $(1,783,144) $ -- $ 23,587,604
Issuance of common stock... 6,718,875 67,189 24,033,753 -- -- 24,100,942
Distributions to former S-
Corporation shareholders -- -- -- (516,000) -- (516,000)
Net loss................... -- -- -- (846,692) -- (846,692)
----------- --------- ------------- ----------- -------- -------------
Balance at March 30, 1995.... 24,772,201 247,722 49,223,968 (3,145,836) -- 46,325,854
Issuance of common stock... 10,059,699 100,597 148,274,378 -- -- 148,374,975
Tax benefits related to
stock option plans....... -- -- 2,687,118 -- -- 2,687,118
Distributions to former S-
Corporation shareholders -- -- -- (455,000) -- (455,000)
Net income................. -- -- -- 1,338,995 -- 1,338,995
Other poolings............. 290,586 2,906 8,011 1,267,304 -- 1,278,221
----------- --------- ------------- ----------- -------- -------------
Balance at March 29, 1996.... 35,122,486 351,225 200,193,475 (994,537) -- 199,550,163
Issuance of common stock... 473,987 4,740 2,456,890 -- -- 2,461,630
Tax benefits related to
stock option plans....... -- -- 1,832,149 -- -- 1,832,149
Distributions to former S-
Corporation shareholders -- -- -- (1,100,000) -- (1,100,000)
Net income................. -- -- -- 4,373,341 -- 4,373,341
Other poolings............. 1,465,142 14,651 3,026,828 (4,651,267) -- (1,609,788)
Cumulative foreign currency
translation adjustment... -- -- -- -- 92,688 92,688
----------- --------- ------------- ----------- -------- -------------
Balance at March 28, 1997.... 37,061,615 $ 370,616 $ 207,509,342 $(2,372,463) $ 92,688 $ 205,600,183
=========== ========= ============= =========== ======== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
- 108 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 28, 1997, March 29, 1996, and March 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ -------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)......................... $ 4,373,341 $ 1,338,995 $ (846,692)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization.......... 5,690,393 4,100,775 4,210,805
Provision for doubtful accounts........ 2,463,000 1,448,000 1,651,000
Merger costs and expenses.............. 3,433,190 5,435,196 --
Restructuring charge................... -- -- 4,388,592
Benefit for deferred income taxes...... (4,611,000) (789,000) --
Gain on sale of equipment.............. -- -- (920,124)
Employee benefit plan stock
contribution........................... 160,000 120,000 85,175
Foreign currency translation adjustment 92,688 -- --
Investment income...................... (520,315) -- --
Changes in operating assets and
liabilities, net of effects from
business acquisitions:
Increase in accounts receivable, net. (1,831,440) (24,385,911) (8,267,662)
Decrease (increase) in inventories... 5,712,693 (18,659,894) (1,670,306)
(Increase) decrease in prepaid
expenses and other assets......... (6,511,771) (1,960,718) 128,628
Increase in other assets............. (3,162,802) (960,194) (1,247,031)
(Decrease) increase in accounts
payable, accruals, and other
liabilities....................... (5,523,970) 13,331,640 (4,930,187)
------------ ------------- -------------
Net cash used in operating
activities........................ (235,993) (20,981,111) (7,417,802)
------------ ------------- -------------
Cash Flows From Investing Activities:
Purchases of marketable securities........ (19,186,172) (317,769,635) --
Proceeds from sales and maturities of
marketable securities.................. 25,428,605 297,002,035 --
Proceeds from sales of assets............. -- -- 11,985,542
Capital expenditures...................... (5,579,526) (5,349,928) (3,220,847)
Purchases of net assets from business
acquisitions........................... (6,801,092) (2,838,529) (9,010,130)
Payments on noncompete agreements......... (3,980,225) (1,545,970) (1,036,957)
------------ ------------- -------------
Net cash used in investing
activities........................ (10,118,410) (30,502,027) (1,282,392)
------------ ------------- -------------
Cash Flows From Financing Activities:
Principal payments under capital lease
obligations............................ (880,166) (1,124,293) (931,949)
Proceeds from long-term debt.............. -- 284,862,211 420,751,863
Principal payments of long-term debt...... (26,913,127) (315,718,771) (434,044,855)
Distributions to former S-Corporation
shareholders........................... (1,100,000) (455,000) (516,000)
Proceeds from issuance of common stock.... 2,421,630 148,253,975 23,498,353
------------ ------------- -------------
Net cash (used in) provided by
financing activities.............. (26,471,663) 115,818,122 8,757,412
------------ ------------- -------------
Net (decrease) increase in cash and cash
equivalents............................... (36,826,066) 64,334,984 57,218
Cash and cash equivalents, beginning of year 65,566,189 1,231,205 1,173,987
------------ ------------- -------------
Cash and cash equivalents, end of year...... $ 28,740,123 $ 65,566,189 $ 1,231,205
============ ============= =============
Supplemental Disclosures:
Interest paid............................. $ 323,826 $ 3,186,105 $ 4,356,763
============ ============= =============
Income taxes paid......................... $ 4,299,900 $ 2,084,282 $ 3,018,917
============ ============= =============
Merger costs and expenses paid............ $ 8,694,978 $ 10,296,520 $ --
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
- 109 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 28, 1997, March 29, 1996 and March 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and Nature of Business
Physician Sales & Service, Inc. (the "Company" or "PSS") was incorporated in
1983 in Jacksonville, Florida. The Company, in its core business, is a leading
distributor of medical supplies, equipment, and pharmaceuticals to primary care
and other office-based physicians. As of March 28, 1997, the Company operated 61
core business service centers in the United States distributing to approximately
103,000 physician office sites in all 50 states.
In November 1996, the Company established a new subsidiary, Diagnostic
Imaging, Inc. ("DI" or "imaging division"). DI distributes medical diagnostic
imaging equipment, supplies and service to acute and alternate care sites. As of
March 28, 1997, DI operated 14 imaging division service centers distributing to
approximately 6,000 medical imaging sites in 9 southeastern states.
In March 1996, the Company established two new subsidiaries, WorldMed
International, Inc. ("WorldMed Int'l") and WorldMed, Inc. These subsidiaries
were established to manage and develop the Company's European medical equipment
and supply distribution market ("European operation"). As of March 28, 1997, the
European operation included 2 service centers distributing to approximately
1,000 acute and alternate care sites in Belgium, Germany and France.
Principles of Consolidation
The consolidated financial statements include the accounts of PSS and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Stock Split
All stock-related data has been retroactively adjusted to reflect a
three-for-one stock split effective on September 22, 1995 which was distributed
on October 5, 1995.
Consolidated Financial Statements
The accompanying consolidated financial statements give retroactive effect
to the mergers (the "Mergers") with Taylor Medical, Inc. ("Taylor") and X-ray
Corporation of Georgia ("X-ray GA"). On August 21, 1995, PSS issued 3,790,215
shares of its common stock in exchange for all of the outstanding equity
interest of Taylor. Taylor was engaged in the distribution and sale of medical
supplies, equipment, and pharmaceuticals to office-based physicians and managed
care facilities in 24 states. On December 20, 1996, PSS issued 593,672 shares of
its common stock in exchange for all of the outstanding equity interest of X-ray
GA. X-ray GA distributed radiology and imaging equipment, chemicals and supplies
and provided technical service to the acute and alternate site markets. These
transactions were accounted for under the pooling-of-interests method of
accounting, and accordingly, the accompanying consolidated financial statements
have been retroactively adjusted as if PSS, Taylor and X-ray GA had operated as
one entity since inception.
Certain items have been reclassified to conform to the current year
presentation.
- 110 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Fiscal Year
Beginning in fiscal year 1996, the Company's fiscal year ends on the Friday
closest to March 31 of each year. The Company's fiscal year ended on the
Thursday closest to March 31 of each year prior to fiscal year 1996. Fiscal
years 1997, 1996, and 1995 consist of 52 weeks.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentration of Credit Risk
The Company's trade accounts receivable are exposed to credit risk; however,
the risk is limited, as the balance is comprised of numerous individual
accounts, none of which is individually significant. The Company monitors the
creditworthiness of its customers on an ongoing basis and provides reserves for
estimated bad debt losses and sales returns. The Company had reserves for
doubtful accounts of approximately $3,581,000 and $2,218,000 as of the end of
fiscal years 1997 and 1996, respectively. Provisions for doubtful accounts were
approximately $2,463,000, $1,448,000, and $1,651,000 for fiscal years ended
1997, 1996, and 1995, respectively.
Cash Management
The Company utilizes a zero balance bank account, and checks issued for cash
disbursements are funded by advances from overnight investments. Outstanding
checks are recorded as accounts payable until they are presented to the bank, at
which time the payments are applied against the overnight investments. The
Company had approximately $8,060,000 and $6,841,000 of outstanding checks
recorded in accounts payable as of the end of fiscal years 1997 and 1996,
respectively.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash held at banks,
short-term government obligations, and money market instruments. The Company
invests its excess cash in high-grade investments and, therefore, bears minimal
risk. These instruments have original maturity dates not exceeding three months.
Marketable Securities
The Company classifies its marketable securities as trading securities and
carries such securities at fair market value. Net unrealized gains and losses on
trading securities are included in net income.
Marketable securities include municipal bond issues with maturity dates
exceeding three months and equity securities classified as trading securities.
Management's intent is to liquidate these securities within one year.
- 111 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, marketable securities, short-term trade receivables and
payables, and long-term debt and capital lease obligations, approximate their
fair values.
Inventories
Inventories are comprised principally of medical supplies and equipment and
are stated at the lower of cost (first-in, first-out) or market. Market is
defined as net realizable value.
Property and Equipment
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to thirty years. Leasehold
improvements are amortized over the lease terms or the estimated useful lives,
whichever is shorter. Gain or loss upon retirement or disposal of property and
equipment is recorded in other income in the accompanying consolidated
statements of operations.
Intangibles
Noncompete agreements are amortized on a straight-line basis over the lives
of the agreements, which range from three to ten years. Customer lists are
amortized on a straight-line basis over ten years.
The Company has classified as goodwill the cost in excess of the fair value
of net identifiable assets purchased in business acquisitions which are
accounted for as purchase transactions. Goodwill is being amortized over fifteen
to thirty years using the straight-line method. Subsequent to the date of
acquisition, the Company continually evaluates whether later events and
circumstances have occurred that indicate a change in the estimated useful life
or recoverability of goodwill.
Self-Insurance Coverage
The Company maintains a self-insurance program for employee health costs.
Additional coverage is provided by a third party for stop-loss based on maximum
costs of $100,000 per employee and approximately $5.3 million in the aggregate.
Claims that have been incurred but not reported are recorded based on estimates
of claims provided by a third-party administrator and are included in accrued
expenses in the accompanying consolidated balance sheets.
Income Taxes
The Company uses the asset and liability method in accounting for income
taxes. Deferred income taxes result primarily from the use of different bases
for financial reporting and tax purposes.
Shareholders' Equity
On May 5, 1994, the Company completed an initial public offering of
5,100,000 shares of its common stock at $3.67 per share, of which 4,200,000 were
offered by the Company. On June 3, 1994, the Company's underwriters exercised
their overallotment option for an additional 765,000 shares of the Company's
common stock at $3.67 per share. The proceeds of the sale after deducting
issuance costs were approximately $15,800,000. The Company used all of the net
proceeds to reduce outstanding bank debt.
- 112 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
On March 27, 1995, the Company signed a Distributorship Agreement (the
"Abbott Agreement") with Abbott Laboratories ("Abbott") providing for the
exclusive distribution of certain Abbott diagnostic products. As part of the
Abbott Agreement, Abbott purchased 825,000 unregistered, restricted shares of
PSS common stock. The proceeds of approximately $5,900,000 were used to reduce
outstanding bank debt.
Effective November 13, 1995, the Company completed a secondary offering of
11,500,000 shares of common stock at $17 per share, 8,800,000 of which were
offered by the Company.
During fiscal 1996, the Company merged with three medical supply and
equipment distributors in stock mergers accounted for under the
pooling-of-interests method by issuing 290,586 shares of PSS common stock in
exchange for all of the common stock of the acquired companies. During fiscal
1997, the Company merged with one core business medical supply and equipment
distributor and three imaging division companies in stock mergers accounted for
under the pooling-of-interests method by issuing approximately 1,465,000 shares
of PSS common stock in exchange for all of the common stock of the acquired
companies. The accompanying consolidated financial statements have not been
restated for periods prior to these poolings due to immateriality.
During 1997 and 1996, the Company realized an income tax benefit from the
exercise or early disposition of certain stock options. This benefit results in
a decrease in current income taxes payable and an increase in additional paid-in
capital.
Foreign Currency Translation
Financial statements for the Company's subsidiary outside the United States
are translated into U.S. dollars at year-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded as a separate component of
shareholders' equity.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the
intrinsic value method. The Company adopted the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." In accordance with SFAS No. 123, for footnote
disclosure purposes only, the Company computes its earnings and earnings per
share on a pro forma basis as if the fair value method had been applied.
Net Income (Loss) Per Common and Common Equivalent Share
Net income (loss) per common and common equivalent share is computed using
the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Weighted average shares outstanding for
purposes of this calculation were approximately 36,501,000, 31,454,000, and
23,762,000 for 1997, 1996, and 1995, respectively.
Statements of Cash Flows
The Company issued stock in the amount of $40,000 and $121,000 related to
acquisitions accounted for as purchases in fiscal 1997 and 1996, respectively.
The Company assumed net liabilities of approximately $1,610,000 and recorded
noncompete assets and liabilities of approximately $4,300,000 in connection with
the mergers of four other medical supply and equipment distributors accounted
for under the pooling-of-interests method in fiscal 1997. The Company also
assumed net assets of approximately $1,278,000 in conjunction with the mergers
of three other medical supply and equipment distributors accounted for under the
pooling-of-interests method in fiscal
- 113 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1996. Also, the Company incurred capital lease obligations to obtain equipment
of approximately $514,000 in fiscal year 1995. All of the above items were
excluded from the statements of cash flows as these items were noncash
transactions.
Accounting Standards Changes
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes new standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock and is effective for
financial statements issued for periods ending after December 15, 1997.
Management expects that the impact of SFAS No. 128 will not be material.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 establishes new standards for disclosing
information about an entity's capital structure and applies to all entities.
SFAS No. 129 is effective for financial statements for periods ending after
December 15, 1997. Management expects that the impact of SFAS No. 129 will not
be material.
2. MARKETABLE SECURITIES
The Company's marketable securities are comprised of municipal bond issues
and equity securities classified as trading securities and are carried at their
fair values based upon the quoted market prices at March 28, 1997 and March 29,
1996. At March 28, 1997 and March 29, 1996, the aggregate fair market value of
the municipal bonds was approximately $14,469,000 and $20,768,000, respectively,
and the aggregate cost was approximately $14,552,000 and $20,800,000,
respectively. The gross unrealized loss on municipal bonds for each year was
approximately $83,000 and $32,000, respectively. Interest income, including
realized gains, on the municipal bonds was approximately $626,000 and $195,000
for fiscal years 1997 and 1996, respectively. At March 28, 1997, the fair market
value of equity securities was $576,000, with a cost of $56,000, and an
unrealized gain of $520,000 which is included in investment income during fiscal
year 1997.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
March 28, March 29,
1997 1996
----------- -----------
<S> <C> <C>
Lines of credit.................... $ -- $ 3,100,000
Other notes......................... 774,794 262,961
Capital lease obligations........... 457,124 1,259,393
----------- -----------
1,231,918 4,622,354
Less current maturities............. 672,154 4,038,454
----------- -----------
$ 559,764 $ 583,900
=========== ===========
</TABLE>
Lines of Credit
The Company has a financing and security agreement (the "Agreement") with a
bank (the "Bank"). The Agreement allows the Company to obtain loans from the
Bank on a revolving basis. The Agreement provides for loans in the amount of 85%
of the outstanding amount of eligible accounts receivable plus the lesser of
$25,000,000 or 50% of eligible inventory. The total amount of loans outstanding
under the Agreement cannot exceed the lesser of $60,000,000 or amounts available
subject to eligible collateral. The Agreement provides for an
- 114 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
option, on the part of the Company, to increase the availability to $75,000,000.
There was no balance outstanding at March 28, 1997 and March 29, 1996.
The loans are collateralized by all company assets. Interest accrues,
subject to certain leverage ratio requirements, at a variable rate indexed on
the London Interbank Offered Rate ("LIBOR") plus the applicable margin or the
Bank's prime rate plus the applicable margin at the option of the Company.
Interest rates may vary from prime to prime plus 75 basis points or from LIBOR
plus 150 basis points to LIBOR plus 250 basis points, based on the Company's
leverage ratio. The Agreement provides for a termination date of April 30, 1998,
at which time the Agreement may be extended annually at the Bank's sole
discretion upon request by the Company.
The Agreement contains certain restrictive covenants which, among other
things, require the Company to maintain a current ratio of 2 to 1, a debt
service coverage ratio of 1.1 to 1 and a debt leverage ratio no greater than 5
to 1, all computed as defined in the Agreement. In addition, the Company must
maintain minimum tangible net worth plus subordinated indebtedness, as defined
in the Agreement, of $24,500,000 as of March 28, 1997, increasing by $1,000,000
as of the end of each subsequent fiscal year. The Agreement also contains
restrictions on mergers, acquisitions, investments, capital expenditures,
intangible assets, indebtedness, and stock transactions, among other things.
Other Notes
X-ray GA maintained various other notes which were repaid by the Company in
fiscal 1997 in conjunction with the merger.
Long-term debt outstanding at March 28, 1997 totaled $775,000. As of March
28, 1997, future minimum payments of long-term debt, by fiscal year and in the
aggregate, are approximately as follows:
<TABLE>
<CAPTION>
Fiscal Year:
<S> <C>
1998....... $ 272,000
1999....... 197,000
2000....... 80,000
2001....... 54,000
2002....... 56,000
Thereafter... 116,000
---------
Total.. $ 775,000
=========
</TABLE>
Capital Lease Obligations
As of March 28, 1997, future minimum payments, by fiscal year and in the
aggregate, required under capital leases are approximately as follows:
<TABLE>
<CAPTION>
Fiscal Year:
<S> <C>
1998............................................. $ 432,000
1999............................................. 34,000
2000............................................. 28,000
---------
Net minimum lease payments......................... 494,000
Less amount representing interest.................. 37,000
---------
Present value of net minimum lease payments under
capital leases........................... 457,000
Less amounts due in one year....................... 400,000
---------
Amounts due after one year............... $ 57,000
=========
</TABLE>
- 115 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. OPERATING LEASE COMMITMENTS
The Company leases various facilities and equipment under operating leases
which expire at various dates through 2005. Certain lease commitments provide
that the Company pay taxes, insurance, and maintenance expenses related to the
leased assets.
Rent expense approximated $6,249,000, $5,369,000, and $5,230,000 for fiscal
years 1997, 1996, and 1995, respectively. As of March 28, 1997, future minimum
payments, by fiscal year and in the aggregate, required under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
<S> <C>
1998....... $ 8,752,000
1999....... 5,662,000
2000....... 4,209,000
2001....... 2,844,000
2002....... 1,627,000
Thereafter... 993,000
------------
Total...... $24,087,000
============
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land..................................... $ 233,312 $ 121,524
Building................................. 2,161,698 1,207,560
Equipment................................ 23,265,561 18,907,914
Furniture, fixtures and leasehold
improvements............................. 6,754,303 3,756,862
------------ ------------
32,414,874 23,993,860
Accumulated depreciation................. (13,603,183) (9,229,154)
------------ ------------
$ 18,811,691 $ 14,764,706
============ ============
</TABLE>
Equipment includes equipment acquired under capital leases with a cost of
$109,000 and $3,909,000 and related accumulated depreciation of $38,000 and
$1,766,000 at March 28, 1997 and March 29, 1996, respectively. Depreciation
expense aggregated approximately $3,219,000, $2,210,000, and $2,214,000 for
1997, 1996, and 1995, respectively, and is included in general and
administrative expenses.
- 116 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. INTANGIBLES
Intangibles, stated at cost, consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Customer lists............. $ 3,228,105 $ 3,466,285
Goodwill................... 11,870,204 6,941,804
Noncompete agreements...... 11,921,251 7,146,913
------------ ------------
27,019,560 17,555,002
Accumulated amortization... (5,402,667) (3,670,680)
------------ ------------
$ 21,616,893 $ 13,884,322
============ ============
</TABLE>
As of March 28, 1997, approximate future minimum payments, by fiscal year
and in the aggregate, required under noncompete agreements are as follows:
<TABLE>
<S> <C>
1998.............. $ 2,312,000
1999.............. 1,736,000
2000.............. 550,000
2001.............. 85,000
2002.............. 42,000
Thereafter........ 73,000
-----------
$ 4,798,000
===========
</TABLE>
Amortization expense aggregated approximately $2,471,000, $1,891,000, and
$1,997,000 for 1997, 1996, and 1995, respectively, and is included in general
and administrative expenses.
7. INCOME TAXES
The provisions for income taxes are detailed below:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Current tax provision:
Federal........................ $ 5,481,000 $ 1,719,000 $ 1,982,000
State.......................... 1,250,000 394,000 439,000
----------- ----------- -----------
Total current.......... 6,731,000 2,113,000 2,421,000
----------- ----------- -----------
Deferred tax benefit:
Federal........................ (3,755,000) (643,000) --
State.......................... (856,000) (146,000) --
----------- ----------- -----------
Total deferred......... (4,611,000) (789,000) --
----------- ----------- -----------
Total income tax
provision............... $ 2,120,000 $ 1,324,000 $ 2,421,000
=========== =========== ===========
</TABLE>
- 117 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The difference between income tax computed at the federal statutory rate and
the actual tax provision is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income before provision for taxes...... $ 6,493,000 $ 2,663,000 $ 1,574,000
=========== =========== ===========
Tax provision at the statutory rate.... $ 2,208,000 $ 905,000 $ 535,000
----------- ----------- -----------
(Decrease) increase in taxes:
Change in valuation allowance for
deferred taxes.................... (900,000) (956,000) 1,023,000
State income tax, net of federal
benefit........................... 370,000 329,000 94,000
Write-off of intangibles............. -- -- 562,000
Meals and entertainment.............. 163,000 134,000 162,000
Goodwill amortization................ 8,000 8,000 10,000
Cash surrender value of life
insurance......................... 62,000 45,000 26,000
Nontaxable interest income........... (660,000) (198,000) --
Merger costs and expenses............ 721,000 2,216,000 --
Utilization of tax net operating
losses............................ -- (776,000) --
LIFO reserve of pooled companies..... 121,000 -- --
Other, net........................... 346,000 9,000 30,000
Income of S-corporation.............. (319,000) (392,000) (21,000)
----------- ----------- -----------
Total (decrease) increase in taxes (88,000) 419,000 1,886,000
----------- ----------- -----------
Total income tax provision... $ 2,120,000 $ 1,324,000 $ 2,421,000
=========== =========== ===========
Effective tax rate..................... 32.7% 49.7% 153.8%
=========== =========== ===========
</TABLE>
Deferred income taxes for 1997 and 1996 reflect the impact of temporary
differences between the financial statement and tax bases of assets and
liabilities. The tax effect of temporary differences which create deferred tax
assets and liabilities at March 28, 1997 and March 29, 1996 are detailed below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Merger costs and expenses..................... $ 1,455,000 $ 204,000
Allowance for doubtful accounts and sales
returns......................................... 1,359,000 717,000
Intangibles................................... 617,000 681,000
Inventory uniform cost capitalization......... 959,000 482,000
Net operating loss carryforwards.............. 1,738,000 219,000
Accrued expenses.............................. 435,000 399,000
Reserve for inventory obsolescence............ 39,000 105,000
Long-term incentive plan...................... 174,000 --
Other......................................... 163,000 197,000
----------- -----------
Gross deferred tax assets............. 6,939,000 3,004,000
----------- -----------
Deferred tax liabilities:
Excess of tax depreciation and amortization
over book depreciation and amortization.... (1,539,000) (1,179,000)
Other......................................... -- (136,000)
-----------
Gross deferred tax liabilities............. (1,539,000) (1,315,000)
----------- -----------
5,400,000 1,689,000
Valuation allowance................... -- (900,000)
----------- -----------
Net deferred tax asset................ $ 5,400,000 $ 789,000
=========== ===========
</TABLE>
- 118 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A valuation allowance was provided in prior years for those temporary
differences for which utilization was uncertain. Based on an evaluation of the
realizability of deferred tax assets, the valuation allowance was reduced by
$900,000 and $956,000 during fiscal 1997 and 1996, respectively.
The income tax benefit related to the exercise or early disposition of
certain stock options reduces taxes currently payable and is credited to
additional paid-in capital. Such amounts approximated $1,832,000 and $2,687,000
for fiscal years 1997 and 1996, respectively.
At March 28, 1997, the Company had net operating loss carryforwards for
income tax purposes arising from mergers of approximately $4,486,000 which
expire from 2006 to 2011. The utilization of the net operating loss
carryforwards is subject to limitation in certain years.
8. RELATED-PARTY TRANSACTIONS
A member of the board of directors provides legal services as general
counsel to the Company. Fees for such legal services were approximately
$132,000, $136,000, and $124,000 in 1997, 1996, and 1995, respectively.
A member of the board of directors is chairman and CEO of the insurance
company that administered the Company's self-insurance program through December
31, 1995. Administrative fees paid to the company were approximately $484,000
during the first nine months of fiscal year 1996 and $339,000 for fiscal year
1995. The Company changed its self-insurance administrator as of January 1, 1996
to an unrelated party.
9. STOCK-BASED COMPENSATION PLANS
At March 28, 1997, the Company had five stock-based compensation plans as
described below:
Incentive Stock Option Plan
Under the Company's qualified 1986 Incentive Stock Option Plan, 8,001,000
shares of the Company's common stock are reserved for sale to officers and key
employees. Options may be granted at prices not less than fair market value at
the date of grant and are exercisable during periods of up to five years from
that date. The exercisability of the options is not subject to future
performance.
Information regarding this plan is summarized below:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price Per Share
--------- ------------------------
<S> <C> <C>
Balance, March 31, 1994........ 1,540,497 $ 2.47
Granted........................ 648,000 4.18
Exercised...................... (817,899) 2.17
Canceled....................... (12,000) 1.59
----------- ----------
Balance, March 30, 1995........ 1,358,598 2.89
Granted........................ -- --
Exercised...................... (607,405) 2.68
Canceled....................... (30,297) 1.48
----------- ----------
Balance, March 29, 1996........ 720,896 2.94
Granted........................ -- --
Exercised...................... (345,570) 2.83
Canceled....................... (12,000) 3.28
----------- ----------
Balance, March 28, 1997........ 363,326 $ 3.05
=========== ==========
</TABLE>
- 119 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
At March 31, 1994, March 30, 1995, March 29, 1996, and March 28, 1997,
1,411,542, 1,274,688, 682,031, and 363,326, respectively, of outstanding options
were exercisable. The weighted average remaining life of the options outstanding
at March 28, 1997 is approximately 1.7 years. No compensation expense has been
recorded because the options were granted at fair market value. As of March 28,
1997, approximately 2,388,000 shares of common stock are available for issuance
under the plan. The Company does not intend to issue any more options under this
plan.
Options Issued in Exchange for Former Taylor Medical Options
In conjunction with the acquisition of Taylor Medical, Inc., the Company
assumed the nonqualified Taylor Medical Stock Option Plans of 1986 and 1993. The
options outstanding at the time of acquisition were converted to allow grantees
the right to acquire the Company's common stock at a rate consistent with the
merger's stock pooling agreement. All options under this plan are priced at
$5.08 per common share and are not subject to future performance.
Information regarding these options is summarized below:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Balance, March 31, 1994..... 613,776
Granted..................... 15,747
Exercised................... (5,118)
Canceled.................... (8,268)
---------
Balance, March 30, 1995..... 616,137
Granted..................... 7,825
Exercised................... (538,815)
Canceled.................... --
---------
Balance, March 29, 1996..... 85,147
Granted..................... --
Exercised................... (37,509)
Canceled.................... --
---------
Balance, March 28, 1997..... 47,638
=========
</TABLE>
The Company does not intend to issue any more options under this plan.
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 1.8 years.
Long Term Stock Plan
In March 1994, the Company adopted the 1994 Long Term Stock Plan under which
the Compensation Committee has discretion to grant nonqualified stock options
and restricted stock to any employee of the Company. A total of 2,190,000 shares
of the Company's common stock, as adjusted by stock splits, consolidations, or
other changes in capitalization, have been reserved for issuance under this
plan. The exercise price of options granted under this plan may be no less than
the fair market value of the Company's common stock on the date of grant.
- 120 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Information regarding the stock option component of this plan is summarized
below:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Per Share
--------- ---------
<S> <C> <C>
Balance, March 31, 1994........ -- --
Granted........................ 160,200 $ 5.32
Exercised...................... -- --
Canceled....................... -- --
------- -------
Balance, March 30, 1995........ 160,200 5.32
Granted........................ 492,300 16.96
Exercised...................... (37,500) 13.07
Canceled....................... -- --
------- -------
Balance, March 29, 1996........ 615,000 14.17
Granted........................ 203,179 23.90
Exercised...................... (27,050) 13.35
Canceled....................... (3,000) 5.79
------- -------
Balance, March 28, 1997........ 788,129 $ 16.52
======= =======
</TABLE>
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 5.6 years. As of March 28, 1997, approximately 1,340,000 shares of
common stock were available for issuance under the plan.
Long Term Incentive Plan
In March 1994, the Company adopted the 1994 Long Term Incentive Plan which
provides officers with performance awards, consisting of cash or registered
shares of common stock, or a combination thereof, based primarily upon the
Company's total shareholder return as ranked against the companies comprising
the NASDAQ Composite Index over a three-year period. The maximum payable under
this plan to an eligible employee, whether in the form of cash or common stock,
may not exceed $1 million per fiscal year. At March 28, 1997, the Company has
accrued approximately $448,000 related to awards granted under this plan.
The plan also provides for nonqualified stock options or restricted stock to
be granted at the full discretion of the Compensation Committee of the Board of
Directors. The exercise price of options granted under this plan may be no less
than the fair market value of the Company's common stock on the date of grant,
and accordingly, no compensation expense is recorded on the date the stock
options are granted. The aggregate number of shares of common stock, including
shares reserved for issuance pursuant to the exercise of options, which may be
granted or issued may not exceed 730,000 shares.
121
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Information regarding the stock option component of the plan is summarized
below:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Per Share
--------- ---------
<S> <C> <C>
Balance, March 30, 1995......... -- --
Granted......................... 350,643 $ 14.88
Exercised....................... (32,406) 14.88
Canceled........................ -- --
------- -------
Balance, March 29, 1996......... 318,237 14.88
Granted......................... 68,364 23.94
Exercised....................... (61,158) 14.88
Canceled........................ -- --
------- -------
Balance, March 28, 1997 325,443 $ 16.78
======== =======
</TABLE>
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 8.5 years. To date, no cash or restricted stock have been issued
under this plan.
Directors' Stock Plan
In March 1994, the Company adopted the Directors' Stock Plan under which
nonemployee directors receive an annual grant of an option to purchase 2,000
shares of common stock. A total of 200,000 shares of the Company's common stock,
as adjusted for stock splits, consolidations, or other changes in
capitalization, have been reserved for issuance under this plan. The exercise
price of options granted under this plan may be no less than the fair market
value of the Company's common stock on the date of grant, and accordingly, no
compensation expense has been recorded in connection with the stock options
granted. Each nonemployee director receives a grant of 2,000 restricted shares
upon initial election and reelection to the Board.
Information regarding the stock option component of this plan is summarized
below:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Per Share
--------- ---------
<S> <C> <C>
Balance, March 31, 1994........ -- --
Granted........................ 27,000 $ 5.48
Exercised...................... -- --
Canceled....................... -- --
-------- -----
Balance, March 30, 1995........ 27,000 5.48
Granted........................ 22,500 14.75
Exercised...................... (4,500) 5.48
Canceled....................... -- --
-------- -----
Balance, March 29, 1996........ 45,000 10.12
Granted........................ 12,000 23.94
Exercised...................... (3,000) 5.48
Canceled....................... -- --
-------- -----
Balance, March 28, 1997........ 54,000 $ 13.44
======== ========
</TABLE>
- 122 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is 8.4
years. To date, 13,500 restricted shares have been issued under this plan.
Fair Value of Stock Options
Under SFAS No. 123, the fair value of stock options granted in the years
ended March 28, 1997 and March 29, 1996 have been estimated using a
Black-Scholes option pricing model with the following weighted average
assumptions for grants: risk-free interest rate ranging from 5.8% to 6.8%,
expected option life ranging from 3.5 to 5 years, expected volatility of 40% for
1996 and 55% for 1997 and no expected dividend yield. Using these assumptions,
the estimated fair values of options granted for the years ended March 28, 1997
and March 29, 1996 were approximately $2.9 million and $6.0 million,
respectively, and such amounts would be included in compensation expense. Pro
forma net income and net income per share for the years ended March 28, 1997 and
March 29, 1996, assuming the Company had accounted for the plans under the fair
value approach, are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net income:
As reported.......................... $ 4,373 $ 1,339
Pro forma............................ $ 2,599 $ (2,315)
Net income per share:
As reported.......................... $ 0.12 $ 0.04
Pro forma............................ $ 0.07 $ (0.07)
</TABLE>
Because the fair value method of accounting has not been applied to options
granted prior to March 31, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Weighted average per share fair value of options
granted:
Incentive Stock Option Plan..................... N/A N/A
Long Term Stock Plan............................ $ 11.08 $ 6.91
Long Term Incentive Plan........................ $ 11.08 $ 6.73
Directors' Stock Plan........................... $ 13.22 $ 6.67
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company has an employee stock ownership plan ("ESOP") available to all
employees with at least one year of service. Effective January 1, 1996, the
Company amended the plan to allow participants to direct the investment of a
portion of their plan balances. Prior to this change, the trustees directed the
investment of the participants' balances. As of March 28, 1997, the ESOP owns
approximately 2,034,000 shares of the Company's common stock. Company
contributions to the plan were approximately $160,000, $120,000, and $85,000 for
1997, 1996, and 1995, respectively, and are made at the discretion of the
Company.
The Company also has an employee stock purchase plan available to employees
with at least one year of service. The plan allows eligible employees to
purchase company stock over the counter through payroll deductions.
- 123 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. BUSINESS ACQUISITIONS
Pooling With X-ray GA
On December 20, 1996, the Company acquired X-ray GA in a merger pursuant to
which the Company issued 593,672 shares of common stock to the former
shareholders of X-ray GA (of which 52,675 shares are being held in escrow as of
March 28, 1997) in exchange for all of the outstanding shares of capital stock
of X-ray GA valued at $11.0 million at the time of the merger. The merger has
been accounted for as a pooling-of-interests, and accordingly, the Company's
consolidated financial statements have been restated to include the accounts and
operations of X-ray GA for all periods prior to the merger.
X-ray GA was an S-Corporation for income tax purposes, and therefore, did
not pay U.S. federal income taxes. X-ray GA will be included in the Company's
U.S. federal income tax return subsequent to the date of acquisition. Separate
net sales, net income (loss) and related per share amounts of merged entities
are presented in the following table. In addition, the table includes pro forma
net income (loss) and net income (loss) per share amounts which reflect pro
forma adjustments to present income taxes of X-ray GA on the basis on which they
will be reported in future periods.
<TABLE>
<CAPTION>
March 30 through
December 31, 1996
(Unaudited) March 29, 1996 March 30, 1995
----------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Net sales
PSS and Taylor combined................. $ 470,357 $ 483,294 $ 366,285
X-ray GA................................ 33,182 45,730 47,016
------------- --------- ---------
Total........................... $ 503,539 $ 529,024 $ 413,301
Net income (loss)
PSS and Taylor combined................. $ 6,139 $ 186 $ (909)
X-ray GA................................ 938 1,153 62
------------- --------- ---------
Net income (loss) as reported............. $ 7,077 $ 1,339 $ (847)
Pro forma tax provision for X-ray GA...... 357 438 23
------------- --------- ---------
Pro forma net income (loss)............... $ 6,720 $ 901 $ (870)
Net income (loss) per share As reported... $ 0.19 $ 0.04 $ (0.04)
Pro forma................................. $ 0.19 $ 0.03 $ (0.04)
Other changes in shareholders' equity
PSS and Taylor combined................. $ 1,446 $ 152,340 $ 24,101
X-ray GA................................ (1,100) (455) (516)
------------- --------- ---------
Total........................... $ 346 $ 151,885 $ 23,585
============= ========= =========
</TABLE>
- 124 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pooling With Taylor
On August 21, 1995, the Company issued approximately 3,790,000 shares of its
common stock in exchange for all of the outstanding common stock of Taylor,
including approximately 416,000 shares held in escrow to satisfy certain
obligations of Taylor related to its operations prior to the merger. Subsequent
to August 21, 1995, approximately 244,000 shares of common stock were returned
to the Company as settlement of the escrow and were canceled. These canceled
shares had no resulting impact on the net income per share calculation. The
merger has been accounted for as a pooling-of-interests, and accordingly, the
Company's consolidated financial statements have been restated to include the
accounts and operations of Taylor for all periods prior to the merger.
Separate net sales, net income (loss) and other changes in shareholders'
equity of the merged entities prior to the merger are presented in the following
table:
<TABLE>
<CAPTION>
April 1 through
June 30, 1995
(unaudited) March 30, 1995
----------- --------------
(In thousands)
<S> <C> <C>
Net sales
PSS................................ $ 73,670 $ 236,188
Taylor............................. 31,640 130,097
--------- ---------
Combined............................. $ 105,310 $ 366,285
Net income
PSS................................ $ 980 $ 3,680
Taylor............................. 193 (4,589)
--------- ---------
Combined............................. $ 1,173 $ (909)
Other changes in shareholders' equity
PSS................................ $ 1,036 $ 24,075
Taylor............................. 1 26
--------- ---------
Combined......................... $ 1,037 $ 24,101
========= =========
</TABLE>
Other Poolings
During fiscal 1997, the Company merged with four other medical supply and
equipment distributors in stock mergers accounted for under the
pooling-of-interests method by issuing approximately 1,465,000 shares of PSS
common stock in exchange for all of the common stock of the acquired companies.
The accompanying consolidated financial statements have not been restated for
periods prior to these poolings due to immateriality. Accordingly, the results
of operations have been reflected in the consolidated financial statements
prospectively from the acquisition date and the accumulated deficit as of their
acquisition dates of approximately $4.7 million has been recorded as an
adjustment to the accumulated deficit of the Company.
During fiscal 1996, the Company merged with three other medical supply and
equipment distributors in stock mergers accounted for under the
pooling-of-interests method by issuing 290,586 shares of PSS common stock in
exchange for all of the common stock of the acquired companies. The accompanying
consolidated financial statements have not been restated for periods prior to
these poolings due to immateriality. Accordingly, the results of operations have
been reflected in the consolidated financial statements prospectively from the
acquisition date, and the accumulated retained earnings as of their acquisition
dates of approximately $1.3 million have been recorded as adjustments to the
accumulated deficit of the Company.
- 125 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Asset Purchases
During fiscal 1997, the Company acquired certain assets, accounted for by
the purchase method, including accounts receivable, inventories, equipment, and
other assets of five medical supplies and equipment distributors for
approximately $14.2 million. The aggregate purchase price paid consisted of cash
of approximately $6.8 million, assumption of accounts payable and accrued
liabilities of approximately $7.4 million, and the issuance of 2,700 shares of
common stock with a fair market value of approximately $40,000. The excess of
the purchase price over the estimated fair value of the net assets acquired of
approximately $2.8 million has been recorded as goodwill and will be amortized
over thirty years. In addition, the Company entered into noncompete agreements
with shareholders of the acquired companies which provide for payments of
approximately $220,000 through the year 2001. The operations of the acquired
companies have been included in the Company's results of operations subsequent
to the dates of acquisition.
During fiscal 1996, the Company acquired certain assets, accounted for by
the purchase method, including accounts receivable, inventories, equipment, and
other assets of seven medical supplies and equipment distributors for
approximately $5.5 million. The aggregate purchase price paid consisted of cash
of approximately $2.8 million, assumption of accounts payable and accrued
liabilities of approximately $2.5 million, and the issuance of 5,700 shares of
common stock with a fair market value of $121,000. The excess of the purchase
price over the estimated fair value of the net assets acquired of approximately
$1.2 million has been recorded as goodwill and will be amortized over thirty
years. In addition, the Company entered into noncompete agreements with
shareholders of the acquired companies which provide for payments of $1.2
million through the year 2000. The operations of the acquired companies have
been included in the Company's results of operations subsequent to the dates of
acquisition.
During fiscal 1995, the Company acquired certain assets, including accounts
receivable, inventories, equipment, and other assets, of nine medical supplies
and equipment distributors for approximately $11.6 million. The aggregate
purchase price paid consisted of cash of approximately $6.9 million, assumption
of accounts payable and accrued liabilities of approximately $4.2 million, and
the issuance of approximately 70,000 shares of common stock with a fair market
value of approximately $0.5 million. The excess of the purchase price over the
estimated fair value of the net assets acquired of approximately $4.0 million
has been recorded as goodwill. In addition, the Company entered into noncompete
agreements with shareholders and an officer of the acquired companies which
provide for payments of approximately $2.3 million through the year 1998.
During fiscal 1995, Taylor acquired certain assets of three medical supplies
and equipment distributors for approximately $2.2 million.
For acquisitions accounted for as purchases, the results of operations
acquired have been included in the financial statements since the dates of
acquisition. Supplemental pro forma information is not presented because the
impact on the Company's results of operations would not be material.
12. COMMITMENTS AND CONTINGENCIES
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability. The
Company has not experienced any significant product liability claims and
maintains product liability insurance coverage. In addition, the Company is
party to various legal and administrative proceedings and claims arising in the
normal course of business. While any litigation contains an element of
uncertainty, management believes that the outcome of any proceedings or claims
which are pending or known to be threatened will not have a material adverse
effect on the Company's consolidated financial position, liquidity, or results
of operations.
- 126 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company has employment agreements with certain executive officers which
provide that in the event of their termination or resignation, under certain
conditions, the Company may be required to continue salary payments and provide
insurance for a period ranging from 12 to 36 months for the chief executive
officer and from 3 to 12 months for other executives and to repurchase a portion
or all of the shares of common stock held by the executives upon their demand.
The period of salary and insurance continuation and the level of stock
repurchases are based on the conditions of the termination or resignation.
13. ABBOTT LABORATORIES DISTRIBUTION AGREEMENT
On March 27, 1995, the Company signed a Distribution Agreement with Abbott
Laboratories providing for the exclusive distribution of certain Abbott
diagnostic products. The Abbott Agreement, effective April 1, 1995, has a
five-year term, although it may be terminated earlier if the Company fails to
meet certain performance objectives. Under the Abbott Agreement, the Company has
become the exclusive distributor in the United States of certain Abbott
diagnostic products and reagents to office-based physician practices with 24 or
fewer physicians per office site. The Abbott Agreement also provides the
Company's sales force with access to over 15,000 physician practices that were
not previously purchasing diagnostic products from the Company. Abbott products
constituted approximately 16% of the Company's sales in fiscal 1997 and 1996.
Simultaneous with the closing of the Abbott Agreement, Abbott purchased 825,000
unregistered, restricted shares of PSS common stock. A three-year irrevocable
proxy to the PSS Board of Directors and a perpetual stand still agreement were
provided by Abbott in the Stock Purchase Agreement.
14. SALES OF ASSETS
On July 1, 1994, Taylor sold the assets of its Taylor Home Health division
for $12,000,000 in cash and an escrow receivable of $1,051,000 based on
subsequent receivables collections and other factors, resulting in a gain on
sale of assets of approximately $2,078,000. In March 1995, Taylor negotiated a
final settlement of the escrowed receivable which included the return to Taylor
of certain receivables. Taylor recorded a $600,000 reduction in the gain
originally recognized to record these receivables at their estimated net
realizable value. The net gain of approximately $1,478,000 is included in other
income for fiscal year 1995.
On November 30, 1994, Taylor sold the assets of its Labcare division, whose
principal business was the repair of medical equipment, for $1,100,000,
resulting in a loss of approximately $403,000. In March 1995, Taylor recorded an
additional loss on the sale of approximately $154,000 related to the write-down
of certain notes receivable issued in conjunction with the sale. The net loss of
approximately $558,000 is included in other income for fiscal year 1995.
15. MERGER COSTS AND EXPENSES AND RESTRUCTURING CHARGES
The Company recorded merger costs and expenses of approximately $12,100,000
and $15,700,000 in fiscal 1997 and 1996, respectively, associated with mergers
accounted for as poolings-of-interests. Such costs include direct merger costs
consisting primarily of investment banking, legal, accounting, and filing fees
as well as consolidation costs from the closing of duplicate service center
locations, realigning regional and corporate functions, and reducing personnel.
At March 28, 1997, accrued merger costs were approximately $3.0 million.
- 127 -
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
During fiscal 1995, Taylor management concluded that recent industry
developments had affected Taylor's strategy and operations. Taylor assessed its
relative position in its major markets and determined that competitive pressures
on margins and cost structures in its Arizona, Indiana and Massachusetts
distribution centers as well as the prospects for its physician consulting
services and equipment repair businesses would not result in full realization of
the future benefits expected from the related intangible assets. Accordingly,
Taylor management concluded that the intangible assets were impaired and
recorded a $4,388,592 noncash charge to write off the intangible assets
associated with these markets and operations.
16. SUBSEQUENT EVENTS.
Subsequent to March 28, 1997, the Company acquired four imaging and
equipment distributors for aggregate consideration of approximately $24.3
million comprised of 1,275,681 shares of PSS common stock and approximately $2.5
million cash.
On August 12, 1997, the Company signed a definitive agreement to merge with
S&W X-Ray, Inc. ("S&W"). As discussed further elsewhere in this Proxy
Statement-Prospectus, the Company intends to acquire S&W in a stock-for-stock
merger, to be accounted for as a pooling-of-interests by issuing shares of PSS
common stock with a value of $26,000,000, subject to adjustment.
- 128 -
<PAGE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 30, 1995, March 29, 1996, and March 28, 1997
<TABLE>
<CAPTION>
Balance at Provision
Valuation allowance beginning of charged to Transfers Balance at
for accounts receivable period expense from Poolings Write-offs end of period
----------------------- ------------ ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended March 30, 1995 $1,848,000 $1,651,000 $ --- $2,245,000 $1,254,000
Year ended March 29, 1996 1,254,000 1,448,000 400,000 884,000 2,218,000
Year ended March 28, 1997 $2,218,000 $2,463,000 $881,000 $1,981,000 $3,581,000
</TABLE>
- 129 -
<PAGE>
INDEX TO S&W FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Interim Financial Statements (Unaudited):
Balance Sheets - June 30, 1997 and March 31, 1997...................................... 131
Statements of Income for the Three Months Ended
June 30, 1997 and 1996................................................................. 133
Statements of Cash Flows for the Three Months Ended
June 30, 1997 and 1996................................................................. 134
Notes to Financial Statements............................................................. 135
Financial Statements:
Independent Auditors Report............................................................... 136
Balance Sheets - March 31, 1997 and 1996 ................................................. 137
Statements of Income for the Years Ended March 31, 1997, 1996 and 1995.................... 139
Statements of Shareholders' Equity for the Years Ended March 31, 1997, 1996 and 1995...... 140
Statements of Cash Flows for the Years Ended March 31, 1997, 1996 and 1995................ 141
Notes to Financial Statements............................................................. 143
</TABLE>
- 130 -
<PAGE>
S&W X-RAY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 1997 1997
------ ---------- --------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS
- --------------
Cash $ 673 $ 335,034
Accounts receivable, less allowances for doubtful accounts
of $653,000 and $100,000 in 1997 and 1996, respectively 10,330,852 11,133,430
Inventory 5,772,281 7,290,574
Prepaid expenses 872,333 1,538,151
Deferred income taxes 1,069,200 611,000
----------- -----------
TOTAL CURRENT ASSETS 18,045,339 20,908,189
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
Land 150,000 150,000
Building 681,066 681,066
Transportation equipment 510,567 510,567
Equipment 1,114,888 1,085,264
Furniture 151,419 151,419
Leasehold improvements 63,032 56,448
----------- -----------
2,670,972 2,634,764
Less: accumulated depreciation 1,312,877 1,243,488
----------- -----------
1,358,095 1,391,276
OTHER ASSETS
- ------------
Goodwill (net of accumulated amortization of $41,667
and $8,333 at June 30, 1997 and 1996, respectively) 458,333 466,667
Other assets 270,265 158,147
Deferred income taxes 58,100 59,400
----------- -----------
786,698 684,214
----------- -----------
$20,190,132 $22,983,679
=========== ===========
</TABLE>
- 131 -
<PAGE>
<TABLE>
<CAPTION>
June 30, March 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1997
------------------------------------ ---------- --------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES
- -------------------
Notes payable to bank $ 3,827,700 $ 5,214,550
Current portion of long-term debt 707,645 1,082,360
Notes payable to related parties 900,000 1,130,000
Accounts payable 3,967,773 4,947,746
Customer deposits 396,973 376,362
Other current liabilities 873,952 262,092
Accrued salaries and pension 825,333 1,749,759
----------- -----------
TOTAL CURRENT LIABILITIES 11,499,376 14,762,869
LONG-TERM LIABILITIES
- ---------------------
Debt 3,463,552 3,265,569
----------- -----------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
SHAREHOLDERS' EQUITY
- --------------------
Common stock, $.04 par value
Authorized, 500,000 shares
Issued and outstanding, 259,574 shares 10,383 10,383
Paid in capital 172,811 172,811
Retained earnings 6,350,001 6,139,703
----------- -----------
6,533,195 6,322,897
Less: Guarantee of employee stock ownership plan debt 1,305,991 1,367,656
----------- -----------
5,227,204 4,955,241
----------- -----------
$20,190,132 $22,983,679
=========== ===========
</TABLE>
The accompanying note is an integral part of these statements.
- 132 -
<PAGE>
S&W X-RAY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
June 30, June 30,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Sales $20,040,450 $17,689,106
Cost of sales 15,470,526 13,995,379
----------- -----------
GROSS PROFIT 4,569,924 3,693,727
General and administrative expenses 4,039,399 3,233,913
----------- -----------
INCOME FROM OPERATIONS 530,525 459,814
Other income (expense):
Interest expense (180,547) (145,623)
Interest income 6,820 2,209
Sundry -- 135
----------- -----------
(173,727) (143,279)
----------- -----------
INCOME BEFORE INCOME TAXES 356,798 316,535
Income taxes:
Federal 467,900 267,800
States 135,500 84,900
Deferred (credit) (456,900) (209,200)
----------- -----------
146,500 143,500
----------- -----------
NET INCOME $ 210,298 $ 173,035
=========== ===========
Net income per common share $ .90 $ .80
=========== ===========
Weighted average number of shares outstanding 234,779 216,463
========= =========
</TABLE>
The accompanying note is an integral part of these statements.
- 133 -
<PAGE>
S&W X-RAY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
June 30, June 30,
1997 1996
-------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
- ---------------------------------
Net income for year $ 210,298 $ 173,035
Adjustments to reconcile net income to net cash provided from
(used for) operating activities:
Depreciation and amortization 77,723 60,854
Bad debts 173,500 -
Inventory, warranty and other reserves 493,100 -
Deferred income taxes (credit) (456,900) (209,200)
Changes in certain assets and liabilities affecting operations:
Accounts receivable 629,078 (1,096,107)
Inventory 1,212,793 1,338,830
Prepaid expenses 665,818 (461,424)
Other assets (112,118) (18,520)
Accounts payable (979,973) 469,847
Customer deposits 20,611 (79,051)
Other current liabilities 424,260 210,252
Accrued salaries and pension (924,426) (537,445)
----------- -----------
NET CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES 1,433,764 (148,929)
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
Purchases of property, plant and equipment (36,208) (41,187)
----------- -----------
NET CASH (USED FOR)
INVESTING ACTIVITIES (36,208) (41,187)
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
Net (payments) borrowings of short-term debt (1,386,850) 25,000
Principal payments of long-term borrowings (115,067) (9,375)
Additional borrowings from related parties 70,000 610,000
Principal payments to related parties (300,000) (550,000)
----------- -----------
NET CASH (USED FOR) PROVIDED FROM
FINANCING ACTIVITIES (1,731,917) 75,625
=========== ============
NET DECREASE IN CASH (334,361) (114,491)
Cash at beginning of year 335,034 115,153
----------- -----------
CASH AT END OF YEAR $ 673 $ 662
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
- ----------------------------------
Cash paid during the year for:
Interest $ 180,547 $ 145,623
=========== ===========
Income taxes $ 225,312 $ 11,799
=========== ============
</TABLE>
The accompanying note is an integral part of these statements.
- 134 -
<PAGE>
S&W X-RAY, INC.
NOTE TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The financial statements of S&W X-Ray, Inc. reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position and results of operations for
the periods indicated.
The accompanying financial statements should be read in conjunction with the
Company's audited March 31, 1997 financial statements and related notes. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to the Securities and Exchange Commission rules and
regulations.
The results of operations for the interim periods covered by this report may not
necessarily be indicative of operating results for the full fiscal year.
- 135 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
S&W X-Ray, Inc.
We have audited the accompanying balance sheet of S&W X-Ray, Inc. as of March
31, 1997, and the related statements of income, shareholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of S&W X-Ray, Inc. as of March 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The 1996 and 1995 financial statements were reviewed by us and our reports
thereon, dated May 29, 1996 and May 26, 1995, respectively, stated that we were
not aware of any material modifications that should be made to those statements
for them to be in conformity with generally accepted accounting principles.
However, a review is substantially less in scope than an audit and does not
provide a basis for the expression of an opinion on the 1996 and 1995 financial
statements taken as a whole.
MAY, ROBINSON, GORDON & PENTA, P.C.
Rochester, New York
July 31, 1997
- 136 -
<PAGE>
S&W X-RAY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
------------------------------
1997 1996
---- ----
(Audited) (Reviewed)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
- --------------
Cash........................................................ $ 335,034 $ 115,153
Accounts receivable, less allowances for doubtful accounts
of $653,000 and $100,000 in 1997 and 1996, respectively... 11,133,430 9,547,463
Inventory .................................................. 7,290,574 5,075,811
Prepaid expenses............................................ 1,538,151 402,325
Deferred income taxes....................................... 611,000 71,200
----------- -----------
TOTAL CURRENT ASSETS................. 20,908,189 15,211,952
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
Land........................................................ 150,000 150,000
Building.................................................... 681,066 667,866
Transportation equipment.................................... 510,567 390,738
Equipment................................................... 1,085,264 700,375
Furniture................................................... 151,419 132,450
Leasehold improvements...................................... 56,448 47,638
----------- -----------
.............................................................. 2,634,764 2,089,067
Less: accumulated depreciation and amortization............ 1,243,488 981,874
----------- -----------
.............................................................. 1,391,276 1,107,193
OTHER ASSETS
Goodwill (net of accumulated amortization of
$33,333 in 1997)......................................... 466,667 500,000
Other assets................................................ 158,147 92,844
Deferred income taxes....................................... 59,400 -
----------- -----------
.............................................................. 684,214 592,844
----------- -----------
.............................................................. $22,983,679 $16,911,989
=========== ===========
</TABLE>
- 137 -
<PAGE>
<TABLE>
<CAPTION>
March 31,
-----------------------------
1997 1996
---- ----
(Audited) (Reviewed)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
-------------------
Notes payable to bank....................................... $ 5,214,550 $ 5,750,000
Current portion of long-term debt........................... 1,082,360 284,167
Notes payable to related parties............................ 1,130,000 1,245,000
Accounts payable............................................ 4,947,746 1,813,375
Customer deposits........................................... 376,362 348,083
Other current liabilities................................... 262,092 26,209
Accrued salaries and pension................................ 1,749,759 1,177,711
----------- -----------
TOTAL CURRENT LIABILITIES............ 14,762,869 10,644,545
LONG-TERM LIABILITIES
---------------------
Long-term debt.............................................. 3,265,569 2,681,762
Deferred income taxes....................................... -- 4,800
----------- -----------
............................................................. 3,265,569 2,686,562
COMMITMENTS AND CONTINGENCIES
-----------------------------
SHAREHOLDERS' EQUITY
--------------------
Common stock, $.04 par value
Authorized, 500,000 shares
Issued and outstanding, 259,574 shares.................. 10,383 10,383
Paid-in capital............................................. 172,811 --
Retained earnings........................................... 6,139,703 6,086,428
----------- -----------
............................................................. 6,322,897 6,096,811
Less: Unearned ESOP shares ................................ 1,367,656 2,515,929
----------- -----------
............................................................. 4,955,241 3,580,882
----------- -----------
............................................................. $22,983,679 $16,911,989
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 138 -
<PAGE>
S&W X-RAY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
(Audited) (Reviewed) (Reviewed)
<S> <C> <C> <C>
Sales......................................................... $72,034,238 $60,096,315 $58,683,889
Cost of sales................................................. 55,260,054 47,170,205 45,981,570
----------- ----------- -----------
GROSS PROFIT......................... 16,774,184 12,926,110 12,702,319
General and administrative expenses........................... 15,773,740 11,044,352 10,747,621
----------- ----------- -----------
INCOME FROM OPERATIONS............... 1,000,444 1,881,758 1,954,698
Other income (expense):
Interest expense............................................ (864,756) (499,985) (441,545)
Interest income............................................. 13,037 8,208 4,540
Sundry...................................................... 450 450 248
Gain on disposal of equipment............................... -- 669 5,660
----------- ----------- -----------
.............................................................. (851,269) (490,658) (431,097)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES........... 149,175 1,391,100 1,523,601
Income taxes:
Federal..................................................... 623,100 452,000 571,500
States...................................................... 192,000 143,000 186,582
Deferred (credit)........................................... (719,200) 6,100 (141,500)
----------- ----------- -----------
.............................................................. 95,900 601,100 616,582
----------- ----------- -----------
NET INCOME........................... $ 53,275 $ 790,000 $ 907,019
=========== =========== ===========
Share Data:
Net income per common and common equivalent share:
Primary................................................. $ .23 $ 3.65 $ 4.43
=========== =========== ===========
Fully diluted........................................... $ .23 $ 3.65 $ 4.43
=========== =========== ===========
Weighted average common shares outstanding:
Primary................................................. 234,779 216,463 204,819
=========== =========== ===========
Fully diluted........................................... 234,779 216,463 204,819
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 139 -
<PAGE>
S&W X-RAY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
<TABLE>
<CAPTION>
UNEARNED
COMMON STOCK PAID-IN RETAINED ESOP
------------
SHARES AMOUNT CAPITAL EARNINGS SHARES TOTAL
------ ------ ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994...... 259,574 $ 10,383 $ -- $4,389,409 $(3,638,335) $ 761,457
Release of unallocated
shares to employee
stock ownership plan....... -- -- -- -- 617,410 617,410
Net income................... -- -- -- 907,019 -- 907,019
-------- --------- -------- ---------- ----------- ----------
Balance, March 31, 1995...... 259,574 10,383 -- 5,296,428 (3,020,925) 2,285,886
Release of unallocated
shares to employee
stock ownership plan....... -- -- -- -- 504,996 504,996
Net income................... -- -- -- 790,000 -- 790,000
-------- --------- -------- ---------- ----------- ----------
Balance, March 31, 1996...... 259,574 10,383 -- 6,086,428 (2,515,929) 3,580,882
Release of unallocated
shares to employee
stock ownership plan....... -- -- 172,811 -- 1,148,273 1,321,084
Net income................... -- -- -- 53,275 -- 53,275
-------- --------- -------- ---------- ----------- ----------
Balance, March 31, 1997...... 259,574 $ 10,383 $172,811 $6,139,703 $(1,367,656) $4,955,241
======== ========= ======== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 140 -
<PAGE>
S&W X-RAY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------
1997 1996 1995
---- ---- ----
(Audited) (Reviewed) (Reviewed)
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
- ---------------------------------
Net income for year.................................................. $ 53,275 $ 790,000 $ 907,019
Adjustments to reconcile net income to net
cash (used for) operating activities:
Depreciation and amortization.................................... 294,947 201,871 182,258
Bad debts........................................................ 577,548 15,758 29,585
Inventory, warranty and other.................................... 301,732 -- --
Gain on disposal of equipment.................................... -- (669) (5,660)
Deferred income taxes (credit)................................... (719,200) 6,100 (141,500)
Changes in certain assets and liabilities
affecting operations:
Accounts receivable.......................................... (2,163,515) (1,016,986) (676,621)
Inventory.................................................... (2,318,863) (624,209) (1,494,978)
Prepaid expenses............................................. (1,135,826) (236,118) 309,814
Other assets................................................. (65,303) (45,833) (46,542)
Accounts payable............................................. 3,134,371 (541,946) 180,251
Customer deposits............................................ 28,279 91,940 (2,233)
Other current liabilities.................................... 38,251 (99,054) 9,235
Accrued salaries and pension ................................ 1,536,446 437,120 (194,964)
----------- ----------- -----------
NET CASH (USED FOR)
OPERATING ACTIVITIES............ (437,858) (1,022,026) (944,336)
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
Purchases of property, plant and equipment........................... (474,630) (59,417) (255,667)
Proceeds from disposal of equipment.................................. -- 9,050 9,150
Net asset acquisition................................................ -- (535,055) --
----------- ----------- -----------
NET CASH (USED FOR)
INVESTING ACTIVITIES............ (474,630) (585,422) (246,517)
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
Net (payments) borrowings of short-term debt......................... (535,450) 2,100,000 1,350,000
Proceeds from long-term borrowings................................... 2,471,886 504,996 617,410
Principal payments of long-term borrowings........................... (689,067) (542,496) (654,910)
Additional borrowings from related parties........................... 1,059,350 350,094 1,109,224
Principal payments to related parties................................ (1,174,350) (791,194) (1,275,150)
----------- ----------- -----------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES............ 1,132,369 1,621,400 1,146,574
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH. 219,881 13,952 (44,279)
Cash at beginning of year.............................................. 115,153 101,201 145,480
----------- ----------- -----------
CASH AT END OF YEAR......... $ 335,034 $ 115,153 $ 101,201
=========== =========== ===========
</TABLE>
- 141 -
<PAGE>
S&W X-RAY, INC.
STATEMENTS OF CASH FLOWS -- (Continued)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------------
1997 1996 1995
---- ---- ----
(Audited) (Reviewed) (Reviewed)
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
- ----------------------------------
Cash paid during the year for:
Interest...................................................... $ 710,719 $ 499,050 $ 406,888
=========== =========== ===========
Income taxes.................................................. $ 796,935 $ 663,805 $ 712,508
=========== =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITY
- -----------------------------------------
Seller financed vehicle purchase.............................. $ 71,067 $ -- $ --
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 142 -
<PAGE>
S&W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------
The Company
- -----------
The Company, incorporated in the state of New York, is principally a distributor
of x-ray chemicals, film, equipment and related products. The Company grants
credit to its customers located principally in New York State.
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventory
- ---------
Inventory consists principally of film and x-ray chemicals and is valued at the
lower of cost or market. At March 31, 1997 and 1996, the cost of the film
inventory was determined by the last-in, first-out (LIFO) method, while the cost
of the remaining inventory was determined by the first-in, first-out (FIFO)
method. The cost of the Company's inventory consists of material purchase costs
only.
Prepaid expenses
- ----------------
Prepaid expenses consist primarily of deposits paid to vendors for the purchase
of imaging equipment for the Company's customers.
Property, plant and equipment
- -----------------------------
Property, plant and equipment is valued at cost and is depreciated or amortized
for financial reporting purposes by straight-line and accelerated methods over
the estimated useful lives of the various assets.
Maintenance and repairs are charged to income when incurred. Additions and major
betterments are capitalized. The cost and accumulated depreciation or
amortization of assets sold or retired are removed from the respective accounts
and any gain or loss is reflected in income for the year.
Goodwill
- --------
Goodwill is being amortized on the straight-line method over a fifteen year
period.
- 143 -
<PAGE>
S&W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
- ------------------------------------------------------------------------------
Income taxes
- ------------
Deferred income tax assets and liabilities arise from temporary differences
associated with differences between the financial statement and tax basis of
assets and liabilities, as measured by the enacted rates which are expected to
be in effect when these differences reverse. Deferred tax assets and liabilities
are classified as current or noncurrent depending on the classification of the
assets and liabilities to which they relate. Deferred tax assets and liabilities
not related to an asset or liability are classified as current or noncurrent
depending on the periods in which the temporary differences are expected to
reverse. The principal types of temporary differences between assets and
liabilities for financial statement and tax return purposes are described in
Note L.
Advertising costs
- -----------------
Advertising costs are expensed as incurred. Advertising costs approximated
$12,000, $14,000 and $8,000 for the years ended March 31, 1997, 1996 and 1995,
respectively.
NOTE B: CASH
- -------------
The Company maintains cash balances at several branches of a financial
institution located in the Northeast. The total of all accounts at the
institution is insured by the Federal Deposit Insurance Corporation up to
$100,000. Uninsured cash balances approximated $620,000 at March 31, 1997.
NOTE C: INVENTORY
- ------------------
At March 31, 1997, 1996 and 1995, inventory consisted of the following:
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------------------------
1997 1996 1995
---- ---- ----
(Audited) (Reviewed) (Reviewed)
<S> <C> <C> <C>
Film $4,810,420 $3,714,887 $3,071,646
X-ray chemicals and other 2,480,154 1,360,924 1,170,000
---------- ---------- ----------
$7,290,574 $5,075,811 $4,241,646
========== ========== ==========
</TABLE>
Film inventory was stated at cost, determined by the last-in, first-out (LIFO)
method. If the first-in, first-out (FIFO) method of accounting for this
inventory had been utilized, this inventory would have been $447,797, $375,816
and $132,388 higher than reported for the years ended March 31, 1997, 1996 and
1995.
- 144 -
<PAGE>
S&W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE D: NOTES PAYABLE TO BANK
- ------------------------------
The Company has available two working capital line of credit agreements and an
equipment line of credit agreement with a local bank in the aggregate amount of
$10,000,000.
The primary credit line is available up to $3,500,000 for working capital
requirements and bears interest at the prime rate minus 1/4% or the LIBOR rate
plus 2% (an effective rate of 7.56% at March 31, 1997). At March 31, 1997 and
1996 there was $3,500,000 outstanding against this credit line.
The secondary credit line is available for bulk inventory purchases up to
$6,000,000 and bears interest at the prime rate (an effective rate of 8.5% at
March 31, 1997). At March 31, 1997 and 1996, there was $1,714,550 and
$2,250,000, respectively, outstanding against this line.
The equipment credit line is available for purchases of equipment for resale up
to $500,000 and bears interest at the prime rate plus 1 1/4% (an effective rate
of 9.75% at March 31, 1997). No amounts were outstanding under this credit line
at March 31, 1997 and 1996.
As collateral for the lines of credit, the bank has a security interest in the
Company's accounts receivable, equipment and inventory, along with the personal
guarantee of one of the shareholders.
NOTE E: NOTES PAYABLE TO RELATED PARTIES
- -----------------------------------------
<TABLE>
<CAPTION>
March 31,
-----------------------------
1997 1996
---- ----
(Audited) (Reviewed)
<S> <C> <C>
Demand notes payable to shareholders and other related
parties bear interest at the prime plus 1% (effective
rate of 9.5% at March 31, 1997). No formal repayment
terms have been established. $1,130,000 $1,245,000
<CAPTION>
NOTE F: LONG-TERM DEBT
- -----------------------
Long-term debt of the Company is summarized as follows:
March 31,
-----------------------------
1997 1996
---- ----
(Audited) (Reviewed)
<S> <C> <C>
Mortgage note payable to a bank due in monthly principal
installments of $3,125 plus interest at the prime rate plus
1% (an effective rate of 9.5% at March 31, 1997), through
March 31, 1998 at which time all remaining principal is due.
This mortgage note is secured by the underlying property and
the same collateral arrangements as described in Note D. 412,500 450,000
---------- ----------
Balance brought forward $ 412,500 $ 450,000
---------- ----------
</TABLE>
- 145 -
<PAGE>
S&W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE F: LONG-TERM DEBT, Continued
- ----------------------------------
<TABLE>
<CAPTION>
March 31,
-----------------------------
1997 1996
---- ----
(Audited) (Reviewed)
<S> <C> <C>
Balance brought forward $ 412,500 $ 450,000
Note payable to a bank for the Employee Stock Ownership Trust (see Note I)
payable in minimum monthly principal installments of $20,555 plus interest at
the LIBOR rate plus 1.5% (an effective rate of 7.06% at March 31, 1997), through
February 1, 2001 at which time all remaining principal is due. This note is
secured by company stock held within the ESOP and the same collateral
arrangements as described in Note D. 2,044,043 2,515,929
Note payable to a bank due in monthly principal installments of $33,333 plus
interest at the LIBOR rate plus 2.25% (an effective rate of 7.8% at March 31,
1997), through November 31, 2001. This note is secured by the same collateral
arrangements as described in Note D. 1,833,334 --
Note payable to financing institution due in monthly principal and
interest (4.9%) installments of $2,127 through August 31, 1999.
This note is secured by a certain vehicle. 58,052 --
---------- ----------
4,347,929 2,965,929
Less current portion of long-term debt and notes payable to
related parties 1,082,360 284,167
---------- ----------
$3,265,569 $2,681,762
========== ==========
</TABLE>
Current maturities of long-term debt and notes payable to related parties are as
follows:
<TABLE>
<CAPTION>
Year ending March 31, Amount
--------------------- ------
<S> <C>
1999 $ 671,022
2000 657,172
2001 1,704,041
2002 233,334
Thereafter --
==========
$3,265,569
==========
</TABLE>
- 146 -
<PAGE>
S&W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE G: COMMITMENTS AND CONTINGENCIES
- --------------------------------------
The Company acquired certain assets from Rossi Walling X-Ray Corp. as further
described in Note K. In connection with this acquisition, the Company entered
into a consulting agreement with James Walling commencing March 20, 1996 and
expiring March 31, 1998. The agreement requires Walling to provide advisory and
consulting services for the Company during this two year period. As
consideration for these services, the Company agreed to pay Walling $125,000 on
March 30, 1997 and March 30, 1998.
In addition, Walling has entered into a five year non-compete agreement with the
Company expiring March 31, 2001. As consideration for this agreement, the
Company is obligated to pay to Walling a percentage of sales ranging from 2% to
3% per year relating to former customers of Rossi Walling X-Ray Corp. As
consideration for this agreement, the Company charged $152,478 to operations for
the year ended March 31, 1997.
The Company leases office and warehouse space at branch locations in Rochester,
Albany, Buffalo, and Newburgh, New York, under operating leases expiring in
various years through 2001. The Rochester facility is leased on a month to month
basis from an entity in which an officer of the Company has an ownership
interest. Payments to this entity approximated $88,500, $84,000 and $80,000 for
the years ending March 31, 1997, 1996, and 1995, respectively.
Total rent expense for the years ended March 31, 1997, 1996, and 1995 was
$384,780, $322,217, and $312,428, respectively.
Minimum future rental payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ending March 31, Amount
--------------------- ------
<S> <C>
1998 $ 285,651
1999 243,493
2000 141,555
2001 80,055
-----------
$ 750,754
===========
</TABLE>
- 147 -
<PAGE>
S&W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE G: COMMITMENTS AND CONTINGENCIES, Continued
- -------------------------------------------------
The Company is a defendant in a lawsuit pending in the U.S. District Court for
the Northern District of New York. The lawsuit has been brought about by a
former employee of Rossi Walling X-Ray Corp. (see Note K) alleging age
discrimination at the time S&W X-Ray, Inc. acquired Rossi Walling X-Ray Corp. In
addition, the Company is a party in an age discrimination claim pending before
the New York State Division of Human Rights. Outside counsel for the Company has
advised that at this time the likelihood of an unfavorable judicial or
administrative outcome is more remote than probable. Therefore, no provision for
loss has been made in the accompanying financial statements. The Company
believes that the suit and claim are without merit and is vigorously defending
its position. However, should the judicial or administrative outcomes be
unfavorable, the range of potential loss is approximated at $75,000 to $145,000.
NOTE H: SHAREHOLDERS' AGREEMENTS
- ---------------------------------
The two majority shareholders of the Company are subject to an agreement which
stipulates the terms under which the Company's shares can be sold, transferred
or pledged. Among other things, the agreement gives each majority shareholder an
option to acquire the shares of the other shareholder wishing to sell his
shares, and may require mandatory redemption by the Company of the shares of a
deceased shareholder at a price specified in the agreement.
The majority shareholders have personally purchased life insurance on the lives
of each other in the amount of $2,500,000, respectively. In the event of the
death of one of the shareholders, the other would be required to purchase the
outstanding shares held by the estate of the deceased at a price specified in
the agreement. However, the remaining shareholder shall not be required to
purchase more shares than there is insurance money available. Any shares which
the remaining shareholder does not agree to purchase will be purchased by the
Company.
As of March 31, 1997, the maximum redemption amount that the Company could be
liable for under such agreement, assuming complete redemption upon the death of
either of its two majority shareholders, would approximate $1,800,000, payable
over a period not to exceed ten years.
- 148 -
<PAGE>
S&W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE I: EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
- ---------------------------------------------
The Company sponsors a leveraged employee stock ownership plan (ESOP) that
covers all employees with one year of service. Contributions to the plan are at
the discretion of the Board of Directors and are deposited under a trust
agreement in the form of cash or Company stock. The number of shares of Company
stock to be contributed or purchased is based upon the fair market value of the
common stock as determined by an independent appraisal. The ESOP shares are
pledged as collateral for its debt. As the debt is repaid, shares are released
from collateral and allocated to active employees, based on the proportion of
debt service paid in the year. The Company accounts for its ESOP in accordance
with Statement of Position 93-6. Accordingly, the debt of the ESOP is recorded
as debt and the shares pledged as collateral are reported as unearned ESOP
shares in the balance sheet. As shares are released from collateral, the Company
reports compensation expense equal to the current market price of the shares,
and the shares become outstanding for earnings-per-share (EPS) computation.
At March 31, 1997, 1996 and 1995, approximately 85,000 shares of the Company's
common stock was held by the Employee Stock Ownership Trust, which was
established to fund the plan. The trust purchased these shares with the proceeds
of a $3,700,000 loan from the Company. The Company, in turn, obtained a
$3,700,000 loan from a bank. Under the loan agreement, the Company is obligated
to make minimum monthly principal payments to the bank of $20,555 plus interest
at the LIBOR rate plus 1.5% (an effective rate of 7.06% at March 31, 1997).
Total contributions to the plan for the years ended March 31, 1997, 1996, and
1995 totaled $1,446,060, $849,596, and $837,903, respectively.
The ESOP shares as of March 31 were as follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996 March 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Allocated shares 42,423 30,779 18,881
Shares released for allocation 18,316 11,644 11,898
Unreleased shares 24,795 43,111 54,755
-------- -------- --------
Total ESOP shares 85,534 85,534 85,534
======== ======== ========
Fair value of unreleased shares at March 31, $1,512,495 $2,392,661 $2,885,589
========== ========== ==========
</TABLE>
- 149 -
<PAGE>
S&W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE J: MAJOR SUPPLIERS
- ------------------------
For the year ended March 31, 1997, four suppliers comprised approximately 63% of
the Company's purchases and for each of the years ended March 31, 1996 and 1995,
three suppliers comprised approximately 62% of the purchases. Purchases from
these suppliers approximated $35 million at March 31, 1997 and $29 million for
each of the years ended March 31, 1996 and 1995.
NOTE K: ASSET ACQUISITION
- --------------------------
On March 20, 1996, the Company acquired certain assets and assumed certain
liabilities from Rossi Walling X-Ray Corp. in a business combination accounted
for as a purchase. Rossi Walling X-Ray Corp. is primarily engaged in the sale
and service of x-ray supplies and imaging equipment. The accompanying financial
statements for the years ended March 31, 1997 and 1996, include the results of
operations of Rossi Walling X-Ray Corp. since the date of acquisition. Sales,
costs and expenses, and results of operations for the acquired operation are not
significant to S&W X-Ray, Inc.'s total sales, costs and expenses, and results of
operations.
The following is a summary of the net assets acquired:
<TABLE>
<S> <C>
Inventory $ 209,956
Fixed assets 35,100
Goodwill 500,000
-----------
745,056
Liabilities assumed 210,001
-----------
Net acquisition cost $ 535,055
===========
</TABLE>
NOTE L: INCOME TAXES
- ---------------------
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts measured by tax law.
- 150 -
<PAGE>
S&W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE L: INCOME TAXES, Continued
- --------------------------------
Deferred taxes resulting from temporary differences are as follows:
<TABLE>
<CAPTION>
Assets/(Liabilities)
-------------------------------
March 31,
-------------------------------
1997 1996
------------- -------------
(Audited) (Reviewed)
<S> <C> <C>
Excess of tax depreciation over book depreciation $ (2,000) $ (4,800)
Inventory uniform cost capitalization 47,700 31,200
Allowance for doubtful accounts 261,200 40,000
Reserve for inventory obsolescence 41,600 --
Accrued expenses 365,800 --
Intangibles 56,900 --
Deferred revenue 14,400 --
------------- -------------
$ 785,600 $ 66,400
============= =============
Classification of deferred taxes:
Current asset $ 611,000 $ 71,200
Non-current asset 59,400 --
Non-current liability -- (4,800)
Reduction of paid-in capital 115,200 --
------------- -------------
$ 785,600 $ 66,400
============= =============
</TABLE>
The difference between income tax computed at the federal statutory rate and the
actual tax provision is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Audited) (Reviewed) (Reviewed)
<S> <C> <C> <C>
Income before provision for taxes $ 149,175 $1,391,100 $1,523,601
=========== ========== ==========
Tax provision at the statutory rate $ 50,720 $ 472,974 $ 518,024
Increase in taxes:
State income tax, net of federal benefit 18,624 95,295 77,532
Meals and entertainment 16,779 32,831 21,026
Other non-deductible expenses 9,777 -- --
----------- ---------- ----------
TOTAL INCREASE IN TAXES 45,180 128,126 98,558
----------- ---------- ----------
TOTAL INCOME TAX PROVISION $ 95,900 $ 601,100 $ 616,582
=========== ========== ==========
Effective tax rate 64.3% 43.2% 40.5%
=========== ========== ==========
</TABLE>
- 151 -
<PAGE>
S&W X-RAY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
NOTE M: FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------
The fair value of cash, accounts receivable, accounts payable, and accrued
expenses are estimated to approximate their carrying value because of the
short-term maturity of these instruments.
Based on borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair value of the Company's notes
payable to bank and long-term debt approximates stated values aggregating
approximately $10,700,000.
Estimates of the fair values of financial instruments are subjective in nature
and involve uncertainties and judgments and, as such, cannot be determined with
precision. Any change in assumptions would effect these changes.
NOTE N: SUBSEQUENT EVENT
- ------------------------
On August 12, 1997, the Company signed a definitive agreement to merge with
Physician Sales & Service, Inc. ("PSS"), one of the leading distributors of
medical supplies and equipment to the physician market. Under the agreement, PSS
will acquire the Company in a stock-for-stock merger with a value of
$26,000,000, subject to adjustment. The consummation of the merger is contingent
upon the transaction qualifying for pooling of interests accounting treatment
and is subject to customary closing conditions. Upon consummation of the merger,
in connection with the consolidation and restructuring of PSS and S&W X-Ray,
Inc., expenses related to closing duplicate service center locations,
restructuring regional and corporate functions, consolidating information
systems and reducing personnel are expected to be incurred. The costs associated
with these activities will be expensed in the period in which the merger is
consummated.
- 152 -
<PAGE>
ANNEX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PHYSICIAN SALES & SERVICE, INC.
DIAGNOSTIC IMAGING, INC.
AND
S&W X-RAY, INC.
Dated as of August 22, 1997
<PAGE>
AMENDED AND RESTATED
--------------------
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this
"Agreement") is made and entered into as of August 22, 1997, by and among S&W
X-RAY, INC. ("S&W"), a New York corporation having its principal office located
in Rochester, New York; PSS MERGER CORP. ("Merger Corp."), a New York
corporation having its principal office located in Jacksonville, Florida;
DIAGNOSTIC IMAGING, INC. ("DI"), a Florida corporation having its principal
office located in Jacksonville, Florida; and PHYSICIAN SALES & SERVICE, INC.
("PSS"), a Florida corporation having its principal office located in
Jacksonville, Florida.
Preamble
--------
The Boards of Directors of PSS, DI, a wholly owned subsidiary of PSS,
Merger Corp., a wholly owned subsidiary of DI, and S&W are of the opinion that
the transactions described herein are in the best interests of the parties and
their respective shareholders. This Agreement provides for the acquisition of
S&W by PSS pursuant to the Merger of Merger Corp. with and into S&W. At the
Effective Time of such Merger, the outstanding shares of the capital stock of
S&W shall be converted into the right to receive shares of the common stock of
PSS (except as provided herein). As a result, shareholders of S&W shall become
shareholders of PSS and S&W shall continue to conduct its business and
operations as a wholly owned subsidiary of DI. It is the intention of the
parties to this Agreement that the Merger shall qualify (i) as a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code for federal income tax purposes, and (ii) for treatment as a pooling of
interests for accounting purposes.
NOW, THEREFORE, in consideration of the above and the mutual
warranties, representations, covenants and agreements set forth herein, the
parties agree as follows:
ARTICLE I
TRANSACTIONS AND TERMS OF MERGER
--------------------------------
1.1 Merger. Subject to the terms and conditions of this Agreement, at
------
the Effective Time, Merger Corp. shall be merged with and into S&W (the
"Merger") in accordance with the applicable provisions of the New York Business
Corporation Law ("NYBCL"). S&W shall be the Surviving Corporation resulting from
the Merger and shall become a wholly owned subsidiary of DI and shall continue
to be governed by the Laws of the State of New York. The Merger shall be
consummated pursuant to the terms of this Agreement, which has been approved and
adopted by the respective Boards of Directors of S&W, Merger Corp. and PSS.
1.2 Time and Place of Closing. The closing (the "Closing") will take
-------------------------
place at 10:00 A.M. on a date to be specified by the parties (the "Closing
Date"), which (subject to the satisfaction or waiver of the conditions set forth
in Sections 9.2 and 9.3) shall be no later than the second business day after
the satisfaction of the conditions set forth in Section 9.1. The place of
Closing shall be at the offices of Alston & Bird, One Atlantic Center, 1201 West
Peachtree Street, Atlanta, Georgia 30309-3424, or such other place as may be
mutually agreed upon by the Parties.
1.3 Effective Time. Subject to the provisions of this Agreement, the
--------------
parties shall file a Certificate of Merger executed in accordance with the
relevant provisions of the NYBCL, and shall make all other filings or recordings
required under the NYBCL as soon as practicable on the Closing Date. The Merger
and other transactions contemplated by this Agreement shall become effective on
the
A-1
<PAGE>
Closing Date and at the time the Certificate of Merger reflecting the Merger
becomes effective with the Secretary of State of the State of New York (the
"Effective Time").
ARTICLE II
TERMS OF MERGER
---------------
2.1 Charter. The Articles of Incorporation of S&W in effect
-------
immediately prior to the Effective Time shall be amended and restated in a
manner satisfactory to PSS. The Articles of Incorporation of S&W, as so amended
and restated, shall be the Articles of Incorporation of the Surviving
Corporation until otherwise amended or repealed.
2.2 Bylaws. The Bylaws of Merger Corp. in effect immediately prior to
------
the Effective Time shall be the Bylaws of the Surviving Corporation until
otherwise amended or repealed.
2.3 Tax-Free Reorganization. The parties intend this Agreement to be a
-----------------------
tax-free plan of reorganization under Section 368(a) of the Internal Revenue
Code.
ARTICLE III
MANNER OF CONVERTING SHARES
---------------------------
3.1 Conversion of Shares. Subject to the provisions of this Article
--------------------
III, at the Effective Time, by virtue of the Merger and without any action on
the part of the Parties or the shareholders of any of the Parties, the shares of
the constituent corporations of the Merger shall be converted as follows:
(a) Each share of Merger Corp. Common Stock issued and outstanding at
the Effective Time shall cease to be outstanding and shall be converted into one
share of S&W Common Stock.
(b) Each share of S&W Common Stock (excluding treasury shares,
excluding shares held by shareholders who perfect their statutory dissenters'
rights as provided in Section 3.4 of this Agreement and shares converted
pursuant to Section 3.1(a) above) issued and outstanding at the Effective Time,
and each such share to be issued under S&W's Supplemental Executive Retirement
Plan in accordance with Section 8.16, shall cease to be outstanding and shall be
converted into and exchanged for: (i) the right to receive that number of shares
of PSS Common Stock obtained by dividing the Common Stock Per Share Purchase
Price by the Base Period Trading Price, and (ii) a contingent right to receive
that portion of the Escrow Shares, that are attributable to each such share of
S&W Common Stock, that are deposited into escrow by PSS pursuant to Section 4.3
of this Agreement. The sum of clause (i) and (ii) of the preceding sentence is
the "Common Stock Exchange Ratio." The Base Period Trading Price is defined to
mean the average of the daily closing prices for the shares of PSS Common Stock
for the ten (10) consecutive trading days on which such shares are actually
traded as over-the-counter securities and quoted on the Nasdaq National Market
System (as reported by The Wall Street Journal or, if not reported thereby, any
other authoritative source) ending at the close of trading on the second trading
day immediately prior to the Closing Date; provided, that for purposes of this
calculation, the Base Period Trading Price shall be deemed to equal (i) $14.9644
in the event the Base Period Trading Price is greater than $14.9644 and (ii)
$12.2436 in the event the Base Period Trading Price is less than $12.2436
(collectively, $14.9644 and $12.2436 are referred to as the "Base Period Trading
Price Limitations").
(c) Subject to adjustment as set forth below, the Aggregate Purchase
Price shall equal $26,000,000, minus any expenses incurred by S&W or on S&W's
behalf in connection with the transactions contemplated hereunder in excess of
$350,000, determined in accordance with Section 11.2 hereof; provided, that such
adjustment shall not exceed $200,000.
3.2 Anti-Dilution Provisions. In the event S&W or PSS changes the
------------------------
number of shares of S&W Common Stock or PSS Common Stock, respectively, issued
and outstanding prior to the Effective Time as a result of a stock split, stock
dividend, combination of shares or similar recapitalization with
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respect to such stock (an "Anti-Dilution Event") and the record date therefor
(in the case of a stock dividend) or the effective date thereof (in the case of
a stock split, share exchange or similar recapitalization for which a record
date is not established) shall be prior to the Effective Time, the Common Stock
Exchange Ratio shall be proportionately adjusted to insure that holders of S&W
Common Stock shall receive PSS Common Stock having the same value as they would
have received prior to the Anti-Dilution Event. In the event PSS has an Anti-
Dilution Event and the record date therefor (in the case of a stock dividend) or
the effective date thereof (in the case of a stock split, share combination,
share exchange or similar recapitalization for which a record date is not
established) shall be prior to the Effective Time, the Base Period Trading Price
shall be adjusted to appropriately adjust the ratio under which shares of S&W
Common Stock will be converted into shares of PSS Common Stock pursuant to
Section 3.1(b) of this Agreement to insure that holders of S&W Common Stock
shall receive PSS Common Stock having the same value as they would have received
prior to the Anti-Dilution Event.
3.3 Shares Held by S&W. Each share of S&W Common Stock held in
------------------
treasury by S&W, shall be canceled and retired at the Effective Time and no
consideration shall be issued in exchange therefor.
3.4 Dissenting Shareholders. Any holder of shares of S&W Capital Stock
-----------------------
who perfects his or her dissenters' rights in accordance with and as
contemplated by Sections 623 and 910, et. seq., of the NYBCL shall be entitled
to receive the value of such shares in cash from S&W after the Effective Time as
determined pursuant to such provision of Law; provided, that no such payment
shall be made to any dissenting shareholder unless and until such dissenting
shareholder has complied with the applicable provisions of the NYBCL and
surrendered to S&W the certificate or certificates representing the shares for
which payment is being made. In the event that a dissenting shareholder of S&W
fails to perfect, or effectively withdraws or loses, its right to appraisal and
of payment for its shares, PSS shall issue and deliver the consideration to
which such holder of shares of S&W Capital Stock is entitled under this Article
3 (without interest) upon surrender by such holder of the certificate or
certificates representing such shares held by such holder.
3.5 Fractional Shares. No certificates representing fractional shares
-----------------
of PSS Common Stock will be issued as a result of the Merger. Each holder of
shares of S&W Common Stock exchanged pursuant to the Merger who would otherwise
have been entitled to receive a fraction of a share of PSS Common Stock shall
receive, in lieu thereof, cash (without interest) in an amount equal to such
fractional part of a share of PSS Common Stock multiplied by the Base Period
Trading Price. No such holder will be entitled to dividends, voting rights, or
any other rights as a shareholder in respect of any fractional shares.
ARTICLE IV
EXCHANGE OF SHARES
------------------
4.1 Exchange Procedures. On the Closing Date, PSS shall mail to the
-------------------
former holders of S&W Common Stock appropriate transmittal materials (which
shall specify that delivery shall be effected, and risk of loss and title to the
certificates theretofore representing shares of S&W Common Stock shall pass,
only upon proper delivery of such certificates to PSS). After the Effective
Time, each holder of shares of S&W Common Stock (other than shares cancelled
pursuant to Sections 3.3 and 3.4 of this Agreement) issued and outstanding at
the Effective Time shall surrender the certificate or certificates representing
such shares to PSS and shall promptly upon surrender thereof receive in exchange
therefor the consideration provided in Section 3.1 of this Agreement. PSS shall
not be obligated to deliver the consideration to which any former holder of S&W
Common Stock is entitled as a result of the Merger until such holder surrenders
his certificate or certificates representing the shares of S&W Common Stock for
exchange as provided in this Section 4.1 or such holder provides an appropriate
affidavit regarding loss of such certificate and an indemnification for loss in
favor of PSS. The certificate or certificates of S&W Common Stock so surrendered
shall be duly endorsed as PSS may require.
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4.2 Rights of Former S&W Shareholders. At the Effective Time, the
---------------------------------
stock transfer books of S&W shall be closed and no transfer of S&W Common Stock
by any such holder shall thereafter be made or recognized. Until surrendered for
exchange in accordance with the provisions of Section 4.1 of this Agreement,
each certificate theretofore representing shares of S&W Common Stock (other than
shares to be canceled pursuant to Sections 3.3 and 3.4 of this Agreement) shall
from and after the Effective Time represent for all purposes only the right to
receive the consideration provided in Sections 3.1 and 3.5 of this Agreement in
exchange therefor. To the extent permitted by Law, former shareholders of record
of S&W shall be entitled to vote after the Effective Time at any meeting of PSS
shareholders the number of whole shares of PSS Common Stock into which their
respective shares of S&W Common Stock are converted, regardless of whether such
holders have exchanged their certificates representing S&W Common Stock for
certificates representing PSS Common Stock in accordance with the provisions of
this Agreement. Whenever a dividend or other distribution is declared by PSS on
the PSS Common Stock, the record date for which is at or after the Effective
Time, the declaration shall include dividends or other distributions on all
shares issuable pursuant to this Agreement, but no dividend or other
distribution payable to the holders of record of PSS Common Stock as of any time
subsequent to the Effective Time shall be delivered to the holder of any
certificate representing shares of S&W Common Stock issued and outstanding at
the Effective Time until such holder surrenders such certificate for exchange as
provided in Section 4.1 of this Agreement. However, upon surrender of such
certificate, both the PSS Common Stock certificate (together with all such
undelivered dividends or other distributions without interest) and any
undelivered cash payments to be paid for fractional share interests (without
interest) shall be delivered and paid with respect to each share represented by
such certificate.
4.3 Escrow Shares. At the Effective Time, and pursuant to the terms of
-------------
the Escrow Agreement attached hereto as Exhibit 4.3, PSS shall issue an
-----------
aggregate number of shares of PSS Common Stock equal to the sum of (A) with
respect to the specific indemnity, (i) $1,000,000, the amount of the Receivables
Claim, (ii) $5,000, the amount of the Escrow Agent Expenses, and (iii) $10,000,
the amount of the Representative Expenses; and (B) five percent (5%) of the
Aggregate Purchase Price ((A) and (B) collectively, the "Escrow Dollar Amount");
the sum of which is divided by the Base Period Trading Price.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF S&W
-------------------------------------
S&W hereby represents and warrants to PSS, Merger Corp. and DI as
follows:
5.1 Organization, Standing, and Power. S&W is a corporation duly
---------------------------------
organized, validly existing, and in good standing under the Laws of the State of
New York, and has the corporate power and authority to carry on its business as
it has been and is now being conducted and to own, lease and operate its Assets.
S&W is duly qualified or licensed to transact business as a foreign corporation
and is in good standing in all jurisdictions where the character of its Assets
or the nature or conduct of its business requires it to be so qualified or
licensed, except for such jurisdictions in which the failure to be so qualified
or licensed will not have, in the aggregate, a Material Adverse Effect on S&W.
Copies of the articles of incorporation and all amendments thereto of S&W and
the bylaws, as amended, of S&W and copies of the corporate minutes (or
resolutions adopted by the shareholders or Board of Directors) of S&W, which
have been made available to PSS for review, are true and complete, in all
Material respects, as in effect on the date of this Agreement, and accurately
reflect all proceedings of the shareholders and Board of Directors of S&W. The
stock record books of S&W, which have been made available to PSS for review,
contain true and complete records of the stock ownership of S&W and all prior
transfers of the shares of its capital stock.
5.2 Authorization of Agreement; No Breach. The execution, delivery and
-------------------------------------
performance of this Agreement has been duly authorized by all necessary
corporate action of S&W. This Agreement constitutes, and all agreements and
other instruments and documents to be executed and delivered by S&W pursuant to
this Agreement will constitute, legal, valid and binding obligations of S&W
enforceable
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against S&W in accordance with their respective terms. The execution, delivery
and performance of this Agreement and the agreements and other documents and
instruments to be executed and delivered by S&W pursuant to this Agreement and
the consummation of the transactions contemplated hereby and thereby will not,
subject to obtaining the consents identified herein, (i) violate or result in a
breach of or Default under the certificate of incorporation or bylaws of S&W or
any other Material instrument or agreement to which S&W is a party or is bound;
(ii) to the knowledge of S&W, violate any Law, administrative decision or award
of any court, arbitrator, mediator, tribunal, administrative agency or
governmental body applicable to or binding upon S&W or upon its securities,
property or business; (iii) except as set forth on Schedule 5.2 or 5.16 conflict
------------ ----
with or constitute a Default under any Material Contract to which S&W is a party
or by which S&W is bound; or (iv) create a Lien upon the securities, property or
business of S&W.
5.3 Capital Stock. The authorized capital stock of S&W consists of
-------------
500,000 shares of S&W Common Stock, of which 259,574 shares are issued and
outstanding as of the date of this Agreement and none of which are issued and
held as treasury shares. All of such shares are duly and validly issued and
outstanding, are fully paid and non-assessable, and were issued pursuant to a
valid exemption from registration under the 1933 Act and all applicable state
securities laws. Except as set forth on Schedule 5.3, there are no outstanding
------------
warrants, options, rights (including outstanding rights to demand registration
or to sell in connection with a registration by S&W under the 1933 Act), calls
or other commitments of any nature relating to the S&W Common Stock, and there
are no outstanding securities of S&W convertible into or exchangeable for shares
of S&W Common Stock or any other capital stock. S&W is not obligated to issue or
repurchase any shares of its capital stock for any purpose, and to the knowledge
of S&W no person or entity has entered into any Contract or option or any right
or privilege (whether preemptive or contractual) capable of becoming a Contract
or option for the purchase, subscription or issuance of any unissued shares, or
other securities of S&W. S&W's Fully Diluted Common Equivalents represent
263,583 shares of S&W Common Stock.
5.4 S&W Subsidiaries. S&W has no Subsidiaries.
----------------
5.5 Financial Statements. (a) Schedule 5.5 contains true and correct
-------------------- ------------
copies of the balance sheets of S&W as of March 31, 1996 and 1997, and the
statements of income for the fiscal years ended March 31, 1995, 1996 and 1997
(the "Financial Statements"), which Financial Statements have been audited for
the period ended March 31, 1997.
(b) The Financial Statements (i) are in accordance with the books and
records of S&W, which books and records have been maintained in accordance with
reasonable business practices; (ii) present fairly the consolidated financial
condition, assets and liabilities of S&W as of the respective dates indicated
and the results of operations and cash flows for the respective periods
indicated; (iii) have been consistently prepared throughout the periods
involved; and (iv) reflect adequate reserves for all known Material Liabilities
and reasonably anticipated losses. The Financial Statements contain no untrue
statements of any Material fact nor omit to state any Material fact required to
be stated to make the Financial Statements as a whole not misleading.
5.6 Absence of Undisclosed Liabilities. Except as disclosed on
----------------------------------
Schedule 5.6, as of the date hereof, S&W does not have any Undisclosed
- ------------
Liabilities except for unpaid liabilities and obligations incurred since March
31, 1997, in the ordinary course of business and not involving Funded Debt.
5.7 Absence of Changes. Except as disclosed on Schedule 5.7, since
------------------ ------------
March 31, 1997 there has not been any Material transaction or Material
occurrence (or, in the case of subparagraphs (i), (l) and (m) below, any
transaction or occurrence) in which S&W has:
(a) issued or delivered or agreed to issue or deliver any capital stock
or other securities (whether stock, bonds, debentures or other corporate
securities) or granted or agreed to grant any options or rights to purchase any
securities or borrowed or agreed to incur any Funded Debt;
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<PAGE>
(b) knowingly incurred or become subject to, or agreed to incur or
become subject to, any Material Liability other than in the ordinary course of
business;
(c) discharged or satisfied any Lien or paid any Material Liability
other than (i) current liabilities shown on the balance sheet as of March 31,
1997 included in the Financial Statements, (ii) current liabilities incurred
since that date in the ordinary course of business, or (iii) Funded Debt shown
on such balance sheet or incurred since March 31, 1997;
(d) except as permitted elsewhere in this Agreement or disclosed in
Schedule 5.7, declared, set aside or made, or agreed to declare, set aside or
- ------------
make any payments or dividends or any distribution to shareholders or purchased,
redeemed or otherwise acquired, directly or indirectly, or agreed to purchase,
redeem or acquire, any shares of its capital stock or other securities;
(e) mortgaged, pledged, subjected or agreed to subject any of its
assets, tangible or intangible, to any Lien, except for any liens regarding
current real and personal property taxes not yet due and payable;
(f) sold, assigned or transferred (or agreed so to do) any of its
tangible assets, or canceled or agreed to cancel any debts or claims, except, in
each case, in the ordinary course of business;
(g) sold, assigned or transferred any patents, trademarks, trade names,
copyrights or other intangible assets;
(h) suffered any Material damage, destruction or loss, whether or not
covered by insurance, which would have a Material Adverse Effect on the
properties or business thereof, or suffered any extraordinary losses or waived
any rights of substantial value, whether or not in the ordinary course of
business;
(i) increased the rate of compensation payable or to become payable by
it to any of its officers, directors, employees or agents over the rate being
paid to them at March 31, 1997, or agreed so to do, except general hourly rate
increases and normal merit increases for employees other than officers;
(j) terminated or amended any Material Contract, License or other
instrument to which it is a party or suffered any loss or termination or
threatened loss or termination, of any existing business arrangement or Material
supplier, the termination or loss of which would have a Material Adverse Effect
on S&W;
(k) through negotiation or otherwise, made any commitment or incurred
any Liability, whether or not enforceable, to any labor organization;
(l) except as specifically provided elsewhere in this Agreement and
except for any year-end compensation bonuses to be paid consistent with past
practice, if any, made or agreed to make any accrual or arrangement for or
payment of any bonus or special compensation of any kind to any officer,
director, employee or agent;
(m) directly or indirectly paid or entered into a Contract to pay any
severance or termination pay to any officer, director, employee or agent;
(n) changed any of the accounting principles followed by it or the
methods of applying such principles;
(o) reclassified its shares of capital stock into a different number of
shares;
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<PAGE>
(p) except in the ordinary course of business or as otherwise disclosed
in writing to PSS, offered or extended more favorable prices, discounts or other
allowances than were offered or extended regularly on and prior to March 31,
1997;
(q) made or approved the making of any capital expenditure exceeding
the amount of $25,000;
(r) except in the ordinary course of business, loaned funds to or
increased the aggregate amount of existing loans to any Person;
(s) suffered or experienced any other event or condition that would
have a Material Adverse Effect on the business, operations, assets, properties
or condition of S&W, financial or otherwise.
5.8 Indebtedness. Schedule 5.8 lists all Funded Debt of S&W as of the
------------ ------------
date hereof, setting forth the principal amounts outstanding, per annum interest
rates and maturity dates for all such indebtedness. All of the indebtedness
(including Funded Debt) of S&W as of the respective dates of the Financial
Statements and as of the date of this Agreement is accurately reflected in the
Financial Statements, and with respect to any Funded Debt, S&W is not in breach
or Default under any of the terms or conditions set forth in the loan documents
or any other document or instrument related thereto. Except as disclosed on
Schedule 5.8, all of the Funded Debt of S&W is prepayable at any time without
- ------------
penalty or premium at the option of S&W. Except as disclosed on Schedule 5.8,
------------
(i) the transactions contemplated in this Agreement will not result in any
penalty or incurrence of any additional obligation or change of any terms with
respect to any such indebtedness, and (ii) S&W has no obligations, Liabilities
or indebtedness to any Affiliate.
5.9 Tax Matters. (a) S&W has filed all federal and state income tax
-----------
returns for all periods prior to the date hereof which were required to be
filed, and, except as described on Schedule 5.9, no audit has been conducted by
------------
the IRS or any state agency with respect to any such period since 1990. Except
as listed on Schedule 5.9, S&W has not received notice of any Material Tax
------------
claims being asserted or any proposed assessment by any taxing authority and no
Tax returns thereof have been audited by the IRS or the appropriate state
agencies for any fiscal year or period ended prior to the date hereof for which
the applicable statute of limitations period has not expired, and S&W is not
presently under, nor has it received notice of any contemplated, investigation
or audit by the IRS or any state agency concerning any fiscal year or period
ended prior to the date hereof for which the applicable statute of limitations
period has not expired. Except as listed on Schedule 5.9, S&W has not executed
------------
any extension or waivers of any statute of limitations on the assessment or
collection of any Tax due that is currently in effect.
(b) As of the date hereof, S&W has filed all Tax returns required to be
filed at this date, taking into account any extensions of the filing deadlines
which have been validly granted to it, and such returns are true and correct in
all Material respects and properly reflect the Tax Liabilities of S&W for the
periods, property or events covered thereby, and S&W has paid all Taxes
(including penalties and interest in respect thereof, if any) that have become
or are due with respect to any period through the date hereof whether shown on
such returns or not.
(c) Adequate provision has been made in the Financial Statements in
accordance with GAAP as of March 31, 1997, for all Tax Liabilities not required
to be paid prior to such date and for all current and deferred Taxes.
(d) S&W and its predecessors have withheld or collected from each
payment made to each of their employees the amount of all Taxes required to be
withheld or collected therefrom and has paid the same to the proper tax
depositories or collecting authorities.
(e) All ad valorem property taxes for years prior to 1996 imposed on
S&W or its Predecessors have been paid in full or adequately reserved in the
Financial Statements, as appropriate.
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<PAGE>
(f) Neither S&W nor to the knowledge of S&W, its Predecessors, has ever
made an election under Section 341(f) of the Internal Revenue Code and no such
entity is a United States real property holding corporation as defined in
Section 897 of the Internal Revenue Code.
5.10 Real Property. (a) Schedule 5.10 identifies all real property
------------- -------------
owned by S&W and describes generally all structures located thereon. Except as
shown on Schedule 5.10, S&W has good and marketable title to all real property
-------------
owned by it, free and clear of all Liens and other imperfections of title, other
than easements which do not materially and adversely affect the ownership or use
of such real property. True and correct copies of all documents evidencing the
Liens upon the real property described on Schedule 5.10 and copies of all title
-------------
insurance policies relating thereto have been provided or made available to PSS.
(b) True and correct copies of all real property leases of S&W have
been provided or made available to PSS. Each of such leases is in full force and
effect on the date hereof, except as the validity of such leases may be affected
by actions, events or conditions involving only the other party thereto, none of
which actions, events or conditions have occurred or exist to the knowledge of
S&W. No Default under any of the terms or conditions set forth in any of the
foregoing leases or any other documents or instruments related thereto has
occurred or been asserted by any party. Except as disclosed on Schedule 5.10,
-------------
the continuation, validity and effectiveness of the terms and conditions of such
leases will not be affected in any way by the transactions contemplated by this
Agreement.
(c) To the knowledge of S&W, all improvements on the real estate owned
by, leased to or used by S&W conform in all Material respects to all applicable
state and local laws.
(d) Each of the buildings, structures, improvements and leased premises
is in satisfactory condition and repair consistent with the uses to which they
are being put.
(e) No proceedings for the taking of any of such real property by
eminent domain by any governmental authority are pending or, to the knowledge of
S&W, threatened.
5.11 Personal Property. (a) True and correct copies of all leases for
-----------------
personal property (except miscellaneous leases of office machinery, medical
equipment, or any leases having future minimum lease payments of less than
$5,000) used or employed by S&W have been provided or made available to PSS.
Each of such leases is in full force and effect on the date hereof, except as
the validity of such leases may be affected by actions, events or conditions
affecting the other party thereto, none of which actions, events or conditions
exists of has occurred to the knowledge of S&W. No Default under any of the
terms or conditions set forth in any of the foregoing leases or any document or
instrument related thereto has occurred or been asserted by any party. Except as
disclosed on Schedule 5.11, the continuation, validity and effectiveness of such
-------------
leases will not be affected in any way by the transactions contemplated by this
Agreement. Except as disclosed on Schedule 5.11, S&W does not lease any personal
-------------
property as lessor.
(b) All Material items of personal property and leasehold improvements
owned or leased by S&W are shown on or reflected in the audited balance sheet of
S&W as of March 31, 1997, included in the Financial Statements, are in
satisfactory operating condition and in a state of reasonable maintenance and
repair, consistent in all Material respects with the uses to which they are
being put, and all such personal property, and leasehold improvements are
considered adequate and usable for the continued operation of the business of
S&W as the same is presently being conducted and are physically located either
at one of the principal places of business of S&W or at S&W's principal business
office.
5.12 Intellectual Property. (a) Schedule 5.12 contains a true and
--------------------- -------------
complete list of all Intellectual Property owned by, registered in the name of,
or used by S&W in its businesses on the date hereof, or for which application
has been made. All such Intellectual Property rights are in full force and
effect and constitute legal, valid and binding obligations of S&W and to S&W's
knowledge, of the other
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parties thereto; and there have not been, and to the knowledge of S&W, there
currently are not any Defaults thereunder by any party. S&W owns or is a valid
licensee of all such Intellectual Property rights free and clear of all Liens or
claims of infringement. Neither S&W or, to the knowledge of S&W, its
Predecessors have knowingly infringed the Intellectual Property rights of others
and none of the Intellectual Property rights as used in the business conducted
by any such entity infringes upon or otherwise violates the rights of others,
nor has any person asserted a claim of such infringement. S&W is not obligated
to pay any royalties to any person or entity with respect to any such
Intellectual Property. S&W owns or has the valid right to use all of the
Intellectual Property rights which it is presently using, or in connection with
the performance of any Material contract or proposal to which it is a party.
(b) To the knowledge of S&W, except as described on Schedule 5.12, no
-------------
officer, director or employee of S&W has entered into any Contract which
requires such officer, director or employee to assign any interest in any
Intellectual Property or keep confidential any trade secrets, proprietary data,
customer lists or other business information or which restricts or prohibits
such officer, director or employee from engaging in activities competitive with
S&W.
5.13 Accounts Receivable. Except as set forth on Schedule 5.13, the
------------------- -------------
accounts receivable and receivables from Affiliates of S&W as of March 31, 1997,
as reflected in the Financial Statements (net of reserves reflected in such
Financial Statements), to the extent uncollected on the date hereof, and the
accounts receivable and receivables from Affiliates reflected on the books of
S&W on the date hereof, are validly existing and represent monies due for goods
sold and delivered or services performed, and the value of such accounts
receivable as shown in the Financial Statements are, in the aggregate, net of
adequate reserves (based on past experience) for doubtful and uncollectible
accounts as determined in accordance with GAAP. Except as set forth in
Schedule 5.13 and except for returns in the ordinary course of business, there
- -------------
are no refunds, discounts or other adjustments payable with respect to any such
accounts receivable and receivables from Affiliates, and, to S&W's knowledge,
there are no defenses, rights of set-off, assignments, restrictions,
encumbrances, or conditions enforceable by third parties on or affecting any of
the foregoing.
5.14 Inventories. All items of inventory of S&W reflected on the March
-----------
31, 1997 audited balance sheet contained in the Financial Statements consisted,
and all such items on hand on the date of this Agreement consist, of items of a
quality and quantity usable and saleable in the ordinary course of business and
conform to generally accepted standards in the industry in which S&W is a part.
The inventory of S&W as reflected in the Financial Statements is net of adequate
reserves for damaged, excess, slow moving, obsolete and unsalable items as
determined in accordance with GAAP. Except as set forth on Schedule 5.14,
-------------
purchase commitments are not materially in excess of normal requirements, and
none of such purchase commitments is at a price in excess of the prevailing
market prices at the time of the commitment. Except as set forth on
Schedule 5.14, since March 31, 1997, no inventory items have been sold or
- -------------
disposed of, except through sales in the ordinary course of business, and in no
event at prices less than the book value of such inventory items as of March 31,
1997 to S&W.
5.15 Insurance. All of the properties and business of S&W of an
---------
insurable nature and of a character usually insured by companies of similar size
and in similar businesses are insured in such amounts and against such losses,
casualties or risks as is usual in such companies and for such properties and
business. A complete and accurate list of all insurance policies held by S&W or
its Subsidiaries and now in force (including, without limitation, property
damage, public liability, worker's compensation, fidelity bonds, errors and
omissions, theft, forgery and other coverage) is attached hereto as
Schedule 5.15, and true and correct copies of all such insurance policies have
- -------------
been provided or made available to PSS. All such policies are in full force and
effect and the premiums due thereon have been timely paid. S&W is not now in
Default regarding the provisions of any such policy, nor has it failed to give
any notice or present any Material claim thereunder in due and timely fashion.
The consummation of the transactions contemplated by this Agreement will not
constitute a Default under, or otherwise affect the coverage under, any such
insurance policies.
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5.16 Compliance with Laws. (a) To the best of its knowledge, S&W has
--------------------
in effect all Permits necessary for it to own, lease or operate its Assets and
to carry on its business as now conducted, except for those Permits the absence
of which are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on S&W. S&W is not in violation of any Laws, Orders or
Permits applicable to its business or employees conducting its business, except
for violations which are not reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on S&W. No notice or warning from any
Regulatory Authority with respect to any failure or alleged failure of S&W to
comply with any Law has been received, nor, to S&W's knowledge, is any such
notice or warning proposed or threatened.
(b) Except as set forth on Schedule 5.16, no consent or approval of,
-------------
prior filing with or notice to, or other action by, any Regulatory Authority or
any other third party is required in connection with the execution and delivery
of this Agreement or any assignment, agreement or other instrument to be
executed and delivered pursuant to this Agreement by S&W or the consummation of
the transactions provided for herein or therein except for such consents and
approvals that have been obtained and filings, notices and other actions that
have been taken or made.
(c) To the knowledge of S&W, there are no Material capital expenditures
that S&W anticipates will be required to be made in connection with the business
of S&W as now conducted in order to comply with any existing Laws or other
governmental requirements applicable to the business of S&W as now conducted,
including, without limitation, requirements relating to occupational health and
safety and protection of the environment. "Capital Expenditures" shall have the
same meaning as it has in the Financial Statements if and to the extent that the
treatment thereof is in accordance with GAAP.
(d) Neither S&W nor, to the knowledge of S&W, any officer, director,
employee, agent or other representative thereof acting or purporting to act on
behalf of any such entity or any business enterprise with which S&W has been
associated or affiliated, has, directly or indirectly, made or authorized any
payment, contribution or gift of money, property, or services, in violation of
applicable Law (i) as a kickback or bribe to any person, or (ii) to any
political organization or the holder of, or any aspirant to, any elective or
appointive office of any nation, state, political subdivision thereof, or other
governmental body or instrumentality.
5.17 Environmental Matters. (a) Except as set forth on Schedule 5.17,
--------------------- -------------
there are no claims, actions, suits, proceedings or investigations related to
Environmental Laws with respect to the ownership, use, condition or operation of
any of the assets held for use or sale by S&W or, to the knowledge of S&W, any
of its Predecessors in any court or before or by any federal, state or other
governmental agency or private arbitration tribunal (hereinafter collectively
referred to as "Environmental Litigation"). Except as set forth on
Schedule 5.17, there are no existing Material violations of federal, state or
- -------------
local Environmental Laws related to Environmental Matters by S&W with respect to
the ownership, use, condition, lease or operation of any Assets thereof or, to
the knowledge of S&W, any property formerly held for use or sale by any of its
Predecessors. Neither S&W nor, to the knowledge of S&W, any of its Predecessors
has used any of its assets or premises for the handling, treatment, storage, or
disposal of any Hazardous Substances except in Material compliance with all
applicable Environmental Laws. Except as set forth on Schedule 5.17, no written
-------------
or oral notice, or other communication from any court or governmental agency,
official or instrumentality, of any alleged violation of any Environmental Law
related to Environmental Matters has been filed or communicated to S&W or, to
the knowledge of S&W, any of its Predecessors with respect to the use,
ownership, condition, operation, or disposal of any of the Assets of S&W or any
property formerly held for use or sale by S&W or, to the knowledge of S&W, any
of its Predecessors. To the knowledge of S&W, no basis exists for the allegation
of any such violations;
(b) Except as set forth on Schedule 5.17, no Material release,
-------------
discharge, spillage or disposal of any Hazardous Substances in violation of any
Law has occurred or is occurring at any assets or premises of S&W or, to the
knowledge of S&W, any of its Predecessors while or before such premises were
owned leased, operated, or managed, directly or indirectly, by any such entity;
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<PAGE>
(c) Except as set forth on Schedule 5.17, no soil or water in, under or
-------------
adjacent to any of the premises of S&W or property formerly held for use or sale
by S&W or, to the knowledge of S&W, its Predecessors, has been contaminated by
any Hazardous Substance while or, to the knowledge of S&W, before such assets or
premises were owned, leased, operated or managed, directly or indirectly, by S&W
or any of its Predecessors;
(d) Except as set forth on Schedule 5.17, all waste containing any
-------------
Hazardous Substances generated, used, handled, stored, treated or disposed of
(directly or indirectly) by S&W or, to the knowledge of S&W, any of its
Predecessors. has been released or disposed of in compliance with all applicable
reporting requirements under CERCLA and RCRA and other applicable legal
requirements;
(e) S&W and, to the knowledge of S&W, its Predecessors have complied
with all applicable reporting requirements under CERCLA and RCRA concerning the
disposal or release of Hazardous Substances, and except as set forth on
Schedule 5.17, neither S&W, nor to the knowledge of S&W, its Predecessors, has
- -------------
made a report concerning any of their premises, operations or activities;
(f) Except as set forth on Schedule 5.17, to the knowledge of S&W, no
-------------
building or other improvement or any premises owned, leased, operated or managed
by S&W contains any asbestos-containing materials; and
(g) Copies of any environmental audits or environmental surveys of any
real estate owned or leased by S&W are attached to Schedule 5.17.
-------------
5.18 Litigation and Claims. There are no outstanding Court Orders or
---------------------
administrative decisions to which S&W is subject, and, except as disclosed on
Schedule 5.18, there is no Litigation pending or threatened against or relating
- -------------
to S&W or its Assets or businesses, and to the knowledge of S&W, there is no
specific event which has occurred for which any such action or any state of
facts or occurrence of any event which might give rise to the foregoing. Except
as disclosed on Schedule 5.18, S&W has not been advised by any attorney
-------------
representing any such entity that there are any "loss contingencies" (as defined
in Statement of Financing Accounting Standards No. 5 issued by the Financial
Accounting Standards Board in March 1975 ("FASB 5")), which would be required by
FASB 5 to be disclosed or accrued in the financial statements of S&W.
5.19 Contracts and Commitments. (a) Schedule 5.19 sets forth a true,
------------------------- -------------
correct and complete list of Contracts to which S&W is a party or by which their
assets are bound, and which involve payment by or the receipt of payment by S&W
of any amounts in excess of $25,000, all of which, to the extent they are in
writing, have been made available to PSS for review:
(i) any Contract for the employment of any officer, director,
employee or consultant;
(ii) any Contract for the purchase, sale, production or supply,
whether on a continuing basis or otherwise, of goods or services of any
type except those made in the ordinary course of business;
(iii) any distributor, sales agency or vendor Contract or sub-
contract or any license agreement, except those made in the ordinary
course of business;
(iv) any Contract not made in the ordinary course of business,
including but not limited to any covenants not to compete;
(v) any continuing Contract for the purchase of materials,
supplies, equipment or services in excess of normal operating
requirements;
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(vi) any Contracts that are, in the reasonable opinion of S&W,
materially adverse, onerous or otherwise harmful to any of S&W's businesses,
properties, operations or assets;
(vii) any Contract pursuant to which such entity receives a
management fee or a billings and collections fee; or
(viii) any Contracts, leases, quotas, restrictions or trade
conditions upon which the business, rights or assets, or condition, financial or
otherwise, of S&W depends or is or would be Materially affected.
(b) Except as set forth on Schedule 5.19 or as to Contracts that are
-------------
cancelable at will or upon 30 days' notice or less, (i) each of the Contracts
described in this Section 5.19 is in full force and effect on the date hereof,
except as the validity of such Contracts may be affected by actions, events or
conditions involving only the other party thereto, none of which actions, events
or conditions have occurred or exist to the knowledge of S&W, (ii) no Default
under any of the terms or conditions set forth in any of the Contracts to which
S&W is a party or any document or instrument related thereto has occurred or
been asserted by any party, and (iii) the continuation, validity and
effectiveness of such Contracts, and all other Material terms thereof, will not
be affected by the transactions contemplated by this Agreement.
(c) Except as set forth on Schedule 5.19, S&W is not a party to
-------------
any covenant not to compete or other agreement which restricts the ability of
S&W or Affiliates to engage in any business.
5.20 Powers of Attorney. Except as disclosed on Schedule 5.20, S&W has
------------------ -------------
not given or granted any power of attorney, whether limited or general, to any
Person that is continuing in effect.
5.21 Benefit Plans. (a) Schedule 5.21.1 lists (i) every pension,
------------- ---------------
retirement, profit-sharing, deferred compensation, stock option, employee stock
ownership, severance pay, vacation, bonus or other incentive plan, any other
written or unwritten employee program, arrangement, agreement or understanding,
whether arrived at through collective bargaining or otherwise; (ii) any medical,
vision, dental or other health plan, any life insurance plan; or (iii) any other
employee benefit plan or fringe benefit plan, including, without limitation, any
"employee benefit plan," as that term is defined in Section 3(3) of ERISA,
currently or expected to be adopted, maintained by, sponsored in whole or in
part by, or contributed to by S&W under Internal Revenue Code Sections 414(b) or
414(c) for the benefit of employees, former employees, retirees, directors,
independent contractors, spouses or dependents of any of the foregoing or any
other beneficiaries and under which such employees, retirees, dependents,
spouses, directors, independent contractors, or other beneficiaries are eligible
to participate (collectively, the "Benefit Plans"). Any Benefit Plan that is an
"employee pension benefit plan," as that term is defined in Section 3(2) of
ERISA, or an "employee welfare benefit plan" as that term is defined in Section
3(1) of ERISA, is referred to herein as an "ERISA Plan." On or after September
26, 1980, neither S&W nor any entity aggregated therewith under Internal Revenue
Code Section 414(b) or 414(c) has had an "obligation to contribute" (as defined
in ERISA Section 4212) to a "multiemployer plan" (as defined in ERISA Sections
4001(a)(3) and 3(37)(A)) ("Multiemployer Plan"). S&W has not incurred, nor is
reasonably expected to incur prior to the Closing Date, any liability under
Title I or Title IV of ERISA or under Internal Revenue Code Section 412 other
than routine funding obligations and routine claims for benefits. Except as
described on Schedule 5.21.2, all Liabilities arising out of or related to
---------------
Benefit Plans and ERISA Plans of S&W are reflected in the Financial Statements
in accordance with GAAP. Neither S&W nor any entity aggregated therewith under
Internal Revenue Code Sections 414(b), (c), (m), and (o) have at any time
sponsored, maintained, contributed to or been obligated to contribute to a
defined benefit plan as that term is defined in Internal Revenue Code Section
414(j) and ERISA Section 3(35).
(b) True, correct and complete copies of all written Benefit Plans, as
currently in effect (or as otherwise requested by PSS), listed on Schedule
--------
5.21.1 and all trust agreements or other funding arrangements, including
- ------
insurance contracts, all amendments thereto and, where applicable, with respect
to any such plans or plan amendments, the most recent determination letters
issued by the IRS, all
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<PAGE>
advisory opinions issued by the United States Department of Labor after December
31, 1974, the annual reports or returns, audited or unaudited financial
statements, actuarial valuations, and summary annual reports for the most recent
three plan years, the most recent summary plan descriptions and any Material
modifications thereto have been provided or made available to PSS.
(c) Except as listed on Schedule 5.21.2, all the Benefit Plans and the
---------------
related trusts subject to ERISA comply with and have been administered in all
Material respects in compliance with, the provisions of ERISA, all provisions of
the Internal Revenue Code relating to qualification and tax exemption under
Internal Revenue Code Section 401(a) and 501(a) or otherwise applicable to
secure intended tax consequences, and all other applicable laws, rules and
regulations and collective bargaining agreements in all Material respects.
Except as listed on Schedule 5.21.2, all governmental approvals for the Benefit
---------------
Plans have been obtained (to the extent such approvals may be obtained),
including, but not limited to, timely determination letters on the qualification
of the ERISA Plans that are "employee benefit plans," as defined in Section 3(2)
of ERISA, and tax exemption of related trusts, as applicable under the Internal
Revenue Code, and all such governmental approvals continue in full force and
effect. Neither S&W nor, to the knowledge of S&W, any administrator or fiduciary
of any such Benefit Plan (or agent of any of the foregoing) has engaged in any
transaction or acted or failed to act in any manner which could subject any such
entity to any direct or indirect liability (by indemnity or otherwise) for a
breach of any fiduciary, co-fiduciary or other duty under ERISA. No oral or
written representation or communication with respect to any aspect of the
Benefit Plans has been made by S&W or its management to employees of S&W or any
of its predecessors prior to or on the Closing Date that is not in accordance
with the written or otherwise preexisting terms and provisions of such Benefit
Plans in effect immediately prior to the Closing Date. There are no unresolved
claims or disputes under the terms of, or in connection with, the Benefit Plans
and no action, legal or otherwise, has been commenced with respect to any claim
other than processing of claims in the ordinary course of business.
(d) Except as described on Schedule 5.21.2, all annual reports or
---------------
returns, audited or unaudited financial statements, actuarial valuations,
summary annual reports and summary plan descriptions issued with respect to the
Benefit Plans are correct and accurate in all Material respects.
(e) Since December 31, 1974, no "party in interest" (as defined in
Section 3(14) of ERISA) or "disqualified person" (as defined in Section
4975(e)(2) of the Internal Revenue Code) of any ERISA Plan has engaged in any
"prohibited transaction" (within the meaning of Section 4975(c) of the Internal
Revenue Code or Section 406 of ERISA) unless exempt under Section 4975(d) of the
Internal Revenue Code or Section 407 of ERISA.
(f) Except as set forth in the Financial Statements, no Liability
exists and no event that could result in a Liability has occurred with respect
to any Benefit Plan that individually or in the aggregate could have a Material
Adverse Effect on S&W.
(g) S&W has not maintained and does not currently maintain a Benefit
Plan providing welfare benefits (as defined in ERISA Section 3(1)) to employees
after retirement or other separation of service except to the extent required
under Part 6 of Title I of ERISA and Internal Revenue Code Section 4980B(f).
(h) Except as set forth on Schedule 5.21.3, the consummation of the
---------------
transactions contemplated by this Agreement will not entitle any current or
former employee of S&W or any of its predecessors whose employment is not
terminated as a result of such transactions, to severance pay, unemployment
compensation or any similar payment, and will not accelerate the time of payment
or vesting, or increase the amount, of compensation due any such employee or
former employee.
(i) All Benefit Plans subject to Section 4980B of the Internal Revenue
Code or Part 6 of Title I of ERISA, or both, have been maintained in compliance
in all Material respects with the requirements of such laws and any regulations
(proposed or otherwise) issued thereunder.
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<PAGE>
(j) S&W represents that based on current compensation levels for
participants in the S&W X-Ray, Inc. Employee Stock Ownership Plan ("ESOP"),
sufficient compensation has been earned by participants through the plan year
ended March 31, 1997 and is projected to be earned by participants through the
plan year ending March 31, 1998 such that S&W may fully repay the ESOP
indebtedness as described in Section 8.1 of this Agreement and nevertheless
satisfy Internal Revenue Code Sections 404 and 415 (measured as of March 31,
1997 and March 31, 1998, respectively).
5.22 Remuneration. Schedule 5.22 contains a complete and accurate
------------ -------------
schedule of the direct compensation (including wages, salaries and actual or
anticipated bonuses), plus a description of other annual benefits not made
available to the other employees generally, paid in fiscal 1997 and to be paid
in the current fiscal year to (i) all of the officers and directors of S&W; and
(ii) all of the employees of S&W who received or will be receiving in excess of
$25,000 base salary during such year. No unpaid salary, other than for the
immediately preceding pay period and other than pursuant to the existing
deferred compensation plans of S&W, is now payable to any of such officers,
directors or employees.
5.23 Union and Employment Agreements. Except as set forth on Schedule
------------------------------- --------
5.23, S&W is not a party to any union agreement, nor does S&W have any written
- ----
or oral agreement that is not terminable by it at will with any of its officers,
directors, employees, consultants, agents, or any other person performing
services therefor, relating to their employment by or performance of services
for S&W or their compensation therefor. To S&W's knowledge, no union attempts to
organize the employees of S&W have been made nor are any such attempts now
threatened. Except as set forth on Schedule 5.23, S&W has not received notice
-------------
that any of the officers or directors of S&W will terminate or contemplates
terminating his or her employment currently or at any time within sixty (60)
days of the Closing Date.
5.24 Interested Transactions. (a) Except as set forth on Schedule
----------------------- --------
5.24, S&W is not currently a party to any Contract, loan or other transaction
- ----
with any of the following persons, or in which any of the following persons have
any direct or indirect interest (other than as a shareholder or employee of
S&W):
(i) Any director, officer, employee of S&W or any of the
shareholders of S&W;
(ii) Any of the spouses, parents, siblings, children, aunts,
uncles, nieces, nephews, in- laws and grandparents of any of the
persons described in clause (i); or
(iii) Any corporation, trust, partnership or other entity in
which any of the persons described in clauses (i) or (ii) has a
beneficial interest (other than in a corporation whose shares are
publicly traded and in which such persons own beneficially in the
aggregate no more than 5% of the equity interest).
(b) Except as set forth on Schedule 5.24, none of the shareholders of
-------------
S&W is an employee, consultant, partner, principal, director or shareholder of
any business entity which is engaged in a business which competes with or is
similar to the business of S&W.
5.25 Brokers and Finders. No broker, agent, finder or consultant
-------------------
(other than Stephen C. Cook of Fieldstone Partners, Inc.) or other person has
been retained by or on behalf of S&W (other than legal or accounting advisors),
or is entitled to be paid based upon any agreements or understandings made by
S&W in connection with the transactions contemplated hereby. Neither PSS nor S&W
shall have any Liability for any broker's fee, finder's fee, consultant's fee or
similar third party remuneration by reason of any action of S&W.
5.26 Statements True and Correct. No statement, certificate,
---------------------------
instrument, or other writing furnished or to be furnished by S&W to PSS pursuant
to this Agreement or any other document, agreement, or instrument referred to
herein furnished by S&W contains or will contain any untrue statement of
Material fact or will omit to state a Material fact necessary to make the
statements therein, in
A-14
<PAGE>
light of the circumstances under which they were made, not misleading. None of
the information supplied by or to be supplied by S&W or any Affiliate thereof
for inclusion in the Registration Statement to be filed by PSS with the SEC
will, when the Registration Statement becomes effective, be false or misleading
with respect to any Material fact, or omit to state any Material fact necessary
to make the statements therein not misleading. None of the information supplied
or to be supplied by S&W or any Affiliates thereof for inclusion in the Proxy
Statement-Prospectus to be mailed to S&W's shareholders in connection with the
Shareholders' Meeting, and any other documents to be filed by S&W with the SEC
or any other Regulatory Authority in connection with the transactions
contemplated hereby, will, at the respective time such documents are filed, and
with respect to the Proxy Statement-Prospectus, when first mailed to the
shareholders of S&W, be false or misleading with respect to any Material fact,
or omit to state any Material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or in the
case of the Proxy Statement-Prospectus or any amendment thereof or supplement
thereto, at the time of the Shareholders' Meeting, be false or misleading with
respect to any Material fact, or omit to state any Material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of any proxy for the Shareholders' Meeting. All documents that S&W
is responsible for filing with any Regulatory Authority in connection with the
transactions contemplated hereby will comply as to form in all Material respects
with the provisions of applicable Law.
5.27 Accounting, Tax and Regulatory Matters. Other than actions
--------------------------------------
permitted or required to be taken under the terms of this Agreement, neither S&W
nor any Affiliate thereof has taken any action or has any knowledge of any fact
or circumstance that is reasonably likely to (i) prevent the transactions
contemplated hereby, including the Merger, from qualifying for
pooling-of-interests accounting treatment or as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code, or (ii) materially
impede or delay receipt of any Consents of Regulatory Authorities.
5.28 Schedules. All Schedules attached hereto are true, correct and
---------
complete as of the date of this Agreement. Matters disclosed on each Schedule
shall be deemed disclosed only for purposes of the matters to be disclosed on
such Schedule and shall not be deemed to be disclosed for any other purpose
unless expressly provided therein.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PSS
-------------------------------------
PSS hereby represents and warrants to S&W as follows:
6.1 Organization, Standing, and Power. Each of PSS and its
---------------------------------
Subsidiaries is a corporation duly organized, validly existing, and in good
standing under the Laws of the state of its incorporation, and has the power and
authority to carry on its business as it has been and is now being conducted and
to own, lease and operate its Assets. Each of PSS and its Subsidiaries is duly
qualified or licensed to transact business as a foreign corporation and is in
good standing in all jurisdictions where the character of its Assets or the
nature or conduct of its business requires it to be so qualified or licensed,
except for such jurisdictions in which the failure to be so qualified or
licensed is not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on PSS or such Subsidiary.
6.2 Authorization of Agreement; No Breach. The execution, delivery
-------------------------------------
and performance of this Agreement has been duly authorized by all necessary
corporate action of PSS. This Agreement constitutes, and all agreements and
other instruments and documents to be executed and delivered by PSS pursuant to
this Agreement will constitute, legal, valid and binding obligations of PSS
enforceable against PSS in accordance with their respective terms. The
execution, delivery and performance of this Agreement and the agreements and
other documents and instruments to be executed and delivered by PSS pursuant to
this Agreement and the consummation of the transactions contemplated hereby and
thereby will not, subject to obtaining the consents identified herein, (i)
violate or result in a breach of or Default under the articles or certificate of
incorporation or bylaws of PSS or any of its Subsidiaries or any other Material
instrument or agreement to which PSS or any of its Subsidiaries is a party or is
bound; (ii) to the
A-15
<PAGE>
knowledge of PSS and its Subsidiaries, violate any Law, administrative decision
or award of any court, arbitrator, mediator, tribunal, administrative agency or
governmental body applicable to or binding upon PSS or its Subsidiaries or upon
their respective securities, property or business; (iii) conflict with or
constitute a Default under any Material Contract to which PSS or any of its
Subsidiaries is a party or by which PSS or any of its Subsidiaries is bound; or
(iv) create a Lien upon the securities, property or business of PSS or any of
its Subsidiaries.
6.3 PSS Capital Stock. The authorized capital stock of PSS consists
-----------------
of (i) 60,000,000 shares of Common Stock, approximately 37,061,615 of which
shares were issued and outstanding as of March 28, 1997, and none of which are
issued and held as treasury shares, and (ii) 1,000,000 shares of Preferred
Stock, none of which shares are issued and outstanding as of the date of this
Agreement and none of which are issued and held as treasury shares. All of such
shares are duly and validly issued and outstanding, and are fully paid and non-
assessable and were issued pursuant to an effective registration statement under
the 1933 Act and all applicable state securities laws or pursuant to an
exemption from registration under the 1933 Act and all applicable state
securities laws. Except as set forth on Schedule 6.3 and as contemplated by this
------------
Agreement, there are no outstanding warrants, options, rights (including
outstanding rights to demand registration or to sell in connection with a
registration by PSS under the 1933 Act), calls or other commitments of any
nature relating to the PSS Common Stock or any other capital stock of PSS, and
there are no outstanding securities of PSS convertible into or exchangeable for
shares of PSS Common Stock or any other capital stock of PSS. PSS and its
Subsidiaries have no knowledge of any voting agreements or voting trusts between
or among any Person or Persons relating to PSS, the PSS Common Stock or any of
its Subsidiaries (if not wholly owned by PSS). Except as set forth on Schedule
--------
6.3, PSS is not obligated to issue or repurchase any shares of its capital stock
- ---
for any purpose, and no person or entity has entered into any Contract or option
or any right or privilege (whether preemptive or contractual) capable of
becoming a Contract or option for the purchase, subscription or issuance of any
unissued shares, or other securities of PSS.
6.4 PSS Subsidiaries. Schedule 6.4 attached hereto is a true and
---------------- ------------
correct list of each Subsidiary of PSS. All of the outstanding shares of capital
stock of each such Subsidiary are duly and validly issued and outstanding, are
fully paid and non-assessable, and were issued pursuant to a valid exemption
from registration under the 1933 Act, and all applicable state securities laws,
and, except as set forth on Schedule 6.4, are owned of record and beneficially
------------
by PSS, free and clear of any and all Liens. No shares of capital stock of any
Subsidiary are reserved for issuance and there are no outstanding options,
warrants, rights, subscriptions, claims of any character, Contracts,
obligations, convertible or exchangeable securities or other commitments,
contingent or otherwise, relating to the capital stock of any Subsidiary,
pursuant to which any Subsidiary is or may become obligated to issue or exchange
any share of capital stock. Neither PSS nor any Subsidiary owns, directly or
indirectly, any capital stock or other equity or ownership or proprietary
interest in any corporation, partnership, or other entity, except as set forth
on Schedule 6.4.
------------
6.5 PSS Documents. PSS has heretofore furnished the following
-------------
documents to S&W:
(a) its final Prospectus, dated November 13, 1995, contained in its
Registration Statement on Form S-3 (Registration No. 33-97524);
(b) its Annual Report on Form 10-K for the fiscal year ended March 28,
1997; and
(c) its Proxy Statement dated June 27, 1997.
Documents (a) - (c) above are collectively referred to herein as the
"PSS Documents." As of their respective dates, the PSS Documents complied in all
Material respects with all applicable Laws. Since May 5, 1994, PSS has filed all
reports and statements, together with any amendments required to be made with
respect thereto, that it was required to file with the SEC, including, but not
limited to, Forms 10-K, Forms 10-Q, Forms 8-K, and proxy statements. The PSS
Documents did not at the time they were filed
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<PAGE>
(or if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) contain any untrue statement of a Material fact
or omit to state a Material fact required to be stated in such PSS Document, in
light of the circumstances under which they were made, not misleading. The
consolidated financial statements (including, in each case, any related notes)
contained in the PSS Documents, complied as to form in all material respects
with the applicable published rules and regulations of the SEC with respect
thereto, were prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods involved (except
as may be indicated in the notes to such financial statements or, in the case of
unaudited statements, as permitted by the published rules and regulations of the
SEC with respect thereto) and fairly presented the consolidated financial
position of PSS and its Subsidiaries, taken as a whole, at the respective dates
and the consolidated results of its operations and cash flows for the periods
indicated, except that the unaudited interim financial statements do not include
notes and are subject to normal year end adjustments which will not, in the
aggregate, be Material. There have been no changes in PSS' accounting policies
and practices between the dates of the PSS Documents and the date hereof that
have had or are likely to have a Material Adverse Effect on the present or
future financial performance of PSS, and no such change is contemplated as of
the date hereof.
6.6 Absence of Undisclosed Liabilities. Except as disclosed on
----------------------------------
Schedule 6.6, as of the date hereof neither PSS nor any of its Subsidiaries has
- ------------
any Undisclosed Liabilities in excess of $1,000,000 in the aggregate, except for
unpaid liabilities and obligations incurred since March 28, 1997, in the
ordinary course of business and not involving Funded Debt.
6.7 Absence of Certain Changes or Events. Since March 28, 1997,
------------------------------------
except as disclosed on Schedule 6.7, (i) there have been no events, changes or
------------
occurrences which have had, or are reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on PSS or its Subsidiaries taken as a
whole, and (ii) neither PSS nor any of its Subsidiaries has taken any action, or
failed to take any action, prior to the date of this Agreement, which action or
failure, if taken after the date of this Agreement, would represent or result in
a Material breach or violation of any of the covenants and agreements of PSS or
its Subsidiaries provided in Article 8 of this Agreement.
6.8 Legal Proceedings. There are no outstanding Court Orders or
-----------------
administrative decisions to which PSS or any of its Subsidiaries is subject, and
there is no Litigation pending or threatened against or relating to PSS or any
of its Subsidiaries or their respective assets or businesses, which if resolved
adversely to PSS would have a Material Adverse Effect on PSS and its
Subsidiaries, taken as a whole. Neither PSS nor any of its Subsidiaries have
been advised by any attorney representing any such entity that there are any
"loss contingencies" as defined in FASB 5, which would be required by FASB 5 to
be disclosed or accrued in the consolidated financial statements of PSS and
which are not so disclosed or accrued.
6.9 Brokers and Finders. No broker, agent, finder or consultant or
-------------------
other person has been retained by or on behalf of PSS (other than legal or
accounting advisors), or is entitled to be paid based upon any agreements or
understandings made by PSS in connection with the transactions contemplated
hereby. Neither S&W nor PSS shall have any Liability for any broker's fee,
finder's fee, consultant's fee or similar third party remuneration by reason of
any action of PSS or DI
6.10 Statements True and Correct. No statement, certificate,
---------------------------
instrument or other writing furnished or to be furnished by PSS or any Affiliate
thereof to S&W pursuant to this Agreement or any other document, agreement or
instrument referred to herein contains or will contain any untrue statement of
Material fact or will omit to state a Material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of the information supplied by or to be supplied by PSS or
any Affiliate thereof for inclusion in the Registration Statement to be filed by
PSS with the SEC will, when the Registration Statement becomes effective, be
false or misleading with respect to any Material fact, or omit to state any
Material fact necessary to make the statements therein not misleading. None of
the information supplied or to be supplied by PSS or any Affiliate thereof for
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inclusion in the Proxy Statement-Prospectus to be mailed to S&W's shareholders
in connection with the Shareholders' Meeting, and any other documents to be
filed by PSS or any Affiliate thereof with the SEC or any other Regulatory
Authority in connection with the transactions contemplated hereby, will, at the
respective time such documents are filed, and with respect to the Proxy
Statement-Prospectus, when first mailed to the shareholders of S&W, be false or
misleading with respect to any Material fact, or omit to state any Material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or in the case of the Proxy Statement-
Prospectus or any amendment thereof or supplement thereto, at the time of the
Shareholders' Meeting, be false or misleading with respect to any Material fact,
or omit to state any Material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of any proxy for the
Shareholders' Meeting. All documents that S&W is responsible for filing with any
Regulatory Authority in connection with the transactions contemplated hereby
will comply as to form in all Material respects with the provisions of
applicable Law.
6.11 Authority of DI. DI is a corporation duly organized, validly
---------------
existing and in good standing under the Laws of the State of Florida as a wholly
owned Subsidiary of PSS. The authorized capital stock of DI consists of 1,000
shares of DI Common Stock, 100 shares of which are validly issued and
outstanding, fully paid and nonassessable. DI has the corporate power and
authority necessary to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein, including the Merger, have been duly and
validly authorized by all necessary corporate action in respect thereof on the
part of DI. This Agreement represents a legal, valid, and binding obligation of
DI, enforceable against DI in accordance with its terms.
6.12 Authority of Merger Corp. Merger Corp. is a corporation duly
------------------------
organized, validly existing and in good standing under the Laws of the State of
New York as a wholly owned Subsidiary of DI. The authorized capital stock of
Merger Corp. consists of 1,000 shares of Merger Corp. Common Stock, 100 shares
of which are validly issued and outstanding, fully paid and nonassessable.
Merger Corp. has the corporate power and authority necessary to execute, deliver
and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on part of Merger Corp. This Agreement
represents a legal, valid, and binding obligation of Merger Corp., enforceable
against Merger Corp. in accordance with its terms.
6.13 Schedules. All Schedules attached hereto are true, correct and
---------
complete as of the date of this Agreement. Matters disclosed on each Schedule
shall be deemed disclosed only for purposes of the matters to be disclosed on
such Schedule and shall not be deemed to be disclosed for any other purpose
unless expressly provided therein.
ARTICLE VII
CONDUCT OF BUSINESS PENDING CONSUMMATION
----------------------------------------
7.1 Conduct of S&W Business. Except as set forth on Schedule 7.1,
----------------------- ------------
prior to the Closing Date, except with the prior written consent of PSS, and
except as necessary to effect the transactions contemplated in this Agreement,
S&W shall:
(a) conduct its business in substantially the same manner as
presently being conducted and refrain from entering into any transaction or
Contract other than in the ordinary course of business, and not make any
Material change in its methods of management, marketing, accounting, or
operations;
(b) consult with PSS prior to undertaking any Material new
business opportunity outside the ordinary course of business and not undertake
such new business opportunity without the prior written consent of PSS, which
consent will not be unreasonably withheld;
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(c) confer on a regular basis with one or more designated
representatives of PSS to report Material operational matters and to report the
general status of ongoing business operations;
(d) notify PSS of any unexpected Material change in the normal
course of business or in the operation of its properties, and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), adjudicatory proceedings or
submissions involving any Material property, and S&W agrees to keep PSS fully
informed of such events and permit PSS's representatives prompt access to all
materials prepared in connection therewith;
(e) Except as set forth on Schedule 7.1, not enter into any new
------------
employment Contract or, except in the ordinary course of business, any
commitment to employees (including any commitment to pay retirement or other
benefits);
(f) not increase the compensation (including fringe benefits)
payable or to become payable to any officer, director, employee, agent or
independent contractor of either such company, except general hourly rate
increases and normal merit increases for employees other than officers made in
the ordinary course of business and consistent with past practice;
(g) except in the ordinary course of business, not (i) create or
incur any indebtedness, (ii) enter into (other than renewals of) or terminate
any lease of real estate, or (iii) release or create any Liens of any nature
whatsoever;
(h) except in the ordinary course of business and, even if in the
ordinary course of business, then not in an amount to exceed $50,000 in the
aggregate, make or commit to make any capital expenditure, or enter into any
lease of capital equipment as lessee or lessor;
(i) not sell any Material asset or make any Material commitment
relating to its assets other than in the ordinary course of business;
(j) not amend the Certificate of Incorporation, Bylaws or other
governing instruments of S&W, or
(k) not make any changes in its accounting methods or practices,
except for changes in its tax accounting methods or practices that may be
necessitated by changes in generally accepted accounting principles or
applicable tax laws;
(l) except for this Agreement and the issuance of 4,009 shares of
S&W Common Stock under the S&W Supplemental Executive Retirement Plan
simultaneously with the Closing of the Merger, issue, sell, pledge, encumber,
authorize the issuance of, enter into any Contract to issue, sell, pledge,
encumber, or authorize the issuance of, or otherwise permit to become
outstanding, any additional shares of S&W Capital Stock, or any stock
appreciation rights, or any option, warrant, conversion, or other right to
acquire any such stock, or any security convertible into any such stock, or pay
or declare or agree to pay or declare any dividend with respect to any S&W
Capital Stock;
(m) other than in the ordinary course of business, not take any
action, or omit to take any action, which would cause the representations and
warranties contained in Article V to be untrue or incorrect;
(n) not make any loan to any Person or increase the aggregate
amount of any loan currently outstanding to any Person, except for usual and
customary advances to employees made in the ordinary course of business; and
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(o) not make any agreement or commitment which will result in or
cause to occur a violation of any of the items contained in paragraphs (a)
through (n).
7.2 Conduct of PSS Business. PSS agrees that from the date hereof to
-----------------------
the Effective Time, except to the extent that S&W shall otherwise consent by an
instrument in writing signed on behalf of S&W by its President:
(a) Operation of Business. It will operate its business
---------------------
substantially as presently operated and only in the ordinary course, except that
any business acquisition by PSS or the incurrence of additional debt or the
issuance or sale of equity securities shall be deemed to be in the ordinary
course.
(b) No Amendments; Corporate Existence. Except as previously
----------------------------------
disclosed in writing by PSS to S&W, it will not, and it will not permit DI or
Merger Corp. to, amend its Articles of Incorporation or By-Laws; and it will
maintain its corporate existence and corporate powers.
7.3 Adverse Changes in Condition. Each Party agrees to give written
----------------------------
notice promptly to the other Party upon becoming aware of the occurrence or
impending occurrence of any event or circumstance relating to it or any of its
Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on it, or (ii) would cause or constitute a
Material breach of any of its representations, warranties, or covenants
contained herein, and to use its reasonable efforts to prevent or promptly to
remedy the same.
7.4 Reports. Each Party and its Subsidiaries shall file all reports
-------
required to be filed by it with Regulatory Authorities between the date of this
Agreement and the Effective Time and shall deliver to the other Party copies of
all such reports promptly after the same are filed. If financial statements are
contained in any such reports filed with the SEC, such financial statements will
fairly present the consolidated financial position of the entity filing such
statements as of the dates indicated and the consolidated results of operations,
changes in shareholders' equity, and cash flows for the periods then ended in
accordance with GAAP (subject in the case of interim financial statements to
normal recurring year-end adjustments that are not Material). As of their
respective dates, such reports filed with the SEC will comply in all Material
respects with the Securities Laws and will not contain any untrue statement of a
Material fact or omit to state a Material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Any financial statements contained
in any other reports to another Regulatory Authority shall be prepared in
accordance with Laws applicable to such reports.
ARTICLE VIII
ADDITIONAL AGREEMENTS
---------------------
8.1 Contributions to ESOP and Repayment of Indebtedness. Prior to the
---------------------------------------------------
Closing Date, in addition to amounts previously accrued and not yet paid, S&W
shall contribute an additional amount of approximately $358,000 for the Plan
Year ending March 31, 1997 to its Employee Stock Ownership Plan ("ESOP") for the
repayment of indebtedness of the ESOP. In addition, prior to the Closing Date,
S&W shall make the maximum contribution to the ESOP permitted under Sections 404
and 415 of the Internal Revenue Code for the repayment of indebtedness of the
ESOP for the period between April 1, 1997 and March 31, 1998. Immediately prior
to the Effective Time, all remaining indebtedness of the ESOP shall be paid.
Furthermore, immediately prior to the Effective Time, S&W shall fully repay all
remaining indebtedness to Fleet Bank of New York, the proceeds of which were
loaned by S&W to the ESOP for the ESOP to acquire stock of S&W.
8.2 Applications; Antitrust Notification. PSS shall promptly prepare
------------------------------------
and file, and S&W shall cooperate in the preparation and, where appropriate,
filing of, applications with all Regulatory Authorities having jurisdiction over
the transactions contemplated by this Agreement seeking the requisite
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Consents necessary to consummate the transactions contemplated by this
Agreement. Each of the Parties will promptly file with the United States Federal
Trade Commission and the United States Department of Justice the notification
and report form required for the transactions contemplated hereby and any
supplemental or additional information which may reasonably be requested in
connection therewith pursuant to the HSR Act and will comply in all Material
respects with the requirement of the HSR Act.
8.3 Filings with State Offices. Upon the terms and subject to the
--------------------------
conditions of this Agreement, S&W and Merger Corp. shall execute and file the
Certificate of Merger with the Secretary of State of the State of New York in
connection with the Closing.
8.4 Agreement as to Efforts to Consummate. Subject to the terms and
-------------------------------------
conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its reasonable best efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Laws to consummate and make effective, as soon as
practicable after the date of this Agreement, the transactions contemplated by
this Agreement, including using its reasonable best efforts to lift or rescind
any Order adversely affecting its legal ability to consummate the transactions
contemplated herein and to cause to be satisfied the conditions referred to in
Article IX of this Agreement; provided, that nothing herein shall preclude
either Party from exercising its rights under this Agreement. Each Party shall
use, and shall cause each of its Subsidiaries to use, its reasonable efforts to
obtain all Consents necessary or desirable for the consummation of the
transactions contemplated by this Agreement.
8.5 Investigation and Confidentiality.
---------------------------------
(a) Prior to the Effective Time, each party shall keep the other
party advised of all Material developments relevant to its business and to
consummation of the Merger. S&W shall provide PSS open and exclusive access to
S&W, its records and employees in order for PSS to make or cause to be made such
investigation of the business and properties of S&W and its Subsidiaries and of
its financial and legal condition as PSS reasonably requests, provided that such
investigation shall not interfere unnecessarily with normal operations. No
investigation by a Party shall affect the representations and warranties of the
other Party.
(b) Each Party shall, and shall cause its advisers and agents to,
maintain the confidentiality of all confidential information not otherwise in
the public domain furnished to it by the other Party concerning its and its
Subsidiaries' businesses, operations, customers and financial positions and
shall not use such information for any purpose except in furtherance of the
transactions contemplated by this Agreement. If this Agreement is terminated
prior to the Effective Time, each Party shall promptly return or certify the
destruction of all documents and copies thereof, and all work papers containing
confidential information received from the other Party.
(c) Each Party agrees to give the other Party notice as soon as
practicable after any determination by it of any fact or occurrence relating to
the other Party which it has discovered through the course of its investigation
and which represents, or is reasonably likely to represent, either a Material
breach of any representation, warranty, covenant or agreement of the other Party
herein or in an agreement or certificate delivered pursuant hereto, or which has
had or is reasonably likely to have a Material Adverse Effect on the other
Party.
8.6 Press Releases. Prior to the Effective Time, S&W and PSS shall
--------------
consult with each other as to the form and substance of any press release or
other public disclosure materially related to this Agreement or any other
transaction contemplated hereby; provided, that nothing in this Section 8.6
shall be deemed to prohibit any Party from making any disclosure which its
counsel deems necessary or advisable in order to satisfy such Party's disclosure
obligations imposed by Law.
8.7 No Shopping. Until the termination of this Agreement pursuant to
-----------
Article X, except with respect to this Agreement and the transactions
contemplated hereby, neither S&W nor any of its
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Affiliates, nor any Representatives thereof shall directly or indirectly solicit
or respond (other than to say that it has entered into a definitive agreement
with another party) to any Acquisition Proposal by any Person. None of S&W or
any Affiliate or Representative thereof shall furnish any non-public
information, negotiate with respect to, or enter into any Contract with respect
to, any Acquisition Proposal. S&W shall promptly notify PSS orally and in
writing in the event that it receives any inquiry or proposal relating to any
such transaction. S&W shall (i) immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any Persons conducted
heretofore with respect to any of the foregoing, and (ii) direct and use its
reasonable best efforts to cause all of its Representatives not to engage in any
of the foregoing.
8.8 Accounting and Tax Treatment. Each of the Parties undertakes and
----------------------------
agrees to use its reasonable efforts to cause the Merger, and to take no action
which would cause the Merger not, to qualify for pooling-of-interests accounting
treatment and treatment as a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code for federal income tax purposes.
8.9 Investment Agreement. S&W shall use its reasonable best efforts
--------------------
to cause each Person whom it reasonably believes is an "affiliate" of S&W for
purposes of Rule 145 under the 1933 Act, as disclosed on Schedule 8.9 hereto, to
------------
deliver to PSS not later than 10 days prior to the Effective Time, a written
agreement, substantially in the form of Exhibit 8.9, providing that such Person
-----------
will not sell, pledge, transfer, or otherwise dispose of the shares of S&W
Common Stock held by such Person except as contemplated by such agreement or by
this Agreement and will not sell, pledge, transfer, or otherwise dispose of the
shares of PSS Common Stock to be received by such Person upon consummation of
the Merger except in compliance with applicable provisions of the 1933 Act and
the rules and regulations thereunder and until such time as financial results
covering at least 30 days of combined operations of PSS and S&W have been
published within the meaning of Section 201.01 of the SEC's Codification of
Financial Reporting Policies. If the Merger will qualify for pooling-of-
interests accounting treatment, shares of PSS Common Stock issued to such
affiliates of S&W in exchange for shares of S&W Common Stock shall not be
transferable until such time as financial results covering at least 30 days of
combined operations of PSS and S&W have been published within the meaning of
Section 201.01 of the SEC's Codification of Financial Reporting Policies,
regardless of whether each such person has provided the written agreement
referred to in this Section 8.9 (and PSS shall be entitled to place restrictive
legends upon certificates for shares of PSS Common Stock issued to affiliates of
S&W pursuant to this Agreement to enforce the provisions of this Section 8.9).
PSS shall not be required to maintain the effectiveness of the Registration
Statement under the 1933 Act for the purposes of resale of PSS Common Stock by
such affiliates.
8.10 Conditional Releases. Simultaneously with the execution and
--------------------
delivery of this Agreement, each officer and director of S&W has executed and
delivered a Conditional Release, in the form of Exhibit 8.10 to this Agreement,
------------
to be effective only if the Effective Time occurs.
8.11 Registration Statement; Proxy Statement; Shareholder Approval. As
-------------------------------------------------------------
soon as practicable after execution of this Agreement, PSS shall file the
Registration Statement with the SEC, and shall use its commercially reasonable
best efforts to cause the Registration Statement to become effective under the
1933 Act and take any action required to be taken under the applicable state
Blue Sky or Securities Laws in connection with the issuance of the shares of PSS
Common Stock upon consummation of the Merger. The information supplied by PSS
and S&W for inclusion in the Registration Statement shall not at the time the
Registration Statement is declared effective by the SEC contain any untrue
statement of material fact or omit to state any material fact required to be
stated in the Registration Statement or necessary in order to make the
statements in the Registration Statement, in the light of the circumstances
under which they were made, not misleading. S&W shall cooperate with PSS and
furnish PSS with all information concerning it and the holders of its capital
stock as PSS may reasonably request in connection with such action. S&W shall
call a Shareholders' Meeting (or vote by written consent), to be held as soon as
practicable after the Registration Statement is declared effective by the SEC,
for the purpose of voting upon approval of this Agreement, the appointment of
the "Representatives," as such term is defined in the
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Escrow Agreement, and such other related matters as it deems appropriate. In
connection with the Shareholders' Meeting, (i) S&W and PSS shall prepare and
file with the SEC a Proxy Statement-Prospectus and mail such Proxy Statement-
Prospectus to the shareholders of S&W, (ii) the Parties shall furnish to each
other all information concerning them as they may reasonably request in
connection with such Proxy Statement-Prospectus, (iii) unless this Agreement is
terminated in accordance with its terms, the Board of Directors of S&W shall
recommend to its shareholders the approval of this Agreement, and (iv) unless
this Agreement is terminated in accordance with its terms, the Board of
Directors and officers of S&W shall use its reasonable efforts to obtain such
shareholders' approval.
8.12 Repayment of Indebtedness. PSS agrees to repay on the Closing
-------------------------
Date notes and bank and long-term debt of S&W in the aggregate amount of
approximately $7,000,000, together with accrued interest and such additional
principal outstanding through the Closing Date (other than a payment owed by
reason of a default or penalty under the loan documents), such final amount
subject to the approval and satisfaction of PSS.
8.13 ESOP Termination. As soon as appropriate approvals have been
----------------
received from the Internal Revenue Service, the ESOP shall be terminated and
ESOP accounts shall be distributed in accordance with the ESOP and applicable
legal requirements and PSS shall adopt all resolutions and take all such actions
as are required to properly effect such termination.
8.14 COBRA Requirements. S&W shall, at all times through the Closing
------------------
Date, comply in all Material respects with the applicable requirements for its
ERISA Plans as set forth in the Internal Revenue Code and ERISA, including,
without limitation, Section 4980B of the Code (as well as its predecessor
provision, Section 162(k) of the Code) and Sections 601 through 608, inclusive,
of ERISA. Employees of S&W who become employees of PSS or DI shall be entitled
to participate in PSS' welfare, qualified retirement and benefit plans on the
same terms as PSS' current employees, and such S&W employees shall receive
credit for their full periods of service with S&W, and, to the extent allowed by
PSS' insurance company, all preexisting condition requirements shall be waived
for such employees. S&W maintains a fully insured medical plan ("Medical Plan").
To the extent permitted by the insurance carrier to such Medical Plan and to the
extent permitted by law, PSS will continue the Medical Plan through March 31,
1998 for S&W employees, former employees and their dependents, each of whom is
covered by the Medical Plan as of the Closing Date.
8.15 Conditions to Closing. S&W and PSS agree to use their
---------------------
commercially reasonable efforts to satisfy the closing conditions set forth in
Article IX of this Agreement by August 31, 1997, and if not by such time, as
soon thereafter as possible.
8.16 Retirement Plan Interests. Simultaneous with the Closing of the
-------------------------
Merger, S&W shall issue 4,009 shares of its Common Stock in exchange for full
cancellation of all rights of the participants in the S&W Supplemental Executive
Retirement Plan, which shares have been represented in the Fully Diluted Common
Equivalents.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
-------------------------------------------------
9.1 Conditions to Obligations of Each Party. The respective
---------------------------------------
obligations of each Party to perform this Agreement and consummate the Merger
and the other transactions contemplated hereby are subject to the satisfaction
of the following conditions, unless waived by both Parties pursuant to Section
11.6 of this Agreement:
(a) Regulatory Approvals. All Consents of, filings and
--------------------
registrations with, and notifications to, all Regulatory Authorities required
for consummation of the Merger shall have been obtained or made and shall be in
full force and effect and all waiting periods required by Law shall have
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expired. No Consent so obtained which is necessary to consummate the
transactions contemplated hereby shall be conditioned or restricted in a manner
which in the reasonable judgment of the Board of Directors of PSS or S&W would
so materially adversely impact the economic or business benefits of the
transactions contemplated by this Agreement so as to render inadvisable the
consummation of the Merger.
(b) Consents and Approvals. Except as set forth on Schedule 9.1,
---------------------- ------------
each Party shall have obtained any and all Consents required for consummation of
the Merger or for the preventing of any Default under any Contract or Permit of
such Party which, if not obtained or made, is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on such Party.
Except as set forth on Schedule 9.1, no Consent so obtained which is necessary
------------
to consummate the transactions contemplated hereby shall be conditioned or
restricted in a manner which in the reasonable judgment of the Board of
Directors of PSS would so materially adversely impact the economic or business
benefits of the transactions contemplated by this Agreement so as to render
inadvisable the consummation of the Merger.
(c) Legal Proceedings. No court or governmental or regulatory
-----------------
authority of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any Law or Order (whether temporary, preliminary or
permanent) or taken any other action which prohibits, restricts or makes illegal
consummation of the transactions contemplated by this Agreement.
(d) Payoff of Long-Term Debt. At the Closing, PSS shall have paid
------------------------
by wire transfer the balance of the outstanding principal and accrued interest
as set forth in Section 8.12 hereof.
(e) Shareholder Approval. The shareholders of S&W shall have
--------------------
approved this Agreement, and the consummation of the transactions contemplated
hereby, including the Merger, and the appointment of the "Representatives" as
defined in the Escrow Agreement, as and to the extent required by Law or by the
provisions of any governing instruments.
(f) Registration Statement. The Registration Statement shall be
----------------------
effective under the 1933 Act, no stop orders suspending the effectiveness of the
Registration Statement shall have been issued, no action, suit, proceeding or
investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing, and all necessary approvals under state securities
Laws or the 1933 Act or 1934 Act relating to the issuance or trading of the
shares of PSS Common Stock issuable pursuant to the Merger shall have been
received.
9.2 Conditions to Obligations of PSS. The obligations of PSS to
--------------------------------
perform this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following conditions,
unless waived by PSS pursuant to Section 11.6(a) of this Agreement:
(a) Representations and Warranties. The representations and
------------------------------
warranties of S&W set forth or referred to in this Agreement shall be true and
correct in all Material respects (except that those representations and
warranties which are qualified as to materiality shall be true and correct in
all respects) as of the date of this Agreement and as of the Effective Time with
the same effect as though all such representations and warranties had been made
on and as of the Effective Time (provided that representations and warranties
which are confined to a specified date shall speak only as of such date).
(b) Performance of Agreements and Covenants. Each and all of the
---------------------------------------
agreements and covenants of S&W to be performed and complied with pursuant to
this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all Material
respects.
(c) Certificates. S&W shall have delivered to PSS (i) a
------------
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its chief financial officer, to the effect that the
conditions of its obligations set forth in Section 9.2(a) and 9.2(b) of this
Agreement have been satisfied, and (ii) certified copies of resolutions duly
adopted by S&W's Board of Directors and
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shareholders evidencing the taking of all corporate action necessary to
authorize the execution, delivery and performance of this Agreement, and the
consummation of the transactions contemplated hereby, all in such reasonable
detail as PSS and its counsel shall request.
(d) Investment Agreements. PSS shall have received from each
---------------------
shareholder of S&W listed on Schedule 8.9 the investment agreement referred to
----------------------
in Section 8.9 of this Agreement, to the extent necessary to assure in the
reasonable judgment of PSS that the transactions contemplated hereby will
qualify for pooling-of-interests accounting treatment.
(e) Pooling Letters. PSS shall have received a letter, dated
---------------
as of the Effective Time, in form and substance reasonably acceptable to PSS,
from Arthur Andersen to the effect that the Merger will qualify for
pooling-of-interests accounting treatment. PSS and Arthur Andersen also shall
have received a letter, dated within two weeks of the date hereof and as of the
Effective Time, in form and substance reasonably acceptable to such Party, from
May, Robinson, Gordon & Penta, P.C. to the effect that S&W qualifies for
pooling-of-interests accounting treatment.
(f) Cold Comfort Letters. PSS shall have received from Arthur
--------------------
Andersen LLP letters dated not more than five days prior to (i) the date of the
Proxy Statement-Prospectus and (ii) the Effective Time, with respect to certain
financial information of PSS contained in or incorporated by reference into the
Proxy Statement-Prospectus, in form and substance reasonably satisfactory to
PSS, which letters shall be based upon customary specified procedures undertaken
by such firm in accordance with Statement of Auditing Standard No. 72. PSS shall
have received from May, Robinson, Gordon & Penta, P.C. letters dated not more
than five days prior to (i) the date of the Proxy Statement-Prospectus and (ii)
the Effective Time, with respect to certain financial information of S&W
contained in the Proxy Statement-Prospectus, in form and substance reasonably
satisfactory to PSS, which letters shall be based upon customary specified
procedures undertaken by such firm in accordance with Statement of Auditing
Standards No. 72.
(g) Noncompetition Agreements. Joseph E. Miller, Jr., Bruce P.
-------------------------
Ashby, George Privitera and Ron Cronin shall have entered into noncompetition
agreements in substantially the form of Exhibits 9.2(g)(i), (ii), (iii) and
-----------------------------------
(iv), respectively.
- ----
(h) Retention of Sales Force. At the Effective Time, S&W shall
------------------------
have retained at least eighteen (18) full-time sales persons and seventy (70)
full-time service technicians, which persons shall have entered into employment
and noncompetition agreements with PSS, in substantially the form of Exhibit
-------
9.2(h) hereto..
- ------
(i) Delivery of Documents. S&W shall have delivered all of its
---------------------
books and records to PSS including, but not limited to, (i) all corporate and
other records of S&W and its Predecessors, including the minute books, stock
books, stock transfer registers, books of account, leases and Contracts, deeds
and title documents, and Financial Statements; and (ii) such other documents or
certificates as shall be reasonably requested by PSS.
(j) Resignation of S&W Directors. S&W shall have delivered to PSS
----------------------------
evidence satisfactory to PSS of the resignation of the directors of S&W
effective as of the Closing Date.
(k) Statements for Services Rendered. S&W shall have received
--------------------------------
final statements for all legal, accounting and advisory fees for which it is
responsible for payment in connection with the transactions contemplated by this
Agreement (through the Closing), together with an acknowledgment by each such
legal counsel, accountant or advisor that such statement represents its final
bill for all services rendered to S&W through the Closing in connection with the
transactions contemplated by this Agreement, and that any statement for
follow-up services shall not exceed $2,000.
(l) No Material Adverse Change. There shall not have been any
--------------------------
Material adverse change in the business, assets, Liabilities, financial
condition, or results of operations of S&W and its
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<PAGE>
Subsidiaries, taken as a whole, between March 31, 1997 and the Closing Date, and
S&W shall have delivered to PSS a certificate, dated as of the Closing Date,
signed by its chief executive officer and chief financial officer certifying to
such effect.
(m) Consent of Lender. PSS shall have received from NationsBank,
-----------------
as agent bank under PSS' senior credit facility, its written consent to the
consummation of the Merger and the other transactions contemplated by this
Agreement.
(n) Escrow Agreement. The Escrow Agreement shall have been
----------------
executed and delivered by S&W and a national bank as the Escrow Agent in
substantially the form of Exhibit 4.3 hereto, with the specific escrow items
included in form and substance satisfactory to PSS.
(o) Satisfactory Due Diligence. PSS shall in all aspects be
--------------------------
satisfied in its reasonable discretion with its due diligence investigation of
S&W, including its continuing review of matters contained or not contained in
the schedules.
(p) Repayment of Indebtedness. PSS shall have received evidence
-------------------------
satisfactory to it of the repayment of all outstanding indebtedness of the ESOP
as provided in Section 8.1 hereof.
9.3 Conditions to Obligations of S&W. The obligations of S&W to
--------------------------------
perform this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following conditions,
unless waived by S&W pursuant to Section 11.6(b) of this Agreement:
(a) Representations and Warranties. The representations and
------------------------------
warranties of PSS set forth or referred to in this Agreement shall be true and
correct in all Material respects (except that those representations and
warranties which are qualified as to materiality shall be true and correct in
all respects) as of the date of this Agreement and as of the Effective Time with
the same effect as though all such representations and warranties had been made
on and as of the Effective Time (provided that representations and warranties
which are confined to a specified date shall speak only as of such date).
(b) Performance of Agreements and Covenants. Each and all of the
---------------------------------------
agreements and covenants of PSS to be performed and complied with pursuant to
this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with.
(c) Certificates. PSS shall have delivered to S&W (i) a
------------
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its chief financial officer, to the effect that the
conditions of its obligations set forth in Section 9.3(a) and 9.3(b) of this
Agreement have been satisfied, and (ii) certified copies of resolutions duly
adopted by PSS's Board of Directors and DI's Board of Directors and sole
shareholder evidencing the taking of all corporate action necessary to authorize
the execution, delivery and performance of this Agreement, and the consummation
of the transactions contemplated hereby, all in such reasonable detail as S&W
and its counsel shall request.
(d) No Material Adverse Change. There shall not have been any
--------------------------
Material adverse change in the business, assets, Liabilities, financial
condition, or results of operations of PSS and its Subsidiaries, taken as a
whole, between March 31, 1997 and the Closing Date, and PSS shall have delivered
to S&W a certificate, dated as of the Closing Date, signed by its chief
executive officer and chief financial officer certifying to such effect.
(e) Escrow Agreement. The Escrow Agreement shall have been
----------------
executed and delivered by PSS and a national bank as the Escrow Agent in
substantially the form of Exhibit 4.3 hereto, with the specific escrow items
-----------
included in form and substance satisfactory to S&W.
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<PAGE>
(f) Employment and Noncompetition Agreements. PSS shall have
----------------------------------------
entered into the employment and noncompetition agreements described in Section
9.2(h). PSS and DI shall have agreed to employ all S&W sales representatives and
service technicians that become PSS or DI employees, on an at-will basis, under
the same compensation, commission and other incentive terms as are currently in
effect for such employees through August 31, 1998 and PSS and DI shall have
agreed to employ the S&W employees that become PSS and DI employees, excluding
George Privitera and Ron Cronin, on an at-will basis, under the same salary
terms as are currently in effect for such employees through August 31, 1998.
(g) Noncompetition Agreements. PSS shall have entered into
-------------------------
noncompetition agreements with Joseph E. Miller, Jr., Bruce P. Ashby., George
Privitera and Ron Cronin in substantially the form of Exhibits 9.2(g)(i), (ii),
(iii) and (iv), respectively.
ARTICLE X
TERMINATION
-----------
10.1 Termination. Notwithstanding any other provision of this
-----------
Agreement, this Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time:
(a) By mutual consent of the Board of Directors of PSS and the
Board of Directors of S&W; or
(b) By the Board of Directors of either Party (provided that
the terminating Party is not then in Material breach of any representation,
warranty, covenant, or other agreement contained in this Agreement) in the event
of a breach by the other Party of any representation or warranty contained in
this Agreement which cannot be or has not been cured within 30 days after the
giving of written notice to the breaching Party of such breach and which breach
is reasonably likely, in the reasonable opinion of the non-breaching Party, to
have, individually or in the aggregate, a Material Adverse Effect on the
breaching Party; or
(c) By the Board of Directors of either Party (provided that
the terminating Party is not then in Material breach of any representation,
warranty, covenant, or other agreement contained in this Agreement) in the event
of a Material breach by the other Party of any covenant or agreement contained
in this Agreement which cannot be or has not been cured within 30 days after the
giving of written notice to the breaching Party of such breach; or
(d) By the Board of Directors of either Party (provided that
the terminating Party is not then in Material breach of any representation,
warranty, covenant, or other agreement contained in this Agreement) in the event
any Consent of any Regulatory Authority required for consummation of the Merger
and the other transactions contemplated hereby shall have been denied by final
nonappealable action of such authority or if any action taken by such authority
is not appealed within the time limit for appeal; or
(e) By the Board of Directors of either Party in the event
that the Merger shall not have been consummated by October 31, 1997, if the
failure to consummate the transactions contemplated hereby on or before such
date is not caused by any breach of this Agreement by the Party electing to
terminate pursuant to this Section 10.1(e); or
(f) By the Board of Directors of either Party in the event
that the Merger shall not have been consummated by November 30, 1997; or
(g) By the Board of Directors of either Party if any of the
conditions precedent to the obligations of such person to consummate the Merger
cannot be satisfied or fulfilled, if such failure is not caused by the party
electing to terminate; or
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<PAGE>
(h) By the Board of Directors of either Party if the Base
Period Trading Price is less than $10.8832 or greater than $16.3248 (in each
case, calculated without regard to the Base Period Trading Price Limitations);
or
(i) By the Board of Directors of PSS if the sum of all
adjustments to the Aggregate Purchase Price as set forth in Section 3.1(c)
hereof would result in a reduction by more than $200,000, but for the proviso at
the end of Section 3.1(c).
10.2 Effect of Termination. In the event of the termination and
---------------------
abandonment of this Agreement pursuant to Section 10.1 of this Agreement, this
Agreement shall become void and have no effect, except that (i) the provisions
of this Section 10.2 and Section 8.5(b) of this Agreement shall survive any such
termination and abandonment, and (ii) a termination of this Agreement shall not
relieve a breaching Party from Liability for an uncured willful breach of a
representation, warranty, covenant, or agreement giving rise to such
termination.
10.3 Non-Survival of Representations and Covenants. The respective
---------------------------------------------
representations, warranties, obligations, covenants, and agreements of the
Parties shall not survive the Effective Time except Articles 2, 3, 4 and 11 and
Sections 8.5(b), 8.8, 8.11, 10.2 and 10.3 this Agreement, and except with
respect to the indemnification obligations in the Escrow Agreement.
ARTICLE XI
MISCELLANEOUS
-------------
11.1 Definitions.
-----------
(a) Except as otherwise provided herein, the capitalized terms set
forth below shall have the following meanings:
"Acquisition Proposal" with respect to a Party shall mean any
tender offer or exchange offer or any proposal for a merger, acquisition of all
of the stock or assets of, or other business combination involving such Party or
any of its Subsidiaries or the acquisition of a substantial equity interest in,
or a substantial portion of the assets of, such Party or any of its
Subsidiaries.
"Affiliate" of a Person shall mean: (i) any other Person
directly, or indirectly through one or more intermediaries, controlling,
controlled by or under common control with such Person; (ii) any officer,
director, partner, employer, or direct or indirect beneficial owner of any 10%
or greater equity or voting interest of such Person; or (iii) any other Person
for which a Person described in clause (ii) acts in any such capacity.
"Agreement" shall mean this Agreement and Plan of Merger,
including the Exhibits and Schedules delivered pursuant hereto and incorporated
herein by reference.
"Assets" of a Person shall mean all of the assets, properties,
businesses and rights of such Person of every kind, nature, character and
description, whether real, personal or mixed, tangible or intangible, accrued or
contingent, or otherwise relating to or utilized in such Person's business,
directly or indirectly, in whole or in part, whether or not carried on the books
and records of such Person, and whether or not owned in the name of such Person
or any Affiliate of such Person and wherever located.
"Certificate of Merger" shall mean the Certificate of Merger
to be executed by Merger Corp. and S&W and filed with the Secretary of State of
the State of New York relating to the Merger as contemplated by Section 1.3 of
this Agreement.
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<PAGE>
"Common Stock Per Share Purchase Price" shall mean the
quotient obtained by dividing (i) the Aggregate Purchase Price minus the Escrow
Dollar Amount by (ii) the Fully Diluted Common Equivalents.
"Consent" shall mean any consent, approval, authorization,
clearance, exemption, waiver, or similar affirmation by any Person pursuant to
any Contract, Law, Order, or Permit.
"Contract" shall mean any Material written or oral agreement,
arrangement, authorization, commitment, contract, indenture, instrument, lease,
obligation, plan, practice, restriction, understanding or undertaking of any
kind or character, or other document to which any Person is a party or that is
binding on any Person or its capital stock, Assets or business.
"Default" shall mean (i) any breach or violation of or default
under any Contract, Order or Permit, (ii) any occurrence of any event that with
the passage of time or the giving of notice or both would constitute a breach or
violation of or default under any Contract, Order or Permit, or (iii) any
occurrence of any event that with or without the passage of time or the giving
of notice would give rise to a right to terminate or revoke, change the current
terms of, or renegotiate, or to accelerate, increase, or impose any Liability
under, any Contract, Order or Permit.
"DI Common Stock" shall mean the $0.01 par value common stock
of DI.
"Environmental Laws" shall mean all Laws relating to pollution
or protection of human health or the environment (including ambient air, surface
water, ground water, land surface or subsurface strata) and which are
administered, interpreted or enforced by the United States Environmental
Protection Agency and state and local agencies with jurisdiction over, and
including common law in respect of, pollution or protection of the environment,
including the Comprehensive Environmental Response Compensation and Liability
Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource Conservation
and Recovery Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"), and other Laws
relating to emissions, discharges, releases or threatened releases of any
Hazardous Material, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of any
Hazardous Material.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"Escrow Agreement" shall mean the Escrow Agreement attached to
this Agreement as Exhibit 4.3.
-----------
"Escrow Shares" shall mean the shares of PSS Common Stock
issued pursuant to Section 4.3 hereof.
"Exhibits" shall mean the Exhibits so marked, copies of which
are attached to this Agreement. Such Exhibits are hereby incorporated by
reference herein and made a part hereof, and may be referred to in this
Agreement and any other related instrument or document without being attached
hereto.
"Fully Diluted Common Equivalents" shall mean the sum of (i)
all issued and outstanding shares of S&W Common Stock, and (ii) all shares of
S&W Common Stock issuable upon the exercise of all outstanding S&W options and
the conversion of all other convertible securities of S&W and the issuance of
all S&W Common Stock issuable pursuant to any other rights or commitments of any
nature.
A-29
<PAGE>
"Funded Debt" shall mean any outstanding indebtedness
(including leases required to be capitalized under GAAP) of such party or its
Subsidiaries, except Funded Debt between such parties, representing borrowing,
but excluding trade payables.
"GAAP" shall mean generally accepted accounting principles,
consistently applied during the periods involved.
"Hazardous Material" shall mean any of the following that are
regulated under Environmental Laws: (i) any hazardous substance, hazardous
material, hazardous waste, regulated substance or toxic substance (as those
terms are defined by any applicable Environmental Laws) and (ii) any chemicals,
pollutants, contaminants, petroleum, petroleum products, or oil (and
specifically shall include asbestos requiring abatement, removal or
encapsulation pursuant to the requirements of Regulatory Authorities and any
polychlorinated biphenyls).
"HSR Act" shall mean Section 7A of the Clayton Act, as added
by Title II of the Hart-Scott Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder.
"Intellectual Property" shall mean the copyrights, patents,
trademarks, service marks, service names, tradenames, applications therefor,
technology rights and licenses, computer software (including, without
limitation, any source or object codes therefor or documentation relating
thereto), trade secrets, franchises, know-how, inventions and other intellectual
property rights.
"Internal Revenue Code" shall mean the Internal Revenue Code
of 1986, as amended, and the rules and regulations promulgated thereunder.
"Law" shall mean any code, law, ordinance, regulation,
reporting or licensing requirement, rule, or statute applicable to a Person or
its Assets, Liabilities or business, including those promulgated, interpreted or
enforced by any Regulatory Authority.
"Liability" shall mean any direct or indirect, primary or
secondary, liability, indebtedness, obligation, penalty, cost or expense
(including costs of investigation, collection and defense), claim, deficiency,
guaranty or endorsement of or by any Person (other than endorsements of notes,
bills, checks, and drafts presented for collection or deposit in the ordinary
course of business) of any type, whether accrued, absolute or contingent,
liquidated or unliquidated, matured or unmatured, or otherwise.
"Lien" shall mean any conditional sale agreement, default of
title, easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention
or other security arrangement, or any adverse right or interest, charge, or
claim of any nature whatsoever of, on, or with respect to any property or
property interest, other than (i) Liens for current property Taxes not yet due
and payable and (ii) Liens which are not reasonably likely to have, individually
or in the aggregate, a Material Adverse Effect on a Party.
"Litigation" shall mean any action, arbitration, cause of
action, claim, complaint, criminal prosecution, demand letter, governmental or
other examination or investigation, hearing, inquiry, administrative or other
proceeding, or notice (written or oral) by any Person alleging potential
Liability or requesting information relating to or affecting a Party, its
business, its Assets (including Contracts related to it), or the transactions
contemplated by this Agreement.
"Material" for purposes of this Agreement shall be determined
in light of the facts and circumstances of the matter in question; provided that
any specific monetary amount stated in this Agreement shall determine
materiality in that instance.
A-30
<PAGE>
"Material Adverse Effect" on a Party shall mean an event,
change or occurrence which, individually or together with any other event,
change or occurrence, has a Material adverse impact on (i) the financial
position, business, or results of operations of such Party and its Subsidiaries,
taken as a whole, or (ii) the ability of such Party to perform its obligations
under this Agreement or the transactions contemplated by this Agreement,
provided that Material Adverse Effect shall not be deemed to include the impact
of (x) changes in Laws of general applicability or interpretations thereof by
courts or governmental authorities, (y) changes in generally accepted accounting
principles, and (z) the Merger and compliance with the provisions of this
Agreement on the operating performance of the Parties or actions taken pursuant
to or required by this Agreement.
"Merger Corp. Common Stock" shall mean the $0.01 par value
common stock of Merger Corp.
"NASD" shall mean the National Association of Securities
Dealers, Inc.
"NYBCL" shall mean the New York Business Corporation Law.
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Order" shall mean any administrative decision or award,
decree, injunction, judgment, order, quasi-judicial decision or award, ruling,
or writ of any federal, state, local or foreign or other court, arbitrator,
mediator, tribunal, administrative agency or Regulatory Authority.
"Party" shall mean any of S&W, DI, Merger Corp. or PSS, and
"Parties" shall mean all of S&W, DI, Merger Corp. and PSS.
"Permit" shall mean any federal, state, local, and foreign
governmental approval, authorization, certificate, easement, filing, franchise,
license, notice, permit, or right to which any Person is a party or that is or
may be binding upon or inure to the benefit of any Person or its securities,
Assets or business.
"Person" shall mean a natural person or any legal, commercial
or governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
"Predecessor" shall mean any entity acquired by, or
substantially all of the assets of which were acquired by, S&W or any entity
merged or consolidated with or into S&W.
"PSS Capital Stock" shall mean, collectively, the PSS Common
Stock, the PSS Preferred Stock and any other class or series of capital stock of
PSS.
"PSS Common Stock" shall mean the $0.01 par value common stock
of PSS.
"PSS Preferred Stock" shall mean the $0.01 par value preferred
stock of PSS.
"Regulatory Authorities" shall mean, collectively, all federal
and state regulatory agencies having jurisdiction over the Parties and their
respective Subsidiaries, including the NASD, and the SEC.
"Representative" shall mean any investment banker, financial
advisor, attorney, accountant, consultant, or other representative of a Person.
A-31
<PAGE>
"S&W Common Stock" shall mean the common stock, $.04 par value
per share, of S&W.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Laws" shall mean the 1933 Act, the 1934 Act, the
Investment Company Act of 1940, as amended, the Investment Advisers Act of 1940,
as amended, the Trust Indenture Act of 1939, as amended, and the rules and
regulations of any Regulatory Authority promulgated thereunder.
"Subsidiaries" shall mean all those corporations,
partnerships, associations, or other entities of which the entity in question
owns or controls 50% or more of the outstanding equity securities either
directly or through an unbroken chain of entities as to each of which 50% or
more of the outstanding equity securities is owned directly or indirectly by its
parent; provided, there shall not be included any such entity acquired through
foreclosure or any such entity the equity securities of which are owned or
controlled in a fiduciary capacity.
"Surviving Corporation" shall mean DI as the surviving
corporation resulting from the Merger.
"Tax" or "Taxes" shall mean any federal, state, county, local,
or foreign income, profits, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise, occupancy, and other taxes,
assessments, charges, fares, or impositions, including interest, penalties, and
additions imposed thereon or with respect thereto.
"Undisclosed Liabilities" shall mean any liability or
obligation of a Party to this Agreement, whether accrued, liquidated,
unliquidated, absolute, contingent, matured, unmatured or otherwise, as of the
Closing Date, that is not fully reflected or reserved against in their
respective financial statements or fully disclosed in a Schedule.
(b) In addition to the terms defined in Section 11.1(a) above, the
terms set forth below shall have the meanings ascribed thereto in the referenced
sections:
<TABLE>
<S> <C>
Benefit Plans - Section 5.21 Escrow Dollar Amount - Section 3.4
Capital Expenditures - Section 5.16(c) FASB 5 - Section 5.18
Closing - Section 1.2 Financial Statements - Section 5.5
Closing Date - Section 1.2 Merger - Section 1.1
Effective Time - Section 1.3 Merger Consideration - Section 3.1(b)
Environmental Litigation - Section 5.7 Multiemployer Plan - Section 5.21(a)
ERISA Plan - Section 5.21(a) PSS Documents - Section 6.5
</TABLE>
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 Expenses. PSS shall bear and pay all direct costs and expenses
--------
incurred by it or on its behalf in connection with the transactions contemplated
hereunder, including filing, registration and application fees, printing fees,
and fees and expenses of its own financial or other consultants, investment
bankers, accountants (including any audit or investigation pursuant to Section
8.1), and counsel. Upon consummation of the Merger, PSS shall bear and pay
reasonable costs and expenses for fees and expenses of S&W's counsel,
consultants, financial advisors and accountants, incurred by S&W or on S&W's
behalf in connection with the transactions contemplated hereunder in an amount
not to exceed $200,000 in the aggregate.
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<PAGE>
11.3 Brokers and Finders. Each of the Parties represents and
-------------------
warrants that neither it nor any of its officers, directors, employees, or
Affiliates has employed any broker or finder or incurred any Liability for any
financial advisory fees, investment bankers' fees, brokerage fees, commissions,
or finders' fees in connection with this Agreement or the transactions
contemplated hereby, except for Stephen Cook of Fieldstone Partners, who has
been retained by S&W and for whom any unpaid fees shall be paid in accordance
with Section 11.2 and, if necessary, Section 3.1(c). In the event of a claim by
any broker or finder based upon his or its representing or being retained by or
allegedly representing or being retained by S&W or PSS, each of S&W and PSS, as
the case may be, agrees to indemnify and hold the other Party harmless of and
from any Liability in respect of any such claim.
11.4 Entire Agreement. Except as otherwise expressly provided
----------------
herein, this Agreement (including the documents and instruments referred to
herein) constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. Nothing in this Agreement,
expressed or implied, is intended to confer upon any Person, other than the
Parties or their respective successors, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, other than as provided in
Section 11.11 of this Agreement.
11.5 Amendments. To the extent permitted by Law, this Agreement may
----------
be amended by a subsequent writing signed by each of the Parties upon the
approval of the Boards of Directors of each of the Parties, whether before or
after shareholder approval of this Agreement has been obtained; provided, that
after any such approval by the holders of S&W Common Stock, there shall be made
no amendment that pursuant to the NYBCL requires further approval by such
shareholders without the further approval of such shareholders.
11.6 Waivers.
-------
(a) Prior to or at the Effective Time, PSS, acting through its
Board of Directors, chief executive officer or other authorized officer, shall
have the right to waive any Default in the performance of any term of this
Agreement by S&W, to waive or extend the time for the compliance or fulfillment
by S&W of any and all of its obligations under this Agreement, and to waive any
or all of the conditions precedent to the obligations of PSS under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any Law. No such waiver shall be effective unless in writing signed
by a duly authorized officer of PSS.
(b) Prior to or at the Effective Time, S&W, acting through its
Board of Directors, chief executive officer or other authorized officer, shall
have the right to waive any Default in the performance of any term of this
Agreement by PSS, to waive or extend the time for the compliance or fulfillment
by PSS of any and all of its obligations under this Agreement, and to waive any
or all of the conditions precedent to the obligations of S&W under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any Law. No such waiver shall be effective unless in writing signed
by a duly authorized officer of S&W.
(c) The failure of any Party at any time or times to require
performance of any provision hereof shall in no manner affect the right of such
Party at a later time to enforce the same or any other provision of this
Agreement. No waiver of any condition or of the breach of any term contained in
this Agreement in one or more instances shall be deemed to be or construed as a
further or continuing waiver of such condition or breach or a waiver of any
other condition or of the breach of any other term of this Agreement.
11.7 Assignment. Except as expressly contemplated hereby, neither
----------
this Agreement nor any of the rights, interests or obligations hereunder shall
be assigned by any Party hereto (whether by operation of Law or otherwise)
without the prior written consent of the other Party. Subject to the
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<PAGE>
preceding sentence, this Agreement will be binding upon, inure to the benefit of
and be enforceable by the Parties and their respective successors and assigns.
11.8 Notices. All notices or other communications which are
-------
required or permitted hereunder shall be in writing and sufficient if delivered
by hand, by facsimile transmission, by registered or certified mail, postage
pre-paid, or by courier or overnight carrier, to the persons at the addresses
set forth below (or at such other address as may be provided hereunder), and
shall be deemed to have been delivered as of the date so delivered:
S&W: S&W X-Ray, Inc.
Cornerstone Center
2300 Buffalo Road
Rochester, NY 14824
Attention: Mr. Joseph E. Miller, Jr.
Copy to Counsel: Kilpatrick Stockton LLP
1100 Peachtree Street, Suite 2800
Atlanta, Georgia 30309-4530
Telecopy Number: (404) 815-6555
Attention: Jerome F. Connell, Jr., Esq.
PSS or DI: c/o Physician Sales & Service, Inc.
4345 Southpoint Boulevard
Jacksonville, Florida 32216
Telecopy Number: (904) 332-3000
Attention: Mr. David A. Smith
Copy to Counsel: Alston & Bird
One Atlantic Center
1201 W. Peachtree Street
Atlanta, Georgia 30309
Telecopy Number: (404) 881-7777
Attention: J. Vaughan Curtis, Esq.
11.9 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the Laws of the State of Florida.
11.10 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
11.11 Captions. The captions contained in this Agreement are for
--------
reference purposes only and are not part of this Agreement.
11.12 Enforcement of Agreement. The Parties hereto agree that
------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the Parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
11.13 Severability. Any term or provision of this Agreement which is
------------
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or
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<PAGE>
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
11.14 Further Assurances. Each Party covenants that at any time, and
------------------
from time to time, after the Closing Date, without additional consideration, it
will execute such additional instruments and take such actions as may be
reasonably requested by the other Parties to confirm or perfect or otherwise to
carry out the intent and purposes of this Agreement.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to
be executed on its behalf and its corporate seal to be hereunto affixed and
attested by officers thereunto on the day and year first above written.
ATTEST: S&W X-RAY, INC.
By: /s/ Joseph E. Miller
- ----------------------------- --------------------------------
Secretary President
[CORPORATE SEAL]
ATTEST: PHYSICIAN SALES & SERVICE, INC.
By: /s/ David A. Smith
- ----------------------------- --------------------------------
Title: Title: Executive Vice President and
----------------------- -----------------------------
Chief Financial Officer
-----------------------
[CORPORATE SEAL]
ATTEST: DIAGNOSTIC IMAGING, INC.
By: /s/ David A. Smith
- ----------------------------- --------------------------------
Title: Title: Secretary
----------------------- -----------------------------
[CORPORATE SEAL]
ATTEST: PSS MERGER CORP.
By: /s/ David A. Smith
- ----------------------------- --------------------------------
Title: Title: Executive Vice President
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[CORPORATE SEAL]
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ANNEX B
ESCROW AGREEMENT
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THIS ESCROW AGREEMENT (this "Agreement") is made and entered into this ____
day of __________, 1997, by and among Physician Sales & Service, Inc., a Florida
corporation ("PSS"), The Bank of New York, as the escrow agent (the "Escrow
Agent"), and Joseph E. Miller, Jr., Bruce P. Ashby and The S&W X-Ray, Inc.
Employee Stock Ownership Trust as representatives (the "Representatives")
appointed by the shareholders ("Shareholders") of S&W X-Ray, Inc., a New York
corporation ("S&W").
W I T N E S S E T H :
- - - - - - - - - -
DI ("DI") is a wholly owned subsidiary of PSS and PSS Merger Corp. ("Merger
Corp."), is a wholly owned subsidiary of DI, and each is a party to an Agreement
and Plan of Merger with S&W dated of even date herewith (the "Merger
Agreement"), pursuant to which Merger Corp. has on this date merged (the
"Merger") with and into S&W with S&W surviving the merger and remaining a wholly
owned subsidiary of DI. Under the Merger Agreement, the Shareholders received
contingent rights to receive, in the aggregate, shares of common stock of PSS
("PSS Common Stock") as provided in Section 3.1(b) of the Merger Agreement.
In accordance with the Merger Agreement, the PSS Common Stock issuable
pursuant to the contingent rights of Shareholders has been issued and will be
held by the Escrow Agent pursuant to the terms of this Agreement until
termination of this Agreement as provided herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
ARTICLE 1
ESTABLISHMENT OF ESCROW
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On this date, PSS has executed a stock certificate in negotiable form
representing the Escrow Shares and naming the Escrow Agent as the registered
holder for the benefit of the Shareholders. Schedule 1 to this Agreement shows
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for each Shareholder (i) the respective percentage interest (the "Percentage
Interest") of each such Shareholder in the General Escrow Shares and the
Specific Escrow Shares, and (ii) the corresponding aggregate maximum number of
shares of PSS Common Stock issuable to each Shareholder, subject to the
adjustments provided herein. The Escrow Agent shall hold the Escrow Shares on
behalf of, and as a convenience to PSS and the Shareholders with the same force
and effect as if such shares had been delivered by PSS to each Shareholder and
subsequently delivered by such Shareholder to the Escrow Agent. The Escrow Agent
shall hold the Escrow Shares, together with any and all future cash dividends or
cash income with respect to the Escrow Shares (as provided in Section 5.1
hereof) ("Cash"), for the benefit of PSS, DI and the Shareholders, as the case
may be, pursuant to the terms of this Agreement. Cash shall be held by the
Escrow Agent in the Nations Fund - Treasury Portfolio, a prospectus of which is
hereby acknowledged and received by PSS and the Representatives. PSS and the
Representatives acknowledge that Escrow Agent may receive a reasonable fee from
the manager of its money market fund for acting as sub-administrator. Any income
or interest realized from the investments made by the Escrow Agent pursuant
hereto shall be included in Cash and paid in accordance with this Agreement.
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ARTICLE 2
INDEMNIFICATION
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2.1 Definitions. As used in this Agreement, the following terms shall
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have the following meanings:
(a) "Accounts Receivable Claim" shall mean any Loss in excess of
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$180,000 incurred by reason of the failure of PSS or DI to receive cash or
checks by __________, 1998 in payment of the accounts receivable of S&W
outstanding as of the Closing Date.
(b) "Closing Date" shall mean the date of the closing of the
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transactions contemplated by the Merger, which shall be the date on which the
Effective Time occurs.
(c) "Effective Time" shall mean the time that the Articles of Merger
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reflecting the Merger becomes effective with the Secretary of State of the
States of New York and Florida
(d) "Disputed Loss Notice" shall mean a Loss Notice that is disputed
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by the Representatives by delivery of a Protest Notice.
(e) "Escrow Agent Expenses" shall mean one-half of the expenses of the
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Escrow Agent which the Representatives is obligated to bear under Section 6.4
hereof, in an amount up to $5,000, incurred in connection with the obligations
of the Escrow Agent under this Agreement.
(f) "Escrow Shares" shall mean the General Escrow Shares and the
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Specific Escrow Shares.
(g) "General Escrow Shares" shall mean _________ shares of PSS Common
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Stock issued and placed in Escrow.
(h) "Indemnifiable Loss" shall mean any Loss for which an Indemnitee
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may be indemnified pursuant to Section 2.2 or 2.3 hereof.
(i) "Indemnitee" shall mean a party entitled to indemnification under
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Section 2.2 hereof.
(j) "Loss" shall mean any direct or indirect demand, claim, payment or
----
failure to receive payment, obligation, action or cause of action, assessment,
loss, liability, cost or expense, including without limitation, penalties,
interest on any amount payable to a third party as a result of the foregoing,
and any legal or other expense reasonably incurred in connection with
investigating or defending any claim or action, whether or not resulting in any
liability.
(k) "Loss Notice" shall mean a written notice, as prescribed in
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Section 2.4 hereof, provided by an Indemnitee to the Escrow Agent and the
Representatives setting forth in reasonable detail the nature and amount of an
Indemnifiable Loss or potential Indemnifiable Loss and the number of Escrow
Shares sought to be canceled in respect of such Indemnifiable Loss.
(l) "Representative Expenses" shall mean expenses of the
-----------------------
Representatives, in an amount up to $10,000, incurred in connection with their
obligations under this Agreement.
(m) "Protest Notice" shall mean a written notice, as prescribed in
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Section 2.4 hereof, provided by the Representatives to an Indemnitee if he
disputes any Loss Notice received from an Indemnitee.
(n) "Shareholders" shall mean the former holders of the issued and
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outstanding shares of capital stock of S&W.
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(o) "Specific Escrow Shares" shall mean _________ shares of PSS Common
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Stock issued and placed in Escrow in respect of the Accounts Receivable Claim,
the Representative Expenses, and the Escrow Agent Expenses.
(p) "Value Per Share" shall mean $___________.
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2.2 General Indemnity by Representatives. The Representatives, as the
------------------------------------
representatives of the Shareholders, shall, to the fullest extent permitted by
law, indemnify, defend, and hold harmless PSS, DI and S&W (an "Indemnitee") from
and against any Loss suffered or incurred by such Indemnitee, as and when due,
which arises out of or results from a breach of any of the representations,
warranties or covenants (except to the extent such covenants are waived by PSS)
and agreements of S&W set forth in the Merger Agreement or in any document or
agreement made or executed by S&W pursuant to the Merger Agreement. The
disclosure provided on Schedule 5.21.2 to the Merger Agreement is for
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information purposes only and shall not impair or otherwise affect the ability
of an Indemnitee to recover for any Loss related to such disclosure under the
terms hereof.
2.3 Specific Indemnity by Representative. In addition to the
------------------------------------
indemnification obligations in Section 2.2 above, the Representatives, as the
representatives of the Shareholders, shall, to the fullest extent permitted by
law, indemnify, defend, and hold harmless the Indemnitees from and against any
Loss suffered or incurred by such Indemnitee, as and when due, which arises out
of or results from an Accounts Receivable Claim, any Representative Expenses and
the Escrow Agent Expenses paid by an Indemnitee.
2.4 Notice of Claim. If an Indemnitee incurs an Indemnifiable Loss, or
---------------
should an Indemnitee negotiate a proposed settlement in satisfaction of a
potential Indemnifiable Loss, it shall promptly provide a Loss Notice to the
Representatives and the Escrow Agent. If the Representatives disputes the amount
sought under any such Loss Notice or otherwise disputes the right of the
Indemnitee to be indemnified hereunder, he shall provide the Indemnitee and the
Escrow Agent a Protest Notice within thirty (30) days of the date any such Loss
Notice is received by the Representative. If no Protest Notice is received by
the Indemnitee and the Escrow Agent within thirty (30) days from the date on
which any Loss Notice is received by the Representatives, or if a Protest Notice
is received and the dispute is resolved in favor of the Indemnitee after
following the procedures set forth below, then the Escrow Agent shall cause to
be delivered to PSS and PSS shall promptly cancel and retire that number of
Escrow Shares as shall equal the number of Escrow Shares (rounded to the next
highest whole number) that, when multiplied by the Value Per Share, equals the
amount sought by or awarded to the Indemnitee. To the extent that Cash is held
in escrow, and at the option of the Indemnitee, the Escrow Agent shall pay any
Indemnifiable Loss, in whole or in part, with such Cash. In its Loss Notice, PSS
shall set forth for the Escrow Agent (i) the number of Escrow Shares, and/or
(ii) the amount of Cash, if any, to be delivered to the Indemnitee in accordance
with this paragraph. If the Indemnitee and the Escrow Agent receive a Protest
Notice within such 30-day period, the Escrow Agent shall not deliver any Escrow
Shares until receipt by it of written instructions (i) signed by a majority of
the Representatives and a duly authorized officer of the Indemnitee; or (ii)
signed by an arbitration panel that has considered and resolved such dispute as
provided in Section 2.5 below, which sets forth (i) the number of Escrow Shares,
and/or (ii) the amount of Cash, if any, to be delivered to the Indemnitee in
accordance with this paragraph. After delivery of any Escrow Shares to the
Indemnitee in accordance with this paragraph, the Escrow Agent shall be reissued
a certificate in respect of any remaining Escrow Shares.
2.5 Procedure With Respect to Disputed Indemnifiable Loss. A Disputed Loss
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Notice may be resolved by the agreement of a majority of the Representatives and
the Indemnitee, in which case written notice of such agreement shall be promptly
provided to the Escrow Agent, together with a statement of the agreed upon
amount to be reimbursed to the Indemnitee. If a majority of the Representatives
and the Indemnitee are unable to resolve a Disputed Loss Notice, then such
Disputed Loss Notice shall be submitted to arbitration in accordance with the
then-current commercial arbitration rules of the American Arbitration
Association. If a Disputed Loss Notice is to be arbitrated, a majority of the
Representatives shall select one arbitrator, the Indemnitee shall select one
arbitrator, and the two arbitrators so chosen
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shall select a third. Any decision of the arbitration panel shall require the
vote of at least two (2) of such arbitrators and shall be deemed conclusive and
each party shall be deemed to have waived any rights to appeal therefrom. Any
resolution of a Disputed Loss Notice, whether by agreement of the parties or by
arbitration, must be made within sixty (60) days of the date of the Protest
Notice in regard to which the dispute relates. That percentage of the reasonable
legal and other expenses incurred by the Indemnitee in the arbitration
proceeding as equals the percentage of the claim sought which is actually
awarded, shall be added to the amount of the Indemnifiable Loss. If resolution
of a Disputed Loss Notice is not made within sixty (60) days of the date of the
Protest Notice as provided in this Section 2.5, then the Escrow Agent may, in
its sole discretion, either (i) continue to hold the Escrow Shares undisbursed
until such time as the disputing parties agree in writing as to a proper
disposition of such Escrow Shares, or (ii) if such agreement is not forthcoming,
the Escrow Agent shall be entitled to tender into the registry or custody of any
court of competent jurisdiction all money or property in its hand under the
terms of this Agreement, and, upon the advice of counsel, may take such other
legal action as may be appropriate or necessary, whereupon the parties hereto
agree Escrow Agent shall be discharged from all further duties under this
Agreement. The filing of any such legal proceedings shall not deprive Escrow
Agent of its compensation earned prior to such filing.
2.6 Employment of Counsel. The Representatives may control the defense of
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any third party claim with respect to which an Indemnifiable Loss has been
asserted. Notwithstanding the foregoing, if the aggregate amount of all such
third party and general indemnity claims plus the aggregate good faith estimates
of the reasonable expenses to defend such claims exceed the number of Escrow
Shares multiplied by the Value Per Share, the Indemnitees may control the
defense of all such third party and general indemnity claims which have been
brought under this Agreement, provided that the Indemnitees may not settle a
third party claim without the approval of a majority of the Representatives,
which approval shall not be unreasonably withheld. When the Indemnitee is in
control of the defense of such a claim, the Representatives may, at their
expense, and when the Representatives are in control of the defense of a claim,
the Indemnitee may, at its expense (which expenses shall not be treated as a
Loss hereunder), participate in the defense of any litigation or claim. The
Representatives shall control the matters relating to any Accounts Receivable
Claim and the Representative Expenses.
2.7 Exclusive Remedy. If an Indemnitee incurs an Indemnifiable Loss, the
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sole and exclusive means of recovery shall be as set forth in this Agreement and
the escrow established hereunder. Any claim pursuant to Section 2.2 or 2.3
hereof may be satisfied from either or both of the General Escrow Shares or
Specific Escrow Shares, whichever is available. Neither the Representatives nor
the Shareholders have any obligation or liability to an Indemnitee beyond the
several interest of such Shareholders in the Escrow Shares. Each Indemnitee
agrees that if it incurs any Indemnifiable Loss it will not sue or seek recourse
against the Representatives or the Shareholders, or any of them, other than as
provided in this Agreement.
ARTICLE 3
TERM; EXPIRATION; LIMITS
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3.1 Term - General Indemnity. With respect to the indemnification
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obligations set forth in Section 2.2 hereof, the term of escrow for the General
Escrow Shares shall commence on the Closing Date of the Merger and shall
terminate upon the occurrence of (i) the first publication by PSS of audited
consolidated financial statements covering an accounting period after the
Closing Date for those items that would be expected to be encountered in the
audit process or (ii) one (1) year after the Closing Date for all other items.
PSS and the Representatives shall provide written notice to the Escrow Agent
upon expiration of the escrow for the General Escrow Shares.
3.2 Term - Specific Indemnity. With respect to the indemnification
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obligations set forth in Section 2.3 hereof, the term of escrow for the Specific
Escrow Shares shall commence on the Closing Date of the Merger and shall
terminate with respect to each type of claim indemnified under Section 2.3
hereof upon a final determination that S&W can incur no Indemnifiable Loss for
an Accounts Receivable Claim,
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Escrow Agent Expenses or Representative Expenses, as the case may be. PSS and
the Representatives shall provide written notice to the Escrow Agent upon
expiration of the escrow for the Specific Escrow Shares. Notwithstanding the
foregoing, with respect to the Specific Escrow Shares related to the Accounts
Receivable Claim, the Representatives may elect on one occasion between six
months following the Closing Date and the expiration of the term for the
Accounts Receivable Claim, to end such term and to have delivered to the
shareholders the Specific Escrow Shares related to such Accounts Receivable
Claim less that portion required to satisfy any Indemnifiable Loss related to
the Accounts Receivable Claim.
3.3 Expiration of Term - No Claim Pending. If at the expiration of an
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escrow term provided in Section 3.1 or 3.2 above, either (i) no Loss Notice has
been received with respect to an Indemnifiable Loss covered by the escrow which
term is expiring; or (ii) any Loss Notice that has been received has been
resolved in accordance with this Agreement; or (iii) no litigation or claim is
pending for which an Indemnitee may be entitled to indemnification hereunder,
the Escrow Agent shall (i) deliver to the transfer agent for PSS Common Stock
for issuance to each Shareholder, a certificate representing the number of
shares of PSS Common Stock equal to the aggregate number of the Escrow Shares
subject to the escrow which term is expiring and then remaining in escrow times
the Percentage Interest for such Shareholder, and (ii) deliver to each
Shareholder, any Cash times the Percentage Interest for such Shareholder. The
Representatives and PSS shall provide written notice to the Escrow Agent which
sets forth the number of Escrow Shares to be delivered as provided in the
foregoing sentence. Any such delivery of PSS Common Stock shall be of full
shares and any fractional portions shall be rounded to a whole number by the
Escrow Agent so that the number of shares remaining in escrow to be delivered
will be fully allocated among such Shareholders.
3.4 Expiration of Term - Claim Pending. If at the expiration of an escrow
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term provided in Section 3.1 or 3.2 above, any claim is pending under Section
2.2 or Section 2.3 for which an Indemnitee would be entitled to indemnification
if such claim were resolved adversely to them, then the Escrow Agent shall
retain in such escrow that number of shares of PSS Common Stock as shall equal
the number of Escrow Shares (rounded to the next highest whole number) that,
when multiplied by the Value Per Share, equals the amount set forth by such
Indemnitee in the Loss Notice with respect to such claims (the "Retained
Shares"). The Representatives and PSS shall provide written notice to the Escrow
Agent which sets forth the Retained Shares as determined in the foregoing
sentence. The number of Escrow Shares, less the number of Retained Shares, shall
then be distributed to the Shareholders as set forth in Section 3.3 above. Upon
the resolution of any claim for which shares were retained in escrow at the
expiration of the term of this Agreement and receipt of written notice from PSS
and the Representatives to such effect, the Escrow Agent shall cancel the
appropriate number of Retained Shares (if any) and shall distribute any
remaining Retained Shares to the Shareholders as set forth in Section 3.3 above.
3.5 Effect of Final Delivery. Notwithstanding the expiration of the term
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of the escrow, this Agreement shall continue in full force and effect until the
Escrow Agent has delivered all of the Escrow Shares pursuant to the terms
hereof. After all of such shares have been so delivered, all rights, duties and
obligations of the respective parties hereunder shall terminate. If any cash is
held in escrow at the expiration of the term of the escrow, such cash shall be
distributed pro rata with the Escrow Shares as provided in Sections 3.3 and 3.4
above.
ARTICLE 4
ESCROW STOCK CERTIFICATES
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The Escrow Agent may at any time request the transfer agent for PSS Common
Stock to issue new certificates representing the Escrow Shares in such
denominations as may be necessary or appropriate in carrying out the Escrow
Agent's obligations under this Agreement.
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ARTICLE 5
DIVIDENDS; VOTING RIGHTS
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5.1 Cash Dividends; Voting Rights. Any and all cash dividends or other
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cash income with respect to the Escrow Shares shall be held in escrow with the
Escrow Shares pursuant to the terms of this Agreement. By written notice signed
by the Representatives, the Representatives shall have the right to direct the
Escrow Agent as to the exercise of voting rights with respect to such Escrow
Shares held by the Escrow Agent on behalf of the Shareholders, and the Escrow
Agent shall comply with such directions if received from the Representatives at
least five (5) days prior to the date of the meeting at which such vote is to be
taken.
5.2 Stock Splits; Stock Dividends. In the event of any stock split, stock
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dividend, recapitalization or similar transaction with respect to PSS Common
Stock that becomes effective during the term of this Agreement, the additional
shares so issued with respect to the Escrow Shares shall be added to the Escrow
Shares and any other references herein to a specific number of shares of PSS
Common Stock and the Value Per Share shall be adjusted accordingly.
ARTICLE 6
THE ESCROW AGENT
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6.1 Liability. In performing any of its duties under this Agreement, or
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upon the claimed failure to perform its duties hereunder, Escrow Agent shall not
be liable to anyone for any damages, losses or expenses which they may incur as
a result of the Escrow Agent so acting, or failing to act; provided, however,
that Escrow Agent shall be liable for damages arising out of its willful default
or gross negligence under this Agreement. Accordingly, the Escrow Agent shall
not incur any such liability with respect to (i) any action taken or omitted to
be taken in good faith upon advice of its counsel or counsel for PSS or the
Representatives given with respect to any questions relating to the duties and
responsibilities of the Escrow Agent hereunder; or (ii) any action taken or
omitted to be taken in reliance upon any document, including any written notice
or instructions provided for in this Agreement, not only as to its due execution
and to the validity and effectiveness of its provisions, but also as to the
truth and accuracy of any information contained therein, which the Escrow Agent
shall in good faith believe to be genuine, to have been signed or presented by
the purported proper person or persons and to conform with the provisions of
this Agreement. Written instructions provided to Escrow Agent hereunder by PSS
and/or the Representatives shall be signed by an "Authorized Representative" of
PSS as identified on Schedule 2 attached hereto and a majority of the
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Representatives. The limitation of liability provisions of this Section 6.1
shall survive the termination of this Agreement and the resignation or removal
of the Escrow Agent.
6.2 Indemnification of Escrow Agent. PSS and the Representatives (on
-------------------------------
behalf of the Shareholders, but not personally) hereby, jointly and severally,
agrees to indemnify and hold harmless the Escrow Agent against any and all
losses, claims, damages, liabilities and expenses, including, without
limitation, reasonable costs of investigation and counsel fees and disbursements
(both at the trial and appellate levels) which may be imposed on Escrow Agent or
incurred by it in connection with its acceptance of this appointment as Escrow
Agent hereunder or the performance of its duties hereunder (except in connection
with the willful default or gross negligence of the Escrow Agent hereunder),
including, without limitation, any litigation arising from this Escrow
Agreement, or involving the subject matter thereof. The indemnity provisions of
this Section 6.2 shall survive the termination of this Agreement and the
resignation or removal of the Escrow Agent.
6.3 Resignation. The Escrow Agent may resign at any time from its
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obligations under this Agreement by providing written notice to the parties
hereto. Such resignation shall be effective not later than sixty (60) days after
such written notice has been given. The Escrow Agent shall have no
responsibility for the appointment of a successor escrow agent. If a successor
escrow agent is not selected within sixty (60) days of the resignation of Escrow
Agent, the Escrow Agent shall have the right to
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institute a Bill of Interpleader or other appropriate judicial proceeding in any
court of competent jurisdiction, and shall be entitled to tender into the
registry or custody of any court of competent jurisdiction all money or property
in its hand under the terms of this Agreement, whereupon the parties hereto
agree Escrow Agent shall be discharged from all further duties under this
Agreement. The filing of any such legal proceedings shall not deprive Escrow
Agent of its compensation earned prior to such filing. The Escrow Agent may be
removed for cause by PSS or the Representatives. The removal of the Escrow Agent
shall not deprive the Escrow Agent of its compensation earned prior to such
removal.
6.4 Expenses of Escrow Agent. The Representatives (on behalf of the
------------------------
Shareholders and out of the Escrow Shares, but not personally) and PSS shall
share equally the expenses of the Escrow Agent in an amount up to $5,000 each,
and thereafter any remaining expenses of the Escrow Agent shall be borne by PSS.
Escrow Agent's fees and expenses are set forth on Schedule 3 attached hereto and
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made a part hereof and Escrow Agent shall bill PSS for the amount of such fees
and expenses. PSS shall pay the amount of its fees and expenses to Escrow Agent,
and the Escrow Agent Expenses. The Escrow Agent Expenses shall constitute an
Indemnifiable Loss pursuant to Section 2.3 hereof. As security for such Escrow
Agent Expenses, Escrow Agent is hereby given a lien upon all assets held by
Escrow Agent hereunder, which lien shall be prior to all other liens or claims
against such assets.
ARTICLE 7
REPRESENTATIVES
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7.1 Power and Authority. The Representatives shall have full power and
-------------------
authority to represent the Shareholders and their successors with respect to all
matters arising under this Agreement, and all action taken by the
Representatives hereunder shall be binding upon such Shareholders and their
successors as if expressly ratified and confirmed in writing by each of them.
Without limiting the generality of the foregoing, the Representatives shall have
full power and authority, on behalf of all the Shareholders and their
successors, to interpret all the terms and provisions of this Agreement, to
dispute or fail to dispute any claim of Indemnifiable Loss against the Escrow
Shares made by an Indemnitee, to negotiate and compromise any dispute which may
arise under this Agreement, to sign any releases or other documents with respect
to any such dispute, and to authorize payments to be made with respect thereto.
Any action or notice hereunder may be taken or given by a majority of the
Representatives.
7.2 Resignation; Successors. A Representative, or any successor hereafter
-----------------------
appointed, may resign and shall be discharged of his duties hereunder upon the
appointment of a successor Representative as hereinafter provided. In case of
such resignation, or in the event of the death or inability to act of a
Representative, a successor shall be named from among the Shareholders by a
majority of the members of the Board of Directors of S&W who served on such
board prior to the Merger. Each such successor Representative shall have all the
power, authority, rights and privileges hereby conferred upon the original
Representative, and the term "Representative" as used herein shall be deemed to
include such successor Representative.
7.3 Liability. In performing any of his duties under this Agreement, or
---------
upon the claimed failure to perform his duties hereunder, the Representatives
shall not be liable to the Shareholders or anyone else for any damages, losses
or expenses which they may incur as a result of any act, or failure to act under
this Agreement; provided, however, that the Representatives shall be liable for
damages arising out of actions or omissions that both (i) were taken or omitted
not in good faith and (ii) constituted willful default or gross negligence under
this Agreement. Accordingly, the Representatives shall not incur any such
liability with respect to (i) any action taken or omitted to be taken in good
faith upon advice of his counsel given with respect to any questions relating to
the duties and responsibilities of the Representatives hereunder; or (ii) any
action taken or omitted to be taken in reliance upon any document, including any
written notice or instructions provided for in this Agreement, not only as to
its due execution and to the validity and effectiveness of its provisions, but
also as to the truth and accuracy of any information contained therein, which
the Representatives shall in good faith believe to be genuine, to have been
signed or presented by the purported proper person or persons and to conform
with the provisions of this
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Agreement. The limitation of liability provisions of this Section 7.3 shall
survive the termination of this Agreement and the resignation of any or all of
the Representatives.
7.4 Representative Expenses. PSS shall pay any Representative Expenses in
-----------------------
amount up to $10,000, which amounts shall constitute an Indemnifiable Loss
pursuant to Section 2.3 hereof. Any expenses of the Representatives in excess of
$10,000 shall be the borne by the Representatives and the Shareholders as agreed
to among themselves.
ARTICLE 8
MISCELLANEOUS
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8.1 Transferability. The contingent right to receive Escrow Shares shall
---------------
not be transferable by the Shareholders otherwise than by will or by the laws of
descent and distribution.
8.2 Notices. Each party shall keep each of the other parties hereto
-------
advised in writing of all transactions pursuant to this Agreement. Any notices
or other communications required or permitted under this Agreement shall be in
writing and shall be sufficiently given if sent by registered or certified mail,
postage prepaid, addressed as follows, or if sent by facsimile to the facsimile
numbers identified below:
If to PSS or DI:
Physician Sales & Service, Inc.
4345 Southpoint Boulevard
Jacksonville, Florida 32216
Attn: Mr. David A. Smith
Tel: (904) 332-3000
Facsimile: (904) 332-3210
with a copy to:
Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attn: J. Vaughan Curtis, Esq.
Tel: (404) 881-7397
Facsimile: (404) 881-7777
If to Representatives:
c/o Joseph E. Miller, Jr.
_______________________________
_______________________________
Tel:___________________________
Fax:___________________________
With a copy to:
___________________________________
___________________________________
___________________________________
Tel:___________________________
Fax:___________________________
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If to Escrow Agent:
The Bank of New York
Corporate Trust Department
101 Barclay Street, 12E
New York, New York 10286
Attn: Thomas Hacker
Tel: (212) 815-7182
Fax: (212) 815-7181
or such other person or address as shall be furnished in writing by any of the
parties and any such notice or communication shall be deemed to have been given
as of the date so mailed.
8.3 Construction. The validity, enforcement and construction of this
------------
Agreement shall be governed by the laws of the State of Florida, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
8.4 Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective heirs, legatees, assigns and
transferees, as the case may be. Escrow Agent shall be bound only by the terms
of this Agreement and shall not be bound by or incur liability with respect to
the Merger Agreement or any other agreement or understanding between PSS and the
Shareholders. The Escrow Agent shall not be charged with notice or knowledge of
any such ancillary document, fact or information not specifically set forth
herein. The Escrow Agent shall undertake to perform only such duties as are
expressly set forth herein and no additional or implied duties or obligations
shall be read into this Agreement against the Escrow Agent.
8.5 Separability. If any provision or section of this Agreement is
------------
determined to be void or otherwise unenforceable, it shall not affect the
validity or enforceability of any other provisions of this Agreement which shall
remain enforceable in accordance with their terms.
8.6 Headings. The headings and subheadings contained in this Agreement are
--------
for reference only and for the benefit of the parties and shall not be
considered in the interpretation or construction of this Agreement.
8.7 Execution in Counterparts. This Agreement may be executed in any number
-------------------------
of counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument
8.8 Amendments. This Agreement may be amended from time to time but only by
----------
written agreement signed by all of the parties hereto.
8.9 Third-Party Beneficiaries. S&W, DI and the former shareholders of S&W
-------------------------
are expressly intended to be third-party beneficiaries of the indemnities and
obligations of the Representatives as if they were parties to this Agreement.
B-9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Escrow Agreement as of
the day and year first above written.
PHYSICIAN SALES & SERVICE, INC.
By:
------------------------------------------------
Title:
---------------------------------------------
"ESCROW AGENT"
THE BANK OF NEW YORK
By:
------------------------------------------------
"REPRESENTATIVES"
---------------------------------------------------
Joseph E. Miller, Jr.
---------------------------------------------------
Bruce P. Ashby
By:
------------------------------------------------
George R. Privitera, Trustee
The S&W X-Ray, Inc. Employee Stock Ownership Trust
B-10
<PAGE>
ANNEX C
SECTIONS 623 AND 910 OF THE
NEW YORK BUSINESS CORPORATION LAW
RELATING TO APPRAISAL RIGHTS
MCKINNEY'S CONSOLIDATED LAWS OF NEW YORK ANNOTATED
BUSINESS CORPORATION LAW
CHAPTER 4 OF THE CONSOLIDATED LAWS
ARTICLE 6--SHAREHOLDERS
(S) 623. Procedure to enforce shareholder's right to receive payment for shares
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) within ten days after the shareholders, authorization date, which term as
used in this section means the date on which the shareholders' vote authorizing
such action was taken, or the date on which such consent without a meeting was
obtained from the requisite shareholders, the corporation shall give written
notice of such authorization or consent by registered mail to each shareholder
who filed written objection or from whom written objection was not required,
excepting any shareholder who voted for or consented in writing to the proposed
action and who thereby is deemed-to have elected not to enforce his right to
receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder from
whom written objection was not required and who elects to dissent shall file
with the corporation a written notice of such election, stating his name and
residence address, the number and classes of shares as to which he dissents and
a demand for payment of the fair value of his shares. Any shareholder who elects
to dissent from a merger under section 905 (Merger of subsidiary corporation) or
paragraph (c) of section 907 (Merger or consolidation of domestic and foreign
corporations) or from a share exchange under paragraph (g) of section 913 (Share
exchanges) shall file a written notice of such election to dissent within twenty
days after the giving to him of a copy of the plan of merger or exchange or an
outline of the material features thereof under section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease to
have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenter's rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has
C-1
<PAGE>
been completed, in lieu thereof, at the election of the corporation, the fair
value thereof in cash as determined by the board as of the time of such
expiration or completion, but without prejudice otherwise to any corporate
proceedings that may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within one month
thereafter the shareholder of shares represented by certificates shall submit
the certificates representing his shares to the corporation, or to its transfer
agent, which shall forthwith note conspicuously thereon that a notice of
election has been filed and shall return the certificates to the shareholder or
other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters, rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements-were previously furnished, nor if in
connection with obtaining the shareholders, authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to .
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make such
offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a special
proceeding in the supreme court in the judicial district in which the office of
the corporation is located to determine the rights of dissenting shareholders
and to fix the fair value of their shares. If, in the case of merger or
consolidation, the surviving or new corporation is a foreign corporation
C-2
<PAGE>
without an office in this state, such proceeding shall be brought in the county
where the office of the domestic corporation, whose shares are to be valued, was
located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such proceeding
for the same purpose not later than thirty days after the expiration of such
twenty day period. If such proceeding is not instituted within such thirty day
period, all dissenter's rights shall be lost unless the supreme court, for good
cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid for
their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting shareholder
who is a resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as to
whom the corporation requests the court to make such determination, is entitled
to receive payment for his shares. If the corporation does not request any such
determination or if the court finds that any dissenting shareholder is so
entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business on
the day prior to the shareholders, authorization date. In fixing the fair value
of the shares, the court shall consider the nature of the transaction giving
rise to the shareholder's right to receive payment for shares and its effects on
the corporation and its shareholders, the concepts and methods then customary in
the relevant securities and financial markets for determining fair value of
shares of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the fair
value of the shares without a jury and without referral to an appraiser or
referee. Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit pretrial
disclosure, including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended for use at the
trial in the proceeding and notwithstanding subdivision (d) of section 3101 of
the civil practice law and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at such rate
as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and expenses,
including the fees and expenses of its counsel and of any experts employed by
it. Notwithstanding the foregoing, the court may, in its discretion, apportion
and assess all or any part of the costs, expenses and fees incurred by the
corporation against any or all of the dissenting shareholders who are parties to
the proceeding, including any who have withdrawn their notices of election as
provided in paragraph (e), if the court finds that their refusal to accept the
corporate offer was arbitrary, vexatious or otherwise not in good faith. The
court may, in its discretion, apportion and assess all or any part of the costs,
expenses and fees incurred by any or all of the dissenting shareholders who are
parties to the proceeding against the corporation if the court finds any of the
following: (A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay; (B) that no offer or
required advance payment was made by the corporation; (C) that the corporation
failed to institute the special proceeding within the period specified therefor;
or (D) that the action of the corporation in complying with its obligations as
provided in this section was arbitrary, vexatious or otherwise not in good
faith. In making any determination as provided in clause (A), the court may
consider the dollar amount or the percentage, or both, by which the fair value
of the shares as determined exceeds the corporate offer.
(8) within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be due
him, upon surrender of the certificates for any such shares represented by
certificates.
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<PAGE>
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section at
a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be deemed
withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it is
liquidated, be subordinated to the rights of creditors of the corporation, but
have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this paragraph
do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment for
his shares cannot be made because of the restrictions of this paragraph. If the
dissenting shareholder fails to exercise such option as provided, the
corporation shall exercise the option by written notice given to him within
twenty days after the expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment for his
shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(1) Except as otherwise expressly provided in this section, any notice to be
given by a corporation to a shareholder under-this section shall be given in the
manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided in
subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations).
C-4
<PAGE>
MCKINNEY'S CONSOLIDATED LAWS OF NEW YORK ANNOTATED
BUSINESS CORPORATION LAW
CHAPTER 4 OF THE CONSOLIDATED LAWS
ARTICLE 9--MERGER OR CONSOLIDATION; GUARANTEE;
DISPOSITION OF ASSETS; SHARE EXCHANGES
s 910. Right of shareholder to receive payment for shares upon merger or
consolidation, or sale, lease, exchange or other disposition of assets, or share
exchange
(a) A shareholder of a domestic corporation shall, subject to and by complying
with section 623 (Procedure to enforce shareholder's right to receive payment
for shares), have the right to receive payment of the fair value of his shares
and the other rights and benefits provided by such section, in the following
cases:
(1) Any shareholder entitled to vote who does not assent to the taking of
an action specified in subparagraphs (A), (B) and C.
(A) Any plan of merger or consolidation to which the corporation is a
party; except that the right to receive payment of the fair value of his shares
shall not be available:
(i) To a shareholder of the parent corporation in a merger
authorized by section 905 (Merger of parent and subsidiary corporations), or
paragraph (c) of section 907 (Merger or consolidation of domestic and foreign
corporations); and
(ii) To a shareholder of the surviving corporation in a merger
authorized by this article, other than a merger specified in subparagraph (i),
unless such merger effects one or more of the changes specified in subparagraph
(b)(6) of section 806 (Provisions as to certain proceedings) in the rights of
the shares held by such shareholder.
(B) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation which requires shareholder
approval under section 909 (Sale, lease, exchange or other disposition of
assets) other than a transaction wholly for cash where the shareholders,
approval thereof is conditioned upon the dissolution of the corporation and the
distribution of substantially all of its net assets to the shareholders in
accordance with their respective interests within one year after the date of
such transaction.
(C) Any share exchange authorized by section 913 in which the
corporation is participating as a subject corporation; except that the right to
receive payment of the fair value of his shares shall not be available to a
shareholder whose shares have not been acquired in the exchange.
(2) Any shareholder of the subsidiary corporation in a merger authorized
by section 905 or paragraph (c) of section 907, or in a share exchange
authorized by paragraph (g) of section 913, who files with the corporation a
written notice of election to dissent as provided in paragraph (c) of section
623.
C-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Amended and Restated Articles of Incorporation and the Amended and
Restated Bylaws of the Registrant set forth the extent to which the Registrant's
directors and officers may be indemnified against liabilities they may incur
while serving in such capacities. Such indemnification will be provided to the
fullest extent allowed by the Florida Business Corporation Act, as amended from
time to time, and judicial or administrative decisions. Under these
indemnification provisions, the Registrant is required to indemnify any of its
directors and officers against any reasonable expenses (including attorneys'
fees) incurred by him in the defense of any action, suit or proceeding, whether
civil, criminal, administrative or investigative, to which he was made a party,
or in defense of any claim, issue or matter therein, by reason of the fact that
he is or was a director or officer of the Registrant or who, while a director or
officer of the Registrant, is or was serving at the Registrant's request as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise to
the extent that such director or officer has been successful, on the merits or
otherwise, in such defense. The Registrant also may indemnify any of its
directors or officers against any liability incurred in connection with any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Registrant, in which event, additional determinations must be made
before indemnification is provided) by reason of the fact that he is or was a
director or officer of the Registrant who, while a director or officer of the
Registrant, is or was serving at the Registrant's request as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise, if
such director or officer acted in good faith and in a manner he believed to be
in, or not opposed to, the best interests of the Registrant, and with respect to
any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. The Registrant may also provide advancement of expenses incurred by a
director or officer in defending any such action, suit or proceeding upon
receipt of a written affirmation of such officer or director that he has met
certain standards of conduct and an understanding by or on behalf of such
officer or director to repay such advances unless it is ultimately determined
that he is entitled to indemnification by the Registrant. Notwithstanding the
foregoing, the Amended and Restated Bylaws of the Registrant provide that the
Registrant shall not be required to indemnify any of its directors or officers
in connection with a proceeding initiated by such person unless such
authorization for such proceeding was not denied by the Board of Directors of
the Registrant prior to sixty (60) days after receipt of notice thereof from
such person stating his or her intent to initiate such proceeding and only upon
such terms and conditions as the Board of Directors may deem appropriate.
The Florida Business Corporation Act contains a provision which limits
the personal liability for monetary damages to the corporation or any other
person for any statement, vote, decision, or failure to act, regarding corporate
management or policy, by a director, unless the director breached or failed to
perform his duties as a director and such breach constitutes (i) a violation of
criminal law, unless the director has reasonable cause to believe his conduct
was unlawful; (ii) a transaction from which the director received an improper
personal benefit; (iii) an unlawful distribution under Florida law, (iv) in a
proceeding by or in the right of a corporation to procure a judgment in its
favor or by or in the right of a shareholder, conscious disregard for the best
interest of the corporation, or willful misconduct; or (v) in a proceeding by or
in the right of someone other that the corporation or a shareholder,
recklessness or an act or omission which was committed in bad faith or with
malicious purpose or in a manner exhibiting wanton or willful disregard of human
rights, safety or property. The Registrant maintains an insurance policy
insuring the Registrant and directors and officers of the Registrant against
certain liabilities, including liabilities under the Securities Act of 1933.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits (See Exhibit Index immediately preceding the exhibits for the
page number where each exhibit can be found)
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
2.1 - Amended and Restated Agreement and Plan of Merger, dated as of
August 22, 1997, among PSS, DI, Merger Corp. and S&W (included in
ANNEX A to the Proxy Statement-Prospectus and incorporated by
reference herein (schedules omitted-- the Registrant agrees to
furnish a copy of any schedule to the Commission upon request)).
2.2 - Form of Escrow Agreement among PSS, S&W and the Stockholder
Representatives (included in ANNEX B to the Proxy Statement-
Prospectus and incorporated by reference herein).
5.1 - Opinion of Fred Elefant, P.A., including consent.
23.1 - Consent of Fred Elefant, P.A. (contained in Exhibit 5.1).
23.2 - Consent of Arthur Andersen LLP.
23.3 - Consent of May, Robinson, Gordon & Penta, P.C.
24.1 - Powers of Attorney (see the signature pages to this Registration
Statement on Form S-4).(1)
99.1 - Form of Proxy of S&W.
</TABLE>
- --------------------
(1) Previously filed with PSS' Registration Statement on Form S-4 (Reg. No.
333-33453) on August 12, 1997.
(b) Financial Statement Schedules
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
financial statements or notes thereto.
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<PAGE>
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers for sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13
or section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the Registrant's Certificate of
Incorporation or Bylaws, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefor, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment for the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
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<PAGE>
(e) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(f) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(g) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Jacksonville, State of Florida, on August 22, 1997.
PHYSICIAN SALES & SERVICE, INC.
By: /s/ David A. Smith
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David A. Smith
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities indicated on August 22, 1997.
<TABLE>
<CAPTION>
Signature Title
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<S> <C>
* Chairman of the Board and Chief Executive
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Patrick C. Kelly Officer (principal executive officer)
* President and Director
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John F. Sasen, Sr.
/s/ David A. Smith Executive Vice President, Chief Financial Officer and
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David A. Smith Assistant Secretary and Director (principal financial and
accounting officer)
Director
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Delmer W. Dallas
* Director
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William C. Mason
* Director
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T. O'Neal Douglas
* Director
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Fred Elefant
* Director
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Delores Kesler
* Director
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James L.L. Tullis
</TABLE>
*By: /s/ David A. Smith
----------------------
David A. Smith
Attorney-in-Fact
II-5
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EXHIBIT INDEX
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<CAPTION>
Exhibit
Number Description of Exhibit Page
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<S> <C> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
August 22, 1997, among PSS, DI. Merger Corp. and S&W (included in
ANNEX A to the Proxy Statement-Prospectus and incorporated by
reference herein (schedules omitted -- the registrant agrees to
furnish a copy of any schedule to the Commission upon request))
2.2 Form of Escrow Agreement among PSS, S&W and the Stockholder
Representatives (included in ANNEX B to the Proxy
Statement-Prospectus and incorporated by reference herein).
5.1 Opinion of Fred Elefant, P.A., including consent.
23.1 Consent of Fred Elefant, P.A. (contained in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of May, Robinson, Gordon & Penta, P.C.
24.1 Powers of Attorney (see the signature pages to this Registration
Statement on Form S-4).(1)
99.1 Form of Proxy of S&W.
</TABLE>
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(1) Previously filed with PSS' Registration Statement on Form S-4 (Reg. No.
333-33453) on August 12, 1997.
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Exhibit 5.1
FRED ELEFANT, P.A.
1650 Prudential Drive, Suite 105
Jacksonville, Florida 32207
August 22, 1997
Physician Sales & Service, Inc.
4345 Southpoint Boulevard
Jacksonville, Florida 32216
Ladies and Gentlemen:
This opinion is given in connection with the filing by Physician Sales
& Service, Inc., a corporation organized and existing under the laws of the
State of Florida (the "Company"), of a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") with respect to the registration under the Securities Act of 1933,
as amended, of up to 2,123,558 shares of the Company's common stock, $.01 par
value per share (the "Shares") to be issued in connection with the proposed
merger of PSS Merger Corp., a wholly owned indirect subsidiary of the Company,
with and into S&W X-Ray, Inc.
In the capacity described above, I have considered such matters of law
and of fact, including the examination of originals or copies, certified or
otherwise identified to my satisfaction, of such records and documents of the
Company, certificates of public officials and such other documents as I have
deemed appropriate as a basis for the opinions hereinafter set forth. In
conducting my examination, I have assumed the genuineness of all signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to me as originals, the conformity to original documents of all
documents submitted to me as certified or photostatic copies, and the
authenticity of the originals of such documents. The opinions set forth herein
are limited to the laws of the State of Florida.
Based upon the foregoing, it is my opinion that the Shares have been
duly authorized and are validly issued, fully paid, and non-assessable by the
Company under the Business Corporation Act of the State of Florida as in effect
on the date hereof.
This opinion is provided to you for your benefit and for the benefit of
the Commission, in each case, solely with regard to the Registration Statement,
may be relied upon by you and the Commission only in connection with the
Registration Statement, and may not be relied upon by any other person or for
any other purpose without my prior written consent.
I consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference made to my firm under the caption "Legal Matters"
in the Prospectus constituting part of the Registration Statement.
FRED ELEFANT, P.A.
By: /s/ Fred Elefant
-------------------------
Fred Elefant
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Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Jacksonville, Florida
August 21, 1997
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ May, Robinson, Gordon & Penta, P.C.
Rochester, New York
August 22, 1997
<PAGE>
EXHIBIT 99.1
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S&W X-RAY, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Joseph E. Miller, Jr. and George R. Privitera
as Proxies, each with the power to appoint his substitute, and hereby
authorizes either one or both of them to represent and to vote, as designated
below, all the shares of Common Stock of S&W X-Ray, Inc. held of record by the
undersigned on August 10, 1997, at the Special Meeting of Stockholders to be
held on September 5, 1997.
1. PROPOSAL TO: (i) approve the Amended and Restated Agreement and Plan of
Merger, dated as of August 22, 1997 (the "Merger Agreement"), by and among
S&W X-Ray, Inc. ("S&W"), Physician Sales & Service, Inc. ("PSS"),
Diagnostic Imaging, Inc., a wholly owned subsidiary of PSS ("DI"), and PSS
Merger Corp., a wholly owned subsidiary of DI, pursuant to which, among
other matters, (a) Merger Corp. will merge with and into S&W (the "Merger")
and (b) each outstanding share of S&W common Stock will be converted into
the right to receive and the contingent right to receive shares of common
stock of PSS; (ii) approve the Escrow Agreement (the "Escrow Agreement") by
and between PSS and the Stockholder Representative; and (iii) appoint
Joseph E. Miller, Jr., Bruce P. Ashby and the S&W X-Ray, Inc. Employee
Stock Ownership Trust as the Stockholder Representatives in accordance with
the Escrow Agreement, all as more fully described in the accompanying Proxy
Statement-Prospectus.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
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THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1 ABOVE.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
If a corporation, please sign in
full corporate name by the presi-
dent or other authorized officer.
If a partnership, please sign in
full partnership name by authorized
person.
Dated: ________________________ 1997
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Signature
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Signature if held jointly
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