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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 20, 1996
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PHYSICIAN SALES & SERVICE, INC.
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(Exact name of registrant as specified in its charter)
Florida 0-23832 59-2280364
- --------------- ----------- -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
7800 Belfort Parkway, Suite 250, Jacksonville, Florida
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32256 (Address, including zip code, of principal executive offices)
(904) 281-0011
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(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The table below sets forth for each of the fiscal years 1994 through 1996
certain financial information. The following financial information gives
retroactive effect to the mergers (the "Mergers") with Taylor Medical, Inc.
("Taylor") and X-ray Corporation of Georgia ("X-ray GA"). Included is pro
forma net income and net income per share excluding merger costs and expenses
and restructuring charges.
<TABLE>
<CAPTION>
Fiscal Year Ended
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1994 1995 1996
-------- --------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Income Statement Data:
Net sales $351,203 $413,301 $529,024
Gross profit 105,968 119,613 149,664
Selling and G&A expenses 99,147 111,492 130,966
Restructuring charges (1) 308 4,389 -
Merger costs and expenses (2) - - 15,732
Earnings before interest and taxes 7,339 5,639 4,552
Net income (loss) before
extraordinary item 1,487 (847) 1,339
Extraordinary loss, net of tax (3) 327 - -
----------------------------------------------
Net income (loss) $ 1,160 $ (847) $ 1,339
==============================================
Net income (loss) per share before
extraordinary item $ 0.08 $ (0.04) $ 0.04
Extraordinary loss per share, net of tax (0.02) - -
----------------------------------------------
Net income (loss) per share $ 0.06 $ (0.04) $ 0.04
==============================================
Unaudited pro forma net income
excluding merger costs and expenses
and restructuring charges $ 1,468 $ 2,042 $ 12,746
==============================================
Unaudited pro forma net income per share
excluding merger costs and expenses
and restructuring charges $ 0.08 $ 0.08 $ 0.41
==============================================
Weighted average shares outstanding 17,772 23,762 31,454
==============================================
</TABLE>
(1) The fiscal 1995 restructuring charge of $4,389 reflects Taylor
management's assessment of the underrealization of future benefits
related to certain intangible assets. The fiscal 1994 restructuring charge
of $308 resulted from Taylor's consolidation of an acquisition.
(2) Merger costs and expenses reflect direct merger expenses incurred in
connection with the merger of PSS and Taylor and other immaterial poolings.
(3) The extraordinary item in fiscal 1994 resulted from early extinguishment
of debt by Taylor.
PSS is a leading distributor of medical supplies, equipment and
pharmaceuticals to primary care and other office-based physicians. Since its
inception in 1983, the Company has achieved significant growth in the number of
service center locations, geographic area of operation, net sales, and
profitability. During the fiscal years 1992 through 1996, PSS's net sales,
excluding the retroactive effect of the mergers with Taylor and X-ray GA, grew
at a
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compound annual rate of 40.5%, and giving retroactive effect of the mergers
with Taylor and X-ray GA, the Company's net sales grew at a compound annual
rate of 25.5%. The number of Company service centers has grown from two at the
end of fiscal 1984 to 65 currently. In order of priority, the Company's
growth has been accomplished through (i) acquiring regional and local
medical supplies and equipment distributors, (ii) increasing sales from
existing service centers, and (iii) opening start-up service centers. Same
center sales growth from centers open for two or more consecutive 12-month
periods was 26.8%, 23.3% and 27.7% for each of fiscal years 1996, 1995, and
1994, respectively. Fiscal 1995 and 1994 same store sales exclude sales of
Taylor as historical branch level data is not available. Fiscal 1996, 1995 and
1994 same store sales exclude sales of X-ray GA as historical branch level data
is not available.
PSS currently has 65 service centers, 32 of which were opened as start-ups
and 33 of which resulted from the acquisition of 37 regional and local medical
supplies and equipment distributors. 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 17 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 connection with the Taylor merger.
PSS has grown the number of its sales representatives from 203 in fiscal
1991 to 692 in fiscal 1996. The Company's sales representatives focus on a
consultative and comprehensive sales approach with an emphasis on sophisticated
diagnostic products. The Company invested approximately $2.1 million in the
training and development of its sales representatives and management in fiscal
1996. In addition, the Company has implemented ICON(SM), a four pound, pen top,
portable computer system for use by its sales representatives. The ICON(SM) has
reduced a majority of the administrative functions of order entry and customer
service by instantly providing product information and availability, back order
status, and billing information. Also, the ICON(SM) system enables the customer
orders to be taken by the sales representative and transmitted via wireless,
radio wave transmission from the portable computer. The Company believes that
the ICON(SM) system has improved and will continue to improve sales
representatives' productivity.
Beginning in fiscal year 1994 and continuing through fiscal year 1996, the
Company refocused its pricing and its customer-focused marketing strategies.
Based on the Company's desire to increase penetration of existing accounts, to
increase aggregate sales and gross profit, and to position itself for better
penetration of larger physician group practices and various forms of managed
care networks, the Company in fiscal year 1994 reduced its sales prices on its
top 300 volume supplies and pharmaceutical products. Also, the Company
established Network Plus(SM), a physician group purchasing program, under which,
when a physician office guarantees at least 80% of its purchase volume to PSS,
then the Company will, in return, guarantee the lowest sales prices on certain
products as well as certain service guarantees. To fulfill this guarantee, the
Company has successfully negotiated lower vendor pricing on its high volume and
Network Plus(SM) products. Despite the lower prices guaranteed to PSS Network
Plus(SM) customers, the Company has been able to increase its service center
sales growth and its aggregate gross profit. The change in pricing strategy
has contributed to reducing the overall gross profit percentage of the Company
by 0.6% and 1.3% in fiscal 1996 and 1995, respectively. Despite the decrease
in gross profit percentage, the Company has maintained its operating profit
margin in fiscal 1995 and improved its operating profit margin by 1.5% in
fiscal 1996, excluding the effect of merger costs in fiscal year 1996 and
restructuring charges in fiscal year 1995. The improved profitability is
primarily the result of lower servicing and
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operating costs as a percentage of net sales due to (i) greater penetration of
its existing customer base, (ii) expansion through acquisition rather than
start-ups which initially entail greater start-up costs as a percentage of net
sales, and (iii) expanding its marketing focus to penetrate larger group
practices and managed care networks with lower selling and service requirement
costs. Management believes the Company's current gross profits are consistent
with the Company's long-term strategy.
The following is management's discussion and analysis of certain
additional factors which have affected the Company's financial position and
operating results during fiscal years 1996, 1995 and 1994, giving retroactive
effect to the merger with Taylor and X-ray GA.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 29, 1996 VERSUS FISCAL YEAR ENDED MARCH 30, 1995
NET SALES. Net sales increased $115.7 million to $529.0 million, or 28.0%
for the fiscal year ended 1996 compared to fiscal year 1995 sales of $413.3
million. Along with the factors discussed in Marketing and Product Mix herein,
the increase in net sales was attributable to (i) internal sales growth of
centers operating at least two years, (ii) incremental sales generated in
connection with the Abbott Agreement, (iii) net sales of centers acquired
during fiscal 1996, and (iv) net sales of fiscal year 1996 Company start-up
service centers.
Same store sales growth approximated 27% for fiscal year 1996. The first
year performance goals as set forth in the Abbott Agreement were met with PSS
realizing approximately $55.0 million in incremental net sales of Abbott
products during fiscal year 1996. Excluding Taylor and X-ray GA, Company
acquisitions and start-ups added to the growth in fiscal year 1996, with
approximately $14.5 million of net sales resulting from the acquisition of
nine local and regional medical suppliers and $9.2 million of net sales
generated by four Company start-ups, one of which was merged into an acquired
Taylor location during fiscal year 1996.
GROSS PROFIT. Gross profit increased $30.1 million, or 25.1%, for the
fiscal year ended 1996 compared to the fiscal year ended 1995. The increase in
gross profit dollars is attributable to the sales growth described above.
Gross profit as a percentage of net sales was 28.3% and 28.9% for the fiscal
years ended 1996 and 1995, respectively. The decrease in gross profit
percentage as a percentage of net sales is attributable to the penetration by
the Company into larger physician group practices that require more competitive
pricing but entail lower selling and servicing costs. The decrease in gross
profit percentage is also attributable to lower margins on diagnostic products
distributed under the Abbott Agreement. Margins under the Abbott Agreement are
scheduled to increase annually based on achievement by the Company of certain
performance goals as stipulated therein.
For the fiscal year ended 1996, the Company sold approximately $75 million
of Abbott product 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%.
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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 the
fiscal years ended 1996 and 1995, respectively. These vendor incentives
effectively raised the gross profit percentage by 1.3% and 1.1% during fiscal
years 1996 and 1995, respectively. Although the Company plans and expects to
continue to negotiate vendor performance incentives, there is no assurance that
vendor performance incentives will continue to positively impact gross profit
at the historical levels.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $12.4 million, or 17.6%, for the fiscal year ended 1996 compared to
the fiscal year ended 1995. General and administrative expenses as a
percentage of net sales, however, decreased to 15.6% for the fiscal year ended
1996 from 17.0% for the fiscal year ended 1995. The decrease in general and
administrative expenses as a percentage of net sales was a result of (i)
improved leveraging by PSS of its existing service centers' fixed general and
administrative expenses through increased sales volume; (ii) reduced overhead
from the sale of assets by Taylor in fiscal 1995 and decreased depreciation
expense associated with the assets sold; and (iii) reduced amortization
relating to intangible assets written-off by Taylor during fiscal 1995. The
decrease in general and administrative expenses as a percentage of net sales
was accomplished despite the additional overhead costs associated with the
implementation of the Abbott product line and the acquisition and start-up of
new service centers.
SELLING EXPENSES. Selling expenses increased $7.1 million, or 17.2%, for
the fiscal year ended 1996 compared to the fiscal year ended 1995. Selling
expense as a percentage of net sales was 9.2% and 10.0% for fiscal years 1996
and 1995, respectively. The decrease in selling expense as a percentage of net
sales is due to improved leveraging of existing service centers' fixed selling
expenses, such as salaries paid to sales representatives during the conversion
period from a guaranteed salary to a commission compensation arrangement and
the leveraging of sales management salaries. The decrease in selling expenses
as a percentage of net sales is also due to the variable commission plan of the
Company which pays a lower commission on Abbott products due to the lower gross
profit as a percentage of net sales on those products.
MERGER COSTS AND EXPENSES. During fiscal 1996, the Company recorded
non-recurring merger costs and expenses of $15.7 million associated with the
merger of PSS and Taylor and the other immaterial poolings. Such costs include
direct merger costs consisting primarily of investment banking, legal,
accounting, and filing fees as well as consolidation costs from the closing of
duplicate service center locations, realigning regional and corporate
functions, and reducing personnel.
OPERATING INCOME. Operating income decreased $0.8 million, or 20.5%, for
the fiscal year ended 1996 compared to 1995. As a percentage of net sales,
operating income for the fiscal year 1996 decreased to 0.6% from 0.9% for the
fiscal year ended 1995. The decrease in operating income is the result of the
merger costs and expenses of $15.7 million related to the Taylor merger during
fiscal 1996. On a pro forma basis, excluding the effect of non-recurring
merger costs and expenses incurred in fiscal year 1996 and the restructuring
charge incurred in fiscal year 1995, operating income for the fiscal year ended
1996 increased 130.9% to $18.7 million from $8.1 million for the fiscal year
ended 1995 due to the factors discussed above.
INTEREST EXPENSE. Interest expense for the fiscal year ended 1996
decreased approximately $1.0 million, or 24.5%, compared to the fiscal year
ended 1995. Interest expense
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decreased as a result of the decrease in average indebtedness and the
refinancing at a more favorable rate of Taylor debt assumed by PSS. The
decrease in average indebtedness for fiscal year 1996 compared to fiscal year
1995 is due to the use of the net proceeds from the secondary offering of
common stock of approximately $58.2 million of the total net proceeds of $142.9
million to repay all outstanding debt, other than capital lease obligations, on
November 20, 1995.
INTEREST INCOME. The Company earned interest income of $1.2 million from
the short-term investment of the remaining net proceeds from the secondary
offering in fiscal 1996.
OTHER INCOME. Other income decreased approximately $0.3 million, or
16.9%, for the fiscal year ended 1996 compared to the fiscal year ended 1995.
Other income decreased due to a net gain on sale of assets by Taylor recorded
during fiscal 1995 of approximately $0.9 million. Excluding the gain, other
income would have increased approximately $0.6 million primarily due to the
increase in finance charge income on customer accounts.
PROVISION FOR INCOME TAXES. Provision for income taxes decreased $1.1
million, or 45.3%, for the fiscal year ended 1996 compared to the fiscal year
ended 1995 due to a tax adjustment for the utilization of Taylor net operating
losses and a change in the valuation allowance. This tax adjustment resulted
in an increase in net income of $1.3 million.
NET INCOME. Net income increased $2.2 million, or 258.1%, for the
fiscal year ended 1996 compared to the fiscal year ended 1995 for the reasons
discussed above. As a percentage of net sales, net income increased for the
fiscal year ended 1996 to 0.3% from the net loss of 0.2% for the fiscal year
ended 1995. Excluding the effect of merger costs and expenses in fiscal year
1996 and the restructuring charge in fiscal year 1995, pro forma net income
would have increased 524.1% to $12.7 million for the fiscal year ended 1996
compared to $2.0 million for the fiscal year ended 1995. The increase in pro
forma net income is primarily attributable to the increasing profitability of
maturing centers and the leveraging of fixed costs through sales growth.
FISCAL YEAR ENDED MARCH 30, 1995 VERSUS FISCAL YEAR ENDED MARCH 31, 1994
NET SALES. Net sales increased $62.1 million, or 17.7%, for the fiscal
year ended 1995 compared to the fiscal year ended 1994. The increase in net
sales was attributable to internal sales growth, expansion through acquisitions
of local medical supply and equipment distributors and Company start-ups.
GROSS PROFIT. Gross profit increased $13.6 million, or 12.9%, for the
fiscal year ended 1995 compared to the fiscal year ended 1994. The increase in
gross profit dollars is attributable to the sales growth as described above.
Gross profit as a percentage of net sales was 28.9% and 30.2% for the
fiscal years ended 1995 and 1994, respectively. The decrease was primarily
attributable to a change in pricing strategy adopted by the Company during
fiscal year 1994 which has allowed the Company to increase market penetration
in its existing customer accounts, to expand the Company's market reach to new
customers in each service center, and to position the Company to better
service larger physician group practices that require more competitive pricing
but entail lower selling and servicing costs.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $8.0 million, or 12.8%, for the fiscal year ended 1995 compared to
the fiscal year ended 1994. General and administrative expenses as a percentage
of net sales decreased to 17.0% from 17.7% for the fiscal years ended 1995 and
1994, respectively. The Company has historically experienced decreases in
general and administrative expenses as a percentage of net sales due to
leveraging of existing service centers' fixed general and administrative
expenses through increased sales volume, as evidenced by the decrease for the
fiscal year ended 1995 compared to 1994.
SELLING EXPENSES. Selling expenses increased $4.4 million, or 11.9%, for
the fiscal year ended 1995 compared to the fiscal year ended 1994. Selling
expense as a percentage of net sales decreased to 10.0% from 10.5% for fiscal
years ended 1995 and 1994, respectively. The decrease in selling expense as a
percentage of net sales was due to improved leveraging of existing service
centers' fixed selling expenses, such as sales management salaries, through
increased sales volume.
RESTRUCTURING CHARGES. Taylor recorded a restructuring charge of
approximately $4.4 million in fiscal 1995 related to the write-off of
intangible assets. Taylor management concluded that future prospects for
certain of its distribution operations and its physician consulting services
and equipment repair business would result in underrealization of future
benefits related to certain intangible assets. Taylor recorded a restructuring
charge of $0.3 million in fiscal 1994 related to a merger with a medical supply
and equipment distributor.
OPERATING INCOME. Operating income decreased $2.8 million, or 42.7%, for
the fiscal year ended 1995 compared to 1994. As a percentage of net sales,
operating income for the fiscal year ended 1995 decreased to 0.9% from 1.9% for
the fiscal year ended 1994. The decrease was attributable to restructuring
charges recorded by Taylor as described above. Excluding the effect of the
fiscal 1995 and 1994 restructuring charges, pro forma operating income
increased $1.3 million or 19.1% to $8.1 million for the fiscal year ended 1995.
INTEREST EXPENSE. Interest expense for the fiscal year ended 1995
decreased approximately $0.7 million, or 15.1%, compared to the fiscal year
ended 1994. Interest expense decreased due to a decrease in average
indebtedness over the same periods. The decrease in average indebtedness for
fiscal year 1995 compared to fiscal year 1994 is primarily attributable to the
use of the net proceeds from the Company's initial public offering of common
stock, consummated during the quarter ended June 30, 1994, to reduce
outstanding debt, and the use of proceeds from the sales of net assets by
Taylor to pay down the Taylor line of credit.
At March 30, 1995, the Company had borrowings with various interest rates
based on LIBOR, the weighted-average rate of which was 7.9%.
OTHER INCOME. Other income increased approximately $1.1 million, or
131.1%, for the fiscal year ended 1995 compared to the fiscal year ended 1994.
The increase was the result of a gain on sale recognized by Taylor in
connection with the sale of the net assets of its home health division of
approximately $1.5 million offset by a loss on sale of assets of its Labcare
division of approximately $0.6 million both during the fiscal year ended 1995.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $1.4
million, or 127.5%, for the fiscal year ended 1995 compared to the fiscal year
ended 1994. The provision for income taxes increased despite a decrease in
operating income for the fiscal year ended 1995
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as compared to fiscal year ended 1994 due to the increase in the non-deductible
restructuring charges recorded by Taylor during the fiscal year ended 1995.
NET (LOSS) INCOME. Net income decreased $2.0 million, or 173.0%, for
the fiscal year ended 1995 to a net loss of $0.8 million compared to net income
of $1.2 million for the fiscal year ended 1994 for the reasons discussed above.
Excluding the effect of the fiscal 1995 and 1994 Taylor restructuring charges,
net income increased $0.6 million, or 39.1%, to $2.0 million for the year ended
1995 as compared to fiscal 1994.
QUARTERLY RESULTS (UNAUDITED)
The following tables present summarized unaudited quarterly results of
operations for the Company for fiscal years 1996 and 1995, giving retroactive
effect to the mergers with 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 and Notes thereto included elsewhere herein.
Future quarterly operating results may fluctuate depending on a number of
factors, including the timing of acquisitions of service centers, the timing of
the opening of start-up service centers, and changes in physicians' buying
patterns of supplies, diagnostic equipment and pharmaceuticals. Results of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year or any other quarter.
<TABLE>
Summary Quarterly Results
Fiscal Year 1996 Fiscal Year 1995
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First Second Third Fourth First Second Third Fourth
quarter quarter quarter quarter quarter quarter quarter quarter
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Net sales $116,082 $132,040 $137,600 $143,302 $99,537 $102,095 $104,277 $107,393
Gross profit 33,575 36,093 39,140 40,856 29,458 29,193 29,630 31,332
Merger costs and expenses - 12,095 3,484 153 - - - -
Restructuring charge - - - - - 4,389 - -
Net income (loss) $ 1,317 $ (7,180) $ 1,318 $ 5,884 $ 1,405 $ (3,369) $ 1,104 $ 14
====================================================================================================
Net income (loss) per share $ 0.04 $ (0.23) $ 0.04 $ 0.19 $ 0.06 $ (0.14) $ 0.04 $ 0.00
====================================================================================================
Pro forma net income
(loss) excluding merger
costs and expenses and
restructuring charge $ 1,317 $ 2,052 $ 3,366 $ 6,011 $ 1,405 $ (481) $ 1,104 $ 14
====================================================================================================
Pro forma net income
(loss) per share excluding
merger costs and expenses
and restructuring charge $ 0.04 $ 0.07 $ 0.11 $ 0.19 $ 0.06 $ (0.02) $ 0.04 $ 0.00
====================================================================================================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of the 1995 fiscal year, the Company completed an
initial public offering of Common Stock resulting in proceeds, after deducting
issuance costs, of approximately $15.8 million. The Company used all of the
net proceeds to reduce outstanding debt. Also, in the third quarter of the
1995 fiscal year, the Company amended and restated its credit facility, thereby
increasing the maximum availability under the credit facility to $60 million
with the option, on the part of the Company, to increase such availability to
$75 million.
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Effective November 13, 1995, the Company completed a secondary offering of
11.5 million shares of common stock at $17 per share, 8.8 million of which were
offered by the Company. The Company used approximately $58.2 million of the
total net proceeds of $142.9 million to repay all outstanding debt. Management
intends to use the remaining net proceeds of the offering for general corporate
purposes, including future acquisitions.
The consummation of these transactions has provided the Company with
resources to continue its strategy of being capable of servicing every
office-based physician in the United States by 1997, through acquisition and
Company start-ups, and has provided the Company with the resources to support
future capital expenditures.
The Company had working capital of $173.7 million and $53.6 million for
the fiscal years ended 1996 and 1995, respectively. The increase in working
capital is primarily attributable to the increase in cash and cash equivalents
from the net proceeds of the Company's secondary offering and also from the
increase in the Company's accounts receivable from the growth in sales for the
fiscal year ended 1996 as compared to fiscal 1995.
Net cash (used in) provided by operating activities was $(21.0) million,
$(7.4) million and $1.3 million in fiscal years 1996, 1995 and 1994,
respectively. The net cash used in operating activities is a result of the
increase in accounts receivable and funds utilized to fund the growth in the
Company's inventories from start-up service centers, to continue growth in
existing service centers, and to implement the consolidation and transition of
Taylor and nine other acquisitions. Net cash used in investing activities was
$9.7 million, $1.3 million and $10.2 million in fiscal years 1996, 1995 and
1994, respectively. These funds were primarily utilized to finance the
acquisition of new service centers and capital expenditures.
Accounts receivable (net of allowances) were $96.1 million and $66.7
million at March 29, 1996 and March 30, 1995, respectively. The average days
sales outstanding were 55 days as of March 29, 1996 and March 30, 1995.
Inventories were $55.8 million and $36.1 million as of March 29, 1996 and
March 30, 1995, respectively. The Company had inventory turnover of 8.3 times
for the fiscal years ended March 29, 1996 and March 30, 1995. The Company's
service centers in existence for more than six years are averaging inventory
turnover of 9.0 times per year. The improvement in inventory turnover was due
to the maturing of the overall service center population and an increase in
equipment sales in the current year. Equipment purchases are typically
drop-shipped from the manufacturer resulting in relatively high dollar items
turning quickly.
The Company has historically been able to finance its liquidity needs for
expansion through lines of credit provided by banks and proceeds from the
public and private offering of stock. Inventory financing has historically
been achieved through negotiating extended payment terms from suppliers. The
Company believes that the expected cash flows from operations, bank borrowings,
capital markets, and vendor credit will be sufficient to fund its liquidity
needs for its existing operations and for service center expansion for at least
the next two years.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
Physician Sales & Service, Inc. (the "Company") hereby amends its
Current Report on Form 8-K dated December 20, 1996 (filed January 3, 1997) to
include the following restated financial statements of Company, reflecting its
acquisition of Treadway Enterprises, Inc. (d/b/a X-Ray of Georgia) on December
20, 1996 accounted for as a pooling of interests:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants...................................F-1
Report of Independent Accountants....................................................F-2
Financial Statements:
Consolidated Balance Sheets - March 29, 1996 and March 30, 1995.............F-3
Consolidated Statements of Operations for the Years Ended
March 29, 1996, March 30, 1995 and March 31, 1994..........................F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended March 29, 1996, March 30, 1995 and March 31, 1994....................F-5
Consolidated Statements of Cash Flows for the Years Ended
March 29, 1996, March 30, 1995 and March 31, 1994..........................F-6
Notes to Consolidated Financial Statements..................................F-7
</TABLE>
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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 29, 1996
and March 30, 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended March 29, 1996. 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 did not audit the consolidated statements of operations, shareholders'
equity or cash flows of Taylor Medical, Inc. and subsidiaries (a company
acquired on August 21, 1995, in a transaction accounted for as a
pooling-of-interests as described in Note 1) for the year ended March 31, 1994,
which statements reflect total net sales of 38% of the related consolidated
total. These statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to amounts included for
Taylor Medical, Inc. and subsidiaries, for the year ended March 31, 1994, is
based solely upon the report of the other auditors.
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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, 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 29, 1996 and March 30, 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
March 29, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
May 14, 1996
(except with respect to the matter
discussed in Note 15, as to which
the date is February 28, 1997)
F-1
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Taylor Medical, Inc.:
In our opinion, the consolidated statements of operations, cash flows and
shareholders' equity of Taylor Medical, Inc. (not presented separately herein)
present fairly, in all material respects, the results of its operations and
cash flows for the year ended March 31, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
and opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which 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 disclosure in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
December 1, 1994
F-2
<PAGE> 13
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1996 AND MARCH 30, 1995
<TABLE>
<CAPTION>
MARCH 29, MARCH 30,
1996 1995
------------ ------------
<C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 86,333,789 $ 1,231,205
Accounts receivable, net 96,080,135 66,673,561
Inventories 55,755,869 36,089,997
Prepaid expenses and other 10,764,125 3,862,980
------------ ------------
Total current assets 248,933,918 107,857,743
Property and equipment, net 14,764,706 11,549,669
Other Assets:
Intangibles, net 13,884,322 12,522,433
Other 1,375,053 2,496,542
------------ ------------
Total assets $278,957,999 $134,426,387
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 59,307,636 $ 38,187,302
Accrued expenses 9,656,433 10,568,560
Other 6,311,699 5,475,321
------------ ------------
Total current liabilities 75,275,768 54,231,183
Long-Term debt and capital lease obligations, net of current portion 583,900 30,719,536
Other 3,548,168 3,149,814
------------ ------------
Total liabilities 79,407,836 88,100,533
------------ ------------
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,
35,122,486 and 24,772,201 shares issued and outstanding at March
29, 1996 and March 30, 1995, respectively 351,225 247,722
Additional paid-in capital 200,193,475 49,223,968
Accumulated deficit (994,537) (3,145,836)
------------ ------------
Total shareholders' equity 199,550,163 46,325,854
------------ ------------
Total liabilities and shareholders' equity $278,957,999 $134,426,387
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 14
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 29, 1996, MARCH 30, 1995, AND MARCH 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Net sales $529,023,956 $413,301,365 $351,202,651
Cost of goods sold 379,359,624 293,688,246 245,234,241
------------- ------------ ------------
Gross profit 149,664,332 119,613,119 105,968,410
General and administrative expenses 82,527,856 70,174,747 62,214,209
Selling expenses 48,438,162 41,317,526 36,932,988
Restructuring charges - 4,388,592 307,686
Merger costs and expenses 15,731,716 - -
------------- ------------ ------------
Income from operations 2,966,598 3,732,254 6,513,527
------------- ------------ ------------
Other income (expense):
Interest expense (3,068,196) (4,064,454) (4,787,274)
Interest income 1,179,684 - -
Other income 1,584,909 1,906,508 824,994
------------- ------------ ------------
(303,603) (2,157,946) (3,962,280)
------------- ------------ ------------
Income before provision for income
taxes and extraordinary item 2,662,995 1,574,308 2,551,247
Provision for income taxes (1,324,000) (2,421,000) (1,064,276)
------------- ------------ ------------
Income (loss) before extraordinary item 1,338,995 (846,692) 1,486,971
Extraordinary loss on early
extinguishment of debt, net of taxes - - (326,959)
------------- ------------ ------------
Net income (loss) $ 1,338,995 $ (846,692) $ 1,160,012
============= ============ ============
Pro forma tax adjustment on pooled
S-Corporation income (Note15) 438,000 23,000 192,000
------------- ------------ ------------
Pro forma net income (loss) $ 900,995 $ (823,692) $ 968,012
============= ============ ============
Net income (loss) per common and
common equivalent share before
extraordinary item $ 0.04 $ (0.04) $ 0.08
Extraordinary loss per common and
common equivalent share - - (0.02)
------------- ------------ ------------
Net income (loss) per common and
common equivalent share $ 0.04 $ (0.04) $ 0.06
============= ============ ============
Pro forma tax adjustment per common
and common equivalent share on pooled
S-Corporation income (Note 15) (0.01) (0.01) (0.01)
------------- ------------ ------------
Pro forma net income (loss) per common
and common equivalent share $ 0.03 $ (0.03) $ 0.05
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 15
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 29, 1996, MARCH 30, 1995, AND MARCH 31, 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1993 16,227,815 $162,278 $ 21,497,279 $(2,762,156) $ 18,897,401
Issuance of common stock 1,825,511 18,255 3,692,936 - 3,711,191
Distribution to former S-
Corporation shareholders - - - (181,000) (181,000)
Net income - - - 1,160,012 1,160,012
-----------------------------------------------------------------------------
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
Distribution 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
Distribution to former S-
Corporation shareholders - - - (455,000) (455,000)
Net income - - - 1,338,995 1,338,995
Other poolings (Note 10) 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
=============================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 16
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 29, 1996, MARCH 30, 1995, AND MARCH 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 1,338,995 $ (846,692) $ 1,160,012
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation and amortization 4,100,775 4,210,805 4,559,619
Merger costs and expenses 5,435,196 - -
Restructuring charge - 4,388,592 307,686
(Benefit) provision for deferred income taxes (789,000) - 199,000
Net (gain) loss on sale of equipment - (920,124) 559
Employee benefit plan stock contribution 120,000 85,175 80,000
Extraordinary loss, net of taxes - - 326,959
Other - - (34,000)
Changes in operating assets and liabilities, net of effects
from business acquisitions:
Increase in accounts receivable, net (22,937,911) (6,616,662) (10,733,007)
Increase in inventories (18,659,894) (1,670,306) (2,799,058)
(Increase) decrease in prepaid expenses and other assets (2,923,212) 128,628 (584,916)
Decrease (increase) in other assets 2,300 (1,247,031) (54,191)
Increase (decrease) in accounts payable, accruals,
and other liabilities 13,331,640 (4,930,187) 8,919,392
------------ ------------ ------------
Net cash (used in) provided by operating activities (20,981,111) (7,417,802) 1,348,055
------------ ------------ ------------
Cash Flows From Investing Activities:
Proceeds from sales of assets - 11,985,542 6,790
Capital expenditures (5,349,928) (3,220,847) (3,904,213)
Payment for purchases of net assets from business acquisitions (2,838,529) (9,010,130) (5,056,200)
Payments on noncompete agreements (1,545,970) (1,036,957) (927,151)
Other - - (322,000)
------------ ------------ ------------
Net cash used in investing activities (9,734,427) (1,282,392) (10,202,774)
------------ ------------ ------------
Cash Flows From Financing Activities:
Principal payments under capital lease obligations (1,124,293) (931,949) (719,893)
Proceeds from long-term debt 284,862,211 420,751,863 322,780,582
Principal payments of long-term debt (315,718,771) (434,044,855) (313,878,773)
Distributions to former S-Corporation shareholders (455,000) (516,000) (181,000)
Proceeds from issuance of common stock 148,253,975 23,498,353 1,503,769
------------ ------------ ------------
Net cash provided by financing activities 115,818,122 8,757,412 9,504,685
------------ ------------ ------------
Net increase in cash and cash equivalents 85,102,584 57,218 649,966
Cash and cash equivalents, beginning of year 1,231,205 1,173,987 524,021
------------ ------------ ------------
Cash and cash equivalents, end of year $ 86,333,789 $ 1,231,205 $ 1,173,987
============ ============ ============
Supplemental Disclosures:
Interest paid $ 3,186,105 $ 4,356,763 $ 4,347,708
============ ============ ============
Income taxes paid $ 2,084,282 $ 3,018,917 $ 485,013
============ ============ ============
Merger costs and expenses paid $ 10,296,520 $ - $ -
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 17
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 29, 1996, MARCH 30, 1995 AND MARCH 31, 1994
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. PSS is a leading distributor of medical
supplies, equipment, and pharmaceuticals to primary care and other office-based
physicians. As of March 29, 1996, the Company operated 64 service centers in
the United States distributing to approximately 88,000 physician office sites
in all 50 states.
In March 1996 the Company established three new subsidiaries, WorldMed,
N.V., WorldMed International, Inc., ("WorldMed, Int'l.") and WorldMed, Inc.
WorldMed, Int'l. was established by the Company to manage and develop the
international medical supply and equipment distribution consolidation. In
order to maintain the focus of PSS, WorldMed, Inc. will serve as a platform to
possibly acquire multi-market medical distribution companies.
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, $.01 par value per share, 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, $.01 par value per
share, 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.
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 1996, 1995, and 1994 consist of 52 weeks.
F-7
<PAGE> 18
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 disclosures 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 $2,326,000 and $1,362,000 as of the end of
fiscal years 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 $6,841,000 and $4,519,000 of
outstanding checks recorded in accounts payable as of the end of fiscal years
ended 1996 and 1995, 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
During 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial
Instruments." SFAS No. 107 requires, among other things, disclosures regarding
the fair value of financial instruments and the assumptions made in determining
their fair values, where practicable. The carrying amounts of the Company's
financial instruments, including cash and cash equivalents, 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 forty 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.
F-8
<PAGE> 19
INTANGIBLES
Noncompete agreements are amortized on a straight-line basis over the
lives of the agreements, which range from three to ten years (Note 5).
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 (Note 5). 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 $4,550,000 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 in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred
income taxes result primarily from the use of different methods 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.
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 (Note 12). 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. The Company used approximately $58,200,000 of the
total net proceeds of $142,900,000 to repay debt. If the common stock offering
had occurred and the debt subsequently had been repaid as of April 1, 1995, pro
forma earnings per share would have approximated $0.18. Management intends to
use the remaining net proceeds of the offering for general corporate purposes,
including future acquisitions.
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 (Note 10).
F-9
<PAGE> 20
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.
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 31,454,000, 23,762,000,
and 17,772,000 for 1996, 1995, and 1994 respectively.
STATEMENTS OF CASH FLOWS
As discussed in Note 10, Business Acquisitions, the Company issued stock
in the amount of $121,000 related to acquisitions accounted for as purchases.
The Company also assumed net assets of $1,278,221 in conjunction with the
mergers of three other medical supply and equipment distributors accounted for
under the pooling-of-interests method. The Company realized an income tax
benefit from the exercise or early disposition of certain stock options of
approximately $2,687,000. 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
non- cash transactions.
ACCOUNTING STANDARDS CHANGES
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 established, among other
things, accounting standards for the impairment of long-lived assets and
certain identifiable intangibles. The Company will be required to adopt SFAS
No. 121 for fiscal year 1997. Based on a preliminary evaluation of this
Standard's requirements, management does not expect the adoption of the
Standard to have a material effect on the Company's financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has decided to continue to account for its employee
stock-based compensation plans under Accounting Principles Board Opinion No. 25
and will comply with the disclosure requirements of SFAS No. 123 in its fiscal
year 1997 financial statements.
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
March 29, 1996 March 30, 1995
-------------- --------------
<S> <C> <C>
Lines of credit $ 3,100,000 $ 23,822,005
Real estate mortgage note - 698,137
Other notes repaid in fiscal 1996 - 7,105,142
Other notes 262,961 302,534
Capital lease obligations 1,259,393 2,026,171
-------------- -------------
4,622,354 33,953,989
Less current maturities 4,038,454 3,234,453
-------------- -------------
$ 583,900 $ 30,719,536
============== =============
</TABLE>
F-10
<PAGE> 21
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 option, on the part of the Company, to increase the availability to
$75,000,000. There was no balance outstanding at March 29, 1996. X-ray GA had
a $3,100,000 balance outstanding on a separate line of credit which was repaid
by the Company in fiscal 1997 at the merger date.
The loans are collateralized by the Company's accounts receivable,
inventory, and equipment. 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 maximum debt leverage ratio of 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 $23,500,000 as of March 29, 1996, 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.
Taylor had a financing and security agreement with a separate bank which,
as amended, allowed Taylor to obtain loans on a revolving basis. The maximum
loan amount available at March 30, 1995 was $17,992,000, of which $10,481,263
was outstanding. The Company repaid the Taylor agreement in fiscal 1996 at the
merger date, dissolving the financing and security agreement with the bank.
OTHER NOTES
Taylor had a real estate mortgage note secured by a commercial office
building with a bank. The Company repaid the real estate mortgage note in
fiscal 1996 at the merger date, satisfying the bank's security interest.
Taylor maintained various other notes which were repaid by the Company in
fiscal 1996 in conjunction with the merger. X-ray GA maintained various other
notes which were repaid by the Company in fiscal 1997 in conjunction with the
merger.
CAPITAL LEASE OBLIGATIONS
As of March 29, 1996, future minimum payments, by fiscal year and in the
aggregate, required under capital leases are as follows:
F-11
<PAGE> 22
<TABLE>
<S> <C>
Fiscal year:
1997 $ 832,588
1998 378,708
1999 158,017
----------------
Net minimum lease payments 1,369,313
Less amount representing interest (109,920)
----------------
Present value of net minimum lease payments under capital leases 1,259,393
Less amounts due in one year (764,476)
----------------
Amounts due after one year $ 494,917
================
</TABLE>
3. OPERATING LEASE COMMITMENTS
The Company leases various office and warehouse facilities and
transportation and office equipment under operating leases which expire at
various dates through 2001. Certain lease commitments provide that the Company
pay taxes, insurance, and maintenance expenses related to the leased assets.
Rent expense approximated $5,369,000, $5,230,000, and $4,452,000 for
fiscal years 1996, 1995, and 1994, respectively. Additional rent expense of
approximately $700,000 was included in merger costs and expenses in fiscal year
1996. These amounts related to duplicate facilities which were closed in
conjunction with the merger with Taylor. As of March 29, 1996, future minimum
payments, by fiscal year and in the aggregate, required under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
Fiscal year:
1997 $ 7,365,000
1998 5,235,000
1999 3,201,000
2000 2,148,000
2001 1,233,000
Thereafter 1,217,000
-----------
Total $20,399,000
===========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Land $ 121,524 $ 121,524
Building 1,207,560 1,207,560
Warehouse and data processing equipment 16,641,106 12,329,878
Transportation equipment 2,266,808 1,863,955
Furniture, fixtures and leasehold improvements 3,756,862 2,715,121
------------ -----------
23,993,860 18,238,038
Accumulated depreciation (9,229,154) (6,688,369)
------------ -----------
$ 14,764,706 $11,549,669
============ ===========
</TABLE>
F-12
<PAGE> 23
Warehouse and data processing equipment and transportation equipment
include equipment acquired under capital leases with a cost of $3,909,000 and
$3,704,000 and related accumulated depreciation of $1,766,000 and $862,000 at
March 29, 1996 and March 30, 1995, respectively. Depreciation expense
aggregated approximately $2,210,000, $2,214,000, and $2,022,000 for 1996, 1995,
and 1994, respectively.
5. INTANGIBLES
Intangibles, stated at cost, consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Customer lists $ 1,714,994 $ 1,365,905
Goodwill 8,693,095 7,415,094
Noncompete agreements 7,146,913 7,163,817
------------- -----------
17,555,002 15,944,816
Accumulated amortization (3,670,680) (3,422,383)
------------- -----------
$ 13,884,322 $12,522,433
============= ===========
</TABLE>
As of March 29, 1996, future minimum payments, by fiscal year and in the
aggregate, required under noncompete agreements are as follows:
<TABLE>
<S> <C>
1997 $1,553,504
1998 1,234,346
1999 860,401
2000 313,328
2001 58,254
Thereafter 112,300
----------
$4,132,133
==========
</TABLE>
6. INCOME TAXES
The provisions for income taxes are detailed below:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current tax provision:
Federal $1,719,000 $1,982,000 $ 581,000
State 394,000 439,000 284,000
---------- ---------- ----------
Total current 2,113,000 2,421,000 865,000
---------- ---------- ----------
Deferred tax (benefit) provision:
Federal (643,000) - 181,000
State (146,000) - 18,000
---------- ---------- ----------
Total deferred (789,000) - 199,000
---------- ---------- ----------
Total income tax provision $1,324,000 $2,421,000 $1,064,000
========== ========== ==========
</TABLE>
F-13
<PAGE> 24
The difference between income tax computed at the federal statutory rate
and the actual tax provision is shown below:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Income before provision for taxes and extraordinary item $2,663,000 $1,574,000 $2,551,000
========== ========== =========
Tax provision at the statutory rate $ 905,000 $ 535,000 $ 867,000
---------- ---------- ----------
Increase (decrease) in taxes:
Taxes related to extraordinary loss - - (87,000)
Change in valuation allowance for deferred taxes (956,000) 1,023,000 156,000
State income tax, net of federal benefit 329,000 94,000 241,000
Write-off of intangibles - 562,000 -
Meals and entertainment 134,000 162,000 44,000
Goodwill amortization 8,000 10,000 91,000
Cash surrender value of life insurance 45,000 26,000 29,000
Non-taxable investment income (198,000) - -
Merger costs and expenses 2,216,000 - -
Utilization of tax net operating losses (776,000) - -
Other, net 9,000 30,000 48,000
Income of S-Corporation (392,000) (21,000) (325,000)
Total increase in taxes 419,000 1,886,000 197,000
---------- ---------- ----------
Total income tax provision $1,324,000 $2,421,000 $1,064,000
========== ========== ==========
Effective tax rate 49.7% 153.8% 41.7%
========== ========== ==========
</TABLE>
Deferred income taxes for 1996 and 1995 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 29, 1996 and March 30, 1995 are detailed below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Merger costs and expenses $ 204,000 $ -
Allowance for doubtful accounts and sales returns 717,000 537,000
Intangibles 681,000 444,000
Inventory uniform cost capitalization 482,000 380,000
Net operating loss carryforwards 219,000 995,000
Accrued expenses 399,000 478,000
Reserve for inventory obsolescence 105,000 66,000
Other 197,000 -
----------- -----------
Gross deferred tax assets 3,004,000 2,900,000
----------- -----------
Deferred tax liabilities:
Excess of tax depreciation and amortization over
book depreciation and amortization (1,179,000) (847,000)
Other (136,000) (197,000)
----------- -----------
Gross deferred tax liabilities (1,315,000) (1,044,000)
----------- -----------
1,689,000 1,856,000
Valuation allowance (900,000) (1,856,000)
----------- -----------
Net deferred tax asset $ 789,000 $ -
=========== ===========
</TABLE>
F-14
<PAGE> 25
A valuation allowance has been provided for those temporary differences
for which utilization is uncertain. Based on an evaluation of the
realizability of deferred tax assets at March 29, 1996, the valuation allowance
was reduced by $956,000.
The income tax benefits 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 $2,687,000 and $0 for
fiscal years 1996 and 1995, respectively.
At March 29, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $564,000 which expire from 2006 to 2011.
7. 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
$136,000, $124,000, and $92,000 in 1996, 1995, and 1994, 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 such company were approximately $484,000
during the first nine months of fiscal year 1996, $339,000 for fiscal year 1995
and $73,000 for the three months during which the company administered claims
in fiscal year 1994. The Company changed its medical insurance administrator
as of January 1, 1996 to an unrelated party.
Taylor had the following related party transactions with persons who were
shareholders or officers of Taylor before the Merger. Taylor had notes
receivable of $823,022 outstanding at March 30, 1995 with interest received in
fiscal 1995 of $241,000. This note was settled in fiscal 1996. Taylor also
had notes payable of $5,966,000 outstanding at March 30, 1995 with interest
payments of $777,000 in fiscal 1995. These notes payable were repaid by the
Company in fiscal 1996 in conjunction with the Merger.
8. STOCK OPTION PLANS
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:
F-15
<PAGE> 26
<TABLE>
<CAPTION>
Number of Exercise Price
Shares Per Share
--------- --------------
<S> <C> <C>
Balance, April 1, 1993 1,486,659 $1.02-$2.02
Granted 630,000 2.10-2.31
Exercised (503,508) 1.02-2.10
Canceled (72,654) 1.43-2.10
--------- -----------
Balance, March 31, 1994 1,540,497 1.02-2.31
Granted 648,000 3.67-5.67
Exercised (817,899) 1.01-3.67
Canceled (12,000) 1.59
--------- -----------
Balance, March 30, 1995 1,358,598 1.43-5.67
Granted - -
Exercised (607,405) 1.43-5.67
Canceled (30,297) 1.01-5.67
--------- -----------
Balance, March 29, 1996 720,896 $2.10-$5.67
========= ===========
</TABLE>
No compensation expense has been recorded because the options were granted
at fair market value. As of March 29, 1996, 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. Options are not subject to future
performance.
Information regarding these options is summarized below:
<TABLE>
<CAPTION>
Number of Exercise Price
Shares Per Share
--------- --------------
<S> <C> <C>
Balance, April 1, 1993 282,222 $5.08
Granted 337,362 5.08
Exercised - -
Canceled (5,808) 5.08
-------- -----
Balance, March 31, 1994 613,776 5.08
Granted 15,747 5.08
Exercised (5,118) 5.08
Canceled (8,268) 5.08
-------- -----
Balance, March 30, 1995 616,137 5.08
Granted 7,825 5.08
Exercised (538,815) 5.08
Canceled - -
-------- -----
Balance, March 29, 1996 85,147 $5.08
======== =====
</TABLE>
F-16
<PAGE> 27
The Company does not intend to issue any more options under this plan.
LONG TERM STOCK PLAN
In March 1994, the Company adopted the 1994 Long Term Stock Plan under
which the Compensation Committee has discretion to grant nonqualified stock
options and restricted stock to any employee of the Company. A total of
2,190,000 shares of the Company's common stock, as adjusted by stock splits,
consolidations, or other changes in capitalization, have been reserved for
issuance under this plan. The exercise price of options granted under this
plan may be no less than the fair market value of the Company's common stock on
the date of grant.
Information regarding the stock option component of this plan is summarized
below:
<TABLE>
<CAPTION>
Number of Exercise Price
Shares Per Share
--------- --------------
<S> <C> <C>
Balance, March 31, 1994 - -
Granted 160,200 $ 5.29-$5.79
Exercised - -
Canceled - -
------- ------------
Balance, March 30, 1995 160,200 5.29-5.79
Granted 492,300 5.29-24.75
Exercised (37,500) 10.67-14.875
Canceled - -
------- ------------
Balance, March 29, 1996 615,000 $5.29-$24.75
======= ============
</TABLE>
As of March 29, 1996, approximately 1,537,500 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. The Company has accrued
approximately $160,000 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 has been recorded in connection
with the stock options 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.
F-17
<PAGE> 28
Information regarding the stock option component of the plan is summarized
below:
<TABLE>
<CAPTION>
Number of Exercise Price
Shares Per Share
--------- --------------
<S> <C> <C>
Balance, March 30, 1995 - -
Granted 350,643 $14.875
Exercised (32,406) 14.875
Canceled - -
------- -------
Balance, March 29, 1996 318,237 $14.875
======= =======
</TABLE>
To date, no cash, registered shares, or restricted stock have been issued
under this plan.
DIRECTORS' STOCK PLAN
In March 1994, the Company adopted the Directors' Stock Plan under which
non-employee directors receive an annual grant of an option to purchase 4,500
shares of common stock. A total of 135,000 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 non-employee director receives a grant of 1,500 restricted
shares per remaining term year on the Board.
Information regarding the stock option component of this plan is summarized
below:
<TABLE>
<CAPTION>
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 $5.48-$14.75
====== ============
</TABLE>
To date 7,500 restricted shares have been issued under this plan.
F-18
<PAGE> 29
9. 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 balance. Prior to this change, the trustees directed the
investment of the participants' balances. As of March 29, 1996, the ESOP owns
approximately 2,053,000 shares of the Company's common stock. Company
contributions to the plan were $120,000, $85,175, and $80,000 for 1996, 1995,
and 1994, 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.
10. BUSINESS ACQUISITIONS
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>
(Dollars in thousands) April 1 through
June 30, 1995
(Unaudited) March 30, 1995 March 31, 1994
------------------------------------------------------
<S> <C> <C> <C>
Net sales
PSS $ 73,670,000 $236,188,000 $169,703,000
Taylor 31,640,000 130,097,000 134,789,000
- --------------------------------------------------------------------------------------
Combined $105,310,000 $366,285,000 $304,492,000
Net income
PSS $ 980,000 $ 3,680,000 $ 1,595,000
Taylor 193,000 (4,589,000) (941,000)
- --------------------------------------------------------------------------------------
Combined $ 1,173,000 $ (909,000) $ 654,000
Other changes in
shareholders' equity
PSS $ 1,036,000 $ 24,075,000 $ 2,042,000
Taylor 1,000 26,000 1,669,000
- --------------------------------------------------------------------------------------
Combined $ 1,037,000 $ 24,101,000 $ 3,711,000
</TABLE>
F-19
<PAGE> 30
OTHER POOLINGS
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 the pooling 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.
ASSET PURCHASES
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
$5,479,804. The aggregate purchase price paid consisted of cash of $2,838,529,
assumption of accounts payable and accrued liabilities of $2,520,275, 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 $1,154,009 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 $1,170,000 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. 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 $11,553,433. The aggregate purchase
price paid consisted of cash of $6,853,130, assumption of accounts payable and
accrued liabilities of $4,182,890, and the issuance of 69,618 shares of common
stock with a fair market value of $517,413. The excess of the purchase price
over the estimated fair value of the net assets acquired of $3,962,404 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 $2,319,231 through the year 1998.
During fiscal 1995, Taylor acquired certain assets of three medical
supplies and equipment distributors for $2,157,000, of which $567,000 consisted
of promissory notes.
All of these acquisitions have been accounted for as purchases, and
accordingly, 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.
11. 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
F-20
<PAGE> 31
product liability claims and maintains product liability insurance coverage.
In addition, the Company is party to various legal and administrative
proceedings and claims arising in the normal course of business. While any
litigation contains an element of uncertainty, management believes that the
outcome of any proceedings or claims which are pending or known to be
threatened will not have a material adverse effect on the Company's
consolidated financial position, liquidity, or results of operations.
The Company has employment agreements with certain executive officers
which provide that in the event of their termination or resignation, under
certain conditions, the Company may be required to continue salary payments and
provide insurance for a period ranging from 12 to 36 months for the chief
executive officer and from 3 to 12 months for other executives and to
repurchase a portion or all of the shares of common stock held by the
executives upon their demand. The period of salary and insurance continuation
and the level of stock repurchases are based on the conditions of the
termination or resignation.
12. 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. 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.
13. 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 $2,078,134. In March 1995, Taylor negotiated a final
settlement of the escrowed receivable which included the return to Taylor of
certain receivables. Taylor recorded a $600,000 reduction in the gain
originally recognized to record these receivables at their estimated net
realizable value. The net gain of approximately $1,478,000 is included in
other income for fiscal year 1995.
On November 30, 1994, Taylor sold the assets of its Labcare division,
whose principal business was the repair of medical equipment, for $1,100,000,
resulting in a loss of approximately $403,000. In March 1995, Taylor recorded
an additional loss on the sale of approximately $154,000 related to the
write-down of certain notes receivable issued in conjunction with the sale.
The net loss of approximately $558,000 is included in other income for fiscal
year 1995.
F-21
<PAGE> 32
14. MERGER COSTS AND EXPENSES AND RESTRUCTURING CHARGES
During fiscal 1996, the Company recorded non-recurring merger costs and
expenses of $15,731,716 associated with the merger of PSS and Taylor and the
other 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.
During fiscal 1995, Taylor management concluded that recent industry
developments had affected their 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.
In 1994, Taylor recorded a restructuring charge of $307,686 relating to
rationalizing locations and staffing while retaining locations of acquired
companies.
15. SUBSEQUENT EVENTS
ACQUISITION OF DECKERS
On April 10, 1996, the Company acquired Deckers, a medical equipment and
supply distribution company located in Leuven, Belgium. The Company acquired
certain assets, accounted for by the purchase method, including accounts
receivable, inventories, equipment, and other assets for $10.8 million. The
aggregate purchase price paid consisted of cash of $7.9 million and assumption
of accounts payable and accrued liabilities of approximately $2.9 million. The
excess of the purchase price over the estimated fair value of the net assets
acquired of approximately $1.0 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 $167,000.
Deckers will transact its business in a functional currency other than
U.S. dollars. As such, the Company will be subject to foreign currency
translation risk. The Company intends to hedge this risk.
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 currently being held in
escrow) in exchange for all of the outstanding shares of capital stock of X-ray
Georgia valued at $11.0 million at the time of the merger. The merger has been
accounted for as a pooling-of-interests and, accordingly, the Company's
consolidated financial statements have been restated to include the accounts
and operations of X-ray GA for all periods prior to the merger.
F-22
<PAGE> 33
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>
(Dollars in thousands) March 29, 1996 March 30, 1995 March 31, 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales
PSS and Taylor combined $ 483,294 $ 366,285 $ 304,492
X-ray GA 45,730 47,016 46,711
- --------------------------------------------------------------------------------
Total $ 529,024 $ 413,301 $ 351,203
Net income
PSS and Taylor combined $ 2,492 $ (909) $ 654
X-ray GA 1,153 62 506
- --------------------------------------------------------------------------------
Net income (loss) as reported $ 1,339 $ (847) $ 1,160
Pro forma tax provision for
X-ray GA 438 23 192
- --------------------------------------------------------------------------------
Pro forma net income (loss) $ 901 $ (824) $ 968
Net income (loss) per share
As reported $ 0.04 $ (0.04) $ 0.06
Pro forma $ 0.03 $ (0.03) $ 0.05
Other changes in
shareholders' equity
PSS and Taylor combined $ 152,340 $ 24,101 $ 3,711
X-ray GA (455) (516,000) (181,000)
- --------------------------------------------------------------------------------
Total $ 151,885 $ 23,585 $ 3,530
</TABLE>
F-23
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PHYSICIAN SALES & SERVICE, INC.
By: /s/ David A. Smith
-----------------------------------------
David A. Smith,
Executive Vice President and Chief
Financial Officer
Dated: March 5, 1997
