<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 6, 1997
PHYSICIAN SALES AND SERVICE, INC.
(Exact name of registrant
as specified in its charter)
Florida 0-23832 59-2280364
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(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
4345 Southpoint Boulevard
Jacksonville, Florida 32216
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 332-3000
N/A
-----------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS.
On October 7, 1997, Physician Sales & Service, Inc. (the "Company") closed
its previously announced private offering of $125 million aggregate principal
amount of 8 1/2% Senior Subordinated Notes due 2007 (the "Notes"). In connection
with such transaction, the Company and its domestic subsidiaries are required to
file a registration statement on Form S-4 (the "Exchange Offer Registration
Statement") with respect to an offer to exchange the Notes for senior
subordinated notes of the Company with identical terms to the Notes (the
"Exchange Notes") (except that the Exchange Notes will not contain terms with
respect to transfer restrictions). As part of such Exchange Offer Registration
Statement, the Company is required to file supplemental consolidated financial
statements to reflect its recent acquisition of S&W X-Ray, Inc. ("S&W") in a
pooling-of-interests transaction. S&W does not meet the definition of
"significant subsidiary" as set forth in Regulation S-X promulgated by the
Securities and Exchange Commission. The following supplemental consolidated
financial statements as well as a restated Management's Discussion and Analysis
of Financial Condition and Results of Operation are being filed herewith so that
they each may be incorporated by reference into the Company's current and future
registration statements.
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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: November 6, 1997
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
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 Medical, Inc. ("Taylor"), X-ray of Georgia ("X-Ray Georgia"), and S & W
X-ray, Inc. ("S&W").
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...............................100.0% 100.0% 100.0%
Gross profit............................ 28.0 27.6 26.9
General and administrative
expenses............................... 16.3 15.2 15.7
Selling expenses ...................... 9.4 8.8 8.8
Restructuring charges(1) .............. 0.9 -- --
Merger costs and expenses(2)............ -- 2.7 1.6
Nonrecurring ESOP cost of acquired
company(4)............................. 0.2 0.1 0.2
Net income.............................. 0.0 0.4 0.6
Unaudited pro forma net income,
including pro forma tax adjustment
on pooled S-Corporation income and
excluding merger costs and expenses,
restructuring charges, nonrecurring
ESOP cost of acquired company,
and 1997 other operating charges(3)... 1.1 2.0 1.9
</TABLE>
(1) Restructuring charges reflect charges taken by a company that merged with
the Company pursuant to a pooling-of-interests transaction, prior to its
date of merger. The fiscal year 1995 restructuring charge reflects
assessment of former management of such merged company of the under-
realization of future benefits related to certain intangible assets.
(2) Merger costs and expenses reflect direct merger expenses incurred in
connection with mergers accounted for as pooling-of-interests transactions.
(3) Fiscal year 1997 other operating charges represent write-offs of inventory
and accounts receivable at branches involved in mergers.
(4) Nonrecurring ESOP cost of acquired company reflects plan expenses of
acquired company. Management intends to terminate this plan.
Fiscal Year Ended March 28, 1997 Versus Fiscal Year Ended March 29, 1996
Net Sales. Net sales increased $174.0 million, or 29.5%, to $763.1
million for fiscal year 1997 compared to fiscal year 1996 net sales of $589.1
million. The increase in net sales was attributable to: (i) internal sales
growth of centers operating at least two years; (ii) the Company's focus on
diagnostic equipment sales; (iii) incremental sales generated in connection with
the Abbott Agreement; (iv) net sales of Physician Supply Business centers and
International Business centers acquired during fiscal year 1997; and (v) net
sales from the acquisitions of the imaging companies during fiscal year 1997.
The net sales increase was slowed by the Company's efforts in the last six
months of fiscal year 1997 to reduce low gross margin sales of the Physician
Supply Business. Physician Supply Business same store sales growth approximated
18% for fiscal year 1997.
Fiscal year 1997 net sales resulting from the acquisitions of the
Imaging Business totaled $146.0 million, an increase of $40.2 million over the
fiscal year 1996 Imaging Business revenues of $105.8 million. Fiscal year 1997
net sales resulting from the acquisition of two Physician Supply Business
medical supply companies and three International Business medical supply
companies totaled approximately $25.5 million and $15.7 million, respectively.
3
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Gross Profit. Gross profit increased $42.3 million, or 26.0%, for
fiscal year 1997 compared to fiscal year 1996. The increase in gross profit
dollars is attributable to the sales growth described above. Gross profit as a
percentage of net sales was 26.9% and 27.6% for fiscal years 1997 and 1996,
respectively. The decrease in gross profit percentage was attributable to: (i)
the write-off of inventory related to centers involved in mergers; (ii) the
increase in gross profit contribution of the Imaging Business as a percentage of
the combined gross profit, which is lower as a percentage of sales than the
Physician Supply Business gross profit margin; and (iii) the continued
penetration by the Company's Physician Supply Business into larger physician
group practices that require more competitive pricing but entail lower selling
and servicing costs.
Vendor performance incentives earned by PSS through the achievement of
certain predetermined Company purchase and sales levels also impacted gross
profits. These performance incentives totaled $3.1 million and $6.4 million
for fiscal years 1997 and 1996, respectively. Although the Company plans and
expects to continue to negotiate vendor performance incentives, there is no
assurance that vendor performance incentives will continue to positively impact
gross profit at the historical levels.
General and Administrative Expenses. General and administrative
expenses increased $30.6 million, or 34.2%, for fiscal year 1997 compared to
fiscal year 1996. General and administrative expenses as a percentage of net
sales, increased to 15.7% for fiscal year 1997 from 15.2% for fiscal year 1996.
The increase in general and administrative expenses as a percentage of net sales
was a result of operating costs associated with transitioning merged and
acquired operations offset by the continued leveraging of fixed costs of mature
service center operations.
Selling Expenses. Selling expenses increased $15.7 million, or
30.4%, for fiscal year 1997 compared to fiscal year 1996 as a result of an
increase in net sales. Selling expense as a percentage of net sales was 8.8%
for both fiscal years 1997 and 1996, respectively. The Company utilizes a
variable commission plan, which pays commissions based on gross profit as a
percentage of net sales.
Merger Costs and Expenses. During fiscal year 1997, the Company
recorded merger costs and expenses of $12.1 million incurred in connection with
mergers accounted for as poolings of interests. Such costs include direct merger
costs consisting primarily of investment banking, legal, accounting, and filing
fees as well as consolidation costs from the closing of duplicate service center
locations, realigning regional and corporate functions, and reducing personnel.
Nonrecurring ESOP Cost of Acquired Company. Prior to the acquisition
of S&W by the Company, S&W sponsored a leveraged ESOP plan. As shares are
released from collateral, the Company reports compensation expense equal to the
current market price of the shares released. Fiscal year 1997 expense
approximated $1.4 million, an increase of 70.2% over fiscal year 1996 expense of
approximately $0.8 million, due to an increase in the number of shares released
and an increase in the per share fair value of the related stock. Prior to
consumation of the acquisition, but after March 28, 1997, the remaining S&W ESOP
shares were released, at an expense of $2.5 million. As of September 30, 1997,
there were no remaining unallocated S&W ESOP shares and there will be no related
expense subsequent to September 30, 1997.
Operating Income. Operating income decreased $1.0 million, or 20.1%,
for fiscal year 1997 compared to fiscal year 1996. As a percentage of net sales,
operating income for fiscal year 1997 decreased to 0.5% from 0.8% for fiscal
year 1996 primarily due to operating costs and asset write-offs associated with
transitioning merged and acquired operations. On a pro forma basis, excluding
the effect of merger costs and expenses, nonrecurring ESOP cost of acquired
company, and 1997 other operating charges for write-offs of inventory of $4.1
million and receivables of $0.5 million at branches involved in mergers,
operating income for fiscal year 1997 would have increased to $22.0 million from
$21.4 million for fiscal year 1996.
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Interest Expense. Interest expense for fiscal year 1997 decreased
approximately $2.4 million, or 66.7%, compared to fiscal year 1996. Interest
expense decreased due to the use of the net proceeds from an equity offering
during the three months ended December 31, 1995 to repay all outstanding debt
other than capital lease obligations. Interest expense for fiscal year 1997
primarily results from the debt of the pooled Imaging Business operations.
Interest and Investment Income. Interest and investment income for
fiscal year 1997 increased approximately $1.2 million, or 103.7%, compared to
fiscal year 1996. The Company earned interest income of $1.9 million in 1997
from the short-term investment of the remaining net proceeds from the equity
offering in fiscal year 1996 and recorded an unrealized gain of $0.5 million on
equity securities.
Other Income. Other income slightly decreased for fiscal year 1997
compared to fiscal year 1996.
Provision for Income Taxes. Provision for income taxes increased
$0.3 million, or 15.1%, for fiscal year 1997 compared to fiscal year 1996 due to
higher pretax income of $6.6 million in fiscal year 1997 compared to $4.1
million in fiscal year 1996 as a result of the factors discussed above and was
also affected by higher nontaxable investment income of $0.7 million in fiscal
year 1997 compared to $0.2 million in fiscal year 1996 and lower nondeductible
merger costs and expenses of $0.7 million in fiscal year 1997 compared to $2.2
million in fiscal year 1996. The effective income tax rate was 33.4% in fiscal
year 1997 primarily due to an income tax benefit resulting from a reduction in
the deferred tax asset valuation allowance of $0.9 million.
Net Income. Net income increased $2.3 million for fiscal year 1997
compared to fiscal year 1996 for the reasons discussed above. As a percentage of
net sales, net income increased to 0.6% for fiscal year 1997 from 0.4% for
fiscal year 1996. On a pro forma basis, including a pro forma tax adjustment on
pooled S-Corporation income and excluding the effect of merger costs and
expenses, nonrecurring ESOP cost of acquired company, and 1997 other operating
charges for write-offs of inventory of $4.1 million and receivables of $0.5
million at branches involved in mergers, pro forma net income would have
increased 21.7% to $14.5 million for fiscal year 1997 compared to $11.9 million
for fiscal year 1996.
Fiscal Year Ended March 29, 1996 Versus Fiscal Year Ended March 30, 1995
Net Sales. Net sales increased $117.1 million to $589.1 million, or
24.8%, for fiscal year 1996 compared to fiscal year 1995 net sales of $472.0
million. The increase in net sales was attributable to: (i) internal sales
growth of centers operating at least two years; (ii) incremental net sales
generated in connection with the Abbott Agreement; (iii) net sales of centers
acquired during fiscal year 1996; and (iv) net sales of fiscal year 1996 Company
start-up service centers.
Physician Supply Business same-center sales growth approximated 27%
for fiscal year 1996. The first-year performance goals as set forth in the
Abbott Agreement were met with PSS realizing approximately $55.0 million in
incremental net sales of Abbott products during fiscal year 1996. Excluding
Taylor, X-ray of Georgia, and S&W, Company acquisitions and start-ups added to
the growth in fiscal year 1996, with approximately $14.5 million of net sales
resulting from the acquisition of nine local and regional medical suppliers and
$9.2 million of net sales generated by four Company start-ups, one of which was
merged into an acquired Taylor location during fiscal year 1996.
5
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Gross Profit. Gross profit increased $30.3 million, or 22.9%, for
fiscal year 1996 compared to fiscal year 1995. The increase in gross profit
dollars is attributable to the sales growth described above. Gross profit as a
percentage of net sales was 27.6% and 28.0% for fiscal years 1996 and 1995,
respectively. The decrease in gross profit as a percentage of net sales is
attributable to the penetration by the Company's Physician Supply Business into
larger physician group practices that require more competitive pricing but
entail lower selling and servicing costs. The decrease in gross profit
percentage is also attributable to lower margins on diagnostic products
distributed under the Abbott Agreement. Margins under the Abbott Agreement are
scheduled to increase annually based on achievement by the Company of certain
performance goals as stipulated therein.
For fiscal year 1996, the Company sold approximately $75.1 million of
Abbott products with a gross profit percentage of 18.0%. In addition, the
Company's gross profits include first-year reimbursements by Abbott for gross
profit on direct sales by Abbott to PSS customers as set forth in the Abbott
Agreement. These reimbursements totaled $1.7 million during fiscal year 1996,
effectively raising gross profit by 0.4%. The Abbott sales, net of
reimbursements, negatively impacted the Company's gross profit percentage by
1.7%.
Also, positively impacting gross profits are vendor performance
incentives, in addition to the Abbott direct sales reimbursements, earned by PSS
through the achievement of certain predetermined Company purchase and sales
levels. These performance incentives totaled $6.4 million and $4.2 million for
fiscal years 1996 and 1995, respectively. These vendor incentives effectively
raised the gross profit percentage by 1.1% and 1.3% during fiscal years 1996 and
1995, respectively. Although the Company plans and expects to continue to
negotiate vendor performance incentives, there is no assurance that vendor
performance incentives will continue to positively impact gross profit at the
historical levels.
General and Administrative Expenses. General and administrative
expenses increased $12.5 million, or 16.3%, for fiscal year 1996 compared to
fiscal year 1995. General and administrative expenses as a percentage of net
sales, however, decreased to 15.2% for fiscal year 1996 from 16.3% for fiscal
year 1995. The decrease in general and administrative expenses as a percentage
of net sales was a result of: (i) improved leveraging by PSS of its existing
Physician Supply Business service centers' fixed general and administrative
expenses through increased sales volume; (ii) reduced overhead from the sale of
assets by Taylor in fiscal year 1995 and decreased depreciation expense
associated with the assets sold; and (iii) reduced amortization relating to
intangible assets written off by Taylor during fiscal year 1995. The decrease in
general and administrative expenses as a percentage of net sales was
accomplished despite the additional overhead costs associated with the
implementation of the Abbott product line and the acquisition and start-up of
new Physician Supply Business service centers.
Selling Expenses. Selling expenses increased $7.2 million, or 16.2%,
for fiscal year 1996 compared to fiscal year 1995. Selling expense as a
percentage of net sales was 8.8% and 9.4% for fiscal years 1996 and 1995,
respectively. The decrease in selling expense as a percentage of net sales is
due to i) improved leveraging of existing Physician Supply Business service
centers' fixed selling expenses, such as salaries paid to sales representatives
during the conversion period from a guaranteed salary to a commission
compensation arrangement and the leveraging of sales management salaries, ii)
the variable commission plan of the Company which pays a lower commission on
Abbott products due to the lower gross profit as a percentage of net sales on
those products, and iii) the increased contribution of the Imaging Business as a
percentage of the combined operations, which incurs lower selling expenses as a
percentage of sales than the Physician Supply Business.
Merger Costs and Expenses. During fiscal year 1996, the Company
recorded merger costs and expenses of $15.7 million associated with the merger
of PSS and Taylor and the other acquisitions accounted for under the pooling of
interests method of accounting. Such costs include direct merger costs
consisting primarily of investment banking, legal, accounting, and filing fees
as well as consolidation costs from the closing of duplicate service center
locations, realigning regional and corporate functions, and reducing personnel.
6
<PAGE>
Operating Income. Operating income decreased $0.8 million, or 14.7%,
for fiscal year 1996 compared to 1995. As a percentage of net sales, operating
income for fiscal year 1996 decreased to 0.8% from 1.2% for fiscal year 1995.
The decrease in operating income is the result of the merger costs and expenses
of $15.7 million related to the Taylor merger during fiscal year 1996. On a pro
forma basis, excluding the effect of merger costs and expenses incurred in
fiscal year 1996 and the restructuring charge incurred in fiscal year 1995, and
the nonrecurring ESOP cost of acquired company in both fiscal year 1996 and 1995
operating income for fiscal year 1996 would have increased 96.5% to $21.4
million from $10.9 million for fiscal year 1995 due to the factors discussed
above.
Interest Expense. Interest expense for fiscal year 1996 decreased
approximately $0.9 million, or 20.8%, compared to fiscal year 1995. Interest
expense decreased as a result of the decrease in average indebtedness and the
refinancing at a more favorable rate of debt assumed by PSS through acquisition.
The decrease in average indebtedness for fiscal year 1996 compared to fiscal
year 1995, is due to the use of the net proceeds from the secondary offering of
common stock of approximately $58.2 million of the total net proceeds of $142.9
million to repay all outstanding debt, other than capital lease obligations, on
November 20, 1995.
Interest Income. The Company earned interest income of $1.2 million
from the short-term investment of the remaining net proceeds from the secondary
offering in fiscal year 1996.
Other Income. Other income decreased approximately $0.3 million, or
17.1%, for fiscal year 1996 compared to fiscal year 1995. Other income decreased
due to a net gain on sale of assets by Taylor recorded during fiscal year 1995
of approximately $0.9 million. Excluding the gain, other income would have
increased approximately $0.6 million primarily due to the increase in finance
charge income on customer accounts.
Provision for Income Taxes. Provision for income taxes decreased
$1.1 million, or 36.6%, for fiscal year 1996 compared to fiscal year 1995 due to
a tax adjustment for the utilization of Taylor net operating losses and a change
in the valuation allowance. Net tax adjustments resulted in a decrease in net
income of $0.4 million.
Net Income. Net income increased $2.1 million for fiscal year 1996
compared to fiscal year 1995 for the reasons discussed above. As a percentage of
net sales, net income increased for fiscal year 1996 to 0.4% from 0.0% for
fiscal year 1995. Excluding the effect of merger costs and expenses in fiscal
year 1996, the restructuring charge in fiscal year 1995, and nonrecurring ESOP
cost of acquired company, pro forma net income would have increased 140.4% to
$11.9 million for fiscal year 1996 compared to $5.0 million for fiscal year
1995. The increase in pro forma net income is primarily attributable to the
increasing profitability of maturing Physician Supply Business centers and the
leveraging of fixed costs through sales growth.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents summarized unaudited quarterly results of
operations for the Company for fiscal years 1997 and 1996. The Company believes
all necessary adjustments have been included in the amounts stated below to
present fairly the following selected information when read in conjunction with
the Supplemental Consolidated Financial Statements of the Company and notes
thereto included elsewhere herein. Future quarterly operating results may
fluctuate depending on a number of factors, including the timing of acquisitions
of service centers, the timing of the opening of start-up service centers, and
changes in physicians' buying patterns of 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.
7
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<TABLE>
<CAPTION>
FISCAL YEAR 1996 FISCAL YEAR 1997
------------------------------------------- -----------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------- -------- -------- --------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $130,792 $146,450 $152,411 $159,467 $169,257 $190,326 $198,435 $205,036
Gross profit ............. 36,628 39,082 42,487 44,393 45,529 51,099 55,476 52,786
Merger costs and expenses.. -- 12,095 3,484 153 6,934 -- 317 4,877
Net income (loss).......... $ 1,507 $ (7,046) $ 1,761 $ 5,907 $ (1,368) $ 4,128 $ 4,433 $ (2,766)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
share.................. $ 0.05 $ (0.26) $ 0.05 $ 0.16 $ (0.04) $ 0.11 $ 0.12 $ (0.07)
Pro forma net income,
excluding merger
costs and expenses....... $ 1,634 $ 2,337 $ 3,704 $ 4,707 $ 3,288 $ 4,062 $ 4,657 $ 122
======== ======== ======== ======== ======== ======== ======== ========
Pro forma net income
per share, excluding
merger costs and
expenses........... $ 0.06 $ 0.09 $ 0.11 $ 0.12 $ 0.09 $ 0.11 $ 0.12 $ 0.00
</TABLE>
The fourth quarter of fiscal year 1997 includes a $4.1 million write-
off of inventories at branches involved in mergers, a $1.0 million increase in
bad debt expense and a reduction in the deferred tax asset valuation allowance
of $0.9 million.
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business grows, its cash and working capital
requirements will also continue to increase as a result of the need to finance
acquisitions and anticipated growth of the Company's operations. This growth
will be funded through a combination of cash flow from operations, revolving
credit borrowings and proceeds from the offering and any future public
offerings.
Net cash used in operating activities was $8.4 million, $22.0 million,
and $0.7 million in fiscal years 1995, 1996, and 1997, respectively. In fiscal
year 1997, a significant portion of operating cash flow was used for the closing
of duplicate service center locations, realigning regional and corporate
functions, consolidating information systems and reducing personnel in
conjunction with acquisitions.
Net cash used in investing activities was $1.5 million, $31.1 million,
and $10.6 million in fiscal years 1995, 1996, and 1997, respectively. These
funds were primarily utilized to finance the acquisition of new service centers
and capital expenditures including the use of the net proceeds from sales and
maturities of marketable securities.
Net cash provided by (used in) financing activities was $9.9 million,
$117.4 million, and $(25.3) million for fiscal years 1995, 1996, and 1997,
respectively. Net cash used in financing activities is the result of the use of
a part of the remaining net proceeds of an equity offering in fiscal year 1996
to pay off debt assumed through fiscal year 1997 acquisitions.
8
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The Company had working capital of $171.6 million and $177.3 million
as of March 28, 1997 and March 29, 1996, respectively. Accounts receivable, net
of allowances, were $130.4 million and $105.6 million at March 28, 1997 and
March 29, 1996, respectively. The average number of days sales in accounts
receivable outstanding was approximately 56 and 55 days for the years ended
March 28, 1997 and March 29, 1996, respectively.
Inventories were $75.2 million and $60.8 million as of March 28, 1997
and March 29, 1996, respectively. The Company had annualized inventory turnover
of 8.2 and 8.4 times for the years ended March 28, 1997 and March 29, 1996.
Inventory financing historically has been achieved through negotiating extended
payment terms from suppliers.
The Company has made forty, nine, and four acquisitions since fiscal
year 1989 in its Physician Supply Business, Imaging Business, and International
Business, respectively. Recently, the Company acquired General X-ray and S&W,
which had approximately $147.6 million in revenues, collectively, for the twelve
months ended March 31, 1997. After consummating a merger or acquisition, the
Company begins an intensive process of converting the acquired company to PSS'
business model through information systems conversion, personnel development and
training, and service and product expansion. The Company intends to continue to
acquire local, regional, and other distributors in new and existing markets
where PSS can leverage its distribution infrastructure, expand its geographic
coverage and gain market share.
The Company has historically been able to finance its liquidity needs
for expansion through lines of credit provided by banks and proceeds from the
public and private offering of stock. In May 1994, the Company completed an
initial public offering of Common Stock resulting in proceeds, after deducting
issuance costs, of approximately $15.8 million. The Company used all of the net
proceeds to reduce outstanding debt. Also, in the third quarter of fiscal year
1995, the Company amended and restated its Credit Facility, thereby increasing
the maximum availability under the Credit Facility to $60.0 million with the
option, on the part of the Company, to increase such availability to $75.0
million.
In November 1995, the Company completed a secondary offering of 11.5
million shares of common stock at $17.00 per share, 8.8 million of which were
offered by the Company. The Company used approximately $58.2 million and $26.9
million of the total net proceeds of $142.9 million to repay Company debt and
debt assumed through acquisitions in fiscal years 1996 and 1997, respectively.
Management used approximately $50.0 million in connection with acquisitions for
the Imaging Business, Physician Supply Business and International Business, and
general corporate purposes, including capital expenditures during fiscal year
1997. Management has used substantially all of the net proceeds and intends to
use the remaining net proceeds of the secondary offering for general corporate
purposes, including future acquisitions. The Company expects that the remaining
net proceeds will be substantially utilized by recent acquisitions.
The Company believes that the expected cash flows from operations,
bank borrowings, the net proceeds of this offering, and capital markets should
be adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures and scheduled payments of interest on its debts
(including the Notes) for the foreseeable future. As of March 28, 1997, the
Company had no outstanding debt under its Credit Facility.
All statements contained herein that are not historical facts,
including, but not limited to, statements regarding anticipated growth in
revenue, gross margins and earnings, statements regarding the Company's current
business strategy, the Company's projected sources and uses of cash, and the
Company's plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigation and
investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business and
economic conditions; and other factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission. The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
9
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INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Financial Statements:
Report of Independent Certified Public Accountants................... 11
Supplemental Consolidated Balance Sheets--March 28,
1997 and March 29, 1996 ........................................... 12
Supplemental Consolidated Statements of Income for the Years
Ended March 28, 1997,March 29, 1996, and March 30, 1995 ............ 13
Supplemental Consolidated Statements of Shareholders' Equity
for the Years Ended March 28, 1997, March 29, 1996,
and March 30, 1995.................................................. 14
Supplemental Consolidated Statements of Cash Flows for the
Years Ended March 28, 1997, March 29, 1996, and March
30, 1995............................................................ 15
Notes to Supplemental Consolidated Financial Statements.............. 16
</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 supplemental 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 supplemental consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended March 28, 1997. The supplemental consolidated
statements give retroactive effect to the merger with S&W X-Ray, Inc. on
September 23, 1997, which has been accounted for as a pooling of interests as
described in Note 1. These supplemental financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental 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 supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Physician Sales & Service, Inc. and subsidiaries as of March 28, 1997 and March
29, 1996, and the results of their operations and their cash flows for each of
the three years in the period ended March 28, 1997, after giving retroactive
effect to the merger with S&W X-Ray, Inc. as described in Note 1, all in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Jacksonville, Florida
October 31, 1997
11
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
MARCH 28, 1997 AND MARCH 29, 1996
<TABLE>
<CAPTION>
1997 1996
---------- ---------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................... $ 29,075,157 $ 65,681,342
Marketable securities....................................... 15,045,482 20,767,600
Accounts receivable, net.................................... 130,426,326 105,627,598
Inventories................................................. 75,185,728 60,831,680
Prepaid expenses and other.................................. 24,120,998 10,275,156
------------ ------------
Total current assets..................................... 273,853,691 263,183,376
Property and equipment, net............................................ 20,202,967 15,871,899
Other Assets:
Intangibles, net............................................ 22,083,560 14,384,322
Other....................................................... 5,129,048 2,430,391
------------ ------------
Total assets............................................. $321,269,266 $295,869,988
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 69,011,247 $ 61,121,011
Accrued expenses............................................ 20,012,856 7,293,684
Current maturities of long-term debt and capital
lease obligations......................................... 8,099,064 11,317,621
Other....................................................... 5,131,051 6,187,997
------------ ------------
Total current liabilities................................ 102,254,218 85,920,313
Long-term debt and capital lease
obligations, net of current portion................................... 3,825,333 3,265,662
Other.................................................................. 4,634,291 3,552,968
------------ ------------
Total liabilities........................................ 110,713,842 92,738,943
------------ ------------
Commitments and contingencies (Notes 1, 3, 4, 9, 10, 12, 13, and 16)
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, no shares issued and outstanding............... -- --
Common stock, $.01 par value; 60,000,000 shares authorized,
38,799,073 and 36,859,944 shares issued and outstanding at
March 28, 1997 and March 29, 1996, respectively........... 387,991 368,600
Additional paid-in capital.................................. 207,675,161 200,186,483
Retained earnings........................................... 3,767,240 5,091,891
Cumulative foreign currency
translation adjustment..................................... 92,688 --
------------ ------------
211,923,080 205,646,974
Unearned ESOP shares..................................... (1,367,656) (2,515,929)
------------ ------------
Total shareholders' equity............................... 210,555,424 203,131,045
------------ ------------
Total liabilities and shareholders' equity............... $321,269,266 $295,869,988
============ ============
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
balance sheets.
12
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
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................................ $763,054,234 $589,120,271 $471,985,254
Cost of goods sold....................... 558,164,047 426,529,829 339,669,816
------------ ------------ ------------
Gross profit............... 204,890,187 162,590,442 132,315,438
General and administrative expenses...... 119,916,121 89,358,343 76,817,943
Selling expenses......................... 67,524,994 51,802,431 44,589,548
Restructuring charges.................... -- -- 4,388,592
Merger costs and expenses................ 12,128,168 15,731,716 --
Nonrecurring ESOP cost of acquired
company................................. 1,446,060 849,596 832,403
------------ ------------ ------------
Income from operations.............. 3,874,844 4,848,356 5,686,952
------------ ------------ ------------
Other income (expense):
Interest expense.................... (1,188,582) (3,568,181) (4,505,999)
Interest and investment
income.......................... 2,419,168 1,187,892 4,540
Other income ...................... 1,537,086 1,586,028 1,912,416
------------ ------------ ------------
2,767,672 (794,261) (2,589,043)
------------ ------------ ------------
Income before provision for income
taxes................................ 6,642,516 4,054,095 3,097,909
Provision for income taxes............... 2,215,900 1,925,100 3,037,582
------------ ------------ ------------
Net income............................... $ 4,426,616 $ 2,128,995 $ 60,327
============ ============ ============
Net income per common and common
equivalent share........................ $ 0.12 $ 0.06 $ --
============= ============ ============
Pro forma tax adjustment on pooled
S-Corporation income.................... (357,000) (438,000) (23,000)
------------ ------------ ------------
Pro forma net income .................. $ 4,069,616 $ 1,690,995 $ 37,327
============ ============ ============
Pro forma tax adjustment per common and
common equivalent share on pooled
S-Corporation income.................... $ (0.01) $ (0.01) $ --
------------- ------------- ------------
Pro forma net income per common and
common equivalent share................. $ 0.11 $ 0.05 $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
statements.
13
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 28, 1997, MARCH 29, 1996, AND MARCH 30, 1995
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY UNEARNED
COMMON STOCK PAID-IN RETAINED TRANSLATION ESOP
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT SHARES TOTAL
---------- -------- ------------ -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994...... 19,790,784 $197,908 $25,183,223 $2,606,265 $ -- $(3,638,335) $24,349,061
Issuance of common
stock.................... 6,718,875 67,189 24,033,753 -- -- -- 24,100,942
Distributions to former
S-Corporation
shareholders ........... -- -- -- (516,000) -- -- (516,000)
Release of unallocated
shares to ESOP........... -- -- -- -- -- 617,410 617,410
Net income................. -- -- -- 60,327 -- -- 60,327
---------- -------- ------------ ----------- ------- ------------ ------------
Balance at March 30, 1995...... 26,509,659 265,097 49,216,976 2,150,592 -- (3,020,925) 48,611,740
Issuance of common
stock.................... 10,059,699 100,597 148,274,378 -- -- -- 148,374,975
Tax benefits related to
stock option plans....... -- -- 2,687,118 -- -- -- 2,687,118
Distributions to former
S-Corporation
shareholders............. -- -- -- (455,000) -- -- (455,000)
Release of unallocated
shares to ESOP -- -- -- -- -- 504,996 504,996
Net income................. -- -- -- 2,128,995 -- -- 2,128,995
Other poolings............. 290,586 2,906 8,011 1,267,304 -- -- 1,278,221
---------- -------- ------------ ----------- ------- ------------ ------------
Balance at March 29, 1996...... 36,859,944 368,600 200,186,483 5,091,891 -- (2,515,929) 203,131,045
Issuance of common
stock.................... 473,987 4,740 2,456,890 -- -- -- 2,461,630
Tax benefits related to
stock option plans....... -- -- 1,832,149 -- -- -- 1,832,149
Distributions to former
S-Corporation
shareholders............. -- -- -- (1,100,000) -- -- (1,100,000)
Release of unallocated
shares to ESOP -- -- 172,811 -- -- 1,148,273 1,321,084
Net income................. -- -- -- 4,426,616 -- -- 4,426,616
Other poolings............. 1,465,142 14,651 3,026,828 (4,651,267) -- -- (1,609,788)
Cumulative foreign
currency translation
adjustment............... -- -- -- -- 92,688 -- 92,688
---------- -------- ------------ ----------- ------- ------------ ------------
Balance at March 28, 1997...... 38,799,073 $387,991 $207,675,161 $ 3,767,240 $92,688 $(1,367,656) $210,555,424
========== ======== ============ =========== ======= ============ ============
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
statements.
14
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 28, 1997, MARCH 29, 1996, AND MARCH 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................................ $ 4,426,616 $ 2,128,995 $ 60,327
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................... 5,985,340 4,302,646 4,393,063
Provision for doubtful accounts......................... 3,040,548 1,463,758 1,680,585
Merger costs and expenses............................... 3,433,190 5,435,196 --
Restructuring charge.................................... -- -- 4,388,592
Benefit for deferred income taxes....................... (5,330,200) (782,900) (141,500)
Gain on sale of equipment............................... -- -- (925,784)
Nonrecurring ESOP cost of acquired company.............. 1,446,060 849,596 832,403
Foreign currency translation adjustment................. 92,688 -- --
Investment income....................................... (520,315) -- --
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Increase in accounts receivable, net.................. (3,994,955) (25,402,897) (8,944,283)
Decrease (increase) in inventories.................... 3,695,562 (19,284,103) (3,165,284)
(Increase) decrease in prepaid expenses and other
assets.............................................. (7,647,597) (2,196,836) 438,442
Increase in other assets.............................. (3,228,105) (1,006,027) (1,293,573)
(Decrease) increase in accounts payable, accruals, and
other liabilities................................... (2,072,683) 12,490,104 (5,685,126)
------------ ------------- -------------
Net cash used in operating activities................. (673,851) (22,002,468) (8,362,138)
------------ ------------- -------------
Cash Flows From Investing Activities:
Purchases of marketable securities........................ (19,186,172) (317,769,635) --
Proceeds from sales and maturities of marketable
securities.............................................. 25,428,605 297,002,035 --
Proceeds from sales of assets............................. -- -- 11,994,692
Capital expenditures...................................... (6,054,156) (5,400,964) (3,476,514)
Purchases of net assets from business acquisitions........ (6,801,092) (3,373,584) (9,010,130)
Payments on noncompete agreements (3,980,225) (1,545,970) (1,036,957)
------------ ------------- -------------
Net cash used in investing activities (10,593,040) (31,088,118) (1,528,909)
------------ ------------- -------------
Cash Flows From Financing Activities:
Principal payments under capital lease obligations........ (880,166) (1,124,293) (931,949)
Proceeds from borrowings.................................. 3,531,236 287,817,301 423,828,497
Repayments of borrowings.................................. (29,311,994) (317,052,461) (435,974,915)
Distributions to former S-Corporation shareholders........ (1,100,000) (455,000) (516,000)
Proceeds from issuance of common stock.................... 2,421,630 148,253,975 23,498,353
------------ ------------- -------------
Net cash (used in) provided by financing activities... (25,339,294) 117,439,522 9,903,986
------------ ------------- -------------
Net (decrease) increase in cash and cash equivalents........ (36,606,185) 64,348,936 12,939
Cash and cash equivalents, beginning of year................ 65,681,342 1,332,406 1,319,467
------------ ------------- -------------
Cash and cash equivalents, end of year...................... $ 29,075,157 $ 65,681,342 $ 1,332,406
============ ============= =============
Supplemental Disclosures:
Interest paid............................................. $ 1,034,545 $ 3,685,155 $ 4,763,651
============ ============= =============
Income taxes paid......................................... $ 5,096,835 $ 2,748,087 $ 3,731,425
============ ============= =============
Merger costs and expenses paid............................ $ 8,694,978 $ 10,296,520 $ --
============ ============= =============
The accompanying notes are an integral part of these supplemental consolidated statements.
</TABLE>
15
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997, MARCH 29, 1996 AND MARCH 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and Nature of Business
Physician Sales & Service, Inc. ("PSS") was incorporated in 1983 in
Jacksonville, Florida. The Company is a leading distributor of medical supplies,
equipment, and pharmaceuticals to primary care and other office-based
physicians. As of March 28, 1997, the Company operated 61 service centers in the
United States distributing to approximately 103,000 physician office sites in
all 50 states.
In November 1996, PSS established a new subsidiary, Diagnostic Imaging,
Inc. ("DI" or "imaging division"). DI distributes medical diagnostic imaging
equipment, supplies, and service to acute and alternate care sites. As of March
28, 1997, DI operated 14 imaging division service centers distributing to
approximately 6,000 medical imaging sites in 9 southeastern states.
In March 1996, PSS established two new subsidiaries, WorldMed
International, Inc. ("WorldMed Int'l") and WorldMed, Inc. These subsidiaries
were established to manage and develop PSS's European medical equipment and
supply distribution market ("European operation"). As of March 28, 1997, the
European operation included 2 service centers distributing to approximately
1,000 acute and alternate care sites in Belgium, Germany and France.
Supplemental Consolidated Financial Statements
The accompanying supplemental consolidated financial statements give
retroactive effect to the merger with S&W X-ray, Inc. ("S&W"). On September 23,
1997, PSS issued 1,737,438 shares of its common stock in exchange for all of the
outstanding equity interest of S&W. S&W distributes radiology and imaging
equipment, chemicals and supplies, and provides technical service to the acute
and alternate site markets through five locations in four states in the northern
region. This transaction was accounted for under the pooling-of-interests method
of accounting, and accordingly, the accompanying supplemental consolidated
financial statements have been retroactively adjusted as if PSS and S&W
(collectively, the "Company") had operated as one entity since inception.
Certain accounting practices of S&W have been changed to conform with those of
PSS. These supplemental consolidated financial statements are the same as the
restated statements that will be issued after post-merger operating results have
been published.
The accompanying consolidated financial statements also give retroactive
effect to the mergers (the "Mergers") with Taylor Medical, Inc. ("Taylor")
and X-ray of Georgia ("X-ray Georgia"). On August 21, 1995, PSS issued
3,790,215 shares of its common stock in exchange for all of the outstanding
equity interest of Taylor. Taylor was engaged in the distribution and sale of
medical supplies, equipment, and pharmaceuticals to office-based physicians and
managed care facilities in 24 states. On December 20, 1996, PSS issued 593,672
shares of its common stock in exchange for all of the outstanding equity
interest of X-ray Georgia. X-ray Georgia distributed radiology and imaging
equipment, chemicals and supplies, and provided technical service to the acute
and alternate site markets. 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 Georgia had operated as one entity since inception. Certain
items have been reclassified to conform to the current year presentation.
16
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Stock Split
All stock-related data has been retroactively adjusted to reflect a three-
for-one stock split effective on September 22, 1995 which was distributed on
October 5, 1995.
Fiscal Year
Beginning in fiscal year 1996, the Company's fiscal year ends on the Friday
closest to March 31 of each year. The Company's fiscal year ended on the
Thursday closest to March 31 of each year prior to fiscal year 1996. Fiscal
years 1997, 1996, and 1995 consist of 52 weeks.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentration of Credit Risk
The Company's trade accounts receivable are exposed to credit risk;
however, the risk is limited, as the balance is comprised of numerous individual
accounts, none of which is individually significant. The Company monitors the
creditworthiness of its customers on an ongoing basis and provides reserves for
estimated bad debt losses and sales returns. The Company had allowances for
doubtful accounts of approximately $4,234,000 and $2,318,000 as of the end of
fiscal years 1997 and 1996, respectively. Provisions for doubtful accounts were
approximately $3,041,000, $1,464,000, and $1,681,000 for fiscal years ended
1997, 1996, and 1995, respectively.
Cash Management
The Company utilizes a zero balance bank account, and checks issued for
cash disbursements are funded by advances from overnight investments.
Outstanding checks are recorded as accounts payable until they are presented to
the bank, at which time the payments are applied against the overnight
investments. The Company had approximately $8,060,000 and $6,841,000 of
outstanding checks recorded in accounts payable as of the end of fiscal years
1997 and 1996, respectively.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash held at banks, short-
term government obligations, and money market instruments. The Company invests
its excess cash in high-grade investments and, therefore, bears minimal risk.
These instruments have original maturity dates not exceeding three months.
17
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Marketable Securities
The Company classifies its marketable securities as trading securities and
carries such securities at fair market value. Net unrealized gains and losses on
trading securities are included in net income.
Marketable securities include municipal bond issues with maturity dates
exceeding three months and equity securities classified as trading securities.
Management's intent is to liquidate these securities within one year.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, marketable securities, short-term trade receivables and
payables, and long-term debt and capital lease obligations, approximate their
fair values.
Inventories
Inventories are comprised principally of medical supplies and equipment and
are stated at the lower of cost (first-in, first-out) or market. Market is
defined as net realizable value.
Property and Equipment
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to thirty years. Leasehold
improvements are amortized over the lease terms or the estimated useful lives,
whichever is shorter. Gain or loss upon retirement or disposal of property and
equipment is recorded in other income in the accompanying consolidated
statements of operations.
Intangibles
Noncompete agreements are amortized on a straight-line basis over the lives
of the agreements, which range from three to fifteen years. Customer lists are
amortized on a straight-line basis over ten years.
The Company has classified as goodwill the cost in excess of the fair value
of net identifiable assets purchased in business acquisitions which are
accounted for as purchase transactions. Goodwill is being amortized over fifteen
to thirty years using the straight-line method. Subsequent to the date of
acquisition, the Company continually evaluates whether later events and
circumstances have occurred that indicate a change in the estimated useful life
or recoverability of goodwill.
Self-Insurance Coverage
The Company maintains a self-insurance program for employee health costs.
Additional coverage is provided by a third party for stop-loss based on maximum
costs of $100,000 per employee and approximately $5.3 million in the aggregate.
Claims that have been incurred but not reported are recorded based on estimates
of claims provided by a third-party administrator and are included in accrued
expenses in the accompanying consolidated balance sheets.
18
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company uses the asset and liability method in accounting for income
taxes. Deferred income taxes result primarily from the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Shareholders' Equity
On May 5, 1994, the Company completed an initial public offering of
5,100,000 shares of its common stock at $3.67 per share, of which 4,200,000 were
offered by the Company. On June 3, 1994, the Company's underwriters exercised
their overallotment option for an additional 765,000 shares of the Company's
common stock at $3.67 per share. The proceeds of the sale after deducting
issuance costs were approximately $15,800,000. The Company used all of the net
proceeds to reduce outstanding bank debt.
On March 27, 1995, the Company signed a Distributorship Agreement (the
"Abbott Agreement") with Abbott Laboratories ("Abbott") providing for the
exclusive distribution of certain Abbott diagnostic products. As part of the
Abbott Agreement, Abbott purchased 825,000 unregistered, restricted shares of
PSS common stock. The proceeds of approximately $5,900,000 were used to reduce
outstanding bank debt.
Effective November 13, 1995, the Company completed a secondary offering of
11,500,000 shares of common stock at $17 per share, 8,800,000 of which were
offered by the Company.
During fiscal year 1996, the Company merged with three medical supply and
equipment distributors in stock mergers accounted for under the pooling-of-
interests method by issuing 290,586 shares of PSS common stock in exchange for
all of the common stock of the acquired companies. During fiscal year 1997, the
Company merged with one medical supply and equipment distributor and three
imaging division companies in stock mergers accounted for under the pooling-of-
interests method by issuing approximately 1,465,000 shares of PSS common stock
in exchange for all of the common stock of the acquired companies. The
accompanying consolidated financial statements have not been restated for
periods prior to these poolings due to immateriality.
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.
19
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share is computed using the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year. Weighted average shares outstanding for purposes of
this calculation were approximately 38,015,000, 32,870,000, and 25,101,000 for
fiscal years 1997, 1996, and 1995, respectively.
Statements of Cash Flows
The Company issued stock in the amount of $40,000 and $121,000 related to
acquisitions accounted for as purchases in fiscal years 1997 and 1996,
respectively. The Company assumed net liabilities of approximately $1,610,000
and recorded noncompete assets and liabilities of approximately $4,300,000 in
connection with the mergers of four other medical supply and equipment
distributors accounted for under the pooling-of-interests method in fiscal year
1997. The Company also acquired net assets of approximately $1,278,000 in
conjunction with the mergers of three other medical supply and equipment
distributors accounted for under the pooling-of-interests method in fiscal year
1996. Also, the Company incurred capital lease obligations to obtain equipment
of approximately $514,000 in fiscal year 1995. All of the above items were
excluded from the statements of cash flows as these items were noncash
transactions.
Accounting Standards Changes
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes new
standards for computing and presenting earnings per share (EPS) and applies to
entities with publicly held common stock or potential common stock and is
effective for financial statements issued for periods ending after December 15,
1997. Management expects that the impact of SFAS No. 128 will not be material.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 establishes new standards for disclosing
information about an entity's capital structure and applies to all entities.
SFAS No. 129 is effective for financial statements for periods ending after
December 15, 1997. Management expects that the impact of SFAS No. 129 will not
be material.
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.
20
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
MARCH 28, 1997 MARCH 29, 1996
-------------- --------------
<S> <C> <C>
Lines of credit................ $ -- $ 3,100,000
Other notes.................... 774,794 262,961
Long-term debt of acquired
company........................ 10,692,479 9,960,929
Capital lease obligations...... 457,124 1,259,393
----------- -----------
11,924,397 14,583,283
Less current maturities........ 8,099,064 11,317,621
----------- -----------
$ 3,825,333 $ 3,265,662
=========== ===========
</TABLE>
Lines of Credit
The Company has a financing and security agreement (the "Agreement") with
a bank (the "Bank"). The Agreement allows the Company to obtain loans from the
Bank on a revolving basis. The Agreement provides for loans in the amount of 85%
of the outstanding amount of eligible accounts receivable plus the lesser of
$30,000,000 or 50% of eligible inventory. The total amount of loans outstanding
under the Agreement cannot exceed the lesser of $60,000,000 or amounts available
subject to eligible collateral. The Agreement provides for an option, on the
part of the Company, to increase the availability to $75,000,000. There was no
balance outstanding at March 28, 1997 and March 29, 1996.
The loans are collateralized by all company assets. Interest accrues,
subject to certain leverage ratio requirements, at a variable rate indexed on
the London Interbank Offered Rate ("LIBOR") plus the applicable margin or the
Bank's prime rate plus the applicable margin at the option of the Company.
Interest rates may vary from prime to prime plus 75 basis points or from LIBOR
plus 150 basis points to LIBOR plus 250 basis points, based on the Company's
leverage ratio. The Agreement provides for a termination date of April 30, 1998,
at which time the Agreement may be extended annually at the Bank's sole
discretion upon request by the Company.
The Agreement contains certain restrictive covenants which, among other
things, require the Company to maintain a current ratio of 2 to 1, a debt
service coverage ratio of 1.1 to 1 and a debt leverage ratio no greater than 5
to 1, all computed as defined in the Agreement. In addition, the Company must
maintain minimum tangible net worth plus subordinated indebtedness, as defined
in the Agreement, of $24,500,000 as of March 28, 1997, increasing by $1,000,000
as of the end of each subsequent fiscal year. The Agreement also contains
restrictions on mergers, acquisitions, investments, capital expenditures,
intangible assets, indebtedness, and stock transactions, among other things.
Other Notes
X-ray Georgia maintained various other notes which were repaid by the
Company in fiscal year 1997 in conjunction with the merger.
21
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term Debt of Acquired Company
S&W has available three line of credit agreements which provide for
borrowings of up to $10,000,000 for working capital, bulk inventory purchases,
and equipment purchases. As collateral for the lines of credit, the bank has a
security interest in S&W's accounts receivable, equipment, and inventory, along
with the personal guarantee of one of S&W's shareholders.
The primary line of credit is available up to $ 3,500,000 and bears
interest at the prime rate minus 0.25% or the LIBOR rate plus 2% (7.56% at March
28, 1997). The secondary credit line is available up to $6,000,000 and bears
interest at the prime rate (8.5% at March 28, 1997). The equipment line of
credit is available up to $500,000 and bears interest at the prime rate plus
1.25% (9.75% at March 28, 1997). These lines of credit were repaid in
conjunction with the merger (Notes 1 and 11).
As of March 28, 1997, S&W has an Employee Stock Ownership Trust note
payable due to a bank in minimum monthly principal installments of $20,555 plus
interest at the LIBOR rate plus 1.5% (7.06% at March 28, 1997), through February
1, 2001, at which time all remaining principal is due. This note payable was
repaid in conjunction with the merger (Notes 1, 10, and 11).
S&W has a note payable due to a bank in monthly principal installments of
$33,333 plus interest at the LIBOR rate plus 2.25% (7.81% at March 28, 1997),
through November 31, 2001. This note payable was repaid in conjunction with the
merger (Notes 1 and 11).
S&W has a mortgage note payable to a bank due in monthly principal
installments of $3,125 plus interest at the prime rate plus 1% (9.5% at March
28, 1997). This note was repaid in conjunction with the merger (Notes 1 and 11).
Long-term debt, excluding capital lease obligations, outstanding at March
28, 1997 was approximately $3,768,000. As of March 28, 1997, future minimum
payments of long-term debt, by fiscal year and in the aggregate, are
approximately as follows:
<TABLE>
<CAPTION>
Fiscal Year:
<S> <C>
1998 ....................................... $ 7,699,000
1999 ....................................... 868,000
2000 ....................................... 737,000
2001 ....................................... 1,758,000
2002 ....................................... 289,000
Thereafter ................................. 116,000
-----------
Total .................................. $11,467,000
===========
</TABLE>
22
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Capital Lease Obligations
As of March 28, 1997, future minimum payments, by fiscal year and in the
aggregate, required under capital leases are approximately as follows:
<TABLE>
<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>
4. OPERATING LEASE COMMITMENTS
The Company leases various facilities and equipment under operating leases
which expire at various dates through 2005. Certain lease commitments provide
that the Company pay taxes, insurance, and maintenance expenses related to the
leased assets.
Rent expense approximated $6,634,000, $5,691,000, and $5,542,000 for fiscal
years 1997, 1996, and 1995, respectively. As of March 28, 1997, future minimum
payments, by fiscal year and in the aggregate, required under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
<S> <C>
1998 ................... $ 9,038,000
1999 ................... 5,905,000
2000 ................... 4,351,000
2001 ................... 2,924,000
2002 ................... 1,627,000
Thereafter ............. 993,000
-----------
Total ............... $24,838,000
===========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Land............................... $ 383,312 $ 271,524
Building........................... 2,842,764 1,875,426
Equipment.......................... 24,861,392 19,999,027
Furniture, fixtures and leasehold
improvements..................... 6,962,170 3,936,950
------------- ------------
35,049,638 26,082,927
Accumulated depreciation........... (14,846,671) (10,211,028)
------------- ------------
$ 20,202,967 $ 15,871,899
============= ============
</TABLE>
23
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Equipment includes equipment acquired under capital leases with a cost of
$109,000 and $3,909,000 and related accumulated depreciation of $38,000 and
$1,766,000 at March 28, 1997 and March 29, 1996, respectively. Depreciation
expense aggregated approximately $3,481,000, $2,412,000, and $2,396,000 for
1997, 1996, and 1995, respectively, and is included in general and
administrative expenses.
6. INTANGIBLES
Intangibles, stated at cost, consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Customer lists.............. $ 3,228,105 $ 3,466,285
Goodwill.................... 12,370,204 7,441,804
Noncompete agreements....... 11,921,251 7,146,913
----------- -----------
27,519,560 18,055,002
Accumulated amortization.... (5,436,000) (3,670,680)
----------- -----------
$22,083,560 $14,384,322
=========== ===========
</TABLE>
As of March 28, 1997, approximate future minimum payments, by fiscal year
and in the aggregate, required under noncompete agreements are as follows:
<TABLE>
<S> <C>
1998................ $2,312,000
1999................ 1,736,000
2000................ 550,000
2001................ 85,000
2002................ 42,000
Thereafter.......... 73,000
----------
$4,798,000
==========
</TABLE>
Amortization expense aggregated approximately $2,504,000, $1,891,000, and
$1,997,000 for 1997, 1996, and 1995, respectively, and is included in general
and administrative expenses.
7. INCOME TAXES
The provisions for income taxes are detailed below:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Current tax provision:
Federal........................... $ 6,105,000 $2,171,000 $2,554,000
State............................. 1,442,000 537,000 626,000
----------- ---------- ----------
Total current................. 7,547,000 2,708,000 3,180,000
----------- ---------- ----------
Deferred tax benefit:
Federal........................... (4,305,000) (638,000) (107,000)
State (1,026,000) (145,000) (35,000)
----------- ---------- ----------
Total deferred................ (5,331,000) (783,000) (142,000)
----------- ---------- ----------
Total income tax provision.... $ 2,216,000 $1,925,000 $3,038,000
=========== ========== ==========
</TABLE>
24
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between income tax computed at the federal statutory rate and
the actual tax provision is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income before provision for taxes ......................................... $6,643,000 $4,054,000 $3,098,000
========== ========== ==========
Tax provision at the statutory rate ....................................... 2,259,000 1,378,000 1,053,000
---------- ---------- ----------
(Decrease) increase in taxes:
Change in valuation allowance for deferred taxes....................... (900,000) (956,000) 1,023,000
State income tax, net of federal benefit ............................. 389,000 424,000 172,000
Write-off of intangibles ............................................. -- -- 583,000
Meals and entertainment .............................................. 180,000 167,000 162,000
Goodwill amortization ................................................ 15,000 8,000 10,000
Cash surrender value of life insurance................................. 62,000 45,000 26,000
Nontaxable interest income ........................................... (660,000) (198,000) --
Merger costs and expenses ............................................ 721,000 2,216,000 --
Utilization of tax net operating losses................................ -- (776,000) --
LIFO reserve of pooled companies ..................................... 121,000 -- --
Other, net............................................................. 348,000 9,000 30,000
Income of S-corporation .............................................. (319,000) (392,000) (21,000)
---------- ---------- ----------
Total (decrease) increase in taxes .............................. (43,000) 547,000 1,985,000
---------- ---------- ----------
Total income tax provision ................................. $2,216,000 $1,925,000 $3,038,000
========== ========== ==========
Effective tax rate ........................................................ 33.4% 47.5% 98.1%
========== ========== ==========
</TABLE>
Deferred income taxes for 1997 and 1996 reflect the impact of temporary
differences between the financial statement and tax bases of assets and
liabilities. The tax effect of temporary differences which create deferred tax
assets and liabilities at March 28, 1997 and March 29, 1996 are detailed below:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Merger costs and expenses ................................. $ 1,455,000 $ 204,000
Allowance for doubtful accounts and sales returns ......... 1,620,000 757,000
Intangibles................................................. 674,000 681,000
Inventory uniform cost capitalization ..................... 1,007,000 513,000
Net operating loss carryforwards .......................... 1,738,000 219,000
Accrued expenses .......................................... 801,000 399,000
Reserve for inventory obsolescence ........................ 39,000 105,000
Long-term incentive plan .................................. 174,000 --
Other....................................................... 219,000 197,000
----------- -----------
Gross deferred tax assets ............................ 7,727,000 3,075,000
----------- -----------
Deferred tax liabilities:
Excess of tax depreciation and amortization over book
depreciation and amortization............................. (1,541,000) (1,184,000)
Other....................................................... -- (136,000)
----------- -----------
Gross deferred tax liabilities ....................... (1,541,000) (1,320,000)
----------- -----------
6,186,000 1,755,000
Valuation allowance ............................. -- (900,000)
----------- -----------
Net deferred tax asset .......................... $ 6,186,000 $ 855,000
=========== ===========
</TABLE>
A valuation allowance was provided in prior years for those temporary
differences for which utilization was uncertain. Based on an evaluation of the
realizability of deferred tax assets, the valuation allowance was reduced by
$900,000 and $956,000 during fiscal years 1997 and 1996, respectively.
25
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The income tax benefit related to the exercise or early disposition of
certain stock options reduces taxes currently payable and is credited to
additional paid-in capital. Such amounts approximated $1,832,000 and $2,687,000
for fiscal years 1997 and 1996, respectively.
At March 28, 1997, the Company had net operating loss carryforwards for
income tax purposes arising from mergers of approximately $4,486,000 which
expire from 2006 to 2011. The utilization of the net operating loss
carryforwards is subject to limitation in certain years.
8. RELATED-PARTY TRANSACTIONS
A member of the board of directors provides legal services as general
counsel to the Company. Fees for such legal services were approximately
$132,000, $136,000, and $124,000 in 1997, 1996, and 1995, respectively.
A member of the board of directors is chairman and CEO of the
insurance company that administered the Company's self-insurance program through
December 31, 1995. Administrative fees paid to the company were approximately
$484,000 during the first nine months of fiscal year 1996 and $339,000 for
fiscal year 1995. The Company changed its self-insurance administrator as of
January 1, 1996 to an unrelated party.
S&W has a demand note payable outstanding to S&W shareholders and other
related parties that bears interest at the prime rate plus 1% (9.5% at March 28,
1997). Payments to S&W related parties were approximately $1,174,000, $791,000,
and $1,275,000 for the years ended March 28, 1997, March 29, 1996, and March 30,
1995, respectively. This note payable was repaid in conjunction with the merger
(Note 1, 3, and 11).
Subsequent to year-end, the Company loaned its Chairman of the Board and
Chief Executive Officer of the Company approximately $3.2 million to refinance
debt incurred in connection with previous purchases of Common Stock. The loans
are unsecured and bear interest at 6.55% and are payable on demand and expected
to be repaid over a 10-year period.
9. STOCK-BASED COMPENSATION PLANS
At March 28, 1997, the Company had five stock-based compensation plans
as described below:
Incentive Stock Option Plan
Under the Company's qualified 1986 Incentive Stock Option Plan,
8,001,000 shares of the Company's common stock are reserved for sale to officers
and key employees. Options may be granted at prices not less than fair market
value at the date of grant and are exercisable during periods of up to five
years from that date. The exercisability of the options is not subject to future
performance.
26
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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>
27
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company does not intend to issue any more options under this plan.
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 1.8 years.
Long Term Stock Plan
In March 1994, the Company adopted the 1994 Long Term Stock Plan under
which the Compensation Committee has discretion to grant nonqualified stock
options and restricted stock to any employee of the Company. A total of
2,190,000 shares of the Company's common stock, as adjusted by stock splits,
consolidations, or other changes in capitalization, have been reserved for
issuance under this plan. The exercise price of options granted under this plan
may be no less than the fair market value of the Company's common stock on the
date of grant.
Information regarding the stock option component of this plan is summarized
below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- ----------------
<S> <C> <C>
Balance, March 31, 1994 .... -- --
Granted ................ 160,200 $ 5.32
Exercised .............. -- --
Canceled ............... -- --
------- ------
Balance, March 30, 1995 .... 160,200 5.32
Granted ................ 492,300 16.96
Exercised .............. (37,500) 13.07
Canceled ............... -- --
------- ------
Balance, March 29, 1996 .... 615,000 14.17
Granted ................ 203,179 23.90
Exercised .............. (27,050) 13.35
Canceled ............... (3,000) 5.79
------- ------
Balance, March 28, 1997 .... 788,129 $16.52
======= ======
</TABLE>
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 5.6 years. As of March 28, 1997, approximately 1,340,000 shares of
common stock were available for issuance under the plan.
Long Term Incentive Plan
In March 1994, the Company adopted the 1994 Long Term Incentive Plan which
provides officers with performance awards, consisting of cash or registered
shares of common stock, or a combination thereof, based primarily upon the
Company's total shareholder return as ranked against the companies comprising
the NASDAQ Composite Index over a three-year period. The maximum payable under
this plan to an eligible employee, whether in the form of cash or common stock,
may not exceed $1 million per fiscal year. At March 28, 1997, the Company has
accrued approximately $448,000 related to awards granted under this plan.
28
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
29
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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 ................ 27,000 $ 5.48
Exercised .............. -- --
Canceled ............... -- --
------ ------
Balance, March 30, 1995 .... 27,000 5.48
Granted ................ 22,500 14.75
Exercised .............. (4,500) 5.48
Canceled ............... -- --
------ ------
Balance, March 29, 1996 .... 45,000 10.12
Granted ................ 12,000 23.94
Exercised .............. (3,000) 5.48
Canceled ............... -- --
------ ------
Balance, March 28, 1997 .... 54,000 $13.44
====== ======
</TABLE>
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is 8.4
years. To date, 13,500 restricted shares have been issued under this plan.
Fair Value of Stock Options
Under SFAS No. 123, the fair value of stock options granted in the years
ended March 28, 1997 and March 29, 1996 have been estimated using a Black-
Scholes option pricing model with the following weighted average assumptions for
grants: risk-free interest rate ranging from 5.8% to 6.8%, expected option life
ranging from 3.5 to 5 years, expected volatility of 40% for 1996 and 55% for
1997 and no expected dividend yield. Using these assumptions, the estimated fair
values of options granted for the years ended March 28, 1997 and March 29, 1996
were approximately $2.9 million and $6.0 million, respectively, and such amounts
would be included in compensation expense. Pro forma net income and net income
per share for the years ended March 28, 1997 and March 29, 1996, assuming the
Company had accounted for the plans under the fair value approach, are as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
------ --------
<S> <C> <C>
Net income (loss):
As reported ........... $4,427 $ 2,129
Pro forma ............. $2,653 $(1,525)
Net income (loss)per share:
As reported ........... $ 0.12 $ 0.06
Pro forma ............. $ 0.07 $ (0.05)
</TABLE>
30
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
S&W sponsors a leveraged employee stock ownership plan ("S&W ESOP") that
covers all employees with one year of service. Contributions to the plan are
deposited under a trust agreement in the form of cash or Company stock. The
number of shares of Company stock to be contributed or purchased is based upon
the fair market value of the common stock as determined by an independent
appraisal. The ESOP shares are pledged as collateral for its debt. As the debt
is repaid, shares are released from collateral and allocated to active
employees, based on the proportion of debt service paid in the year. The Company
accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the debt of the ESOP is recorded as debt and the shares pledged as
collateral are reported as unearned ESOP shares in the balance sheet. As shares
are released from collateral, the Company reports compensation expense equal to
the current market price of the shares, and the shares become outstanding for
the earnings-per-share (EPS) computation.
At March 28, 1997, March 29, 1997, and March 30, 1996, 561,496 shares of
the Company's common stock was held by the Employee Stock Ownership Trust (the
"Trust"), which was established to fund the plan. The Trust purchased these
shares with the proceeds of a $3,700,000 loan from S&W. S&W, in turn, obtained a
$3,700,000 loan from a bank.
The S&W ESOP shares were as follows:
<TABLE>
<CAPTION>
MARCH 28, 1997 MARCH 29, 1996 MARCH 30, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Allocated shares ...................................... 278,490 202,052 123,946
Shares released for allocation.......................... 120,237 76,438 78,106
Unreleased shares ..................................... 162,769 283,006 359,444
---------- ---------- ----------
Total ESOP shares ................................. 561,496 561,496 561,496
========== ========== ==========
Fair value of unreleased shares......................... $1,512,495 $2,392,661 $2,885,589
========== ========== ==========
</TABLE>
31
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Subsequent to March 28, 1997, the Company committed to release the
remaining shares to the S&W ESOP participants and it is management's intention
to terminate this plan. Accordingly, approximately $2.5 million of related
expense was recognized subsequent to year-end.
11. BUSINESS ACQUISITIONS
Pooling With S&W
On September 23, 1997, the Company acquired S&W in a merger pursuant to
which the Company issued 1,737,458 shares of common stock to the former
shareholders of S&W (of which 154,700 shares are being held in escrow) in
exchange for all of the outstanding shares of capital stock of S&W valued at
$26.0 million at the time of the merger. The merger has been accounted for as a
pooling-of-interests, and accordingly, the Company's supplemental consolidated
financial statements have been restated to include the accounts and operations
of S&W for all periods prior to the merger.
Separate net sales, net income, and other changes in shareholders' equity
of the merged entities prior to the merger are presented in the following table:
<TABLE>
<CAPTION>
MARCH 28, 1997 MARCH 29, 1996 MARCH 30, 1995
-------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales
PSS, Taylor, and X-Ray of Geogia combined ................ $691,020 $529,024 $413,301
S&W....................................................... 72,034 60,096 58,684
-------- -------- --------
Total ................................................ $763,054 $589,120 $471,985
======== ======== ========
Net income (loss)
PSS, Taylor, and X-Ray of Geogia combined ................ $ 4,373 $ 1,339 $ (847)
S&W....................................................... 54 790 907
-------- -------- --------
Total ................................................ $ 4,427 $ 2,129 $ 60
======== ======== ========
Other changes in shareholders' equity
PSS, Taylor, and X-ray of Georgia combined................ $ 1,677 $151,885 $ 23,585
S&W....................................................... 1,321 505 617
-------- -------- --------
Total ................................................ $ 2,998 $152,390 $ 24,202
======== ======== ========
</TABLE>
Pooling With X-ray Georgia
On December 20, 1996, the Company acquired X-ray Georgia in a merger
pursuant to which the Company issued 593,672 shares of common stock to the
former shareholders of X-ray Georgia (of which 52,675 shares are being held in
escrow as of March 28, 1997) in exchange for all of the outstanding shares of
capital stock of X-ray Georgia valued at $11.0 million at the time of the
merger. The merger has been accounted for as a pooling-of-interests, and
accordingly, the Company's consolidated financial statements have been restated
to include the accounts and operations of X-ray Georgia for all periods prior to
the merger.
X-ray Georgia was an S-Corporation for income tax purposes, and therefore,
did not pay U.S. federal income taxes. X-ray Georgia will be included in the
Company's U.S. federal income tax return subsequent to the date of acquisition.
Separate net sales, net income (loss) and related per share amounts of merged
entities are presented in the following table. In addition, the table includes
pro forma net income (loss) and net income (loss) per share amounts which
reflect pro forma adjustments to present income taxes of X-ray Georgia on the
basis on which they will be reported in future periods.
32
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<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 Georgia .................................... 33,182 45,730 47,016
-------- -------- --------
Total .......................................... $503,539 $529,024 $413,301
======== ======== ========
Net income (loss)
PSS and Taylor combined .......................... $ 6,139 $ 186 $ (909)
X-ray Georgia .................................... 938 1,153 62
-------- -------- --------
Net income (loss) as reported......................... $ 7,077 $ 1,339 $ (847)
Pro forma tax provision for X-ray Georgia............. (357) (438) (23)
-------- -------- --------
Pro forma net income (loss) ......................... $ 6,720 $ 901 $ (870)
======== ======== ========
Net income (loss) per share:
As reported ...................................... $ 0.19 $ 0.04 $ (0.04)
Pro forma ........................................ $ 0.19 $ 0.03 $ (0.04)
Other changes in shareholders' equity
PSS and Taylor combined .......................... $ 1,446 $152,340 $ 24,101
X-ray Georgia .................................... (1,100) (455) (516)
-------- -------- --------
Total .......................................... $ 346 $151,885 $ 23,585
======== ======== ========
</TABLE>
Pooling With Taylor
On August 21, 1995, the Company issued approximately 3,790,000 shares of
its common stock in exchange for all of the outstanding common stock of Taylor,
including approximately 416,000 shares held in escrow to satisfy certain
obligations of Taylor related to its operations prior to the merger. Subsequent
to August 21, 1995, approximately 244,000 shares of common stock were returned
to the Company as settlement of the escrow and were canceled. These canceled
shares had no resulting impact on the net income per share calculation. The
merger has been accounted for as a pooling-of-interests, and accordingly, the
Company's consolidated financial statements have been restated to include the
accounts and operations of Taylor for all periods prior to the merger.
33
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 year 1997, the Company merged with four other medical
supply and equipment distributors in stock mergers accounted for under the
pooling-of-interests method by issuing approximately 1,465,000 shares of PSS
common stock in exchange for all of the common stock of the acquired companies.
The accompanying 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 year 1996, the Company merged with three other medical supply
and equipment distributors in stock mergers accounted for under the pooling-of-
interests method by issuing 290,586 shares of PSS common stock in exchange for
all of the common stock of the acquired companies. The accompanying consolidated
financial statements have not been restated for periods prior to these poolings
due to immateriality. Accordingly, the results of operations have been reflected
in the consolidated financial statements prospectively from the acquisition
date, and the accumulated retained earnings as of their acquisition dates of
approximately $1.3 million have been recorded as adjustments to the accumulated
deficit of the Company.
Asset Purchases
During fiscal year 1997, the Company acquired certain assets, accounted for
by the purchase method, including accounts receivable, inventories, equipment,
and other assets of five medical supplies and equipment distributors for
approximately $14.2 million. The aggregate purchase price paid consisted of cash
of approximately $6.8 million, assumption of accounts payable and accrued
liabilities of approximately $7.4 million, and the issuance of 2,700 shares of
common stock with a fair market value of approximately $40,000. The excess of
the purchase price over the estimated fair value of the net assets acquired of
approximately $2.8 million has been recorded as goodwill and will be amortized
over thirty years. In addition, the Company entered into noncompete agreements
with shareholders of the acquired companies which provide for payments of
approximately $220,000 through the year 2001. The operations of the acquired
companies have been included in the Company's results of operations subsequent
to the dates of acquisition.
34
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During fiscal year 1996, the Company acquired certain assets, accounted for
by the purchase method, including accounts receivable, inventories, equipment,
and other assets of eight medical supplies and equipment distributors for
approximately $6.2 million. The aggregate purchase price paid consisted of cash
of approximately $3.3 million, assumption of accounts payable and accrued
liabilities of approximately $2.7 million, and the issuance of 5,700 shares of
common stock with a fair market value of $121,000. The excess of the purchase
price over the estimated fair value of the net assets acquired of approximately
$1.7 million has been recorded as goodwill and will be amortized over thirty
years. In addition, the Company entered into noncompete agreements with
shareholders of the acquired companies which provide for payments of $1.3
million through the year 2000. The operations of the acquired companies have
been included in the Company's results of operations subsequent to the dates of
acquisition.
During fiscal year 1995, the Company acquired certain assets, including
accounts receivable, inventories, equipment, and other assets, of nine medical
supplies and equipment distributors for approximately $11.6 million. The
aggregate purchase price paid consisted of cash of approximately $6.9 million,
assumption of accounts payable and accrued liabilities of approximately $4.2
million, and the issuance of approximately 70,000 shares of common stock with a
fair market value of approximately $0.5 million. The excess of the purchase
price over the estimated fair value of the net assets acquired of approximately
$4.0 million has been recorded as goodwill. In addition, the Company entered
into noncompete agreements with shareholders and an officer of the acquired
companies which provide for payments of approximately $2.3 million through the
year 1998.
During fiscal year 1995, Taylor acquired certain assets of three medical
supplies and equipment distributors for approximately $2.2 million.
For acquisitions accounted for as purchases, the results of operations
acquired have been included in the financial statements since the dates of
acquisition. Supplemental pro forma information is not presented because the
impact on the Company's results of operations would not be material.
12. COMMITMENTS AND CONTINGENCIES
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability. The
Company has not experienced any significant product liability claims and
maintains product liability insurance coverage. In addition, the Company is
party to various legal and administrative proceedings and claims arising in the
normal course of business. While any litigation contains an element of
uncertainty, management believes that the outcome of any proceedings or claims
which are pending or known to be threatened will not have a material adverse
effect on the Company's consolidated financial position, liquidity, or results
of operations.
The Company has employment agreements with certain executive officers which
provide that in the event of their termination or resignation, under certain
conditions, the Company may be required to continue salary payments and provide
insurance for a period ranging from 12 to 36 months for the chief executive
officer and from 3 to 12 months for other executives and to repurchase a portion
or all of the shares of common stock held by the executives upon their demand.
The period of salary and insurance continuation and the level of stock
repurchases are based on the conditions of the termination or resignation.
35
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. ABBOTT LABORATORIES DISTRIBUTION AGREEMENT
On March 27, 1995, the Company signed a Distribution Agreement with
Abbott Laboratories providing for the exclusive distribution of certain Abbott
diagnostic products. The Abbott Agreement, effective April 1, 1995, has a five-
year term, although it may be terminated earlier if the Company fails to meet
certain performance objectives. Under the Abbott Agreement, the Company has
become the exclusive distributor in the United States of certain Abbott
diagnostic products and reagents to office-based physician practices with 24 or
fewer physicians per office site. The Abbott Agreement also provides the
Company's sales force with access to over 15,000 physician practices that were
not previously purchasing diagnostic products from the Company. Abbott products
constituted approximately 16% of the Company's sales in fiscal years 1997 and
1996. Simultaneous with the closing of the Abbott Agreement, Abbott purchased
825,000 unregistered, restricted shares of PSS common stock. A three-year
irrevocable proxy to the PSS Board of Directors and a perpetual stand still
agreement were provided by Abbott in the Stock Purchase Agreement.
14. SALES OF ASSETS
On July 1, 1994, Taylor sold the assets of its Taylor Home Health division
for $12,000,000 in cash and an escrow receivable of $1,051,000 based on
subsequent receivables collections and other factors, resulting in a gain on
sale of assets of approximately $2,078,000. In March 1995, Taylor negotiated a
final settlement of the escrowed receivable which included the return to Taylor
of certain receivables. Taylor recorded a $600,000 reduction in the gain
originally recognized to record these receivables at their estimated net
realizable value. The net gain of approximately $1,478,000 is included in other
income for fiscal year 1995.
On November 30, 1994, Taylor sold the assets of its Labcare division, whose
principal business was the repair of medical equipment, for $1,100,000,
resulting in a loss of approximately $403,000. In March 1995, Taylor recorded an
additional loss on the sale of approximately $154,000 related to the write-down
of certain notes receivable issued in conjunction with the sale. The net loss of
approximately $558,000 is included in other income for fiscal year 1995.
15. MERGER COSTS AND EXPENSES AND RESTRUCTURING CHARGES
The Company recorded merger costs and expenses of approximately $12,100,000
and $15,700,000 in fiscal years 1997 and 1996, respectively, associated with
mergers accounted for as poolings-of-interests. Such costs include direct merger
costs consisting primarily of investment banking, legal, accounting, and filing
fees as well as consolidation costs from the closing of duplicate service center
locations, realigning regional and corporate functions, and reducing personnel.
At March 28, 1997, accrued merger costs were approximately $3.0 million.
During fiscal year 1995, Taylor management concluded that recent industry
developments had affected Taylor's strategy and operations. Taylor assessed its
relative position in its major markets and determined that competitive pressures
on margins and cost structures in its Arizona, Indiana and Massachusetts
distribution centers as well as the prospects for its physician consulting
services and equipment repair businesses would not result in full realization of
the future benefits expected from the related intangible assets. Accordingly,
Taylor management concluded that the intangible assets were impaired and
recorded a $4,388,592 noncash charge to write off the intangible assets
associated with these markets and operations.
36
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SUBSEQUENT EVENTS
Subsequent to March 28, 1997, the Company purchased three imaging and
equipment distributors with annual revenues of $76 million for aggregate
consideration of approximately $16.5 million comprised of approximately 868,000
shares of PSS common stock and approximately $2.5 million cash. In addition, the
Company acquired two physician supply businesses and one imaging and equipment
distributor with annual revenues of $18 million for aggregate consideration of
$4.4 million in stock-for-stock mergers accounted for using the pooling of
interests methods of accounting. The supplemental consolidated financial
statements have not been restated to account for these acquisitions.
During October 1997, the Company issued 8.5 % senior subordinated notes due
in 2007 ( the "Notes") in the amount of $125.0 million. Interest on the Notes
will accrue from their date of original issuance and will be payable semi-
annually on April 1 and October 1 of each year, commencing on April 1, 1998, at
a rate of 8.5% per annum.
37
