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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 29, 1996 Commission File Number 0-23832
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PHYSICIAN SALES & SERVICE, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-2280364
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(State of incorporation) (IRS Employer Identification Number)
7800 Belfort Parkway, Suite 250,
Jacksonville, Florida 32256
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 281-0011
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant (assuming, for purposes of this calculation, without conceding,
that all executive officers and directors are "affiliates"), was $761,668,826
on March 29, 1996, based on the average bid and asked price of $24.75 for the
Common Stock as reported by the Nasdaq National Market.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1996 Annual Meeting of Stockholders of the
Registrant which will be filed with the Securities and Exchange Commission not
later than 120 days after March 29, 1996.
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PART I
ITEM 1. BUSINESS
GENERAL
Physician Sales & Service, Inc. (the "Company" or "PSS") was incorporated
in 1983 in Jacksonville, Florida. PSS is a leading distributor of medical
supplies, equipment, and pharmaceuticals to primary care and other office-based
physicians. The Company currently operates 64 U.S. service centers
distributing to approximately 88,000 physician office sites in all 50 states
and one service center located in Belgium opened by its WorldMed, Inc.
subsidiary. Of the 65 Company service centers, 33 were the result of
acquisitions of local or regional medical supply and equipment distributors,
including 10 existing service centers merged into acquired locations and two
service centers opened as a result of acquisitions during fiscal 1996. Of the
39 service centers opened as start-ups by the Company, seven have been merged
into acquired centers leaving 32 service centers which were opened by the
Company.
On August 21, 1995, the Company completed the acquisition of Taylor
Medical, Inc. ("Taylor"), its largest acquisition to date, in a stock-for-stock
pooling. Taylor distributed medical supplies and equipment mainly to
office-based physicians and managed care facilities. Taylor operated five
distribution centers, primarily in the Southwest and Northeast, with 20
redistribution and sales offices with approximately 175 sales representatives.
Taylor had physician-related net sales of approximately $122 million for the
fiscal year ended March 30, 1995. The acquisition of Taylor increases the
Company's market presence in the Southwest and Northeast and provides an
opportunity to enhance profitability through the integration and consolidation
of Taylor's operations.
The Company's primary market is the approximately 398,000 physicians who
practice medicine in approximately 190,000 office sites throughout the United
States. According to industry estimates, the physician office site segment of
the health care industry represents a $6.6 billion market estimated to be
growing at 8% to 12% annually. PSS has historically grown faster than the
overall market. During the fiscal years ended 1992 through 1996, PSS's net
sales, excluding the retroactive effect of net sales of Taylor, grew at a
compound annual rate of 40.5% and, giving retroactive effect to the merger with
Taylor, the Company's net sales grew at a compound annual rate of 28.2%. The
Company's objective is to be capable of servicing every office-based physician
in the United States by 1997. To achieve this objective and expand
profitability, PSS intends to (i) continue its efforts to acquire local and
regional medical supply distributors in select markets; (ii) increase sales of
existing service centers by adding additional sales representatives and
providing superior service, competitive pricing, and a broad product line which
includes sophisticated diagnostic equipment marketed by PSS on an exclusive and
semi-exclusive basis; (iii) open new service centers in select markets; and
(iv) continue expanding operating margins by increasing sales force
productivity, focusing on growth through acquisitions rather than start-ups,
which initially entail significant losses, reducing product costs through
volume purchase arrangements, leveraging fixed distribution costs, and
improving operational efficiencies through computer system enhancements.
Effective November 13, 1995 the Company completed a secondary offering of
11.5 million shares of common stock at $17 per share, 8.8 million of which were
offered by the Company. The Company used approximately $58.2 million of the
total net proceeds of $142.9 million to repay debt. Management intends to use
the remaining net proceeds of the secondary offering for general corporate
purposes, including future acquisitions. The consummation of this transaction,
along with the Company's financing arrangements, has provided the Company with
resources to continue its strategy of being capable
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of servicing every office-based physician in the United States by 1997, through
acquisition and Company start-ups, and has provided the Company with the
resources to support future capital expenditures. PSS Common Stock is publicly
traded over the counter by the NASDAQ National Market System under the ticker
symbol "PSSI".
The Company recently completed the first year of a Distributorship
Agreement (the "Abbott Agreement") with Abbott Laboratories ("Abbott")
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 after two years from the date of the Abbott Agreement. The Company
exceeded the first year performance objectives and believes it can achieve the
sales performance necessary to provide favorable margins over the term of the
Abbott Agreement. 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 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. At the time of the execution
of the Abbott Agreement, Abbott acquired 825,000 shares of PSS Common Stock.
Under the terms of the Stock Purchase Agreement between Abbott and the Company,
Abbott is limited by certain prohibitions on further purchases of PSS Common
Stock and has granted a three-year irrevocable proxy to vote its shares.
In March 1996 the Company established three new subsidiaries, WorldMed,
N.V., a Belgian company, which is a subsidiary of WorldMed International, Inc.,
("WorldMed Int'l."), a Delaware corporation and WorldMed, Inc. WorldMed Int'l.
was established by the Company to manage and develop the international medical
supply and equipment distribution consolidation and growth opportunity.
WorldMed, Inc.. will serve as a platform for the Company to acquire multimarket
medical distributors in the United States without disrupting the focus of PSS.
On April 10, 1996, WorldMed, N.V. acquired Deckers, a medical equipment and
supply distributor to hospitals and physician offices in Belgium, Germany, and
France located in Leuven, Belgium. Decker's last 12 months' sales were
approximately U.S. $15.5 million.
OPERATIONS
PSS focuses on complete customer satisfaction, which it characterizes to
its customers as "no hassle" service. Consistent with this approach, the
Company offers its customers same-day delivery service on a regular basis,
highly trained, consultative sales professionals, a broad product line
including sophisticated diagnostic equipment and supplies, no minimum order
size or shipping charges, and returns of unused, saleable products for instant
credit.
The Company has increased its emphasis on national customer accounts,
including large physician group practices, physician practice management
companies, physician-hospital organizations, physician management service
organizations and group purchasing organizations. In selling to these national
accounts, the Company emphasizes its core strengths of same-day service, which
permits stockless inventory, competitive pricing and high service levels,
including inventory maintenance.
At March 29, 1996, PSS maintained a highly decentralized distribution
network of 64 service centers operating a total of 540 delivery vans throughout
the United States. This distribution network along with the Company's Instant
Customer Order Network ("ICON"(SM)), described in "Information
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Technology" herein, has enabled PSS to provide same-day delivery service on a
consistent basis. Customer orders received by 10:30 a.m. at the local service
center are delivered the same day within a 100 mile radius. Within a 30 mile
radius, orders received by noon are delivered the same day.
Each PSS service center operates as a profit center and is led by a
management team that typically includes a sales manager and an operations
manager. Each service center employs sales representatives and staff,
including purchasing agents, customer service representatives, and warehouse
and delivery personnel. Employees are compensated based upon both individual
and service center performance. Both management and employee bonuses are based
largely upon attainment of asset management goals and operating profit
performance.
Through its 692 sales representatives, PSS distributes medical supplies
and equipment to physicians in approximately 88,000 office sites nationally.
Generally, each sales representative is responsible for calling on
approximately 150 to 200 physician offices, with a minimum goal of visiting
each office once every one to two weeks.
The Company is required to carry a significant investment in inventory to
meet the rapid delivery requirements of its customers. The Company distributes
over 30,000 different products manufactured by approximately 3,000
manufacturers. During the twelve months ended March 29, 1996, Abbott was the
only vendor which accounted for more than 10% of the Company's inventory
purchases. The Company believes it is not vulnerable to significant supply
interruptions due to the diverse product base sold by PSS and the significant
number of manufacturers supplying those products. However, the Company's
ability to maintain good relations with these vendors will affect the
profitability of the business.
The Company's customer base consists mainly of primary care and
office-based physicians which accounted for approximately 99% of the Company's
net sales for the twelve months ended March 29, 1996. No single customer
accounted for more than 1% of PSS's net sales for the fiscal year ended March
29, 1996.
At March 29, 1996 the Company had 692 sales representatives and 2,072
total employees. The Company considers its employee relations to be excellent.
INFORMATION TECHNOLOGY
PSS maintains a decentralized information system with data acquisition at
the local service centers and a central corporate data base that is accessible
from all of the service centers. The Company's information systems were
designed to allow the service center to have both the hardware and software to
conduct operations independently. The failure of a computer system at a
service center would not affect the operations of any other service center or
the corporate system. Likewise, the short-term failure of the corporate system
would not affect the operations of any service center.
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To enable the Company to maintain high customer order fill rates on a
consistent basis, PSS utilizes its Back-Order Eliminator and Allocation of
Resources ("BEAR"(SM)) system. Service centers report inventory quantities daily
into the corporate database along with the separate service center reports
which are combined into one company-wide inventory report containing product
number, quantity on hand and a projected 45-day usage. BEAR(SM) reduces the
number of backorders to customers reducing the Company's total inventory.
BEAR(SM) also displays the on-hand quantities of five neighboring service
centers that are within one commercial shipping day of the service center there
by minimizing freight and ensuring quicker delivery to the customer.
ICON(SM) is a sales force automation technology enabling the PSS sales
representative access to critical customer information from any location.
ICON(SM) provides the sales representative with customer pricing, contracts,
backorders, inventory levels, account status and on the spot ordering through
the use of a wireless network. ICON(SM) has increased selling time, decreased
operating expenses in the service centers and increased same-day delivery to
customers.
From the ICON(SM), a sales representative can give product demonstrations
and equipment feasibility studies showing the physician potential revenues and
return on investment. Most recently, ICON(SM) gives the sales representative
the ability to perform quotes and bids to the larger accounts and standing
order capabilities.
PSS introduced, in fiscal 1996, PSS DIAL (Digital Information Access Link).
This is a 24 hour on-line ordering system for customers. PSS DIAL will provide
the customer with inventory levels, pricing contract information, account
status, backorder usage reports, promotions, and electronic mail.
The installation of PSS DIAL requires no major capital investment from the
physician for hardware or software. Beginning in August 1996, customers can
access PSS DIAL through the worldwide web at http://www.pssd.com.
MARKETING AND PRODUCT MIX
Historically, Taylor did not maintain a system for tracking net sales by
product category. Taylor's net sales included below were primarily derived
from sales of medical supplies, equipment, and pharmaceuticals to office-based
physicians. Historically, both PSS and Taylor have principally targeted and
offered similar products to the office-based physician market, although
Taylor's net sales were more highly concentrated in disposable supplies while
PSS focused on a consultative sales approach which included an emphasis on
diagnostic equipment.
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The following table sets forth information regarding the Company's net sales
mix and gross profit percentages by significant product category for the
periods indicated:
FISCAL YEAR ENDED
--------------------------------------------
1994 (1) 1995 (1) 1996 (2)
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NET SALES:
PSS
Supplies $110,846 $151,588 $239,367
Equipment 29,980 51,127 58,768
Pharmaceuticals 23,185 29,836 43,708
Other 5,692 3,637 3,845
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PSS Total 169,703 236,188 345,688
Abbott sales
Supplies - - 57,691
Equipment - - 17,376
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Abbott Total - - 75,067
Taylor 134,789 130,097 62,539
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Company Total $304,492 $366,285 $483,294
=========== =========== ===========
PERCENTAGE OF NET SALES:
PSS
Supplies 65.3% 64.2% 56.9%
Equipment 17.7 21.7 14.0
Pharmaceuticals 13.6 12.6 10.4
Other 3.4 1.5 0.9
Abbott sales
Supplies - - 13.7
Equipment - - 4.1
----------- ----------- -----------
Total 100.0% 100.0% 100.0%
=========== =========== ===========
GROSS PROFIT PERCENTAGE:
PSS
Supplies 34.0% 33.3% 34.2%
Equipment 25.8 26.8 26.3
Pharmaceuticals 26.2 26.6 27.0
Other 33.1 28.2 32.3
PSS Total 31.5 31.0 32.0
Abbott sales
Supplies - - 16.9
Equipment - - 21.8
Abbott Total - - 18.0
Taylor 34.1 30.5 29.4
Company Total 32.7% 30.8% 29.4%
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(1) Fiscal years 1995 and 1994 exclude Abbott net sales by category. The
Company began tracking Abbott net sales by category in connection with the
Abbott Agreement effective April 1, 1995.
(2) Fiscal 1996 excludes Taylor net sales by category for the period April 1,
1995 through September 30, 1995. The Company began tracking combined
net sales by category beginning October 1, 1995.
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For the fiscal year ended 1996, the Company sold approximately $75 million
of Abbott product with a gross profit percentage of 18.0%. 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 direct reimbursements,
negatively impacted the Company's gross profit percentage by 1.7%.
The Company has focused on a comprehensive and consultative sales approach
with an emphasis on diagnostic products, which includes sophisticated
diagnostic equipment and supplies related to the use of such equipment. As a
result, the Company has been able to expand and increase its diagnostic
products sales in periods of uncertainty in the health care market.
Additionally, as manufacturers search for means to reduce sales and marketing
expenses, PSS has used its expertise and market reach to distribute products to
physicians as evidenced by the increase in total sales dollars of equipment and
pharmaceuticals. The decrease in percentage of net sales of these two
categories is the result of the inclusion of Taylor net sales which comprised a
higher percentage of medical disposable supplies than that of PSS historically.
PSS distributes selected items from substantially all major product lines
of medical supplies and equipment. PSS currently sells a broad range of
medical supplies which include over 30,000 stock keeping units, including
various types and sizes of paper goods, needles and syringes, gauze and wound
dressings, sutures, latex gloves, orthopedic soft goods and casting products,
wood tongue blades and applicators, sterilization and intravenous solutions,
and specimen containers.
The Company's equipment lines include blood chemistry analyzers, automated
cell and differential counters, immuno assay analyzers, exam tables and
furniture, electrocardiograph monitors, cardiac stress systems, holter
monitors, flexible sigmoidoscopy scopes, autoclaves, spirometers, pulse
oximeters, ocular screeners, tympanometers, and microscopes. Demand for
diagnostic equipment has increased recently, reflecting in part, technological
advances which enable increasingly sophisticated diagnostic tests to be
performed in the physician's office. Sales of diagnostic equipment, while
generally lower in gross margin than supplies, normally require the ongoing
reordering of disposable diagnostic reagents which generally yield higher
margins.
The Company's pharmaceutical sales include vaccines, injectables and
ointments. As a result of the changing dynamics in the pharmaceutical
industry, particularly the reduction in focusing on the sales force in the
physician's offices, pharmaceutical manufacturers are increasingly seeking
alternative means of distribution. The Company believes that its consultative
sales approach and its emphasis on training have allowed PSS to be highly
effective in selling pharmaceuticals to the physician office market.
The decrease in other net sales over the period from fiscal 1994 to
fiscal 1996 reflects the improvement and expansion of the Company's product
file to more specifically track and categorize supply, equipment and
pharmaceuticals product sales.
During fiscal year 1994 the Company refocused its pricing and
customer-focused marketing strategies. Based on PSS's desire to increase
penetration of existing accounts, increase aggregate sales and gross profit,
and position itself for better penetration of larger physician group practices
and various managed care networks, PSS reduced its sales prices on its top 300
volume supplies and pharmaceutical products.
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PSS is implementing a new Penny Saver product line. The Penny Saver
products represent the core products or most frequently used products by PSS
customers. This product line will provide customers a choice between name
brand products and Penny Saver quality low price alternatives for commodity
products.
PSS plans to continue to focus on providing products and services to the
primary care physician market whether the physician is a single practitioner or
a member of a large group practice. In that effort, PSS developed Network
Plus(SM), a comprehensive savings plan for physicians in which PSS offers
special group purchasing contract pricing and provides periodic cost analyses
to help manage the supply needs of each physician. Under this program, when a
physician office guarantees at least 80% of its purchase volume to PSS, the
Company will guarantee the lowest purchase prices on certain products as well
as certain service guarantees.
The Abbott Agreement has positioned PSS as the sole distributor for the
CELL DYN(R) 1400, 1600 and 1700 hematology products, Abbott Vision(R) products,
IMx(R) products, and the Abbott Testpack(R) line of rapid tests sold to
physician offices with 24 or less physicians per geographic location over the
next three years. Gross profits for Abbott product sales converted to PSS will
be at substantially less than standard PSS margins. Gross profits on these
products are scheduled to gradually improve over the five-year term to
standard PSS gross margin levels. However, based on a formula stipulated in
the Abbott Agreement, PSS's sales performance can cause margins to improve or
decline. If after two years from the date of the Abbott Agreement, PSS has
failed to achieve certain performance goals, Abbott has the right to terminate
the Abbott Agreement. PSS achieved the first year performance goals and
believes it can achieve the sales performance necessary to provide favorable
margins over the term of the Abbott Agreement.
EXPANSION
Historically, Taylor did not account for operating profits on a
decentralized service center level. Therefore, the following expansion
information is based on PSS historical data until the date of the Taylor
merger.
PSS has grown from one service center located in Jacksonville, Florida
in 1983 to 65 service centers, 64 service centers located throughout the United
States and one service center located in Europe which was acquired subsequent
to March 29, 1996. Historically, the Company's growth has been accomplished
through both the start-up of service centers in new locations and the
acquisition of local and regional medical supply and equipment distributors.
Since fiscal 1994 the Company has accelerated its acquisition of medical supply
and equipment distributors both in number and in materiality of the operations
acquired. Significantly impacting the expansion of the Company was the
acquisition of Taylor during the current fiscal year. Taylor maintained a
centralized distribution organization comprised of five distribution centers
and 20 redistribution centers and sales offices. In connection with the
integration of Taylor into PSS, the Company closed or merged into existing PSS
service centers 17 of the Taylor locations. Additionally, the Company merged
eight PSS service centers into the eight remaining Taylor locations, and
established two new service centers. With this integration the Company has
successfully converted the Taylor centralized process into the decentralized
process which has historically enabled PSS to provide same-day delivery service
while maintaining high service levels.
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The following table depicts the number of service centers opened and
acquired by the Company for the period indicated. Also included is the number
of PSS service centers merged in connection with the integration of Taylor and
the integration of one additional acquisition during fiscal year 1996. The
table does not include the European service center acquired subsequent to
fiscal year 1996.
Fiscal Year (4)
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1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Centers at beginning of year 25 29 40 45 54
Newly opened centers (1) 1 8 1 5 4
Acquired centers (2) 3 3 4 4 16
PSS centers merged (3) 0 0 0 0 (10)
---- ---- ---- ---- ----
Centers at end of year 29 40 45 54 64
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(1) Does not include two service centers that were opened but subsequently
combined with existing service centers in fiscal year 1993.
(2) Does include eight Taylor service centers acquired and two service
centers opened to service additional markets resulting from the Taylor
merger into which 10 PSS service centers were combined in fiscal 1996.
Does not include seven acquisitions prior to fiscal 1996 and five
acquisitions during fiscal 1996 in which the operations were either
combined or combined with existing PSS service centers.
(3) Includes eight service centers combined with operations acquired from
Taylor and two additional service centers combined with operations of
other acquisitions.
(4) Fiscal years 1992 through 1995 exclude Taylor service centers.
Historically, PSS has sustained operating losses of approximately
$150,000 to $450,000 per start-up service center before reaching a monthly
break-even point generally by the eighteenth month of operation. The Company
commits approximately $250,000 to $1.5 million of working capital to each
start-up to support inventory, capital expenditures, and start-up losses. The
amount of operating loss and working capital support has varied with the
population base and market potential of the start-up service centers and the
level of resources allocated by the Company. As of March 29, 1996 the Company
had eight service centers in the start-up phase, which the Company defines as
Company-opened service centers less than two years old. Due to its existing
geographic market coverage, the Company plans to open substantially fewer new
centers in the future than it has historically opened in order to avoid the
start-up losses associated with new centers.
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The following table sets forth the average net sales and average operating
profit for the first six years of operations for start-up service centers that
have been open for an entire 12-month period. Operating results of Taylor
locations merged into existing PSS start-up service centers have been included
from the date the service centers were combined. Excluded are PSS start-up
service centers merged into acquired Taylor locations.
START-UP SERVICE CENTERS
First Second Third Fourth Fifth Sixth
----- ------ ----- ------ ----- -----
12-Month Period of Service Center Operation
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(Dollars in thousands)
Average net sales $1,603 $ 2,676 $3,850 $3,739 $4,396 $5,167
Average operating profit percentage (1) (7.34)% 2.57% 4.01% 5.47% 6.71% 7.15%
Number of centers (2) 30 25 24 16 15 13
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(1) Operating profit of a service center is defined as each service center's
net sales and vendor incentives less cost of goods sold, operating
expenses, amortization of non-compete agreements and signing bonuses, and
certain corporate overhead.
(2) Does not include a service center which was a satellite of an existing
center.
As evidenced by the increase in acquisition activity, PSS views the
acquisition of medical supplies and equipment distributors as an integral part
of its growth strategy. The Company intends to continue to acquire local and
regional distributors especially in existing markets where it can leverage its
distribution infrastructure and gain market share. PSS believes that local and
regional distributors are finding competition increasingly difficult as a
result of (i) lack of purchasing and administrative economies of scale, (ii)
reduced access to medical equipment product lines as equipment manufacturers
seek to reduce marketing costs by minimizing the number of distributors to
which they must provide field support, (iii) lack of resources for continued
development and training of personnel for maintenance, expansion or replacement
of existing business, and (iv) lack of resources to develop new distribution
system technologies and services.
Since inception the Company has acquired 37 medical supply and equipment
distributors. Excluding the acquisition of Taylor, the operations of 12 of the
distributors acquired were combined with existing PSS service centers leaving
25 operating service centers. Additionally, PSS merged eight existing service
centers into eight acquired Taylor locations and established two new locations
in connection with the Taylor merger in fiscal 1996. Also, two additional
existing service centers were merged as a result of other acquisitions during
fiscal 1996. Subsequent to the reorganization resulting from the integration
of Taylor and two other fiscal year 1996 acquisitions and including the Belgian
acquisition in April 1996, PSS maintains 32 service centers from acquisitions
of local and regional medical supply and equipment distributors.
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The following table sets forth the average net sales and average operating
profit for the first six years for acquired service centers that have been
operating as a Company service center for an entire 12-month period. Operating
results of Taylor locations merged into existing PSS acquired service centers
have been included from the date the service centers were combined. Excluded
are previously acquired PSS service centers merged into acquired Taylor
locations.
ACQUIRED SERVICE CENTERS
First Second Third Fourth Fifth Sixth
----- ------ ----- ------ ----- -----
12-Month Period of Service Center Operation
-----------------------------------------------------------------------
(Dollars in thousands)
Average net sales $4,573 $4,840 $4,425 $4,493 $5,119 $7,240
Average operating profit percentage (1)(2) 1.49% 5.44% 3.97% 4.11% 6.63% 7.03%
Number of service centers (3) 16 13 10 8 6 6
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(1) Operating profit of a service center is defined as each service center's
net sales and vendor incentives less cost of goods sold, operating
expenses, amortization of non-compete agreements and signing bonuses, and
certain corporate overhead.
(2) Second year results include operations of three recently acquired service
centers which have a weighted-average operating profit percentage of
5.58% and average net sales of $10.3 million.
(3) Does not include a service center that was a satellite of an existing
service center.
Along with the opening of new service centers and the acquisition of local
medical supply and equipment distributors, PSS sales growth is largely
attributable to high levels of same center sales growth. PSS quantifies same
center sales by aggregating the sales for service centers which have been in
operation for at least two consecutive 12-month periods.
The following table sets forth the same center sales growth of the Company
for the periods indicated.
Fiscal Year Ended (1)
---------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- -----
Number of centers per period 22 25 29 40 45
Same center sales growth 24.6% 18.5% 27.7% 23.3% 26.8%
- ----------
(1) Results for fiscal years 1992 through 1995 exclude Taylor centers.
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COMPETITION
PSS operates in a highly competitive environment. The Company's principal
competitors are multi-market medical distributors that are full-line,
full-service medical supply companies, some of which are national in scope.
These national companies have sales representatives competing directly with
PSS, are substantially larger in size, and have substantially greater financial
resources than PSS. There are also numerous local dealers and mail order firms
that distribute medical supplies and equipment within the same market as the
Company. Most local dealers are privately owned and operate with limited
product lines. There are several mail order firms which distribute medical
supplies on a national or regional basis. The Company also competes with
certain manufacturers that sell their products both to distributors and
directly to users, including office-based physicians.
REGULATORY MATTERS
The Company's business is subject to regulation under the Federal Food,
Drug, and Cosmetic Act, the Prescription Drug Marketing Act of 1987, the
Controlled Substances Act and state laws applicable to the distribution and
manufacture of medical devices and over-the-counter pharmaceutical products, as
well as, the distribution of prescription pharmaceutical products.
The Federal Food, Drug, and Cosmetic Act generally regulates the
manufacture of drug and medical devices shipped in interstate commerce,
including such matters as labeling, packaging, storage and handling of such
products. The Prescription Drug Marketing Act of 1987, which amended the
Federal Food, Drug and Cosmetic Act, establishes certain requirements
applicable to the wholesale distribution of prescription drugs, including the
requirements that wholesale drug distributors be registered with the Secretary
of Health and Human Services or be licensed in each state in which they
conduct business in accordance with federally established guidelines on
storage, handling, and records maintenance. Under the Controlled Substances
Act, the Company, as a distributor of controlled substances, is required to
obtain annually a registration from the Attorney General in accordance with
specified rules and regulations and is subject to inspection by the Drug
Enforcement Administration acting on behalf of the Attorney General. The
Company is required to maintain licenses and permits for the distribution of
pharmaceutical products and medical devices under the laws of the states in
which it operates. In addition, the Company's physician customers are subject
to significant federal and state regulation. There can be no assurance that
regulations that impact the physicians' practices will not have a material
adverse impact on the Company's business.
On April 10, 1996, the Company, through its Belgian subsidiary, WorldMed
N.V., acquired substantially all of the operating assets of Deckers, a Belgian
division of Internatio-Muller N.V., a Netherlands public limited company. The
assets acquired include real estate, inventory, and accounts receivable.
Deckers is based in Leuven, Belgium, and distributes medical equipment, certain
pharmaceuticals, and disposables to hospitals and doctors in Belgium, Germany,
and France.
As a result of the acquisition of Deckers in Belgium, WorldMed N.V. is
subject to compliance with applicable Belgian, Flemish and European Union laws
and regulations, primarily relating to tax, accounting, environmental, labor,
medical products and pharmaceuticals distribution, and antitrust matters.
12
13
ITEM 2. PROPERTIES
The Company currently maintains 64 service centers providing service to 50
states throughout the United States and one service center in Belgium. With
the exception of the service centers located in Leuven, Belgium and Beaumont,
Texas, which are owned, all locations are leased by the Company. The following
table identifies the locations of the Company's service centers and the
locations which they service.
Service center locations Locations serviced Service center locations Locations serviced
- ------------------------ ------------------ ------------------------ ------------------
Albany, NY NY, CT, VT Los Angeles, CA(South) CA
Albuquerque, NM NM, CO, TX Louisville, KY IN, KY
Atlanta, GA GA, AL Lubbock, TX TX
Baltimore, MD MD, PA, VA, WV Memphis, TN AR, MS, TN
Beaumont, TX TX Miami, FL FL
Birmingham, AL AL, MS Minneapolis, MN IA, MN, MT, ND, SD, WI
Boise, ID ID, MT Mobile, AL AL, FL, MS
Leuven, Belgium (1) Belgium, France, Germany Nashville, TN IL, KY, TN
Charlotte, NC NC, SC, VA, TN New Orleans, LA LA, MS, TX
Chattanooga, TN AL, GA, TN Norfolk, VA NC, VA, WV
Chicago, IL IL, IN, WI Oklahoma City, OK OK, KS
Cincinnati, OH KY, IN, OH, WV Omaha, NE CO, NE, IA, WY
Cleveland, OH OH Orlando, FL FL
Columbia, SC SC, GA Philadelphia, PA DE, NJ, NY, PA
Dallas, TX TX, OK Phoenix, AZ AZ
Davenport, IA IA, IL Pittsburgh, PA PA, WV, MD, OH, NY
Delray Beach, FL FL Portland, OR CA, OR, WA
Denver, CO CO, NM, WY Raleigh, NC NC, VA
Detroit, MI MI Richmond, VA VA
Fairfield, NJ NJ, NY Roanoke, VA TN, VA
Hartford, CT CT, MA, VT Rochester, NY NY
Honolulu, HI HI Salt Lake City, UT CO, NV, UT
Houston, TX TX, OK San Antonio, TX TX
Indianapolis, IN IN, IL San Diego, CA CA
Jackson, MS MS, LA San Francisco, CA CA
Jacksonville, FL FL, GA, SC Seattle, WA WA, AK
Kansas City, KS IL, IA, KS, MO St. Louis, MO IL, MO
Knoxville, TN KY, NC, TN St. Petersburg, FL FL
Lafayette, LA LA Tallahassee, FL AL, FL, GA
Las Vegas, NV AZ, NV, UT Tulsa, OK AK, OK, MO
Little Rock, AR TX, AR Union, NJ NJ, NY
Long Island, NY MA, NJ, NY Wareham, MA RI, CT, ME, MA, NH
Los Angeles, CA (North) CA
- ----------
(1) Acquired subsequent to March 29, 1996.
In the aggregate, PSS' service centers consist of approximately 745,000
square feet, of which all is leased, with the exception of the locations in
Leuven, Belgium and Beaumont, Texas, under lease agreements with expiration
dates ranging from 1996 to 2001. The Company's service centers range in size
from 4,800 square feet to 51,000 square feet.
13
14
The executive offices of PSS consist of approximately 9,000 square feet of
leased office space located at 7800 Belfort Parkway, Suite 250, Jacksonville,
Florida 32256. The lease for this space expires in April 1997.
At March 29, 1996, the Company's facilities provided adequate space for
the Company's operations. Throughout the Company's history of growth, the
Company has been able to secure the required facilities.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings against the Company or any of its
subsidiaries, other than incidental litigation arising in the ordinary course
of business. The Company believes that such litigation will not have a
material adverse effect on the Company's operations as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Company's fiscal year covered by this
report, no matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
Shares of the Company's Common Stock are quoted on the NASDAQ National
Market under the ticker symbol "PSSI". The following table reflects the range
of the NASDAQ reported high and low closing sale prices of the Company's Common
Stock during the periods indicated:
QUARTER ENDED HIGH LOW
- ------------- ----- -----
June 30, 1994 (1) 5.08 4.42
September 30, 1994 6.00 5.08
December 31, 1994 6.08 5.04
March 30, 1995 10.67 5.58
June 30, 1995 13.83 10.33
September 30, 1995 18.67 13.50
December 31, 1995 28.50 13.92
March 29, 1996 30.75 21.00
- ----------
(1) Represents trading of the Company's Common Stock from May 5, 1994 to
June 30, 1994. The registration of the Company's Common Stock was
effective May 4, 1994 with the first day of public trading commencing
on May 5, 1994 at an initial public offering price of $3.67 per share.
As of March 29, 1996, there were 901 holders of record and approximately
7,600 beneficial holders of the Company's Common Stock.
14
15
Since inception, the Company has neither declared nor paid cash dividends
on the Common Stock. PSS expects that earnings will be retained for the growth
and development of the Company's business. Accordingly, PSS does not
anticipate that any dividends will be declared on the Common Stock for the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company for fiscal years 1993
through 1996 have been derived from the Company's audited Consolidated
Financial Statements which give retroactive effect to the merger with Taylor.
The selected financial data of the Company for fiscal year 1992 has been
derived from the Company's unaudited consolidated financial statements which
give retroactive effect to the merger with Taylor.
Fiscal Year Ended
--------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- --------- -------- -------- --------
(Unaudited)
(Dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Net sales $179,276 $227,046 $304,492 $366,285 $483,294
Gross profit 60,550 77,168 99,418 112,929 141,954
Selling and G&A expenses 56,587 73,107 93,104 105,145 124,760
Restructuring charges (1) - 303 308 4,389 -
Merger costs and expenses (2) - - - - 15,732
Earnings before interest and taxes 4,421 4,309 6,831 5,301 4,227
Net income (loss) before
extraordinary item 661 535 981 (909) 186
Extraordinary loss, net of tax (3) - - 327 - -
--------- -------- -------- -------- --------
Net income (loss) $ 661 $535 $ 654 $ (909) $ 186
========= ======== ======== ======== ========
Net income (loss) per share before
extraordinary item $ .05 $ .03 $ .06 $ (0.04) $ 0.01
Extraordinary loss per share, net
of tax - - (.02) - -
--------- -------- -------- -------- --------
Net income (loss) per share (4) $ .05 $ .03 $ .04 $ (0.04) $ 0.01
========= ======== ======== ======== ========
Weighted average shares
outstanding (4) 13,087 16,137 17,178 23,168 30,860
========= ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital $ 28,791 $ 36,615 $ 44,665 $ 52,603 $171,945
Total assets 66,481 88,369 118,844 127,476 271,074
Long-term liabilities 28,183 42,868 54,945 34,601 4,043
Total equity 15,818 17,564 21,929 45,121 197,647
- -----------
(1) The fiscal 1995 restructuring charge of $4,389 reflects Taylor
management's assessment of the underrealization of future benefits related
to certain intangible assets. The fiscal 1994 restructuring charge of
$308 resulted from Taylor's consolidation of an acquisition. The fiscal
1993 restructuring charge of $303 resulted from Taylor management's writed
own of capitalized software costs.
(2) Merger costs and expenses reflect direct merger expenses incurred in
connection with the merger of PSS and Taylor and other poolings.
(3) The extraordinary item in fiscal 1994 resulted from early extinguishment
of debt by Taylor.
(4) Adjusted to give effect to a three-for-one stock split.
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The table below sets forth for each of the fiscal years ended 1994 through
1996 certain financial information. Included is pro forma net income and net
income per share excluding merger costs and expenses and restructuring charges.
Fiscal Year Ended
-------------------------------------------
1994 1995 1996
-------- -------- --------
(Dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Net sales $304,492 $366,285 $483,294
Gross profit 99,418 112,929 141,954
Selling and G&A expenses 93,104 105,145 124,760
Restructuring charges (1) 308 4,389 -
Merger costs and expenses (2) - - 15,732
Earnings before interest and
taxes 6,831 5,301 4,227
Net income (loss) before
extraordinary item 981 (909) 186
Extraordinary loss, net of tax (3) 327 - -
------ -------- --------
Net income (loss) $ 654 $ (909) $ 186
====== ========= ========
Net income (loss) per share before
extraordinary item $ .06 $ (0.04) $ 0.01
Extraordinary loss per share, net
of tax (.02) - -
------ -------- --------
Net income (loss) per share (4) $ .04 $ (0.04) $ 0.01
====== ========= ========
Pro forma net income excluding
merger costs and expenses and
restructuring charges $ 962 $ 1,979 $ 11,592
====== ========= ========
Pro forma net income per share
excluding merger costs and
expenses and restructuring charges $ .06 $ .09 $ .38
====== ========= ========
Weighted average shares
outstanding (4) 17,178 23,168 30,860
====== ========= ========
(1) The fiscal 1995 restructuring charge of $4,389 reflects Taylor
management's assessment of the underrealization of future benefits
related to certain intangible assets. The fiscal 1994 restructuring
charge of $308 resulted from Taylor's consolidation of an acquisition.
The fiscal 1993 restructuring charge of $303 resulted from Taylor
management's writedown of capitalized software costs.
(2) Merger costs and expenses reflect direct merger expenses incurred in
connection with the merger of PSS and Taylor and other immaterial
poolings.
(3) The extraordinary item in fiscal 1994 resulted from early
extinguishment of debt by Taylor.
(4) Adjusted to give effect to a three-for-one stock split.
16
17
PSS is a leading distributor of medical supplies, equipment, and
pharmaceuticals to primary care and other office-based physicians. Since its
inception in 1983, the Company has achieved significant growth in the number of
service center locations, geographic area of operation, net sales, and
profitability. During the fiscal years ended 1992 through 1996, PSS's net
sales, excluding the retroactive effect of the merger with Taylor, grew at a
compound annual rate of 40.5%, and giving retroactive effect of the merger with
Taylor, the Company's net sales grew at a compound annual rate of 28.2%. The
number of Company service centers has grown from two at the end of fiscal 1984
to 65 currently. In order of priority, the Company's growth has been
accomplished through (i) acquiring regional and local medical supplies and
equipment distributors, (ii) increasing sales from existing service centers,
and (iii) opening start-up service centers. Same center sales growth from
centers open for two or more consecutive 12-month periods was 26.8%, 23.3% and
27.7% for each of fiscal years 1996, 1995, and 1994, respectively. Fiscal 1995
and 1994 same store sales exclude sales of Taylor as historical branch level
data is not available.
PSS currently has 65 service centers, 32 of which were opened as start-ups
and 33 of which resulted from the acquisition of 37 regional and local medical
supplies and equipment distributors. A significant portion of the Company's
growth occurred recently with the merger of Taylor. In connection with the
integration of Taylor into PSS, the Company closed or merged into existing PSS
service centers 17 of the Taylor locations. Additionally, the
Company merged eight PSS service centers into the eight remaining Taylor
locations, and established two additional service centers in connection with
the Taylor merger.
PSS has grown the number of its sales representatives from 203 in fiscal
1991 to 692 in fiscal 1996. The Company's sales representatives focus on a
consultative and comprehensive sales approach with an emphasis on sophisticated
diagnostic products. The Company invested approximately $2.1 million in the
training and development of its sales representatives and management in fiscal
1996. In addition, the Company has implemented ICONSM, a four pound, pen top,
portable computer system for use by its sales representatives. The ICONSM has
reduced a majority of the administrative functions of order entry and customer
service by instantly providing product information and availability, back order
status, and billing information. Also, the ICONSM system enables the customer
orders to be taken by the sales representative and transmitted via wireless,
radio wave transmission from the portable computer. The Company believes that
the ICONSM system has improved and will continue to improve sales
representatives' productivity.
Beginning in fiscal year 1994 and continuing through fiscal year 1996, the
Company refocused its pricing and its customer-focused marketing strategies.
Based on the Company's desire to increase penetration of existing accounts, to
increase aggregate sales and gross profit, and to position itself for better
penetration of larger physician group practices and various forms of managed
care networks, the Company in fiscal year 1994 reduced its sales prices on its
top 300 volume supplies and pharmaceutical products. Also, the Company
established Network PlusSM, a physician group purchasing program, under which,
when a physician office guarantees at least 80% of its purchase volume to PSS,
then the Company will, in return, guarantee the lowest sales prices on certain
products as well as certain service guarantees. To fulfill this guarantee, the
Company has successfully negotiated lower vendor pricing on its high volume and
Network PlusSM products. Despite the lower prices guaranteed to PSS Network
PlusSM customers, the Company has been able to increase its service center
sales growth and its aggregate gross profit. The change in pricing strategy
has contributed to reducing the overall gross profit percentage of the Company
by 1.4% and 1.9% in fiscal 1996 and 1995, respectively. Despite the decrease
in gross profit percentage, the Company has maintained its operating profit
margin in fiscal 1995 and improved its operating profit margin by 1.5% in
fiscal 1996, excluding the effect of merger costs in fiscal year
17
18
1996 and restructuring charges in fiscal year 1995. The improved profitability
is primarily the result of lower servicing and operating costs as a percentage
of net sales due to (i) greater penetration of its existing customer base, (ii)
expansion through acquisition rather than start-ups which initially entail
greater start-up costs as a percentage of net sales, and (iii) expanding its
marketing focus to penetrate larger group practices and managed care networks
with lower selling and service requirement costs. Management believes the
Company's current gross profits are consistent with the Company's long-term
strategy.
The following is management's discussion and analysis of certain
additional factors which have affected the Company's financial position and
operating results during fiscal years 1996, 1995, and 1994, giving retroactive
effect to the merger with Taylor.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 29, 1996 VERSUS FISCAL YEAR ENDED MARCH 30, 1995
NET SALES. Net sales increased $117.0 million to $483.3 million, or 31.9%
for the fiscal year ended 1996 compared to fiscal year 1995 sales of $366.3
million. Along with the factors discussed in Marketing and Product Mix herein,
the increase in net sales was attributable to (i) internal sales growth of
centers operating at least two years, (ii) incremental sales generated in
connection with the Abbott Agreement, (iii) net sales of centers acquired
during fiscal 1996, and (iv) net sales of fiscal year 1996 Company start-up
service centers.
Same store sales growth approximated 27% for fiscal year 1996. The first
year performance goals as set forth in the Abbott Agreement were met with PSS
realizing approximately $55.0 million in incremental net sales of Abbott
products during fiscal year 1996. Excluding Taylor, Company acquisitions and
start-ups added to the growth in fiscal year 1996 net sales with approximately
$14.5 million of net sales resulting from the acquisition of nine local and
regional medical suppliers and $9.2 million of net sales generated by four
Company start-ups, one of which was merged into an acquired Taylor location
during fiscal year 1996.
GROSS PROFIT. Gross profit increased $29.0 million, or 25.7%, for the
fiscal year ended 1996 compared to the fiscal year ended 1995. The increase in
gross profit dollars is attributable to the sales growth described above.
Gross profit as a percentage of net sales was 29.4% and 30.8% for the fiscal
years ended 1996 and 1995, respectively. The decrease in gross profit
percentage as a percentage of net sales is attributable to the penetration by
the Company into larger physician group practices that require more competitive
pricing but entail lower selling and servicing costs. The decrease in gross
profit percentage is also attributable to lower margins on diagnostic products
distributed under the Abbott Agreement. Margins under the Abbott Agreement are
scheduled to increase annually based on achievement by the Company of certain
performance goals as stipulated therein.
For the fiscal year ended 1996, the Company sold approximately $75 million
of Abbott product with a gross profit percentage of 18.0%. Also the Company's
gross profits include first year reimbursements by Abbott for gross profit on
direct sales by Abbott to PSS customers as set forth in the Abbott Agreement.
These reimbursements totaled $1.7 million during fiscal year 1996 effectively
raising gross profit by 0.4%. The Abbott sales, net of direct reimbursements,
negatively impacted the Company's gross profit percentage by 1.7%.
18
19
Also positively impacting gross profits are vendor performance incentives,
in addition to the Abbott direct sales reimbursements, earned by PSS through the
achievement of certain predetermined Company purchase and sales levels. These
performance incentives totaled $6.4 million and $4.2 million for the fiscal
years ended 1996 and 1995, respectively. These vendor incentives effectively
raised the gross profit percentage by 1.3% and 1.1% during fiscal years 1996 and
1995, respectively. Although the Company plans and expects to continue to
negotiate vendor performance incentives, there is no assurance that vendor
performance incentives will continue to positively impact gross profit at the
historical levels.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $12.4 million, or 18.8%, for the fiscal year ended 1996 compared to
the fiscal year ended 1995. General and administrative expenses as a
percentage of net sales, however, decreased to 16.3% for the fiscal year ended
1996 from 18.1% for the fiscal year ended 1995. The decrease in general and
administrative expenses as a percentage of net sales was a result of (i)
improved leveraging by PSS of its existing service centers' fixed general and
administrative expenses through increased sales volume; (ii) reduced overhead
from the sale of assets by Taylor in fiscal 1995 and decreased depreciation
expense associated with the assets sold; and (iii) reduced amortization
relating to intangible assets written-off by Taylor during fiscal 1995. The
decrease in general and administrative expenses as a percentage of net sales
was accomplished despite the additional overhead costs associated with the
implementation of the Abbott product line and the acquisition and start-up of
new service centers.
SELLING EXPENSES. Selling expenses increased $7.2 million, or 18.4%, for
the fiscal year ended 1996 compared to the fiscal year ended 1995. Selling
expense as a percentage of net sales was 9.5% and 10.6% for fiscal years 1996
and 1995, respectively. The decrease in selling expense as a percentage of net
sales is due to improved leveraging of existing service centers' fixed selling
expenses, such as salaries paid to sales representatives during the conversion
period from a guaranteed salary to a commission compensation arrangement and
the leveraging of sales management salaries. The decrease in selling expenses
as percentage of net sales is also due to the variable commission plan of the
Company which pays a lower commission on Abbott products due to the lower gross
profit as a percentage of net sales on those products.
MERGER COSTS AND EXPENSES. During fiscal 1996, the Company recorded
non-recurring merger costs and expenses of $15.7 million associated with the
merger of PSS and Taylor and the other immaterial poolings. Such costs
include direct merger costs consisting primarily of investment banking, legal,
accounting, and filing fees as well as consolidation costs from the closing of
duplicate service center locations, realigning regional and corporate
functions, and reducing personnel.
OPERATING INCOME. Operating income decreased $1.9 million, or 56.9%, for
the fiscal year ended 1996 compared to 1995. As a percentage of net sales,
operating income for the fiscal year 1996 decreased to 0.3% from 0.9% for the
fiscal year ended 1995. The decrease in operating income is the result of the
merger costs and expenses of $15.7 million related to the Taylor merger during
fiscal 1996. On a pro forma basis, excluding the effect of merger costs and
expenses incurred in fiscal year 1996 and the restructuring charge incurred in
fiscal year 1995, operating income for the fiscal year ended 1996 would have
increased 120.9% to $17.2 million from $7.8 million for the fiscal year ended
1995 due to the factors discussed above.
19
20
INTEREST EXPENSE. Interest expense for the fiscal year ended 1996
decreased approximately $1.1 million, or 28.3%, compared to the fiscal year
ended 1995. Interest expense decreased as a result of the decrease in average
indebtedness and the refinancing at a more favorable rate of Taylor debt
assumed by PSS. The decrease in average indebtedness for fiscal year 1996
compared to fiscal year 1995 is due to the use of the net proceeds from the
secondary offering of common stock of approximately $58.2 million of the total
net proceeds of $142.9 million to repay all outstanding debt, other than
capital lease obligations, on November 20, 1995.
INTEREST INCOME. The Company earned interest income of $1.2 million from
the short-term investment of the remaining net proceeds from the secondary
offering.
OTHER INCOME. Other income decreased approximately $0.3 million, or
16.9%, for the fiscal year ended 1996 compared to the fiscal year ended 1995.
Other income decreased due to a net gain on sale of assets by Taylor recorded
during fiscal 1995 of approximately $920,000. Excluding the gain, other income
would have increased approximately $598,000 primarily due to the increase in
finance charge income on customer accounts.
PROVISION FOR INCOME TAXES. Provision for income taxes decreased $1.1
million, or 45.3%, for the fiscal year ended 1996 compared to the fiscal year
ended 1995 due to a tax adjustment for the utilization of Taylor net operating
losses and a change in the valuation allowance. This tax adjustment resulted
in an increase in net income of $1.3 million.
NET INCOME. Net income increased $1.1 million, or 120.4%, for the
fiscal year ended 1996 compared to the fiscal year ended 1995 as a result of
the utilization of Taylor net operating losses as discussed above. As a
percentage of net sales, net income increased for the fiscal year ended 1996
to 0.04% from the net loss of 0.2% for the fiscal year ended 1995. Excluding
the effect of merger costs and expenses in fiscal year 1996 and the
restructuring charge in fiscal year 1995, pro forma net income would have
increased 480% to $11.6 million for the fiscal year ended 1996 compared to
$2.0 million for the fiscal year ended 1995. The increase in pro forma net
income is primarily attributable to the increasing profitability of maturing
centers and the leveraging of fixed costs through sales growth.
FISCAL YEAR ENDED MARCH 30, 1995 VERSUS FISCAL YEAR ENDED MARCH 31, 1994
NET SALES. Net sales increased $61.8 million, or 20.3%, for the fiscal
year ended 1995 compared to the fiscal year ended 1994. The increase in net
sales was attributable to internal sales growth, expansion through acquisitions
of local medical supply and equipment distributors and Company start-ups.
Of the increase in net sales, $37.0 million, or 59.9% resulted from the
sales growth of service centers operating during the entire fiscal years 1995
and 1994, $26.0 million, or 42.1%, resulted from the increase in fiscal 1995
sales of four service centers acquired in fiscal 1995 and the sales of four
service centers acquired in fiscal 1994, and $3.5 million, or 5.7%, resulted
from the increase in fiscal 1995 sales of five Company start-up service centers
in fiscal 1995 and the sales of one Company start-up service center in fiscal
1994. Of the five fiscal 1995 Company start-up service centers, three were in
operation three months or less as of March 30, 1995.
20
21
GROSS PROFIT. Gross profit increased $13.5 million, or 13.6%, for the
fiscal year ended 1995 compared to the fiscal year ended 1994. The increase in
gross profit dollars is attributable to the sales growth as described above.
Gross profit as a percentage of net sales was 30.8% and 32.7% for the
fiscal years ended 1995 and 1994, respectively. The decrease is primarily
attributable to a change in pricing strategy adopted by the Company during
fiscal year 1994 which has allowed the Company to increase market penetration
in its existing customer accounts, to expand the Company's market reach to new
customers in each service center, and to position the Company to better
service larger physician group practices that require more competitive
pricing but entail lower selling and servicing costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $7.8 million, or 13.3%, for the fiscal year ended 1995 compared to
the fiscal year ended 1994. General and administrative expenses as a percentage
of net sales, however decreased to 18.1% from 19.2% for the fiscal years ended
1995 and 1994, respectively. The Company has historically experienced decreases
in general and administrative expenses as a percentage of net sales due to
leveraging of existing service centers' fixed general and administrative
expenses through increased sales volume, as evidenced by the decrease for the
fiscal year ended 1995 compared to 1994.
SELLING EXPENSES. Selling expenses increased $4.3 million, or 12.3%, for
the fiscal year ended 1995 compared to the fiscal year ended 1994. Selling
expense as a percentage of net sales decreased to 10.6% from 11.4% for fiscal
years ended 1995 and 1994, respectively. The decrease in selling expense as a
percentage of net sales was due to improved leveraging of existing service
centers' fixed selling expenses, such as sales management salaries, through
increased sales volume.
RESTRUCTURING CHARGES. Taylor recorded a restructuring charge of
approximately $4.4 million in fiscal 1995 related to the write-off of
intangible assets. Taylor management concluded that future prospects for
certain of its distribution operations and its physician consulting services
and equipment repair business would result in underrealization of future
benefits related to certain intangible assets. Taylor recorded a restructuring
charge of $308,000 in fiscal 1994 related to a merger with a medical supply and
equipment distributor.
OPERATING INCOME. Operating income decreased $2.6 million, or 43.5%, for
the fiscal year ended 1995 compared to 1994. As a percentage of net sales,
operating income for the fiscal year ended 1995 decreased to 0.9% from 2.0% for
the fiscal year ended 1994. The decrease was attributable to restructuring
charges recorded by Taylor as described above. Excluding the effect of the
fiscal 1995 and 1994 restructuring charges, pro forma operating income
increased $1.5 million or 23.3% to $7.8 million for the fiscal year ended 1995.
21
22
INTEREST EXPENSE. Interest expense for the fiscal year ended 1995
decreased approximately $764,000, or 16.8%, compared to the fiscal year ended
1994. Interest expense decreased due to a decrease in average indebtedness over
the same periods. The decrease in average indebtedness for fiscal year 1995
compared to fiscal year 1994 is primarily attributable to the use of the net
proceeds from the Company's initial public offering of common stock,
consummated during the quarter ended June 30, 1994, to reduce outstanding debt,
and the use of proceeds from the sales of net assets by Taylor to pay down the
Taylor line of credit.
At March 30, 1995, the Company had borrowings with various interest rates
based on Libor, the weighted-average rate of which was 7.9%.
OTHER INCOME. Other income increased approximately $1.1 million, or
131.2%, for the fiscal year ended 1995 compared to the fiscal year ended 1994.
The increase was the result of a gain on sale recognized by Taylor in
connection with the sale of the net assets of its home health division of
approximately $1.5 million offset by a loss on sale of assets of its Labcare
division of approximately $0.6 million both during the fiscal year ended 1995.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $1.1
million, or 86.7%, for the fiscal year ended 1995 compared to the fiscal year
ended 1994. The provision for income taxes increased despite a decrease in
operating income for the fiscal year ended 1995 as compared to fiscal year
ended 1994 due to the increase in the non-deductible restructuring charges
recorded by Taylor during the fiscal year ended 1995.
NET (LOSS) INCOME. Net income decreased $1.6 million, or 239.1%, for
the fiscal year ended 1995 to a net loss of $909,000 compared to net income of
$654,000 for the fiscal year ended 1994. The decrease in net income resulted
from the Taylor restructuring charges discussed above. Excluding the effect of
the fiscal 1995 and 1994 Taylor restructuring charges, net income increased
$1.0 million, or 105.9%, to $2.0 million for the year ended 1995 as compared to
fiscal 1994.
22
23
QUARTERLY RESULTS (UNAUDITED)
The following table presents summarized unaudited quarterly results of
operations for the Company for fiscal years 1996 and 1995, giving retroactive
effect to the merger with Taylor. The Company believes all necessary
adjustments have been included in the amounts stated below to present fairly
the following selected information when read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere herein.
Future quarterly operating results may fluctuate depending on a number of
factors, including the timing of acquisitions of service centers, the timing of
the opening of start-up service centers, and changes in physicians' buying
patterns of supplies, diagnostic equipment and pharmaceuticals. Results of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year or any other quarter.
Summary Quarterly Results
Fiscal Year 1996
---------------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
(in thousands)
Net sales $105,310 $119,672 $126,311 $132,001
Gross profit 31,829 34,323 37,145 38,657
Merger costs and expenses - 12,095 3,484 153
Restructuring charges - - - -
Net income (loss) $ 1,173 $ (7,376) $ 1,031 $ 5,358
==========================================================
Net income (loss) per share $ .05 $ (.30) $ .03 $ .15
==========================================================
Pro forma net income
excluding merger
costs and expenses and
restructuring charges $ 1,173 $ 1,856 $ 3,079 $ 5,484
==========================================================
Pro forma net income
per share excluding
merger costs and expenses
and restructuring charges $ .05 $ .07 $ .10 $ .15
==========================================================
Summary Quarterly Results
Fiscal Year 1995
---------------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
(in thousands)
Net sales $88,602 $90,612 $92,236 $94,835
Gross profit 27,899 27,459 28,089 29,482
Merger costs and expenses - - - -
Restructuring charges - 4,389 - -
Net income (loss) $ 1,261 $(3,586) $ 1,044 $ 372
=======================================================
Net income (loss) per share $ .06 $ (.16) $ .04 $ .02
=======================================================
Pro forma net income
(loss) excluding merger
costs and expenses and
restructuring charges $ 1,261 $ (697) $ 1,044 $ 372
=======================================================
Pro forma net income
(loss) per share excluding
merger costs and expenses
and restructuring charges $ .06 $ (.03) $ .04 $ .02
=======================================================
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of the 1995 fiscal year, the Company completed an
initial public offering of Common Stock resulting in proceeds, after deducting
issuance costs, of approximately $15.8 million. The Company used all of the
net proceeds to reduce outstanding debt. Also, in the third quarter of the
1995 fiscal year, the Company amended and restated its credit facility, thereby
increasing the maximum availability under the credit facility to $60 million
with the option, on the part of the Company, to increase such availability to
$75 million.
Effective November 13, 1995, the Company completed a secondary offering of
11.5 million shares of common stock at $17 per share, 8.8 million of which were
offered by the Company. The Company used approximately $58.2 million of the
total net proceeds of $142.9 million to repay all outstanding debt.
Management intends to use the remaining net proceeds of the offering for
general corporate purposes, including future acquisitions.
23
24
The consummation of these transactions has provided the Company with
resources to continue its strategy of being capable of servicing every
office-based physician in the United States by 1997, through acquisition and
Company start-ups, and has provided the Company with the resources to support
future capital expenditures.
The Company had working capital of $171.9 million and $52.6 million for
the fiscal years ended 1996 and 1995, respectively. The increase in working
capital is primarily attributable to the increase in cash and cash equivalents
from the net proceeds of the Company's secondary offering and also from the
increase in the Company's accounts receivable from the growth in sales for the
fiscal year ended 1996 as compared to fiscal 1995.
Net cash (used in) provided by operating activities was $(21.4) million,
$(8.1) million and $1.1 million in fiscal years 1996, 1995 and 1994,
respectively. The net cash used in operating activities is a result of the
increase in accounts receivable and funds utilized to fund the growth in the
Company's inventories from start-up service centers, to continue growth in
existing service centers, and to implement the consolidation and transition of
Taylor and nine other acquisitions. Net cash used in investing activities was
$9.7 million, $1.2 million and $10.1 million in fiscal years 1996, 1995 and
1994, respectively. These funds were primarily utilized to finance the
acquisition of new service centers and capital expenditures.
Accounts receivable (net of allowances) were $92.1 million and $62.9
million at March 29, 1996 and March 30, 1995, respectively. The average days
sales outstanding were 58 days as of both March 29, 1996 and March 30, 1995.
Inventories were $52.3 million and $33.3 million as of March 29, 1996 and
March 30, 1995, respectively. The Company had inventory turnover of 8.0 and
7.7 times for the fiscal years ended March 29, 1996 and March 30, 1995,
respectively. The Company's service centers in existence for more than six
years are averaging inventory turnover of 9.0 times per year. The improvement
in inventory turnover was due to the maturing of the overall service center
population and an increase in equipment sales in the current year. Equipment
purchases are typically drop-shipped from the manufacturer resulting in
relatively high dollar items turning quickly.
The Company has historically been able to finance its liquidity needs for
expansion through lines of credit provided by banks and proceeds from the
public and private offering of stock. Inventory financing has historically
been achieved through negotiating extended payment terms from suppliers. The
Company believes that the expected cash flows from operations, bank borrowings,
capital markets, and vendor credit will be sufficient to fund its liquidity
needs for its existing operations and for service center expansion for at least
the next two years.
24
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Certified Public Accountants 26
Report of Independent Accountants 27
Financial Statements:
Consolidated Balance Sheets - March 29, 1996 and March 30, 1995 28
Consolidated Statements of Operations for the Years Ended March 29, 1996,
March 30, 1995, and March 31, 1994 29
Consolidated Statements of Shareholders' Equity for the Years Ended
March 29, 1996, March 30, 1995, and March 31, 1994 30
Consolidated Statements of Cash Flows for the Years Ended March 29, 1996,
March 30, 1995, and March 31, 1994 31
Notes to Consolidated Financial Statements 33
Supplemental Schedule:
Valuation and Qualifying Accounts for the Years Ended March 31, 1994,
March 30, 1995, and March 29, 1996 50
25
26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physician Sales & Service, Inc.:
We have audited the accompanying consolidated balance sheets of Physician Sales
& Service, Inc. (a Florida corporation) and subsidiaries as of March 29,
1996 and March 30, 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended March 29, 1996. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the schedule based
on our audits.
We did not audit the consolidated statements of operations, shareholders'
equity or cash flows of Taylor Medical, Inc. and subsidiaries (a company
acquired on August 21, 1995, in a transaction accounted for as a
pooling-of-interests as described in Note 1) for the year ended March 31, 1994,
which statements reflect total net sales of 44% of the related consolidated
total. These statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to amounts included for
Taylor Medical, Inc. and subsidiaries, for the year ended March 31, 1994,
is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Physician Sales & Service, Inc. and
subsidiaries as of March 29, 1996, and March 30, 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
March 29, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 8,
Financial Statements and Supplementary Data, is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, based on our audits and the report
of the other auditors, fairly states in all material respects the financial
data required to be set forth therein, in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
May 14, 1996
-26-
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Taylor Medical, Inc.
In our opinion, the consolidated statements of operations, cash flows and
shareholders' equity of Taylor Medical, Inc. (not presented separately herein)
present fairly, in all material respects, the results of its operations and
cash flows for the year ended March 31, 1994, in conformity with generally
accepted accounting principles. These finacial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
December 1, 1994
27
28
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1996 AND MARCH 30, 1995
1996 1995
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 86,332,758 $ 1,151,210
Accounts receivable, net 92,060,750 62,936,366
Inventories 52,270,694 33,334,540
Prepaid expenses and other 10,665,017 3,763,728
------------ ------------
Total current assets 241,329,219 101,185,844
Property and equipment, net 14,486,092 11,272,091
Other assets:
Intangibles, net 13,884,322 12,522,433
Other 1,374,148 2,495,637
------------ ------------
Total assets $271,073,781 $127,476,005
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 57,638,770 $ 35,861,520
Accrued expenses 8,939,122 9,883,307
Other 2,806,048 2,837,740
------------ ------------
Total current liabilities 69,383,940 48,582,567
Long-term debt and capital lease obligations, net of
current portion 494,917 30,622,911
Other 3,548,168 3,149,814
------------ ------------
Total liabilities 73,427,025 82,355,292
Commitments and contingencies (Notes 2, 3, 8, 9, 11 and 12)
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, 34,528,814 and 24,178,529 shares issued and
outstanding at March 29, 1996 and March 30, 1995,
respectively 345,288 241,785
Additional paid-in capital 200,124,412 49,154,905
Accumulated deficit (2,822,944) (4,275,977)
------------ ------------
Total shareholders' equity 197,646,756 45,120,713
------------ ------------
Total liabilities and shareholders' equity $271,073,781 $127,476,005
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
28
29
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 29, 1996, MARCH 30, 1995, AND MARCH 31, 1994
1996 1995 1994
------------ ------------ ------------
Net sales $483,293,788 $366,284,546 $304,491,473
Cost of goods sold 341,339,892 253,355,591 205,073,723
------------ ------------ ------------
Gross profit 141,953,896 112,928,955 99,417,750
General and administrative expenses 78,618,097 66,176,317 58,406,924
Selling expenses 46,141,955 38,969,241 34,696,963
Restructuring charges - 4,388,592 307,686
Merger costs and expenses 15,731,716 - -
------------ ------------ ------------
Income from operations 1,462,128 3,394,805 6,006,177
------------ ------------ ------------
Other income (expense):
Interest expense (2,716,992) (3,789,488) (4,553,553)
Interest income 1,179,684 - -
Other income 1,584,909 1,906,508 824,994
------------ ------------ ------------
47,601 (1,882,980) (3,728,559)
------------ ------------ ------------
Income before provision for income taxes
and extraordinary item 1,509,729 1,511,825 2,277,618
Provision for income taxes 1,324,000 2,421,000 1,297,000
------------ ------------ ------------
Income (loss) before extraordinary item 185,729 (909,175) 980,618
Extraordinary loss on early extinguishment of debt,
net of taxes - - (326,959)
------------ ------------ ------------
Net income (loss) $ 185,729 $ (909,175) $ 653,659
============ ============ ============
Net income (loss) per common and common
equivalent share before extraordinary item $ 0.01 $ (0.04) $ 0.06
Extraordinary loss per common and common
equivalent share - - (0.02)
------------ ------------ ------------
Net income (loss) per common and common
equivalent share $ 0.01 $ (0.04) $ 0.04
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
29
30
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 29, 1996, MARCH 30, 1995, AND MARCH 31, 1994
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------------------------------------------------------------------------
Balance at April 1, 1993 15,634,143 $156,341 $21,428,216 $(4,020,461) $17,564,096
Issuance of common stock 1,825,511 18,255 3,692,936 - 3,711,191
Net income - - - 653,659 653,659
-------------------------------------------------------------------------
Balance at March 31, 1994 17,459,654 174,596 25,121,152 (3,366,802) 21,928,946
Issuance of common stock 6,718,875 67,189 24,033,753 - 24,100,942
Net loss - - - (909,175) (909,175)
-------------------------------------------------------------------------
Balance at March 30, 1995 24,178,529 241,785 49,154,905 (4,275,977) 45,120,713
Issuance of common stock 10,059,699 100,597 148,274,378 - 148,374,975
Tax benefits related to stock option - - 2,687,118 - 2,687,118
Net income - - - 185,729 185,729
Other poolings (Note 10) 290,586 2,906 8,011 1,267,304 1,278,221
-------------------------------------------------------------------------
Balance at March 29, 1996 34,528,814 $345,288 $200,124,412 $(2,822,944) $197,646,756
=========================================================================
The accompanying notes are an integral part of these consolidated statements.
30
31
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 29, 1996, MARCH 30, 1995, AND MARCH 31, 1994
1996 1995 1994
Cash Flows From Operating Activities:
Net income (loss) $ 185,729 $ (909,175) $ 653,659
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 4,019,127 4,137,443 4,482,671
Merger costs and expenses 5,435,196 - -
Restructuring charges - 4,388,592 307,686
(Benefit) provision for deferred income taxes (789,000) - 199,000
Net (gain) loss on sale of equipment - (920,124) 559
Employee benefit plan stock contribution 120,000 85,175 80,000
Extraordinary loss, net of taxes - - 326,959
Other - - (34,000)
Changes in operating assets and liabilities, net of effects
from business acquisitions:
Increase in accounts receivable, net (22,655,721) (6,911,602) (10,054,193)
Increase in inventories (17,930,176) (1,266,370) (2,361,027)
(Increase) decrease in prepaid expenses and other
current assets (2,923,356) 179,597 (638,218)
Decrease (increase) in other assets 2,300 (1,248,038) (53,391)
Increase (decrease) in accounts payable, accruals,
and other liabilities 13,088,428 (5,617,334) 8,184,321
------------ ----------- -----------
Net cash (used in) provided by operating
activities (21,447,473) (8,081,836) 1,094,026
------------ ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sales of assets - 11,985,542 6,790
Capital expenditures (5,267,244) (3,124,286) (3,776,351)
Payment for purchases of net assets from business
acquisitions (2,838,529) (9,010,130) (5,056,200)
Payments on noncompete agreements (1,545,970) (1,036,957) (927,151)
Other - - (322,000)
------------ ----------- -----------
Net cash used in investing activities (9,651,743) (1,185,831) (10,074,912)
------------ ----------- -----------
The accompanying notes are an integral part of these consolidated statements.
31
32
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 29, 1996, MARCH 30, 1995, AND MARCH 31, 1994
(CONTINUED)
1996 1995 1994
Cash Flows From Financing Activities:
Principal payments under capital lease obligations (1,124,293) (931,949) (719,893)
Proceeds from long-term debt 284,862,211 420,751,863 322,780,582
Principal payments of long-term debt (315,711,129) (434,060,803) (313,926,202)
Proceeds from issuance of common stock 148,253,975 23,498,353 1,503,769
------------ ------------- -------------
Net cash provided by financing activities 116,280,764 9,257,464 9,638,256
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents 85,181,548 (10,203) 657,370
Cash and cash equivalents, beginning of year 1,151,210 1,161,413 504,043
------------ ------------- -------------
Cash and cash equivalents, end of year $ 86,332,758 $ 1,151,210 $ 1,161,413
============ ============= =============
Supplemental Disclosures:
Interest paid $ 2,834,901 $ 4,081,797 $ 4,113,987
============ ============= =============
Income taxes paid $ 2,084,282 $ 3,018,917 $ 485,013
============ ============= =============
Merger costs and expenses paid $ 10,296,520 $ - $ -
============ ============= =============
The accompanying notes are an integral part of these consolidated statements.
32
33
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 29, 1996, MARCH 30, 1995 AND MARCH 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND NATURE OF BUSINESS
Physician Sales & Service, Inc. (the "Company" or "PSS") was incorporated in
1983 in Jacksonville, Florida. PSS is a leading distributor of medical
supplies, equipment, and pharmaceuticals to primary care and other office-based
physicians. The Company currently operates 64 service centers in the United
States distributing to approximately 88,000 physician office sites in all 50
states and one service center located in Belgium.
In March 1996 the Company established three new subsidiaries, WorldMed,
N.V., WorldMed International, Inc., ("WorldMed Int'l.") and WorldMed, Inc.
WorldMed Int'l. was established by the Company to manage and develop the
international medical supply and equipment distribution consolidation. In
order to maintain the focus of PSS, WorldMed, Inc. will serve as a platform to
possibly acquire multi-market medical distribution companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PSS and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
STOCK SPLIT
All stock-related data has been retroactively adjusted to reflect a
three-for-one stock split effective on September 22, 1995 which was distributed
on October 5, 1995.
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements give retroactive effect
to the merger (the "Merger") with Taylor Medical, Inc. ("Taylor"). On August
21, 1995, PSS issued 3,790,215 shares of its common stock, $.01 par value per
share, in exchange for all of the outstanding equity interest of Taylor.
Taylor was engaged in the distribution and sale of medical supplies, equipment,
and pharmaceuticals to office-based physicians and managed care facilities in
24 states. The transaction was accounted for under the pooling-of-interests
method of accounting and, accordingly, the accompanying consolidated financial
statements have been retroactively adjusted as if PSS and Taylor had operated
as one entity since inception.
Certain items have been reclassified to conform to the current year
presentation.
FISCAL YEAR
Beginning in fiscal year 1996, the Company's fiscal year ends on the Friday
closest to March 31 of each year. The Company's fiscal year ended on the
Thursday closest to March 31 of each year prior to fiscal year 1996. Fiscal
years 1996, 1995, and 1994 consist of 52 weeks.
33
34
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company's trade accounts receivable are exposed to credit risk; however,
the risk is limited as the balance is comprised of numerous individual
accounts, none of which is individually significant. The Company monitors the
creditworthiness of its customers on an ongoing basis and provides reserves for
estimated bad debt losses and sales returns. The Company had reserves for
doubtful accounts of approximately $2,218,000 and $1,254,000 as of the end of
fiscal years 1996 and 1995, respectively.
CASH MANAGEMENT
The Company utilizes a zero balance bank account, and checks issued for cash
disbursements are funded with balances 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 $6,841,573 and $4,519,329 of outstanding checks recorded in
accounts payable as of the end of fiscal years ended 1996 and 1995,
respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents generally consist of cash held at banks,
short-term government obligations and money market instruments. The Company
invests its excess cash in high-grade investments and, therefore, bears minimal
risk. These instruments have original maturity dates not exceeding three
months.
FAIR VALUE OF FINANCIAL INSTRUMENTS
During 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") 107, "Disclosures About Fair Value of Financial Instruments." SFAS
No. 107 requires, among other things, disclosures regarding the fair value of
financial instruments and the assumptions made in determining their fair
values, where practicable. The carrying amounts of the Company's financial
instruments, including cash and cash equivalents, short-term trade receivables
and payables, and long-term debt and capital lease obligations, approximate
their fair values.
INVENTORIES
Inventories are comprised principally of medical supplies and equipment and
are stated at the lower of cost (first-in, first-out) or market. Market is
defined as net realizable value.
PROPERTY AND EQUIPMENT
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to forty years. Leasehold
improvements are amortized over the lease terms or the estimated useful lives,
whichever is shorter. Gain or loss upon retirement or disposal of property
and equipment is recorded in other income in the accompanying consolidated
statements of operations.
34
35
INTANGIBLES
Noncompete agreements are amortized on a straight-line basis over the lives
of the agreements, which range from three to ten years (Note 5). Customer
lists are amortized on a straight-line basis over ten years.
The Company has classified as goodwill the cost in excess of the fair value
of net identifiable assets purchased in business acquisitions which are
accounted for as purchase transactions. Goodwill is being amortized over
fifteen to thirty years using the straight-line method (Note 5). Subsequent to
the date of acquisition, the Company continually evaluates whether later events
and circumstances have occurred that indicate a change in the estimated useful
life or recoverability of goodwill.
SELF-INSURANCE COVERAGE
The Company maintains a self-insurance program for employee health costs.
Additional coverage is provided by a third party for stop-loss based on maximum
costs of $100,000 per employee and approximately $4,550,000 in the aggregate.
Claims that have been incurred but not reported are recorded based on estimates
of claims provided by a third-party administrator and are included in accrued
expenses in the accompanying consolidated balance sheets.
INCOME TAXES
The Company uses the asset and liability method in accounting for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred
income taxes result primarily from the use of different methods for financial
reporting and tax purposes.
SHAREHOLDERS' EQUITY
On May 5, 1994, the Company completed an initial public offering of
5,100,000 shares of its common stock at $3.67 per share, of which 4,200,000
were offered by the Company. On June 3, 1994, the Company's underwriters
exercised their overallotment option for an additional 765,000 shares of the
Company's common stock at $3.67 per share. The proceeds of the sale after
deducting issuance costs were approximately $15,800,000. The Company used all
of the net proceeds to reduce outstanding bank debt.
On March 27, 1995, the Company signed a Distributorship Agreement (the
"Abbott Agreement") with Abbott Laboratories ("Abbott") providing for the
exclusive distribution of certain Abbott diagnostic products (Note 12).
As part of the Abbott Agreement, Abbott purchased 825,000 unregistered,
restricted shares of PSS common stock. The proceeds of approximately
$5,900,000 were used to reduce outstanding bank debt.
Effective November 13, 1995 the Company completed a secondary offering of
11,500,000 shares of common stock at $17 per share, 8,800,000 of which were
offered by the Company. The Company used approximately $58,200,000 of the total
net proceeds of $142,900,000 to repay debt. If the common stock offering had
occurred, the debt subsequently had been repaid, and the remaining net proceeds
had been invested as of April 1, 1995, pro forma net income per share would have
approximated $0.12. Management intends to use the remaining net proceeds of the
offering for general corporate purposes, including future acquisitions.
During fiscal 1996, the Company merged with three other medical supply and
equipment distributors in stock mergers accounted for under the
pooling-of-interests method, by issuing 290,586 shares of PSS common stock in
exchange for all of the common stock of the acquired companies (Note 10).
35
36
The Company realized an income tax benefit from the exercise or early
disposition of certain stock options. This benefit resulted in a decrease in
current income taxes payable and an increase in additional paid-in capital.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per common and common equivalent share is computed using
the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Weighted average shares outstanding
for purposes of this calculation were approximately 30,860,000, 23,168,000,
and 17,178,000 for 1996, 1995, and 1994 respectively.
STATEMENTS OF CASH FLOWS
As discussed in Note 10, Business Acquisitions, the Company issued stock in
the amount of $121,000 related to acquisitions accounted for as purchases. The
Company also assumed net assets of $1,278,221 in conjunction with the
mergers of three other medical supply and equipment distributors accounted for
under the pooling-of-interests method. The Company realized a reduction of
income taxes payable from the exercise or early disposition of certain stock
options of approximately $2,687,000. Also, the Company incurred capital lease
obligations to obtain equipment of approximately $514,000 in fiscal year 1995.
All of the above items were excluded from the statements of cash flows as these
items were non-cash transactions.
ACCOUNTING STANDARDS CHANGES
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 121 established, among other things,
accounting standards for the impairment of long-lived assets and certain
identifiable intangibles. The Company will be required to adopt SFAS No. 121
for fiscal year 1997. Based on a preliminary evaluation of this Standard's
requirements, management does not expect the adoption of the Standard to have a
material effect on the Company's financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has decided to continue to account for its employee
stock-based compensation plans under Accounting Principles Board Opinion No. 25
and will comply with the disclosure requirements of SFAS No. 123 in its fiscal
year 1997 financial statements.
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
March 29, March 30,
1996 1995
--------------- --------------
Lines of credit $ - $ 21,622,005
Real estate mortgage note - 698,137
Other notes repaid in fiscal 1996 - 7,105,142
Capital lease obligations 1,259,393 2,026,171
--------------- -------------
1,259,393 31,451,455
Less current maturities 764,476 828,544
--------------- -------------
$ 494,917 $ 30,622,911
=============== =============
36
37
LINES OF CREDIT
The Company has a financing and security agreement (the "Agreement") with a
bank (the "Bank"). The Agreement allows the Company to obtain loans from the
Bank on a revolving basis. The Agreement provides for loans in the amount of
85% of the outstanding amount of eligible accounts receivable plus the lesser
of $25,000,000 or 50% of eligible inventory. The total amount of loans
outstanding under the Agreement cannot exceed the lesser of $60,000,000 or
amounts available subject to eligible collateral. The Agreement provides for
an option, on the part of the Company, to increase the availability to
$75,000,000. There was no balance outstanding at March 29, 1996.
The loans are collateralized by the Company's accounts receivable,
inventory, and equipment. Interest accrues, subject to certain leverage ratio
requirements, at a variable rate indexed on the London Interbank Offered Rate
("LIBOR") plus the applicable margin or the Bank's Prime Rate plus the
applicable margin at the option of the Company. Interest rates may vary from
Prime to Prime plus 75 basis points or from LIBOR plus 150 basis points to
LIBOR plus 250 basis points, based on the Company's leverage ratio. The
Agreement provides for a termination date of April 30, 1998, at which time the
Agreement may be extended annually at the Bank's sole discretion upon request
by the Company.
The Agreement contains certain restrictive covenants which, among other
things, require the Company to maintain a current ratio of 2 to 1, a debt
service coverage ratio of 1.1 to 1 and a maximum debt leverage ratio of 5 to
1, all computed as defined in the Agreement. In addition, the Company must
maintain minimum tangible net worth plus subordinated indebtedness, as
defined in the Agreement, of $23,500,000 as of March 29, 1996, increasing by
$1,000,000 as of the end of each subsequent fiscal year. The Agreement also
contains restrictions on mergers, acquisitions, investments, capital
expenditures, intangible assets, indebtedness, and stock transactions, among
other things.
Taylor had a financing and security agreement with a separate bank which, as
amended, allowed Taylor to obtain loans on a revolving basis. The maximum loan
amount available at March 30, 1995 was $17,992,000, of which $10,481,263 was
outstanding. The Company repaid the Taylor agreement in fiscal 1996 at the
merger date, dissolving the financing and security agreement with the bank.
CAPITAL LEASE OBLIGATIONS
As of March 29, 1996, future minimum payments, by fiscal year and in the
aggregate, required under capital leases are as follows:
Fiscal year:
1997 $ 832,588
1998 378,708
1999 158,017
-----------------
Net minimum lease payments 1,369,313
Less amount representing interest (109,920)
-----------------
Present value of net minimum lease payments under capital leases 1,259,393
Less amounts due in one year (764,476)
-----------------
Amounts due after one year $ 494,917
=================
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3. OPERATING LEASE COMMITMENTS
The Company leases various office and warehouse facilities and
transportation and office equipment under operating leases which expire at
various dates through 2001. Certain lease commitments provide that the Company
pay taxes, insurance, and maintenance expenses related to the leased assets.
Rent expense approximated $5,203,000, $5,067,000, and $4,288,000 for fiscal
years 1996, 1995, and 1994, respectively. Additionally, the Company accrued
approximately $700,000 in fiscal year 1996 to cover operating lease payments
related to duplicate facilities which were closed in conjunction with the
Merger. This amount is included in merger costs and expenses. As of
March 29, 1996, future minimum payments, by fiscal year and in the
aggregate, required under noncancelable operating leases are as follows:
Fiscal year:
1997 $ 7,365,000
1998 5,235,000
1999 3,201,000
2000 2,148,000
2001 1,233,000
Thereafter 1,217,000
------------
Total $ 20,399,000
============
4. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
1996 1995
------------ ------------
Land $ 121,524 $ 121,524
Building 1,207,560 1,207,560
Warehouse and data processing equipment 16,293,663 11,982,435
Transportation equipment 1,986,876 1,629,970
Furniture, fixtures and leasehold improvements 3,725,176 2,683,435
------------ ------------
23,334,799 17,624,924
Accumulated depreciation (8,848,707) (6,352,833)
------------ ------------
$ 14,486,092 $ 11,272,091
============ ============
Warehouse and data processing equipment and transportation equipment include
equipment acquired under capital leases with a cost of $3,909,000 and
$3,704,000 and related accumulated depreciation of $1,766,000 and $862,000 at
March 29, 1996 and March 30, 1995, respectively.
Depreciation expense aggregated approximately $2,128,000, $2,141,000, and
$1,945,000 for 1996, 1995, and 1994, respectively.
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5. INTANGIBLES
Intangibles, stated at cost, consist of the following:
1996 1995
-------------- -------------
Customer lists $ 1,714,994 $ 1,365,905
Goodwill 8,693,095 7,415,094
Noncompete agreements 7,146,913 7,163,817
-------------- -------------
17,555,002 15,944,816
Accumulated amortization (3,670,680) (3,422,383)
-------------- -------------
$ 13,884,322 $ 12,522,433
============== =============
As of March 29, 1996, future minimum payments, by fiscal year and in the
aggregate, required under noncompete agreements are as follows:
1997 $ 1,553,504
1998 1,234,346
1999 860,401
2000 313,328
2001 58,254
Thereafter 112,300
--------------
$ 4,132,133
==============
6. INCOME TAXES
The provisions for income taxes are detailed below:
1996 1995 1994
---------- ---------- -----------
Current tax provision:
Federal $1,719,000 $1,982,000 $ 814,000
State 394,000 439,000 284,000
---------- ---------- -----------
Total current 2,113,000 2,421,000 1,098,000
---------- ---------- -----------
Deferred tax (benefit) provision:
Federal (643,000) - 181,000
State (146,000) - 18,000
---------- ---------- -----------
Total deferred (789,000) - 199,000
---------- ---------- -----------
Total income tax provision $1,324,000 $2,421,000 $ 1,297,000
========== ========== ===========
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The difference between income tax computed at the federal statutory
rate and the actual tax provision is shown below:
1996 1995 1994
-------------- ------------- -------------
Income before taxes $ 1,510,000 $ 1,512,000 $ 2,278,000
============== ============= =============
Tax provision at the statutory rate $ 513,000 $ 514,000 $ 775,000
-------------- ------------- -------------
Increase (decrease) in taxes:
Taxes related to extraordinary loss - - (87,000)
Change in valuation allowance for deferred taxes (956,000) 1,023,000 156,000
State income tax, net of federal benefit 329,000 94,000 241,000
Write-off of intangibles - 562,000 -
Meals and entertainment 134,000 162,000 44,000
Goodwill amortization 8,000 10,000 91,000
Cash surrender value of life insurance 45,000 26,000 29,000
Non-taxable investment income (198,000) - -
Merger costs and expenses 2,216,000 - -
Utilization of tax net operating losses (776,000) - -
Other, net 9,000 30,000 48,000
-------------- ------------- -------------
Total increase in taxes 811,000 1,907,000 522,000
-------------- ------------- -------------
Total income tax provision $ 1,324,000 $ 2,421,000 $ 1,297,000
============== ============= =============
Effective tax rate 87.7% 160.1% 56.9%
============== ============= =============
Deferred income taxes for 1996 and 1995 reflect the impact of
temporary differences between the financial statement and tax bases of assets
and liabilities. The tax effect of temporary differences which create deferred
tax assets and liabilities at March 29, 1996 and March 30, 1995 are detailed
below:
1996 1995
----------- ----------
Deferred tax assets:
Merger costs and expenses $ 204,000 $ -
Allowance for doubtful accounts and sales returns 717,000 537,000
Intangibles 681,000 444,000
Inventory uniform cost capitalization 482,000 380,000
Net operating loss carryforwards 219,000 995,000
Accrued expenses 399,000 478,000
Reserve for inventory obsolescence 105,000 66,000
Other 197,000 -
----------- ----------
Gross deferred tax assets 3,004,000 2,900,000
----------- ----------
Deferred tax liabilities:
Excess of tax depreciation and amortization over
book depreciation and amortization (1,179,000) (847,000)
Other (136,000) (197,000)
----------- ----------
Gross deferred tax liabilities (1,315,000) (1,044,000)
----------- ----------
1,689,000 1,856,000
Valuation allowance (900,000) (1,856,000)
----------- ----------
Net deferred tax asset $ 789,000 $ -
=========== ==========
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A valuation allowance has been provided for those temporary differences for
which utilization is uncertain. Based on an evaluation of the realizability of
deferred tax assets at March 29, 1996, the valuation allowance was reduced by
$956,000.
The income tax benefits related to the exercise or early disposition of
certain stock options reduces taxes currently payable and is credited to
additional paid-in capital. Such amounts approximated $2,687,000 and $0 for
fiscal years 1996 and 1995, respectively.
At March 29, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $564,000 which expire from 2006 to 2011.
7. RELATED-PARTY TRANSACTIONS
A member of the board of directors provides legal services as general
counsel to the Company. Fees for such legal services were approximately
$136,000, $124,000, and $92,000 in 1996, 1995, and 1994, respectively.
A member of the board of directors is Chairman and CEO of the insurance
company that administered the Company's self-insurance program through December
31, 1995. Administrative fees paid to such company were approximately $484,000
during the first nine months of fiscal year 1996, $339,000 for fiscal year 1995
and $73,000 for the three months during which the company administered claims
in fiscal year 1994. The Company changed its medical insurance administrator
as of January 1, 1996 to an unrelated party.
Taylor had the following related party transactions with persons who were
shareholders or officers of Taylor before the Merger. Taylor had notes
receivable of $823,022 outstanding at March 30, 1995 with interest received in
fiscal 1995 of $241,000. This note was settled in fiscal 1996. Taylor also
had notes payable of $5,966,000 outstanding at March 30, 1995 with interest
payments of $777,000 in fiscal 1995. These notes payable were repaid by the
Company in fiscal 1996 in conjunction with the Merger.
8. STOCK OPTION PLANS
INCENTIVE STOCK OPTION PLAN
Under the Company's qualified 1986 Incentive Stock Option Plan, 8,001,000
shares of the Company's common stock are reserved for sale to officers and key
employees. Options may be granted at prices not less than fair market value at
the date of grant and are exercisable during periods of up to five years from
that date. The exercisability of the options is not subject to future
performance.
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Information regarding this plan is summarized below:
Number of Exercise Price
Shares Per Share
---------- -------------
Balance, April 1, 1993 1,486,659 $1.02-$2.02
Granted 630,000 2.10-2.31
Exercised (503,508) 1.02-2.10
Canceled (72,654) 1.43-2.10
---------- -------------
Balance, March 31, 1994 1,540,497 1.02-2.31
Granted 648,000 3.67-5.67
Exercised (817,899) 1.01-3.67
Canceled (12,000) 1.59
---------- -------------
Balance, March 30, 1995 1,358,598 1.43-5.67
Granted
- -
Exercised (607,405) 1.43-5.67
Canceled (30,297) 1.01-5.67
---------- -------------
Balance, March 29, 1996 720,867 $2.10-$5.67
========== =============
No compensation expense has been recorded because the options were granted
at fair market value. As of March 29, 1996, approximately 2,388,000 shares of
common stock are available for issuance under the plan. The Company does not
intend to issue any more options under this plan.
OPTIONS ISSUED IN EXCHANGE FOR FORMER TAYLOR MEDICAL OPTIONS
In conjunction with the acquisition of Taylor Medical, Inc., the Company
assumed the nonqualified Taylor Medical Stock Option Plans of 1986 and 1993.
The options outstanding at the time of acquisition were converted to allow
grantees the right to acquire the Company's common stock at a rate consistent
with the merger's stock pooling agreement. All options under this plan are
priced at $5.08 per common share. Options are not subject to future
performance.
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Information regarding these options are summarized below:
Number of Exercise Price
Shares Per Share
--------- --------------
Balance, April 1, 1993 282,222 $5.08
Granted 337,362 5.08
Exercised - -
Canceled (5,808) 5.08
--------- --------------
Balance, March 31, 1994 613,776 5.08
Granted 15,747 5.08
Exercised (5,118) 5.08
Canceled (8,268) 5.08
--------- --------------
Balance, March 30, 1995 616,137 5.08
Granted 7,825 5.08
Exercised (538,815) 5.08
Canceled - -
--------- --------------
Balance, March 29, 1996 85,147 $5.08
========= ==============
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:
Number of Exercise Price
Shares Per Share
--------- --------------
Balance, March 31, 1994 - -
Granted 160,200 $ 5.29-$5.79
Exercised - -
Canceled - -
--------- -------------
Balance, March 30, 1995 160,200 5.29-5.79
Granted 492,300 5.29-24.75
Exercised (37,500) 10.67-14.875
Canceled - -
--------- -------------
Balance, March 29, 1996 615,000 $ 5.29-$24.75
========= =============
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44
As of March 29, 1996, approximately 1,537,500 shares of common stock were
available for issuance under the plan. To date, no restricted stock has been
issued under this plan.
LONG TERM INCENTIVE PLAN
In March 1994, the Company adopted the 1994 Long Term Incentive Plan which
provides officers with performance awards, consisting of cash or registered
shares of common stock, or a combination thereof, based primarily upon the
Company's total shareholder return as ranked against the companies comprising
the NASDAQ Composite Index over a three year period. The maximum payable under
this plan to an eligible employee, whether in the form of cash or common stock,
may not exceed $1 million per fiscal year. The Company has accrued
approximately $160,000 related to awards granted under this plan.
The plan also provides for nonqualified stock options or restricted stock to
be granted at the discretion of the Compensation Committee of the Board of
Directors. The exercise price of options granted under this plan may be no less
than the fair market value of the Company's common stock on the date of grant
and accordingly, no compensation expense has been recorded in connection with
the stock options granted. The aggregate number of shares of common stock,
including shares reserved for issuance pursuant to the exercise of options,
which may be granted or issued, may not exceed 730,000 shares.
Information regarding the stock option component of the plan is summarized
below:
Number of Exercise Price
Shares Per Share
--------- --------------
Balance, March 30, 1995 - -
Granted 350,643 $ 14.875
Exercised (32,406) 14.875
Canceled - -
--------- --------------
Balance, March 29, 1996 318,237 $ 14.875
========= ==============
To date, no cash, registered shares, or restricted stock have been issued
under this plan.
DIRECTORS' STOCK PLAN
In March 1994, the Company adopted the Directors' Stock Plan under which
non-employee directors receive an annual grant of an option to purchase 4,500
shares of common stock. A total of 135,000 shares of the Company's common
stock, as adjusted for stock splits, consolidations, or other changes in
capitalization, have been reserved for issuance under this plan. The exercise
price of options granted under this plan may be no less than the fair market
value of the Company's common stock on the date of grant and accordingly, no
compensation expense has been recorded in connection with the stock options
granted. Each non-employee director receives a grant of 1,500 restricted shares
per remaining term year on the Board.
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45
Information regarding the stock option component of this plan is summarized
below:
Number of Exercise Price
Shares Per Share
--------- --------------
Balance, March 31, 1994 - -
Granted 27,000 $ 5.48
Exercised - -
Canceled - -
--------- --------------
Balance, March 30, 1995 27,000 5.48
Granted 22,500 14.75
Exercised (4,500) 5.48
Canceled - -
--------- --------------
Balance, March 29, 1996 45,000 $ 5.48-$14.75
========= ==============
To date, 7,500 restricted shares have been issued under this plan.
9. EMPLOYEE BENEFIT PLANS
The Company has an employee stock ownership plan ("ESOP") available to all
employees with at least one year of service. Effective January 1, 1996, the
Company amended the plan to allow participants to direct the investment of a
portion of their plan balance. Prior to this change, the trustees directed the
investment of the participants' balances. As of March 29, 1996, the ESOP owns
approximately 2,053,000 shares of the Company's common stock. Company
contributions to the plan were $120,000, $85,175, and $80,000 for 1996, 1995,
and 1994, respectively, and are made at the discretion of the Company.
The Company also has an employee stock purchase plan available to employees
with at least one year of service. The plan allows eligible employees to
purchase Company stock over the counter through payroll deductions.
10. BUSINESS ACQUISITIONS
POOLING WITH TAYLOR
On August 21, 1995, the Company issued approximately 3,790,000 shares of its
common stock in exchange for all of the outstanding common stock of Taylor,
including approximately 416,000 shares held in escrow to satisfy certain
obligations of Taylor related to its operations prior to the Merger.
Subsequent to August 21, 1995, approximately 244,000 shares of common stock
were returned to the Company as settlement of the escrow and were canceled.
These canceled shares had no resulting impact on the net income (loss) per
share calculation for fiscal years ended 1996 and 1995. The Merger has been
accounted for as a pooling-of-interests and, accordingly, the Company's
consolidated financial
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46
statements have been restated to include the accounts and operations of Taylor
for all periods prior to the Merger.
Separate approximate 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.
April 1 through
June 30, 1995 March 30, 1995 March 31, 1994
------------- -------------- --------------
Unaudited
---------
Net sales
PSS $ 73,670,000 $ 236,188,000 $ 169,703,000
Taylor 31,640,000 130,097,000 134,789,000
--------------------------------------------------------------------------------------------------
Combined $ 105,310,000 $ 366,285,000 $ 304,492,000
Net income
PSS $ 980,000 $ 3,680,000 $ 1,595,000
Taylor 193,000 (4,589,000) (941,000)
--------------------------------------------------------------------------------------------------
Combined $ 1,173,000 $ (909,000) $ 654,000
Other changes in
shareholders' equity
PSS $ 1,036,000 $ 24,075,000 2,042,000
Taylor 1,000 26,000 1,669,000
--------------------------------------------------------------------------------------------------
Combined $ 1,037,000 $ 24,101,000 $ 3,711,000
OTHER POOLINGS
During fiscal 1996, the Company merged with three other medical supply and
equipment distributors in stock mergers accounted for under the
pooling-of-interests method, by issuing 290,586 shares of PSS common stock in
exchange for all of the common stock of the acquired companies. The
accompanying consolidated financial statements have not been restated for
periods prior to the pooling due to immateriality. Accordingly, the results of
operations have been reflected in the consolidated financial statements
prospectively from the acquisition date and the accumulated retained earnings
as of their acquisition dates of approximately $1.3 million have been recorded
as adjustments to the accumulated deficit of the Company.
ASSET PURCHASES
During fiscal 1996, the Company acquired certain assets, accounted for by
the purchase method, including accounts receivable, inventories, equipment, and
other assets of seven medical supplies and equipment distributors for
$5,479,804. The aggregate purchase price paid consisted of cash of $2,838,529,
assumption of accounts payable and accrued liabilities of $2,520,275, and the
issuance of 5,700 shares of common stock with a fair market value of $121,000.
The excess of the purchase price over the estimated fair value of the net
assets acquired of $1,154,009 has been recorded as goodwill and will be
amortized over thirty years. In addition, the Company entered into noncompete
agreements with shareholders of the acquired companies which provide for
payments of $1,170,000 through the year 2000. The operations of the acquired
companies have been included in the Company's results of operations subsequent
to the dates of acquisition.
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During fiscal 1995, the Company acquired certain assets, including accounts
receivable, inventories, equipment, and other assets, of nine medical supplies
and equipment distributors for $11,553,433. The aggregate purchase price paid
consisted of cash of $6,853,130, assumption of accounts payable and accrued
liabilities of $4,182,890, and the issuance of 69,618 shares of common stock
with a fair market value of $517,413. The excess of the purchase price over
the estimated fair value of the net assets acquired of $3,962,404 has been
recorded as goodwill. In addition, the Company entered into noncompete
agreements with shareholders and an officer of the acquired companies which
provide for payments of $2,319,231 through the year 1998.
During fiscal 1995, Taylor acquired certain assets of three medical supplies
and equipment distributors for $2,157,000, of which $567,000 consisted of
promissory notes.
All of these acquisitions have been accounted for as purchases, and
accordingly, the results of operations acquired have been included in the
financial statements since the dates of acquisition. Supplemental pro forma
information is not presented because the impact on the Company's results of
operations would not be material.
11. COMMITMENTS AND CONTINGENCIES
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability.
The Company has not experienced any significant product liability claims and
maintains product liability insurance coverage. In addition, the Company is
party to various legal and administrative proceedings and claims arising in the
normal course of business. While any litigation contains an element of
uncertainty, management believes that the outcome of any proceedings or claims
which are pending or known to be threatened will not have a material adverse
effect on the Company's consolidated financial position, liquidity, or results
of operations.
The Company has employment agreements with certain executive officers which
provide that in the event of their termination or resignation, under certain
conditions, the Company may be required to continue salary payments and provide
insurance for a period ranging from 12 to 36 months for the chief executive
officer and from 3 to 12 months for other executives and to repurchase a
portion or all of the shares of common stock held by the executives upon their
demand. The period of salary and insurance continuation and the level of stock
repurchases are based on the conditions of the termination or resignation.
12. ABBOTT LABORATORIES DISTRIBUTION AGREEMENT
On March 27, 1995, the Company signed a Distribution Agreement with Abbott
Laboratories providing for the exclusive distribution of certain Abbott
diagnostic products. The Abbott Agreement, effective April 1, 1995, has a five
year term, although it may be terminated earlier if the Company fails to meet
certain performance objectives. Under the Abbott Agreement, the Company has
become the exclusive distributor in the United States of certain Abbott
diagnostic products and reagents to office-based physician practices with 24 or
fewer physicians per office site. The Abbott Agreement also provides the
Company's sales force with access to over 15,000 physician practices that were
not previously purchasing diagnostic products from the Company. Simultaneous
with the closing of the Abbott Agreement, Abbott purchased 825,000
unregistered, restricted shares of PSS common stock. A
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three year irrevocable proxy to the PSS Board of Directors and a perpetual
stand still agreement were provided by Abbott in the Stock Purchase Agreement.
13. SALES OF ASSETS
On July 1, 1994, Taylor sold the assets of its Taylor Home Health division
for $12,000,000 in cash and an escrow receivable of $1,051,000 based on
subsequent receivables collections and other factors, resulting in a gain on
sale of assets of $2,078,134. In March 1995, Taylor negotiated a final
settlement of the escrowed receivable which included the return to Taylor of
certain receivables. Taylor recorded a $600,000 reduction in the gain
originally recognized to record these receivables at their estimated net
realizable value. The net gain of approximately $1,478,000 is included in
other income for fiscal year 1995.
On November 30, 1994, Taylor sold the assets of its Labcare division, whose
principal business was the repair of medical equipment, for $1,100,000,
resulting in a loss of approximately $403,000. In March 1995, Taylor recorded
an additional loss on the sale of approximately $154,000 related to the
write-down of certain notes receivable issued in conjunction with the sale.
The net loss of approximately $558,000 is included in other income for fiscal
year 1995.
14. MERGER COSTS AND EXPENSES AND RESTRUCTURING CHARGES
During fiscal 1996, the Company recorded non-recurring merger costs and
expenses of $15,731,716 associated with the merger of PSS and Taylor and the
other poolings. Such costs include direct merger costs consisting primarily of
investment banking, legal, accounting, and filing fees as well as consolidation
costs from the closing of duplicate service center locations, realigning
regional and corporate functions, and reducing personnel.
During fiscal 1995, Taylor management concluded that recent industry
developments had affected their strategy and operations. Taylor assessed its
relative position in its major markets and determined that competitive
pressures on margins and cost structures in its Arizona, Indiana and
Massachusetts distribution centers as well as the prospects for its physician
consulting services and equipment repair businesses would not result in full
realization of the future benefits expected from the related intangible assets.
Accordingly, Taylor management concluded that the intangible assets were
impaired and recorded a $4,388,592 noncash charge to write off the intangible
assets associated with these markets and operations.
In 1994, Taylor recorded a restructuring charge of $307,686 relating to
rationalizing locations and staffing while retaining locations of acquired
companies.
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15. SUBSEQUENT EVENTS
On April 10, 1996, the Company acquired certain assets of Deckers, a medical
equipment and supply distribution company located in Leuven, Belgium, for $10.8
million in a transaction accounted for as a purchase. The assets acquired
consist of accounts receivable, inventories, equipment, and other assets. The
aggregate purchase price paid consisted of cash of $7.9 million and assumption
of accounts payable and accrued liabilities of approximately $2.9 million. The
excess of the purchase price over the estimated fair value of the net assets
acquired of approximately $1.0 million has been recorded as goodwill and will
be amortized over thirty years. In addition, the Company entered into
noncompete agreements with shareholders of the acquired companies which provide
for payments of approximately $167,000.
Deckers will transact its business in a functional currency other than U.S.
dollars. As such, the Company will be subject to foreign currency translation
risk. The Company intends to hedge this risk.
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SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS
ENDED MARCH 31, 1994, MARCH 30, 1995, AND MARCH 29, 1996
Balance at Provisions Transfers
Valuation allowance beginning of charged to from Balance at
for accounts receivable period expense Poolings Write-offs end of period
- ---------------------------- ------------ ------------ ------------- ------------- -------------
Year ended March 31, 1994 $ 1,637,000 $ 1,676,000 $ 1,465,000 $ 1,848,000
Year ended March 30, 1995 1,848,000 1,651,000 2,245,000 1,254,000
Year ended March 29, 1996 $ 1,254,000 $ 1,448,000 $ 400,000 $ 884,000 $ 2,218,000
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on
accounting and financial disclosures during the two years ended March 29, 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company's Definitive Proxy
Statement to be filed by June 6, 1996 for its fiscal year 1996 Annual Meeting
of Shareholders under the caption "Directors and Executive Officers of the
Registrant".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's Definitive Proxy
Statement to be filed by June 6, 1996 for its fiscal year 1996 Annual Meeting
of Shareholders under the caption "Executive Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Incorporated by reference from the Company's Definitive Proxy
Statement to be filed by June 6, 1996 for its fiscal year 1996 Annual Meeting
of Shareholders under the caption "Beneficial Ownership of Certain
Stockholders" and "Stock Ownership of Directors and Officers".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's Definitive Proxy
Statement to be filed by June 6, 1996 for its fiscal year 1996 Annual Meeting
of Shareholders under the caption "Certain Relationships and Related
Transactions".
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Registration Statement:
1. Consolidated Financial Statements
Refer to Item 8 "Financial Statements and Supplementary Data" for a
listing of the Consolidated Financial Statements included therein.
2. Supplementary Data
Refer to Item 8 "Financial Statements and Supplementary Data" for a
listing of the Supplementary Data included therein.
3. Exhibits
EXHIBIT
-------
NO. DESCRIPTION
--- -----------
3.1 Amended and Restated Articles of Incorporation dated March 15, 1994.
(1)
3.2 Amended and Restated Bylaws dated March 15, 1994. (2)
10.1 Financing and Security Agreement between the Company and NationsBank
of Georgia, N.A. (as successor to NCNB
National Bank of Florida), dated as of September 26, 1991, as
amended. (2)
10.2 Registration Rights Agreement between the Company and
Tullis-Dickerson Capital Focus, LP, dated as of March 16,
1994. (2)
10.3 Employment Contract, as amended, for Patrick C. Kelly. (2)
10.4 Incentive Stock Option Plan dated May 14, 1986. (2)
10.5 Shareholders Agreement dated March 26, 1986, between the Company,
the Charthouse Co., Underwood, Santioni and Dunaway. (2)
10.6 Shareholders Agreement dated April 10, 1986, between the Company
and Clyde Young. (2)
10.7 Shareholders Agreement between the Company and John D. Barrow. (2)
10.8 Directors Stock Plan. (2)
10.9 1994 Long Term Incentive Plan. (2)
10.10 1994 Long Term Stock Plan. (2)
10.11 1994 Employee Stock Purchase Plan (3)
10.12 1994 Amended Incentive Stock Option Plan (2)
10.13 Amended and Restated Loan and Security Agreement between the Company
and NationsBank of Georgia, N.A. dated
December 21, 1994 (4)
52
53
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.14 Distributorship Agreement between Abbott Laboratories and Physician Sales &
Service, Inc. (Portions omitted as confidential - Separately filed with
Commission) (5)
10.15 Stock Purchase Agreement between Abbott Laboratories and Physician Sales &
Service, Inc. (5)
10.16 Intentionally Omitted
10.17 Third Amended and Restated Agreement and Plan of Merger By and Among
Taylor Medical, Inc. and Physician Sales & Service, Inc. (including exhibits
thereto)
21.1 Subsidiaries of the registrant
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Price Waterhouse, LLP
27 Financial Data Schedule (for SEC use only)
(1) Incorporated by Reference to the Company's Registration Statement on Form
S-3, Registration No. 33-97524
(2) Incorporated by Reference to the Company's Registration Statement on Form
S-1 No. 33-76580.
(3) Incorporated by Reference to the Company's Registration Statement on Form
S-8, filed October 7, 1994
(4) Incorporated by Reference to the Company's Report on Form 10-Q for the
quarterly period ended December 31, 1994.
(5) Incorporated by Reference to the Company's Report on Form 10-K for the
fiscal year ended March 30, 1995
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended March 29,
1996:
The Company reported on March 7, 1996 (under Item 8, Change in Fiscal
Year) that the Company's Board of Directors had determined to change the fiscal
year end of the Registrant to the 52 or 53 week period ending on the Friday
closest to March 31.
53
54
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, thereunto duly authorized, in the City of Jacksonville, State of
Florida, on May 29, 1996.
PHYSICIAN SALES & SERVICE, INC.
By: /s/ Patrick C. Kelly
----------------------------------
Patrick C. Kelly,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/Patrick C. Kelly
------------------- Chairman of the Board of Directors, Chief Executive Officer,
Patrick C. Kelly and Director (Principal Executive Officer) May 29, 1996
/s/David A. Smith
------------------- Vice President, Chief Financial Officer, Director, and Assistant
David A. Smith Secretary (Principal Financial Officer) May 29, 1996
/s/Donald M. DuMond
------------------- Chief Accounting Officer
Donald M. DuMond (Principal Accounting Officer) May 29, 1996
/s/John F. Sasen, Sr.
-------------------
John F. Sasen, Sr. President, Chief Operating Officer and Director May 29, 1996
/s/Delmer W. Dallas
-------------------
Delmer W. Dallas Director May 29, 1996
/s/T. O'Neal Douglas
-------------------
T. O'Neal Douglas Director May 29, 1996
/s/Fred Elefant
-------------------
Fred Elefant Director and Corporate Secretary May 29, 1996
/s/Delores Kesler
-------------------
Delores Kesler Director May 29, 1996
54