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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 28, 1997 Commission File Number
0-23832
PHYSICIAN SALES & SERVICE, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-2280364
(State of incorporation) (I.R.S. Employer
Identification No.)
4345 SOUTHPOINT BOULEVARD
JACKSONVILLE, FLORIDA 32216
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 332-3333
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 [ ]
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 common stock, par value $0.01 per share (the
"Common Stock") held by nonaffiliates, based upon the closing sales price, was
approximately $481,800,995 as of March 28, 1997. In the determination of this
amount, affiliates include all of the Company's officers, directors and persons
known to the Company to be beneficial owners of more than five percent of the
Company's Common Stock. This amount should not be deemed conclusive for any
other purpose. As of March 28, 1997, a total of 37,061,615 shares of the
Company's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1997 Annual Meeting of Stockholders of the
Registrant which will be filed with the Securities and Exchange Commission not
later than 120 days after March 28, 1997.
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PART I
All statements contained herein that are not historical facts, including,
but not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigations
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business and
economic conditions; and other factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
ITEM 1. BUSINESS
GENERAL
Physician Sales & Service, Inc. (The "Company" or "PSS") is a leading
distributor of medical supplies, equipment and pharmaceuticals to primary care
and other office-based physicians. PSS currently operates 61 physician office
medical supply distribution ("core business") service centers distributing to
approximately 103,000 physician office sites in all 50 states. The Company's
primary market is the approximately 399,000 physicians who practice medicine in
approximately 198,000 office sites throughout the United States.
According to industry estimates, the medical supply and equipment segment
of the health care industry represents a $30.2 billion market, of which $6.6
billion represents the primary care and other office-based physicians. The
medical supply and equipment industry is estimated to be growing at an annual
rate of 6% to 8%. PSS has historically grown faster than the overall market. The
Company estimates that approximately 300 companies supply medical products to
the office-based physician sector.
The Company, through its newly formed subsidiary, Diagnostic Imaging, Inc.
("DI" or "imaging division"), distributes medical diagnostic imaging supplies,
chemicals, equipment and service to the acute care and alternate care market. DI
currently operates 16 imaging service centers in nine southeastern states. The
Company is in the process of developing a separate information system for DI
which will include the current ICON(SM) and CustomerLink systems. A primary
company objective is to pursue acquisition opportunities within the radiology
and imaging distribution market in order to gain market share and expand the
product offerings to the physician office market currently serviced by PSS and
the acute care market currently serviced by DI.
The Company also distributes medical supplies and equipment in Belgium,
France, Germany, and the Netherlands through its WorldMed International, Inc.
subsidiary. The Company currently has three service centers ("European
operations") in Europe distributing to the acute and alternate care markets.
The Company's primary objectives are to be capable of servicing the medical
equipment and supply needs of every office-based physician in the United States,
to create a national diagnostic imaging distribution company, and to expand its
presence in the European medical equipment and supply market. To achieve these
objectives and increase profitability, the Company intends to (i) continue to
acquire core business medical supply and equipment distributors, especially in
existing markets where it can leverage its distribution infrastructure and gain
market share, (ii) acquire diagnostic imaging distributors to expand its
geographic coverage and leverage its existing infrastructure, (iii) increase
sales of existing service centers by adding additional sales representatives and
providing superior service, competitive pricing and a broad product line,
including sophisticated diagnostic equipment, (iv) expand operating margins, (v)
open new service centers in
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selected markets where acquisition opportunities are not available, and (vi)
invest in sophisticated information systems that bring efficiency to the Company
and its subsidiaries.
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 increased 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.
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 in fiscal 1996. Management
used approximately $50 million in connection with acquisitions of the imaging
division, core business, European operations, and general corporate purposes,
including capital expenditures during fiscal 1997. 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 of servicing the medical equipment and
supply needs of every office-based physician in the United States, to create a
national imaging distribution company, and to expand its presence in the
European medical equipment and supply market.
On December 29, 1996, the Company acquired X-ray Corporation of Georgia
("X-ray GA") in a merger pursuant to which the Company issued 593,672 shares of
common stock to the former shareholders of X-ray GA, in exchange for all of the
outstanding shares of capital stock of X-ray GA valued at $11.0 million at the
time of the merger. This merger has been accounted for as a material
pooling-of-interests and, accordingly, the Company's consolidated financial
statements have been restated to include the accounts and operations of Taylor
and X-ray GA for all periods prior to the mergers.
In addition to Taylor and X-ray GA, for which the consolidated financial
statements have been restated for all periods prior to merger during fiscal 1996
and 1997, respectively, the Company merged with seven companies accounted for as
poolings-of-interest (four core business and three imaging division companies)
and 12 companies accounted for as purchases (nine core business and three
European operation companies).
PSS Common Stock is publicly traded over the counter by the NASDAQ National
Market System under the ticker symbol "PSSI".
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 permits returns of unused, saleable products for instant
credit.
The Company has increased its emphasis on national customer accounts,
including large physician group practices, physician practice management
companies, physician-hospital organizations, physician management service
organizations and group purchasing organizations. In selling to these national
accounts, the Company emphasizes its core strengths of same-day service, which
permits stockless inventory, competitive pricing and high service levels,
including inventory maintenance.
At March 28, 1997, the core business of PSS maintained a highly
decentralized distribution network of 61 service centers operating over 550
delivery vans throughout the United States. This distribution network along with
the Company's Instant Customer Order Network ("ICON(SM)"), 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.
Through its over 720 sales representatives in its core business, PSS
distributes medical supplies and equipment to physicians in approximately
103,000 office sites nationally. Generally, each sales representative is
responsible for calling on approximately 150 to 200 physician offices, with a
minimum goal of visiting each office once every one to two weeks.
The Company is required to carry a significant investment in inventory to
meet the rapid delivery requirements of its customers. The Company distributes
over 35,000 different products manufactured by approximately 3,000
manufacturers. During the twelve months ended March 28, 1997, Abbott was the
only vendor which accounted for more than 10% of the Company's inventory
purchases. 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 core business 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 28, 1997. No single
company customer accounted for more than 1% of PSS's net sales for the fiscal
year ended March 28, 1997.
The Company's imaging division operates in a similar decentralized format
with 16 service centers operating a total of over 70 delivery vans throughout
nine southeastern states. The delivery routes and customer service guarantees
are currently being developed. While imaging division gross margins are lower
than the core business gross margins, general and administrative expenses are
also lower than the core business due in part to less products distributed,
larger order size, less frequent deliveries and fewer personnel.
The imaging division has over 60 sales representatives and 160 field
service engineers who service customer equipment ranging from processors to
radiographic equipment. This division has approximately 6,000 customers
including 1,300 acute sites and 4,700 alternate care sites.
The Company's European operation operates three European service centers,
located in Belgium, Germany, and the Netherlands, employing approximately 25
sales representatives and approximately 65 total employees.
All of the Company's service centers operate as a profit center led by a
management team that typically includes a sales manager and an operations
manager. Each service center employs sales representatives and staff, including
purchasing agents, customer service representatives, and warehouse and delivery
personnel. Employees are compensated based upon both individual and service
center performance. Both management and employee bonuses are based largely upon
asset management, attainment of goals and operating profit performance.
At March 28, 1997, the Company had approximately 800 sales representatives
and approximately 2,600 total employees. The Company considers its employee
relations to be excellent.
INFORMATION TECHNOLOGY
PSS' core business maintains a decentralized information system with data
acquisition at the local service centers and a central corporate data base that
is accessible from all of the service centers. The information systems were
designed to allow the service center to have both the hardware and software to
conduct operations independently. The failure of a computer system at a service
center would not affect the operations of any other service center or the
corporate system. Likewise, the short-term failure of the corporate system would
not affect the operations of any service center.
ICON(SM) is a sales force automation technology enabling the PSS core
business sales representatives access to critical customer information from any
location. ICON(SM) provides the sales representatives with
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customer pricing, contracts, backorders, inventory levels, account status and on
the spot ordering through the use of a wireless network. ICON(SM) has increased
time available for selling, decreased operating expenses in the service centers
and increased the Company's ability to provide same-day delivery to customers.
Utilizing ICON(SM), sales representatives can give product demonstrations,
equipment feasibility studies, potential equipment revenue, and return on
investment analyses. Most recently, ICON(SM) gives the sales representative the
ability to perform quotes and bids to the larger accounts and standing order
capabilities.
During fiscal 1997, PSS test marketed and developed the CustomerLink or
DIAL (Digital Information Access Line) system. The Company believes this system
is the first internet based healthcare information system designed and used
specifically for inventory management and purchasing for the medical practice.
All company customers, regardless of size, with access to the internet, will be
given access to a multitude of services including:
- On-Line Purchasing
- Order placement and confirmation
- Customer specific product availability
- Customer specific pricing
- Product utilization reports
- Back order status reports
- Accounts receivable management reports
- Inventory management tools
- On-Line Information
- Practice compliance assistance for OSHA and CLIA
- Comprehensive database of medical safety data sheets
- Continuing medical and professional education courses
- Scientific and medical journals
- Comprehensive pharmaceutical pharmacology database
Company customers can access CustomerLink through the internet at
http://www.pssd.com after receiving their personal password from the Company.
The Company is implementing a delivery automation software system that is
expected to be completed in fiscal 1998. The system will provide electronic
signature recognition and delivery routing which the Company believes will
improve the Company's distribution efficiency.
The Company is currently in the process of developing and implementing a
separate hardware and software system for its imaging division which will
include the ICON(SM) and CustomerLink systems. The Company expects the imaging
division system to be implemented in fiscal 1998.
PRODUCT MIX
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 the majority of its purchase volume to PSS,
the Company will guarantee the lowest purchase prices on certain products as
well as certain service
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guarantees. The Company has recently signed distribution agreements with several
national and regional integrated and managed care groups.
Through its core business, the Company distributes medical products
consisting of medical supplies, diagnostic equipment, and pharmaceuticals. The
following is a discussion of the types of products offered by the Company's core
business.
MEDICAL SUPPLIES
PSS core business medical supplies include items from substantially all
major product lines. PSS currently sells a broad range of medical supplies which
include over 35,000 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, specimen containers,
diagnostic equipment reagents, and diagnostic rapid test kits for pregnancy,
strep, chlamydia, H-Pylori, and bladder cancer.
PSS has implemented a new Penny Saver product line. The Penny Saver
products represent the most frequently used products by PSS customers. This
product line will provide customers a choice between name brand products and the
Penny Saver quality, low price alternatives. Currently, the Company has over 250
products under the Penny Saver label.
MEDICAL EQUIPMENT
The Company's core business equipment lines include blood chemistry
analyzers, automated cell and differential counters, immunoassay analyzers, bone
densitometers, exam tables and furniture, electrocardiograph monitors, cardiac
stress systems, holter monitors, flexible sigmoidoscopy scopes, autoclaves,
spirometers, pulse oximeters, tympanometers, and microscopes. Demand for
diagnostic equipment has increased recently, reflecting in part, technological
advances which enable increasingly sophisticated diagnostic tests to be
performed in the physician's office. Sales of diagnostic equipment, while
generally lower in gross margin than supplies, normally require the ongoing
reordering of disposable diagnostic reagents which generally yield higher
margins.
The Company recently entered into four separate exclusive distribution
agreements for certain products manufactured by Siemens Medical Systems, Inc.,
Hologic, Inc., Bard Diagnostic Sciences, Inc., and Tanita Corporation of
America, Inc. These strategic alliances should continue to broaden the Company's
product offerings to both the core business and imaging division customers.
PHARMACEUTICALS
The Company's pharmaceutical sales include vaccines, injectables and
ointments. As a result of the changing dynamics in the pharmaceutical industry,
particularly the reduction in sales force for physicians' offices,
pharmaceutical manufacturers are increasingly seeking alternative means of
distribution. The Company believes that its consultative sales approach and its
emphasis on training have allowed PSS to be highly effective in selling
pharmaceuticals to the physician office market.
EXPANSION
The Company's core business has grown from one service center located in
Jacksonville, Florida in 1983 to 61 service centers currently. Historically, the
Company's growth has been accomplished through both the start-up of service
centers and the acquisition of local and regional medical supply and equipment
distributors. Since fiscal 1994 the Company has accelerated its acquisition of
medical supply and equipment distributors both in number and in materiality of
the operations acquired.
With the November 1996 acquisition of a medical diagnostic imaging supply
and equipment distributor, the Company began the operations of its imaging
division. Subsequent acquisitions have resulted in 16 imaging division service
centers operating throughout nine southeastern states. The Company's objective
for
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the imaging division this year is to (i) continue geographic expansion with
acquisitions of local and regional imaging distributors to leverage existing
infrastructure, (ii) develop and implement a separate hardware and software
system for the division utilizing the core business' ICON(SM) and CustomerLink
systems, (iii) expand the products and services currently provided, (iv)
implement same day delivery, and (v) develop a university training program
specifically tailored for the division.
PSS views the acquisition of medical and imaging supplies and equipment
distributors as an integral part of its growth strategy. The Company intends to
continue to acquire local and regional distributors especially in existing
markets where it can leverage its distribution infrastructure, gain market
share, and expand geographically. PSS believes that local and regional
distributors are finding competition increasingly difficult as a result of (i)
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.
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 other regulation by the U.S. Food and Drug
Administration and state laws applicable to the distribution and manufacture of
medical devices and over-the-counter pharmaceutical products as well as the
distribution of prescription pharmaceutical products.
The Federal Food, Drug, and Cosmetic Act generally regulates the
manufacture of drug and medical devices shipped in interstate commerce,
including such matters as labeling, packaging, storage and handling of such
products. The Prescription Drug Marketing Act of 1987, which amended the Federal
Food, Drug and Cosmetic Act, establishes certain requirements applicable to the
wholesale distribution of prescription drugs, including the requirements that
wholesale drug distributors be registered with the Secretary of Health and Human
Services or be licensed in each state in which they conduct business in
accordance with federally established guidelines on storage, handling, and
records maintenance. Under the Controlled Substances Act, the Company, as a
distributor of controlled substances, is required to obtain annually a
registration from the Attorney General in accordance with specified rules and
regulations and is subject to inspection by the Drug Enforcement Administration
acting on behalf of the Attorney General. The Company is required to maintain
licenses and permits for the distribution of pharmaceutical products and medical
devices under the laws of the states in which it operates. In addition, the
Company's physician customers are subject to significant federal and state
regulation. There can be no assurance that regulations that impact the
physicians' practices will not have a material adverse impact on the Company's
business.
The Company is also subject to regulation in the European countries where
its Belgian subsidiary, WorldMed, N.V., markets its products. Many of the
regulations applicable in such countries are similar to those of the U.S. Food
and Drug Administration. The national health or social security organizations of
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certain countries require the products distributed by the Company to be
qualified before they can be marketed in those countries.
Federal, state and foreign regulations regarding the sale and distribution
of medical supplies, equipment and devices by the Company are subject to change.
The Company cannot predict what impact, if any, such changes might have on its
business.
ITEM 2. PROPERTIES
The Company maintains 80 service centers providing service to 50 states
throughout the United States, as well as Belgium, France, Germany, and the
Netherlands. All locations are leased by the Company with the exception of the
service center located in Leuven, Belgium and the former Taylor corporate office
and distribution center located in Beaumont, Texas, which are owned. The
following table identifies the locations of the Company's service centers and
the areas which they service.
CORE BUSINESS
SERVICE CENTER LOCATION STATES SERVICED
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Albany, NY NY, CT, VT
Albuquerque, NM NM, CO, TX
Atlanta, GA GA, AL
Baltimore, MD MD, PA, VA, WV
Beaumont, TX TX
Birmingham, AL AL, MS
Boise, ID ID, MT
Charlotte, NC NC, SC, VA, TN
Chattanooga, TN AL, GA, TN
Chicago, IL IL, IN, WI
Cincinnati, OH KY, IN, OH, WV
Cleveland, OH OH
Columbia, SC SC, GA
Dallas, TX TX, OK
Davenport, IA IA, IL
Deerfield Beach, FL FL
Denver, CO CO, NM, WY
Detroit, MI MI
Honolulu, HI HI
Houston, TX TX, OK
Indianapolis, IN IN, IL
Jackson, MS MS, LA
Jacksonville, FL FL, GA, SC
Kansas City, KS IL, IA, KS, MO
Knoxville, TN KY, NC, TN
Lafayette, LA LA
Las Vegas, NV AZ, NV, UT
Little Rock, AR TX, AR
Long Island, NY MA, NJ, NY
Los Angeles, CA (North) CA
Los Angeles, CA (South) CA
SERVICE CENTER LOCATION STATES SERVICED
- ----------------------- ------------------------
Louisville, KY IN, KY
Lubbock, TX TX
Memphis, TN AR, MS, TN
Milwaukee, WI WI
Minneapolis, MN IA, MN, MT, ND, SD, WI
Mobile, AL AL, FL, MS
Nashville, TN IL, KY, TN
New Orleans, LA LA, MS, TX
Norfolk, VA NC, VA, WV
Omaha, NE CO, NE, IA, WY
Orlando, FL FL
Philadelphia, PA DE, NJ, NY, PA
Phoenix, AZ AZ
Pittsburgh, PA PA, WV, MD, OH, NY
Portland, OR CA, OR, WA
Raleigh, NC NC, VA
Richmond, VA VA
Roanoke, VA TN, VA
Rochester, NY NY
Salt Lake City, UT CO, NV, UT
San Antonio, TX TX
San Diego, CA CA
San Francisco, CA CA
Seattle, WA WA, AK
St. Louis, MO IL, MO
St. Petersburg, FL FL
Tallahassee, FL AL, FL, GA
Tulsa, OK AK, OK, MO
Union, NJ NJ, NY
Wareham, MA RI, CT, ME, MA, NH
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IMAGING DIVISION
SERVICE CENTER LOCATION STATES SERVICED
- ----------------------- ------------------------
Atlanta, GA GA
Birmingham, AL AL, MS
Charlotte, NC NC
Columbia, SC SC, GA
Pompano Beach, FL FL
Jacksonville, FL FL, GA
Gainesville, FL FL
Memphis, TN (1) AR, KY, TN
SERVICE CENTER LOCATION STATES SERVICED
- ----------------------- ------------------------
Mobile, AL AL, FL, MS
Nashville, TN(1) KY, TN
Raleigh, NC NC, VA
Richmond, VA VA
Roanoke, VA TN, VA, WV
Tallahassee, FL FL, GA
Savannah, GA FL, GA, SC
Winston Salem, NC NC, VA
EUROPEAN OPERATIONS
SERVICE CENTER LOCATION COUNTRY SERVICED
- ----------------------- ------------------------
Leuven, Belgium Belgium, France, Germany
SERVICE CENTER LOCATION COUNTRY SERVICED
- ----------------------- ------------------------
Dusseldorf, Germany Germany
Utrecht, Netherlands(1) Netherlands
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(1) Acquired subsequent to March 28, 1997.
In the aggregate, the Company's service centers consist of approximately
875,000 square feet, of which all is leased, with the exception of the locations
in Leuven, Belgium and Beaumont, Texas, under lease agreements with expiration
dates ranging from 1995 to 2001. The Company's service centers range in size
from 4,800 square feet to 51,000 square feet.
The corporate offices of PSS consist of approximately 50,000 square feet of
leased office space located at 4345 Southpoint Boulevard, Jacksonville, Florida
32216. The lease for this space expires in April 2002.
At March 28, 1997, the Company's facilities provided adequate space for the
Company's operations. Throughout the Company's history of growth, the Company
has been able to secure the required facilities.
ITEM 3. LEGAL PROCEEDINGS
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability. The
Company has not experienced any significant product liability claims and
maintains product liability insurance coverage. In addition, the Company is
party to various legal and administrative proceedings and claims arising in the
normal course of business. While any litigation contains an element of
uncertainty, 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.
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.
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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
June 30, 1996............................................... 33.00 22.75
September 30, 1996.......................................... 25.63 15.00
December 31, 1996........................................... 26.88 13.75
March 28, 1997.............................................. 19.75 13.00
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(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 28, 1997, there were 1,109 holders of record and approximately
9,000 beneficial holders of the Company's Common Stock.
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. An imaging division company paid distributions to S-corporation
shareholders in the amounts of $516,000, $455,000, and $1,100,000 during fiscal
years 1995, 1996, and 1997, respectively, prior to the acquisition by the
Company.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company for fiscal years 1994
through 1997 have been derived from the Company's audited Consolidated Financial
Statements which give retroactive effect to the merger with Taylor and X-ray GA.
The selected financial data of the Company for fiscal year 1993 has been
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derived from the Company's unaudited consolidated financial statements which
give retroactive effect to the merger with Taylor and X-ray GA.
FISCAL YEAR ENDED
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Net sales................................... $691,020 $529,024 $413,301 $351,203 $268,473
Gross profit................................ 188,116 149,664 119,613 105,968 83,294
Selling and G&A expenses.................... 173,113 130,966 111,492 99,147 78,961
Restructuring charges(1).................... -- -- 4,389 308 303
Merger costs and expenses(2)................ 12,128 15,732 -- -- --
Net income (loss) before extraordinary
item...................................... 4,373 1,339 (847) 1,487 692
Extraordinary loss, net of tax(3)........... -- -- -- 327 --
Net income (loss)........................... $ 4,373 $ 1,339 $ (847) $ 1,160 $ 692
======== ======== ======== ======== ========
Net income (loss) before extraordinary item
per share................................. $ 0.12 $ 0.04 $ (0.04) $ 0.08 $ 0.04
Extraordinary loss per share, net of tax.... -- -- -- $ (0.02) --
-------- -------- -------- -------- --------
Net income (loss) per share................. $ 0.12 $ 0.04 $ (0.04) $ 0.06 $ 0.04
======== ======== ======== ======== ========
Unaudited pro forma net income including pro
forma tax adjustment on pooled
S-corporation income and excluding merger
costs and expenses, restructuring charges,
and 1997 other operating
charges(1)(2)(5).......................... $ 15,078 $ 12,307 $ 2,018 $ 1,276 $ 878
======== ======== ======== ======== ========
Unaudited pro forma net income per share
including pro forma tax adjustment on
pooled S-corporation income and excluding
merger costs and expenses, restructuring
charges, and 1997 other operating
charges(1)(2)(5).......................... $ 0.41 $ 0.39 $ 0.08 $ 0.07 $ 0.05
======== ======== ======== ======== ========
Weighted average shares outstanding(4)...... 36,501 31,454 23,762 17,772 16,731
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital............................. $165,454 $172,696 $ 53,626 $ 46,148 $ 37,777
Total assets................................ 298,286 278,958 134,426 125,545 93,962
Long-term liabilities....................... 5,194 4,132 33,869 55,026 42,901
Total shareholders' equity.................. 205,600 199,550 46,326 23,588 18,897
Service centers(6).......................... 77 65 55 46 41
- ---------------
(1) The fiscal 1995 restructuring charge of $4,389 reflects Taylor management's
assessment of the under-realization of future benefits related to certain
intangible assets. The fiscal 1994 restructuring charge of $308 resulted
from Taylor's consolidation of an acquisition. The fiscal 1993 restructuring
charge of $303 resulted from Taylor management's writedown of capitalized
software costs.
(2) Merger costs and expenses reflect direct merger expenses incurred in
connection with mergers accounted for as poolings-of-interests.
(3) The extraordinary item in fiscal 1994 resulted from early extinguishment of
debt by Taylor.
(4) Adjusted to give effect to a three-for-one stock split in fiscal year 1996.
(5) Fiscal 1997 other operating charges represent write-offs of inventory of
$4,090 and accounts receivable of $500 at branches involved in mergers.
(6) Fiscal years 1993 through 1995 exclude Taylor service centers and the
imaging division.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
COMPANY OVERVIEW
Physician Sales & Service, Inc. (the "Company" or "PSS") is a leading
distributor of medical supplies, equipment and pharmaceuticals to primary care
and other office-based physicians. PSS currently operates 61 physician office
medical supply distribution ("core business") service centers distributing to
approximately 103,000 physician office sites in all 50 states. The Company's
primary market is the approximately 399,000 physicians who practice medicine in
approximately 198,000 office sites throughout the United States.
PSS believes that in purchasing medical products, the physician's office
staff primarily is interested in a professional relationship with the
distributor's sales representative and in service, product quality and price.
These customer preferences primarily are due to the critical role such products
play in the day-to-day operation of physicians' practices, the lack of storage
space in their offices and, as a result, the importance of receiving supplies in
a timely manner. PSS believes it is the only national distributor providing
same-day delivery service to physicians' offices on a regular basis and focusing
exclusively on physicians.
According to industry estimates, the medical supply and equipment segment
of the health care industry represents a $30.2 billion market, of which $6.6
billion represents the primary care and other office-based physicians. The
medical supply and equipment industry is estimated to be growing at an annual
rate of 6% to 8%. PSS has historically grown faster than the overall market. The
Company estimates that approximately 300 companies supply medical products to
the office-based physician sector.
In addition, the Company distributes medical diagnostic imaging supplies,
chemicals, equipment and service to the acute care and alternate care market in
nine southeastern states. The Company currently operates 16 imaging service
centers through its new subsidiary, Diagnostic Imaging, Inc. ("DI" or "imaging
division"). The Company is in the process of developing a separate information
system for DI which will include the current ICON(SM) and CustomerLink systems.
A primary company objective is to pursue acquisition opportunities within the
radiology and imaging distribution market in order to gain market share and
expand the product offerings to the physician office market currently serviced
by PSS and the acute care market currently serviced by DI.
The Company also distributes medical supplies and equipment in Belgium,
France, Germany, and the Netherlands through its WorldMed International, Inc.
subsidiary. The Company currently has three service centers ("European
operations") in Europe distributing to the acute and alternate care markets.
The Company's primary objectives are to be capable of servicing the medical
equipment and supply needs of every office-based physician in the United States,
to create a national diagnostic imaging distribution company, and to expand its
presence in the European medical equipment and supply market. To achieve these
objectives and increase profitability, the Company intends to (i) continue to
acquire core business medical supply and equipment distributors, especially in
existing markets where it can leverage its distribution infrastructure and gain
market share, (ii) acquire diagnostic imaging distributors to expand its
geographic coverage and leverage its existing infrastructure, (iii) increase
sales of existing service centers by adding additional sales representatives and
providing superior service, competitive pricing and a broad product line,
including sophisticated diagnostic equipment, (iv) expand operating margins, (v)
open new service centers in selected markets where acquisition opportunities are
not available, and (vi) invest in sophisticated information systems that bring
efficiency to the Company and its subsidiaries.
COMPANY GROWTH
Since its inception in 1983, the Company has achieved significant growth in
the number of service center locations, geographic area of operation, net sales,
and profitability. During the fiscal years 1992 through 1997, the Company and
its subsidiaries' net sales, excluding the retroactive effect of the mergers
with Taylor and X-ray GA, grew at a compound annual rate of approximately 49%,
and giving retroactive effect of the mergers with Taylor and X-ray GA, the
Company's net sales grew at a compound annual rate of approximately 27%. The
number of company service centers has grown from 2 at the end of fiscal 1984 to
80 currently, including 61 core business service centers, 16 imaging division
services centers and 3 European operation service centers.
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In order of priority, the Company's growth has been accomplished through (i)
acquiring regional and local core business medical supply and equipment
distributors, (ii) acquiring local and regional diagnostic imaging equipment and
supply distributors, (iii) increasing sales from existing service centers, and
(iv) opening start-up core business service centers.
The following table depicts the number of core business service centers
opened and acquired by the Company for the period indicated. The table excludes
the three European service centers acquired during fiscal year 1997, two of
which were merged and one European service center acquired subsequent to fiscal
year 1997. The table also excludes the 16 imaging division service centers.
Refer to Item 2. Properties for a list of the core business, imaging division,
and European operations service centers.
FISCAL YEAR(1)
--------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Centers at beginning of year................................ 29 40 45 54 64
Newly opened centers(2)..................................... 8 1 5 4 0
Acquired centers(3)......................................... 3 4 4 16 6
Centers merged(3)........................................... 0 0 0 (10) (9)
-- -- -- --- --
Centers at end of year...................................... 40 45 54 64 61
- ---------------
(1) Fiscal years 1993 through 1995 exclude Taylor service centers.
(2) Does not include two service centers that were opened but subsequently
combined with existing service centers in fiscal year 1993.
(3) Includes centers of acquired companies with multiple center locations which
were merged into existing company service centers and into which existing
customer service centers were merged in fiscal 1996 and 1997.
Of the Company's 61 core business service centers, 31 were opened as
start-ups and 30 resulted from acquisitions. A significant portion of the
Company's growth occurred with the merger of Taylor in fiscal 1996. In
connection with the integration of Taylor into PSS, the Company closed or merged
into existing PSS service centers the majority of the Taylor locations.
Additionally, the Company merged eight PSS service centers into the eight
remaining Taylor locations and established two additional service centers.
SALES GROWTH AND MIX
In addition to the opening of new service centers and the acquisition of
local medical supply and equipment distributors, PSS sales growth is largely
attributable to high levels of same center sales growth. PSS quantifies same
center sales by aggregating the sales for service centers which have been in
operation for at least two consecutive 12-month periods.
The following table sets forth the same center sales growth of the core
business for the periods indicated:
FISCAL YEAR ENDED
-------------------------------------------
1993(1) 1994(1) 1995(1) 1996 1997
------- ------- ------- ----- -----
Number of centers per period................... 25 29 40 45 53
Same center sales growth....................... 18.5% 27.7% 23.3% 26.8% 18.2%
- ---------------
(1) Excludes Taylor centers.
This same center sales growth has been accomplished by (i) focusing on
diagnostic equipment which produces residual sales of reagents, (ii)
productivity gains of its maturing sales force, (iii) pursuing customer reach
and penetration, and (iv) accessing new products not previously distributed.
PSS has grown the number of its core business sales representatives from
203 in fiscal 1991 to over 720 in fiscal 1997. The Company's sales
representatives focus on a consultative and comprehensive sales approach with an
emphasis on sophisticated diagnostic products. The Company invested
approximately $2.6 million in the training and development of its sales
representatives and management in fiscal 1997.
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The following table sets forth information regarding the Company's core
business net sales mix and gross profit percentages by significant product
category for the periods indicated:
FISCAL YEAR ENDED
------------------------------
1997 1996 1995
-------- -------- --------
NET SALES:
Core business
Supplies.......................................... $404,859 $297,058 $151,588
Equipment......................................... 125,994 76,144 51,127
Pharmaceuticals................................... 66,427 43,708 29,836
Other............................................. 4,030 3,845 3,637
Taylor............................................ -- 62,539 130,097
-------- -------- --------
Core business total.......................... $601,310 $483,294 $366,285
Imaging division..................................... 74,003 45,730 47,016
European operations.................................. 15,707 -- --
-------- -------- --------
Company total................................ $691,020 $529,024 $413,301
======== ======== ========
PERCENTAGE OF NET SALES (CORE BUSINESS)(1):
Supplies.......................................... 67.3% 70.6% 64.2%
Equipment......................................... 21.0 18.1 21.7
Pharmaceuticals................................... 11.0 10.4 12.6
Other............................................. 0.7 0.9 1.5
-------- -------- --------
Total........................................ 100.0% 100.0% 100.0%
======== ======== ========
GROSS PROFIT PERCENTAGE(2):
Core business
Supplies.......................................... 29.8% 30.8% 33.3%
Equipment......................................... 24.8 25.3 26.8
Pharmaceuticals................................... 27.4 27.0 26.6
Other............................................. 37.9 32.3 28.2
Taylor............................................ -- 29.4 30.5
Core business weighted average............... 28.6 29.4 30.8
Imaging division..................................... 19.1 16.9 14.2
European operations.................................. 40.7 -- --
Company weighted average..................... 27.8% 28.3% 28.9%
- ---------------
(1) Excludes Taylor net sales by category for period April 1, 1994 through
September 30, 1995. The Company began tracking combined net sales by
category beginning October 1, 1995.
(2) Excludes fiscal 1997 operating write-offs of inventory of branches involved
in mergers of approximately $4.1 million.
The Company recently completed the second year of a Distributorship
Agreement (the "Abbott Agreement") with Abbott Laboratories providing for the
exclusive distribution of certain Abbott diagnostic products. Gross profits for
Abbott product sales converted to PSS are generally substantially less than
standard PSS margins. The average gross profit on sales of Abbott products by
the Company's core business was 22.2% and 18.0% for fiscal 1997 and 1996,
respectively. Gross profits on these products have gradually improved over the
term of the relationship. PSS and Abbott are currently negotiating fiscal 1998
performance goals and related acquisition cost of product.
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
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15
sales and marketing expenses, PSS has used its expertise and market reach to
distribute products to physicians as evidenced by the increase in total sales
dollars of diagnostic equipment and pharmaceuticals.
PSS distributes in the core business 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 35,000 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, specimen containers, diagnostic equipment reagents, and diagnostic
rapid test kits for pregnancy, strep, chlamydia, H-Pylori, and bladder cancer.
The Company's core business equipment lines include blood chemistry
analyzers, automated cell and differential counters, immunoassay analyzers, bone
densitometers, exam tables and furniture, electrocardiograph monitors, cardiac
stress systems, holter monitors, flexible sigmoidoscopy scopes, autoclaves,
spirometers, pulse oximeters, tympanometers, and microscopes. Demand for
diagnostic equipment has increased recently, reflecting in part, technological
advances which enable increasingly sophisticated diagnostic tests to be
performed in the physician's office. Sales of diagnostic equipment, while
generally lower in gross margin than supplies, normally require the ongoing
reordering of disposable diagnostic reagents which generally yield higher
margins.
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.
The Company's pharmaceutical sales include vaccines, injectables and
ointments. As a result of the changing dynamics in the pharmaceutical industry,
particularly the reduction in sales force for physicians' offices,
pharmaceutical manufacturers are increasingly seeking alternative means of
distribution. The Company believes that its consultative sales approach and its
emphasis on training have allowed PSS to be highly effective in selling
pharmaceuticals to the physician office market.
PSS has implemented a new Penny Saver product line. The Penny Saver
products represent the most frequently used products by PSS customers. This
product line will provide customers a choice between name brand products and the
Penny Saver quality, low price alternatives. Currently, the Company has over 250
products under the Penny Saver label.
PSS plans to continue to focus on providing products and services to the
primary care physician market whether the physician is a single practitioner or
a member of a large group practice. In that effort, PSS developed Network
Plus(SM), a comprehensive savings plan for physicians in which PSS offers
special group purchasing contract pricing and provides periodic cost analyses to
help manage the supply needs of each physician. Under this program, when a
physician office guarantees at least 80% of its purchase volume to PSS, the
Company will guarantee the lowest purchase prices on certain products as well as
certain service guarantees. In addition to this program, the Company has
recently signed distribution agreements with several national and regional
integrated and managed care groups.
The Company recently entered into four separate exclusive distribution
agreements for certain products manufactured by Siemens Medical Systems, Inc.,
Hologic, Inc., Bard Diagnostic Sciences, Inc. and Tanita Corporation of America,
Inc. These strategic alliances should continue to broaden the Company's product
offerings to both the core business and imaging division customers.
IMAGING DIVISION
The Company's imaging division distributes over 3,500 medical diagnostic
imaging supplies, chemicals and equipment to the acute care and alternate care
market. This division began operations in November 1996 with the acquisition of
8 service centers, 24 sales representatives and 75 field service engineers.
Currently, the imaging division provides service to approximately 6,000 acute
and alternate site customers through 16 service centers, 60 sales
representatives and 160 field service engineers. The field service engineers
service products ranging from processors to radiographic equipment.
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The Company's objective for the imaging division this year is to (i)
continue geographic expansion with acquisitions of local and regional imaging
distributors to leverage existing infrastructure, (ii) develop and implement a
separate hardware and software system for the division utilizing the core
business' ICON(SM) and CustomerLink systems, (iii) expand the products and
services currently provided, (iv) implement same day delivery, and (v) develop a
university training program specifically tailored for the division.
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 1997, 1996 and 1995, giving retroactive effect to
the mergers with Taylor and X-ray GA.
RESULTS OF OPERATIONS
The table below sets forth for each of the fiscal years 1995 through 1997
certain financial information. The following financial information gives
retroactive effect to the mergers with Taylor and X-ray GA.
FISCAL YEAR ENDED
------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Income Statement Data:
Net sales................................................. $691,020 $529,024 $413,301
Gross profit.............................................. 188,116 149,664 119,613
Selling and G&A expenses.................................. 173,113 130,966 111,492
Restructuring charges(1).................................. -- -- 4,389
Merger costs and expenses(2).............................. 12,128 15,732 --
Net income (loss)......................................... 4,373 1,339 (847)
Net income (loss) per share............................... 0.12 0.04 (0.04)
Unaudited pro forma net income, including pro forma tax
adjustment on pooled S-corporation income and excluding
merger costs and expenses, restructuring charges, and
1997 other operating charges(3)........................ 15,078 12,307 2,018
Unaudited pro forma net income per share, including pro
forma tax adjustment on pooled S-corporation income and
excluding merger costs and expenses, restructuring
charges, and 1997 other operating charges(3)........... $ 0.41 $ 0.39 $ 0.08
Weighted average shares outstanding(4).................... 36,501 31,454 23,762
- ---------------
(1) The fiscal 1995 restructuring charge of $4,389 reflects Taylor management's
assessment of the under-realization of future benefits related to certain
intangible assets.
(2) Merger costs and expenses reflect direct merger expenses incurred in
connection with mergers accounted for as poolings-of-interests.
(3) Fiscal 1997 other operating charges represent write-offs of inventory of
$4,090 and accounts receivable of $500 at branches involved in mergers.
(4) Adjusted to give effect to a three-for-one stock split in fiscal 1996.
Fiscal Year Ended March 28, 1997 Versus Fiscal Year Ended March 29, 1996
Net Sales. Net sales increased $162.0 million to $691.0 million, or 30.6%
for the fiscal year ended 1997 compared to fiscal year 1996 sales of $529.0
million. The increase in net sales was attributable to (i) internal sales growth
of centers operating at least two years, (ii) the Company's focus on diagnostic
equipment sales, (iii) incremental sales generated in connection with the Abbott
Agreement, (iv) net sales of core business centers and European operations
acquired during fiscal 1997, and (v) sales from the acquisitions of the imaging
companies during fiscal 1997. The net sales increase was slowed by the Company's
efforts in the last six months of fiscal 1997 to reduce low gross margin sales.
Core business same store sales growth approximated 18% for fiscal year
1997. Fiscal 1997 sales resulting from the acquisitions of the imaging division
totaled $74.0 million, an increase of $28.3 million over the fiscal
15
17
1996 X-ray GA revenues. Net sales of the imaging division totaled $33.2 million
for the three months ended March 28, 1997. Fiscal 1997 sales resulting from the
acquisition of two core business medical supply companies and three European
medical supply companies totaled approximately $25.5 million and $15.7 million,
respectively.
Gross Profit. Gross profit increased $38.5 million, or 25.7%, for the
fiscal year ended 1997 compared to the fiscal year ended 1996. The increase in
gross profit dollars is attributable to the sales growth described above. Gross
profit as a percentage of net sales was 27.2% and 28.3% for the fiscal years
ended 1997 and 1996, respectively. The decrease in gross profit percentage was
attributable to (i) the write-off of inventory related to centers involved in
mergers, (ii) lower gross profit as a percent of sales of the imaging division
and (iii) the continued penetration by the Company's core business into larger
physician group practices that require more competitive pricing but entail lower
selling and servicing costs.
Also impacting gross profits are vendor performance incentives earned by
PSS through the achievement of certain predetermined company purchase and sales
levels. These performance incentives totaled $3.1 million and $6.4 million for
the fiscal years ended 1997 and 1996, respectively. Although the Company plans
and expects to continue to negotiate vendor performance incentives, there is no
assurance that vendor performance incentives will continue to positively impact
gross profit at the historical levels.
General and Administrative Expenses. General and administrative expenses
increased $27.8 million, or 33.7%, for the fiscal year ended 1997 compared to
the fiscal year ended 1996. General and administrative expenses as a percentage
of net sales, increased to 16.0% for the fiscal year ended 1997 from 15.6% for
the fiscal year ended 1996. The increase in general and administrative expenses
as a percentage of net sales was a result of operating costs associated with
transitioning merged and acquired operations offset by the continued leveraging
of fixed cost of mature service center operations.
Selling expenses. Selling expenses increased $14.4 million, or 29.6%, for
the fiscal year ended 1997 compared to the fiscal year ended 1996 as a result of
an increase in net sales. Selling expense as a percentage of net sales was 9.1%
and 9.2% for fiscal years 1997 and 1996, respectively. The decrease in selling
expense as a percentage of net sales is due to leveraging of existing service
centers' fixed selling expenses, such as salaries paid to sales representatives
during the conversion period from a guaranteed salary to a commission
compensation arrangement and the leveraging of sales management salaries. The
decrease in selling expenses as a percentage of net sales is also due to the
variable commission plan of the Company, which pays commissions based on gross
profit as a percentage of net sales.
Merger Costs and Expenses. During fiscal 1997, the Company recorded merger
costs and expenses of $12.1 million incurred in connection with mergers
accounted for as poolings. Such costs include direct merger costs consisting
primarily of investment banking, legal, accounting, and filing fees as well as
consolidation costs from the closing of duplicate service center locations,
realigning regional and corporate functions, and reducing personnel.
Operating Income. Operating income decreased $0.1 million, or 3.1%, for
the fiscal year ended 1997 compared to the fiscal year ended 1996. As a
percentage of net sales, operating income for the fiscal year 1997 decreased to
0.4% from 0.6% for the fiscal year ended 1996 primarily due to operating costs
and asset write-offs associated with transitioning merged and acquired
operations. On a pro forma basis, excluding the effect of merger costs and
expenses and 1997 other operating charges for write-offs of inventory of $4.1
million and receivables of $0.5 million at branches involved in mergers,
operating income for the fiscal year ended 1997 increased to $19.6 million from
$18.7 million for the fiscal year ended 1996.
Interest Expense. Interest expense for the fiscal year ended 1997
decreased approximately $2.7 million, or 89.4%, compared to the fiscal year
ended 1996. Interest expense decreased due to the use of the net proceeds from
an equity offering during the three months ended December 31, 1995 to repay all
outstanding debt other than capital lease obligations. Interest expense for
fiscal 1997 represents interest expense from the accounting restatement for the
operations of X-ray GA.
Interest and Investment Income. Interest and investment income for the
fiscal year ended 1997 increased approximately $1.2 million, or 104.0%, compared
to the fiscal year ended 1996. The Company
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earned interest income of $1.9 million in 1997 from the short-term investment of
the remaining net proceeds from the equity offering in fiscal 1996 and recorded
an unrealized gain of $0.5 million on equity securities.
Other Income. Other income decreased approximately $0.05 million, or 3.0%,
for the fiscal year ended 1997 compared to the fiscal year ended 1996.
Provision for Income Taxes. Provision for income taxes increased $0.8
million, or 60.1%, for the fiscal year ended 1997 compared to the fiscal year
ended 1996 due to higher pretax income of $6.5 million in fiscal 1997 compared
to $2.7 million in fiscal 1996 as a result of the factors discussed above,
higher nontaxable investment income of $0.7 million in fiscal 1997 compared to
$0.2 million in fiscal 1996 and lower nondeductible merger costs and expenses of
$0.7 million in 1997 compared to $2.2 million in 1996. The effective income tax
rate was 32.7% in 1997 primarily due to an income tax benefit resulting from a
reduction in the deferred tax asset valuation allowance of $0.9 million.
Net Income. Net income increased $3.0 million, or 226.6%, for the fiscal
year ended 1997 compared to the fiscal year ended 1996 for the reasons discussed
above. As a percentage of net sales, net income increased for the fiscal year
ended 1997 to 0.6% from net income of 0.3% for the fiscal year ended 1996. On a
pro forma basis, including a pro forma tax adjustment on pooled S-corporation
income and excluding the effect of merger costs and expenses and 1997 other
operating charges for write-offs of inventory of $4.1 million and receivables of
$0.5 million at branches involved in mergers, pro forma net income would have
increased 22.8% to $15.1 million for the fiscal year ended 1997 compared to
$12.3 million for the fiscal year ended 1996.
Fiscal Year Ended March 29, 1996 Versus Fiscal Year Ended March 30, 1995
Net Sales. Net sales increased $115.7 million to $529.0 million, or 28.0%,
for the fiscal year ended 1996 compared to fiscal year 1995 sales of $413.3
million. The increase in net sales was attributable to (i) internal sales growth
of centers operating at least two years, (ii) incremental sales generated in
connection with the Abbott Agreement, (iii) net sales of centers acquired during
fiscal 1996, and (iv) net sales of fiscal year 1996 company start-up service
centers.
Core business same store sales growth approximated 27% for fiscal year
1996. The first year performance goals as set forth in the Abbott Agreement were
met with PSS realizing approximately $55.0 million in incremental net sales of
Abbott products during fiscal year 1996. Excluding Taylor and X-ray GA, Company
acquisitions and start-ups added to the growth in fiscal year 1996, with
approximately $14.5 million of net sales resulting from the acquisition of nine
local and regional medical suppliers and $9.2 million of net sales generated by
four company start-ups, one of which was merged into an acquired Taylor location
during fiscal year 1996.
Gross Profit. Gross profit increased $30.1 million, or 25.1%, for the
fiscal year ended 1996 compared to the fiscal year ended 1995. The increase in
gross profit dollars is attributable to the sales growth described above. Gross
profit as a percentage of net sales was 28.3% and 28.9% for the fiscal years
ended 1996 and 1995, respectively. The decrease in gross profit percentage as a
percentage of net sales is attributable to the penetration by the Company's core
business into larger physician group practices that require more competitive
pricing but entail lower selling and servicing costs. The decrease in gross
profit percentage is also attributable to lower margins on diagnostic products
distributed under the Abbott Agreement. Margins under the Abbott Agreement are
scheduled to increase annually based on achievement by the Company of certain
performance goals as stipulated therein.
For the fiscal year ended 1996, the Company sold approximately $75 million
of Abbott products with a gross profit percentage of 18.0%. Also the Company's
gross profits include first year reimbursements by Abbott for gross profit on
direct sales by Abbott to PSS customers as set forth in the Abbott Agreement.
These reimbursements totaled $1.7 million during fiscal year 1996, effectively
raising gross profit by 0.4%. The Abbott sales, net of reimbursements,
negatively impacted the Company's gross profit percentage by 1.7%.
Also positively impacting gross profits are vendor performance incentives,
in addition to the Abbott direct sales reimbursements, earned by PSS through the
achievement of certain predetermined company purchase and sales levels. These
performance incentives totaled $6.4 million and $4.2 million for the fiscal
years ended
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1996 and 1995, respectively. These vendor incentives effectively raised the
gross profit percentage by 1.3% and 1.1% during fiscal years 1996 and 1995,
respectively. Although the Company plans and expects to continue to negotiate
vendor performance incentives, there is no assurance that vendor performance
incentives will continue to positively impact gross profit at the historical
levels.
General and Administrative Expenses. General and administrative expenses
increased $12.4 million, or 17.6%, for the fiscal year ended 1996 compared to
the fiscal year ended 1995. General and administrative expenses as a percentage
of net sales, however, decreased to 15.6% for the fiscal year ended 1996 from
17.0% for the fiscal year ended 1995. The decrease in general and administrative
expenses as a percentage of net sales was a result of (i) improved leveraging by
PSS of its existing core business 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 core business service centers.
Selling expenses. Selling expenses increased $7.1 million, or 17.2%, for
the fiscal year ended 1996 compared to the fiscal year ended 1995. Selling
expense as a percentage of net sales was 9.2% and 10.0% for fiscal years 1996
and 1995, respectively. The decrease in selling expense as a percentage of net
sales is due to improved leveraging of existing core business service centers'
fixed selling expenses, such as salaries paid to sales representatives during
the conversion period from a guaranteed salary to a commission compensation
arrangement and the leveraging of sales management salaries. The decrease in
selling expenses as a percentage of net sales is also due to the variable
commission plan of the Company which pays a lower commission on Abbott products
due to the lower gross profit as a percentage of net sales on those products.
Merger Costs and Expenses. During fiscal 1996, the Company recorded merger
costs and expenses of $15.7 million associated with the merger of PSS and Taylor
and the other immaterial poolings. Such costs include direct merger costs
consisting primarily of investment banking, legal, accounting, and filing fees
as well as consolidation costs from the closing of duplicate service center
locations, realigning regional and corporate functions, and reducing personnel.
Operating Income. Operating income decreased $0.8 million, or 20.5%, for
the fiscal year ended 1996 compared to 1995. As a percentage of net sales,
operating income for the fiscal year 1996 decreased to 0.6% from 0.9% for the
fiscal year ended 1995. The decrease in operating income is the result of the
merger costs and expenses of $15.7 million related to the Taylor merger during
fiscal 1996. On a pro forma basis, excluding the effect of merger costs and
expenses incurred in fiscal year 1996 and the restructuring charge incurred in
fiscal year 1995, operating income for the fiscal year ended 1996 increased
130.9% to $18.7 million from $8.1 million for the fiscal year ended 1995 due to
the factors discussed above.
Interest Expense. Interest expense for the fiscal year ended 1996
decreased approximately $1.0 million, or 24.5%, compared to the fiscal year
ended 1995. Interest expense decreased as a result of the decrease in average
indebtedness and the refinancing at a more favorable rate of Taylor debt assumed
by PSS. The decrease in average indebtedness for fiscal year 1996 compared to
fiscal year 1995 is due to the use of the net proceeds from the secondary
offering of common stock of approximately $58.2 million of the total net
proceeds of $142.9 million to repay all outstanding debt, other than capital
lease obligations, on November 20, 1995.
Interest Income. The Company earned interest income of $1.2 million from
the short-term investment of the remaining net proceeds from the secondary
offering in fiscal 1996.
Other Income. Other income decreased approximately $0.3 million, or 16.9%,
for the fiscal year ended 1996 compared to the fiscal year ended 1995. Other
income decreased due to a net gain on sale of assets by Taylor recorded during
fiscal 1995 of approximately $0.9 million. Excluding the gain, other income
would have increased approximately $0.6 million primarily due to the increase in
finance charge income on customer accounts.
18
20
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. Net tax adjustments resulted in
a decrease in net income of $0.4 million.
Net Income. Net income increased $2.2 million, or 258.1%, for the fiscal
year ended 1996 compared to the fiscal year ended 1995 for the reasons discussed
above. As a percentage of net sales, net income increased for the fiscal year
ended 1996 to 0.3% from the net loss of 0.2% for the fiscal year ended 1995.
Excluding the effect of merger costs and expenses in fiscal year 1996 and the
restructuring charge in fiscal year 1995, pro forma net income would have
increased 515.0% to $12.3 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
core business centers and the leveraging of fixed costs through sales growth.
QUARTERLY RESULTS (UNAUDITED)
The following tables present summarized unaudited quarterly results of
operations for the Company for fiscal years 1997 and 1996, giving retroactive
effect to the mergers with Taylor and X-ray GA. The Company believes all
necessary adjustments have been included in the amounts stated below to present
fairly the following selected information when read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere herein.
Future quarterly operating results may fluctuate depending on a number of
factors, including the timing of acquisitions of service centers, the timing of
the opening of start-up service centers, and changes in physicians' buying
patterns of supplies, diagnostic equipment and pharmaceuticals. Results of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year or any other quarter.
SUMMARY QUARTERLY RESULTS
FISCAL YEAR 1997 FISCAL YEAR 1996
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Net sales.............................. $151,568 $172,359 $179,612 $187,481 $116,082 $132,040 $137,600 $143,302
Gross profit........................... 41,835 46,768 51,054 48,459 33,575 36,093 39,140 40,856
Merger costs and expenses.............. 6,934 -- 317 4,877 -- 12,095 3,484 153
Net income (loss)...................... $ (1,540) $ 4,152 $ 4,465 $ (2,704) $ 1,317 $ (7,180) $ 1,318 $ 5,884
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share............ $ (0.04) $ 0.11 $ 0.12 $ (0.07) $ 0.04 $ (0.23) $ 0.04 $ 0.16
======== ======== ======== ======== ======== ======== ======== ========
Pro forma net income (loss), excluding
merger costs and expenses............ $ 3,135 $ 4,105 $ 4,652 $ 732 $ 1,317 $ 2,052 $ 3,366 $ 6,011
======== ======== ======== ======== ======== ======== ======== ========
Pro forma net income (loss) per share,
excluding merger costs and
expenses............................. $ 0.09 $ 0.11 $ 0.13 $ 0.02 $ 0.04 $ 0.07 $ 0.11 $ 0.16
======== ======== ======== ======== ======== ======== ======== ========
The fourth quarter of fiscal year 1997 includes a $4.1 million write-off of
inventories at branches involved in mergers, a $1.0 million increase in bad debt
expense and a reduction in the deferred tax asset valuation allowance of $0.9
million.
LIQUIDITY AND CAPITAL RESOURCES
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.
19
21
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 in fiscal 1996. Management
used approximately $50 million in connection with acquisitions of the imaging
division, core business, European operations, and general corporate purposes,
including capital expenditures during fiscal 1997. 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 of servicing the medical equipment and
supplying the needs of every office-based physician in the United States, to
create a national imaging distribution company, and to expand its presence in
the European medical equipment and supply market.
The Company had working capital of $165.5 million and $172.7 million for
the fiscal years ended 1997 and 1996, respectively. The decrease in working
capital is primarily attributable to the merger costs and expenses paid during
fiscal year 1997 and capital expenditures.
Net cash used in operating activities was $0.2 million, $21.0 million, and
$7.4 million in fiscal years 1997, 1996, and 1995, respectively. The net cash
used in fiscal 1996 and 1995 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 mergers
and acquisitions.
Net cash used in investing activities was $10.1 million, $30.5 million, and
$1.3 million in fiscal years 1997, 1996, and 1995, respectively. These funds
were primarily utilized to finance the acquisition of new service centers and
capital expenditures including the use of the net proceeds from sales and
maturities of marketable securities.
Net cash (used in) provided by financing activities was $(26.5) million,
$115.8 million, and $8.8 million for fiscal years 1997, 1996, and 1995,
respectively. Net cash used in financing activities is the result of the use of
a part of the remaining net proceeds of an equity offering in fiscal 1996 to pay
off debt assumed through fiscal 1997 acquisitions.
Accounts receivable, net of allowances, were $119.3 million and $96.1
million at March 28, 1997 and March 29, 1996, respectively. The average days
sales outstanding were 56 days and 55 days as of March 28, 1997 and March 29,
1996, respectively. In March 1997, the Company acquired an imaging division
company with accounts receivable of $3.3 million. Excluding this increase in
accounts receivable, the average days sales outstanding were 55 days as of March
28, 1997.
Inventories were $67.9 million and $55.8 million as of March 28, 1997 and
March 29, 1996, respectively. The Company had inventory turnover of 8.1 times
and 8.3 times for the fiscal years ended March 28, 1997 and March 29, 1996,
respectively. The increase in inventory resulting from the acquisition described
in the above paragraph was $2.5 million. Excluding this increase in inventory,
average inventory turnover was 8.3 times as of March 28, 1997.
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. As of March 28, 1997, the Company had no outstanding debt under its
credit facility.
All statements contained herein that are not historical facts, including,
but not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following: the
availability of sufficient
20
22
capital to finance the Company's business plans on terms satisfactory to the
Company; competitive factors; the ability of the Company to adequately defend or
reach a settlement of outstanding litigations and investigations involving the
Company or its management; changes in labor, equipment and capital costs;
changes in regulations affecting the Company's business; future acquisitions or
strategic partnerships; general business and economic conditions; and other
factors described from time to time in the Company's reports filed with the
Securities and Exchange Commission. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which statements
are made pursuant to the Private Litigation Reform Act of 1995 and, as such,
speak only as of the date made.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Report of Independent Certified Public Accountants.......... 22
Financial Statements:
Consolidated Balance Sheets -- March 28, 1997 and March
29, 1996.................................................. 23
Consolidated Statements of Operations for the Years
Ended March 28, 1997, March 29, 1996, and March 30,
1995...................................................... 24
Consolidated Statements of Shareholders' Equity for the
Years Ended March 28, 1997, March 29, 1996, and March 30,
1995...................................................... 25
Consolidated Statements of Cash Flows for the Years
Ended March 28, 1997, March 29, 1996, and March 30,
1995...................................................... 26
Notes to Consolidated Financial Statements............. 27
Supplemental Schedule:
Schedule of Valuation and Qualifying Accounts for the
Years Ended March 30, 1995, March 29, 1996, and March 28,
1997...................................................... 45
21
23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physician Sales & Service, Inc.:
We have audited the accompanying consolidated balance sheets of Physician
Sales & Service, Inc. (a Florida corporation) and subsidiaries as of March 28,
1997 and March 29, 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended March 28, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Physician Sales & Service,
Inc. and subsidiaries as of March 28, 1997 and March 29, 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended March 28, 1997, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule 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 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, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
May 27, 1997
22
24
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 28, 1997 AND MARCH 29, 1996
1997 1996
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 28,740,123 $ 65,566,189
Marketable securities..................................... 15,045,482 20,767,600
Accounts receivable, net.................................. 119,292,896 96,080,135
Inventories............................................... 67,895,154 55,755,869
Prepaid expenses and other................................ 21,971,847 9,801,631
------------ ------------
Total current assets.............................. 252,945,502 247,971,424
Property and equipment, net................................. 18,811,691 14,764,706
Other Assets:
Intangibles, net.......................................... 21,616,893 13,884,322
Other..................................................... 4,911,501 2,337,547
------------ ------------
Total assets...................................... $298,285,587 $278,957,999
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 64,063,501 $ 59,307,636
Accrued expenses.......................................... 18,263,097 6,115,973
Other..................................................... 5,164,751 9,852,159
------------ ------------
Total current liabilities......................... 87,491,349 75,275,768
Long-term debt and capital lease obligations, net of current
portion................................................... 559,764 583,900
Other....................................................... 4,634,291 3,548,168
------------ ------------
Total liabilities................................. 92,685,404 79,407,836
------------ ------------
Commitments and contingencies (Notes 1, 3, 4, 9, 10, 12, and
13)
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, no shares issued and outstanding........... -- --
Common stock, $.01 par value; 60,000,000 shares
authorized, 37,061,615 and 35,122,486 shares issued and
outstanding at March 28, 1997 and March 29, 1996,
respectively........................................... 370,616 351,225
Additional paid-in capital................................ 207,509,342 200,193,475
Accumulated deficit....................................... (2,372,463) (994,537)
Cumulative foreign currency translation adjustment........ 92,688 --
------------ ------------
Total shareholders' equity........................ 205,600,183 199,550,163
------------ ------------
Total liabilities and shareholders' equity........ $298,285,587 $278,957,999
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
23
25
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 28, 1997, MARCH 29, 1996, AND MARCH 30, 1995
1997 1996 1995
------------ ------------ ------------
Net sales............................................ $691,019,996 $529,023,956 $413,301,365
Cost of goods sold................................... 502,903,993 379,359,624 293,688,246
------------ ------------ ------------
Gross profit............................... 188,116,003 149,664,332 119,613,119
General and administrative expenses.................. 110,316,575 82,527,856 70,174,747
Selling expenses..................................... 62,796,860 48,438,162 41,317,526
Restructuring charges................................ -- -- 4,388,592
Merger costs and expenses............................ 12,128,168 15,731,716 --
------------ ------------ ------------
Income from operations..................... 2,874,400 2,966,598 3,732,254
------------ ------------ ------------
Other income (expense):
Interest expense................................... (323,826) (3,068,196) (4,064,454)
Interest and investment income..................... 2,406,131 1,179,684 --
Other income....................................... 1,536,636 1,584,909 1,906,508
------------ ------------ ------------
3,618,941 (303,603) (2,157,946)
------------ ------------ ------------
Income before provision for income taxes............. 6,493,341 2,662,995 1,574,308
Provision for income taxes........................... (2,120,000) (1,324,000) (2,421,000)
------------ ------------ ------------
Net income (loss).................................... $ 4,373,341 $ 1,338,995 $ (846,692)
============ ============ ============
Net income (loss) per common and common equivalent
share.............................................. $ 0.12 $ 0.04 $ (0.04)
============ ============ ============
Pro forma tax adjustment on pooled S-Corporation
income............................................. 357,000 438,000 23,000
------------ ------------ ------------
Pro forma net income (loss).......................... $ 4,016,341 $ 900,995 $ (869,692)
============ ============ ============
Pro forma tax adjustment per common and common
equivalent share on pooled S-Corporation income.... $ (0.01) $ (0.01) $ --
------------ ------------ ------------
Pro forma net income (loss) per common and common
equivalent share................................... $ 0.11 $ 0.03 $ (0.04)
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
24
26
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 28, 1997, MARCH 29, 1996, AND MARCH 30, 1995
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
--------------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- -------- ------------ ----------- ----------- ------------
Balance at March 31, 1994........ 18,053,326 $180,533 $ 25,190,215 $(1,783,144) $ -- $ 23,587,604
Issuance of common stock....... 6,718,875 67,189 24,033,753 -- -- 24,100,942
Distributions to former S-
Corporation shareholders..... -- -- -- (516,000) -- (516,000)
Net loss....................... -- -- -- (846,692) -- (846,692)
---------- -------- ------------ ----------- ------- ------------
Balance at March 30, 1995........ 24,772,201 247,722 49,223,968 (3,145,836) -- 46,325,854
Issuance of common stock....... 10,059,699 100,597 148,274,378 -- -- 148,374,975
Tax benefits related to stock
option plans................. -- -- 2,687,118 -- -- 2,687,118
Distributions to former S-
Corporation shareholders..... -- -- -- (455,000) -- (455,000)
Net income..................... -- -- -- 1,338,995 -- 1,338,995
Other poolings................. 290,586 2,906 8,011 1,267,304 -- 1,278,221
---------- -------- ------------ ----------- ------- ------------
Balance at March 29, 1996........ 35,122,486 351,225 200,193,475 (994,537) -- 199,550,163
Issuance of common stock....... 473,987 4,740 2,456,890 -- -- 2,461,630
Tax benefits related to stock
option plans................. -- -- 1,832,149 -- -- 1,832,149
Distributions to former S-
Corporation shareholders..... -- -- -- (1,100,000) -- (1,100,000)
Net income..................... -- -- -- 4,373,341 -- 4,373,341
Other poolings................. 1,465,142 14,651 3,026,828 (4,651,267) -- (1,609,788)
Cumulative foreign currency
translation adjustment....... -- -- -- -- 92,688 92,688
---------- -------- ------------ ----------- ------- ------------
Balance at March 28, 1997........ 37,061,615 $370,616 $207,509,342 $(2,372,463) $92,688 $205,600,183
========== ======== ============ =========== ======= ============
The accompanying notes are an integral part of these consolidated statements.
25
27
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 28, 1997, MARCH 29, 1996, AND MARCH 30, 1995
1997 1996 1995
------------ ------------- -------------
Cash Flows From Operating Activities:
Net income (loss)................................ $ 4,373,341 $ 1,338,995 $ (846,692)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization................. 5,690,393 4,100,775 4,210,805
Provision for doubtful accounts............... 2,463,000 1,448,000 1,651,000
Merger costs and expenses..................... 3,433,190 5,435,196 --
Restructuring charge.......................... -- -- 4,388,592
Benefit for deferred income taxes............. (4,611,000) (789,000) --
Gain on sale of equipment..................... -- -- (920,124)
Employee benefit plan stock contribution...... 160,000 120,000 85,175
Foreign currency translation adjustment....... 92,688 -- --
Investment income............................. (520,315) -- --
Changes in operating assets and liabilities,
net of effects from business acquisitions:
Increase in accounts receivable, net........ (1,831,440) (24,385,911) (8,267,662)
Decrease (increase) in inventories.......... 5,712,693 (18,659,894) (1,670,306)
(Increase) decrease in prepaid expenses and
other assets............................. (6,511,771) (1,960,718) 128,628
Increase in other assets.................... (3,162,802) (960,194) (1,247,031)
(Decrease) increase in accounts payable,
accruals, and other liabilities.......... (5,523,970) 13,331,640 (4,930,187)
------------ ------------- -------------
Net cash used in operating activities.... (235,993) (20,981,111) (7,417,802)
------------ ------------- -------------
Cash Flows From Investing Activities:
Purchases of marketable securities............... (19,186,172) (317,769,635) --
Proceeds from sales and maturities of marketable
securities.................................... 25,428,605 297,002,035 --
Proceeds from sales of assets.................... -- -- 11,985,542
Capital expenditures............................. (5,579,526) (5,349,928) (3,220,847)
Purchases of net assets from business
acquisitions.................................. (6,801,092) (2,838,529) (9,010,130)
Payments on noncompete agreements................ (3,980,225) (1,545,970) (1,036,957)
------------ ------------- -------------
Net cash used in investing activities.... (10,118,410) (30,502,027) (1,282,392)
------------ ------------- -------------
Cash Flows From Financing Activities:
Principal payments under capital lease
obligations................................... (880,166) (1,124,293) (931,949)
Proceeds from long-term debt..................... -- 284,862,211 420,751,863
Principal payments of long-term debt............. (26,913,127) (315,718,771) (434,044,855)
Distributions to former S-Corporation
shareholders.................................. (1,100,000) (455,000) (516,000)
Proceeds from issuance of common stock........... 2,421,630 148,253,975 23,498,353
------------ ------------- -------------
Net cash (used in) provided by financing
activities............................. (26,471,663) 115,818,122 8,757,412
------------ ------------- -------------
Net (decrease) increase in cash and cash
equivalents...................................... (36,826,066) 64,334,984 57,218
Cash and cash equivalents, beginning of year....... 65,566,189 1,231,205 1,173,987
------------ ------------- -------------
Cash and cash equivalents, end of year............. $ 28,740,123 $ 65,566,189 $ 1,231,205
============ ============= =============
Supplemental Disclosures:
Interest paid.................................... $ 323,826 $ 3,186,105 $ 4,356,763
============ ============= =============
Income taxes paid................................ $ 4,299,900 $ 2,084,282 $ 3,018,917
============ ============= =============
Merger costs and expenses paid................... $ 8,694,978 $ 10,296,520 $ --
============ ============= =============
The accompanying notes are an integral part of these consolidated statements.
26
28
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997, MARCH 29, 1996 AND MARCH 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND NATURE OF BUSINESS
Physician Sales & Service, Inc. (the "Company" or "PSS") was incorporated
in 1983 in Jacksonville, Florida. The Company, in its core business, is a
leading distributor of medical supplies, equipment, and pharmaceuticals to
primary care and other office-based physicians. As of March 28, 1997, the
Company operated 61 core business service centers in the United States
distributing to approximately 103,000 physician office sites in all 50 states.
In November 1996, the Company established a new subsidiary, Diagnostic
Imaging, Inc. ("DI" or "imaging division"). DI distributes medical diagnostic
imaging equipment, supplies and service to acute and alternate care sites. As of
March 28, 1997, DI operated 14 imaging division service centers distributing to
approximately 6,000 medical imaging sites in 9 southeastern states.
In March 1996, the Company established two new subsidiaries, WorldMed
International, Inc. ("WorldMed Int'l") and WorldMed, Inc. These subsidiaries
were established to manage and develop the Company's European medical equipment
and supply distribution market ("European operation"). As of March 28, 1997, the
European operation included 2 service centers distributing to approximately
1,000 acute and alternate care sites in Belgium, Germany and France.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PSS and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
STOCK SPLIT
All stock-related data has been retroactively adjusted to reflect a
three-for-one stock split effective on September 22, 1995 which was distributed
on October 5, 1995.
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements give retroactive effect
to the mergers (the "Mergers") with Taylor Medical, Inc. ("Taylor") and X-ray
Corporation of Georgia ("X-ray GA"). On August 21, 1995, PSS issued 3,790,215
shares of its common stock in exchange for all of the outstanding equity
interest of Taylor. Taylor was engaged in the distribution and sale of medical
supplies, equipment, and pharmaceuticals to office-based physicians and managed
care facilities in 24 states. On December 20, 1996, PSS issued 593,672 shares of
its common stock in exchange for all of the outstanding equity interest of X-ray
GA. X-ray GA distributed radiology and imaging equipment, chemicals and supplies
and provided technical service to the acute and alternate site markets. These
transactions were accounted for under the pooling-of-interests method of
accounting, and accordingly, the accompanying consolidated financial statements
have been retroactively adjusted as if PSS, Taylor and X-ray GA had operated as
one entity since inception.
Certain items have been reclassified to conform to the current year
presentation.
FISCAL YEAR
Beginning in fiscal year 1996, the Company's fiscal year ends on the Friday
closest to March 31 of each year. The Company's fiscal year ended on the
Thursday closest to March 31 of each year prior to fiscal year 1996. Fiscal
years 1997, 1996, and 1995 consist of 52 weeks.
27
29
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company's trade accounts receivable are exposed to credit risk;
however, the risk is limited, as the balance is comprised of numerous individual
accounts, none of which is individually significant. The Company monitors the
creditworthiness of its customers on an ongoing basis and provides reserves for
estimated bad debt losses and sales returns. The Company had reserves for
doubtful accounts of approximately $3,581,000 and $2,218,000 as of the end of
fiscal years 1997 and 1996, respectively. Provisions for doubtful accounts were
approximately $2,463,000, $1,448,000, and $1,651,000 for the fiscal years ended
1997, 1996, and 1995, respectively.
CASH MANAGEMENT
The Company utilizes a zero balance bank account, and checks issued for
cash disbursements are funded by advances from overnight investments.
Outstanding checks are recorded as accounts payable until they are presented to
the bank, at which time the payments are applied against the overnight
investments. The Company had approximately $8,060,000 and $6,841,000 of
outstanding checks recorded in accounts payable as of the end of fiscal years
1997 and 1996, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents generally consist of cash held at banks,
short-term government obligations, and money market instruments. The Company
invests its excess cash in high-grade investments and, therefore, bears minimal
risk. These instruments have original maturity dates not exceeding three months.
MARKETABLE SECURITIES
The Company classifies its marketable securities as trading securities and
carries such securities at fair market value. Net unrealized gains and losses on
trading securities are included in net income.
Marketable securities include municipal bond issues with maturity dates
exceeding three months and equity securities classified as trading securities.
Management's intent is to liquidate these securities within one year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, marketable securities, short-term trade receivables and
payables, and long-term debt and capital lease obligations, approximate their
fair values.
INVENTORIES
Inventories are comprised principally of medical supplies and equipment and
are stated at the lower of cost (first-in, first-out) or market. Market is
defined as net realizable value.
28
30
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to thirty years. Leasehold
improvements are amortized over the lease terms or the estimated useful lives,
whichever is shorter. Gain or loss upon retirement or disposal of property and
equipment is recorded in other income in the accompanying consolidated
statements of operations.
INTANGIBLES
Noncompete agreements are amortized on a straight-line basis over the lives
of the agreements, which range from three to ten years. Customer lists are
amortized on a straight-line basis over ten years.
The Company has classified as goodwill the cost in excess of the fair value
of net identifiable assets purchased in business acquisitions which are
accounted for as purchase transactions. Goodwill is being amortized over fifteen
to thirty years using the straight-line method. Subsequent to the date of
acquisition, the Company continually evaluates whether later events and
circumstances have occurred that indicate a change in the estimated useful life
or recoverability of goodwill.
SELF-INSURANCE COVERAGE
The Company maintains a self-insurance program for employee health costs.
Additional coverage is provided by a third party for stop-loss based on maximum
costs of $100,000 per employee and approximately $5.3 million in the aggregate.
Claims that have been incurred but not reported are recorded based on estimates
of claims provided by a third-party administrator and are included in accrued
expenses in the accompanying consolidated balance sheets.
INCOME TAXES
The Company uses the asset and liability method in accounting for income
taxes. Deferred income taxes result primarily from the use of different bases
for financial reporting and tax purposes.
SHAREHOLDERS' EQUITY
On May 5, 1994, the Company completed an initial public offering of
5,100,000 shares of its common stock at $3.67 per share, of which 4,200,000 were
offered by the Company. On June 3, 1994, the Company's underwriters exercised
their overallotment option for an additional 765,000 shares of the Company's
common stock at $3.67 per share. The proceeds of the sale after deducting
issuance costs were approximately $15,800,000. The Company used all of the net
proceeds to reduce outstanding bank debt.
On March 27, 1995, the Company signed a Distributorship Agreement (the
"Abbott Agreement") with Abbott Laboratories ("Abbott") providing for the
exclusive distribution of certain Abbott diagnostic products. As part of the
Abbott Agreement, Abbott purchased 825,000 unregistered, restricted shares of
PSS common stock. The proceeds of approximately $5,900,000 were used to reduce
outstanding bank debt.
Effective November 13, 1995, the Company completed a secondary offering of
11,500,000 shares of common stock at $17 per share, 8,800,000 of which were
offered by the Company.
During fiscal 1996, the Company merged with three medical supply and
equipment distributors in stock mergers accounted for under the
pooling-of-interests method by issuing 290,586 shares of PSS common stock in
exchange for all of the common stock of the acquired companies. During fiscal
1997, the Company merged with one core business medical supply and equipment
distributor and three imaging division companies in stock mergers accounted for
under the pooling-of-interests method by issuing approximately 1,465,000 shares
of PSS common stock in exchange for all of the common stock of the acquired
companies. The accompanying
29
31
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated financial statements have not been restated for periods prior to
these poolings due to immateriality.
During 1997 and 1996, the Company realized an income tax benefit from the
exercise or early disposition of certain stock options. This benefit results in
a decrease in current income taxes payable and an increase in additional paid-in
capital.
FOREIGN CURRENCY TRANSLATION
Financial statements for the Company's subsidiary outside the United States
are translated into U.S. dollars at year-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded as a separate component of
shareholders' equity.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the
intrinsic value method. The Company adopted the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." In accordance with SFAS No. 123, for footnote
disclosure purposes only, the Company computes its earnings and earnings per
share on a pro forma basis as if the fair value method had been applied.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per common and common equivalent share is computed using
the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Weighted average shares outstanding for
purposes of this calculation were approximately 36,501,000, 31,454,000, and
23,762,000 for 1997, 1996, and 1995, respectively.
STATEMENTS OF CASH FLOWS
The Company issued stock in the amount of $40,000 and $121,000 related to
acquisitions accounted for as purchases in fiscal 1997 and 1996, respectively.
The Company assumed net liabilities of approximately $1,610,000 and recorded
noncompete assets and liabilities of approximately $4,300,000 in connection with
the mergers of four other medical supply and equipment distributors accounted
for under the pooling-of-interests method in fiscal 1997. The Company also
assumed net assets of approximately $1,278,000 in conjunction with the mergers
of three other medical supply and equipment distributors accounted for under the
pooling-of-interests method in fiscal 1996. Also, the Company incurred capital
lease obligations to obtain equipment of approximately $514,000 in fiscal year
1995. All of the above items were excluded from the statements of cash flows as
these items were noncash transactions.
ACCOUNTING STANDARDS CHANGES
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes new standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock and is effective for
financial statements issued for periods ending after December 15, 1997.
Management expects that the impact of SFAS No. 128 will not be material.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 establishes new standards for disclosing
information about an entity's capital structure and applies to all entities.
SFAS No. 129 is effective for financial statements for periods ending after
December 15, 1997. Management expects that the impact of SFAS No. 129 will not
be material.
30
32
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MARKETABLE SECURITIES
The Company's marketable securities are comprised of municipal bond issues
and equity securities classified as trading securities and are carried at their
fair values based upon the quoted market prices at March 28, 1997 and March 29,
1996. At March 28, 1997 and March 29, 1996, the aggregate fair market value of
the municipal bonds was approximately $14,469,000 and $20,768,000, respectively,
and the aggregate cost was approximately $14,552,000 and $20,800,000,
respectively. The gross unrealized loss on municipal bonds for each year was
approximately $83,000 and $32,000, respectively. Interest income, including
realized gains, on the municipal bonds was approximately $626,000 and $195,000
for fiscal years 1997 and 1996, respectively. At March 28, 1997, the fair market
value of equity securities was $576,000, with a cost of $56,000, and an
unrealized gain of $520,000 which is included in investment income during fiscal
year 1997.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
MARCH 28, MARCH 29,
1997 1996
---------- ----------
Lines of credit............................................. $ -- $3,100,000
Other notes................................................. 774,794 262,961
Capital lease obligations................................... 457,124 1,259,393
---------- ----------
1,231,918 4,622,354
Less current maturities..................................... 672,154 4,038,454
---------- ----------
$ 559,764 $ 583,900
========== ==========
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 28, 1997 and March 29, 1996.
The loans are collateralized by all company assets. Interest accrues,
subject to certain leverage ratio requirements, at a variable rate indexed on
the London Interbank Offered Rate ("LIBOR") plus the applicable margin or the
Bank's prime rate plus the applicable margin at the option of the Company.
Interest rates may vary from prime to prime plus 75 basis points or from LIBOR
plus 150 basis points to LIBOR plus 250 basis points, based on the Company's
leverage ratio. The Agreement provides for a termination date of April 30, 1998,
at which time the Agreement may be extended annually at the Bank's sole
discretion upon request by the Company.
The Agreement contains certain restrictive covenants which, among other
things, require the Company to maintain a current ratio of 2 to 1, a debt
service coverage ratio of 1.1 to 1 and a debt leverage ratio no greater than 5
to 1, all computed as defined in the Agreement. In addition, the Company must
maintain minimum tangible net worth plus subordinated indebtedness, as defined
in the Agreement, of $24,500,000 as of March 28, 1997, increasing by $1,000,000
as of the end of each subsequent fiscal year. The Agreement also contains
restrictions on mergers, acquisitions, investments, capital expenditures,
intangible assets, indebtedness, and stock transactions, among other things.
31
33
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER NOTES
X-ray GA maintained various other notes which were repaid by the Company in
fiscal 1997 in conjunction with the merger.
Long-term debt outstanding at March 28, 1997 totaled $775,000. As of March
28, 1997, future minimum payments of long-term debt, by fiscal year and in the
aggregate, are approximately as follows:
Fiscal year:
1998...................................................... $272,000
1999...................................................... 197,000
2000...................................................... 80,000
2001...................................................... 54,000
2002...................................................... 56,000
Thereafter.................................................. 116,000
--------
Total............................................. $775,000
========
CAPITAL LEASE OBLIGATIONS
As of March 28, 1997, future minimum payments, by fiscal year and in the
aggregate, required under capital leases are approximately as follows:
Fiscal year:
1998...................................................... $432,000
1999...................................................... 34,000
2000...................................................... 28,000
--------
Net minimum lease payments.................................. 494,000
Less amount representing interest........................... 37,000
--------
Present value of net minimum lease payments under capital
leases.................................................... 457,000
Less amounts due in one year................................ 400,000
--------
Amounts due after one year........................ $ 57,000
========
4. OPERATING LEASE COMMITMENTS
The Company leases various facilities and equipment under operating leases
which expire at various dates through 2005. Certain lease commitments provide
that the Company pay taxes, insurance, and maintenance expenses related to the
leased assets.
Rent expense approximated $6,249,000, $5,369,000, and $5,230,000 for fiscal
years 1997, 1996, and 1995, respectively. As of March 28, 1997, future minimum
payments, by fiscal year and in the aggregate, required under noncancelable
operating leases are as follows:
Fiscal year:
1998.................................................... $ 8,752,000
1999.................................................... 5,662,000
2000.................................................... 4,209,000
2001.................................................... 2,844,000
2002.................................................... 1,627,000
Thereafter................................................ 993,000
-----------
Total........................................... $24,087,000
===========
32
34
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
1997 1996
------------ -----------
Land....................................................... $ 233,312 $ 121,524
Building................................................... 2,161,698 1,207,560
Equipment.................................................. 23,265,561 18,907,914
Furniture, fixtures and leasehold improvements............. 6,754,303 3,756,862
------------ -----------
32,414,874 23,993,860
Accumulated depreciation................................... (13,603,183) (9,229,154)
------------ -----------
$ 18,811,691 $14,764,706
============ ===========
Equipment includes equipment acquired under capital leases with a cost of
$109,000 and $3,909,000 and related accumulated depreciation of $38,000 and
$1,766,000 at March 28, 1997 and March 29, 1996, respectively. Depreciation
expense aggregated approximately $3,219,000, $2,210,000, and $2,214,000 for
1997, 1996, and 1995, respectively, and is included in general and
administrative expenses.
6. INTANGIBLES
Intangibles, stated at cost, consist of the following:
1997 1996
----------- -----------
Customer lists.............................................. $ 3,228,105 $ 3,466,285
Goodwill.................................................... 11,870,204 6,941,804
Noncompete agreements....................................... 11,921,251 7,146,913
----------- -----------
27,019,560 17,555,002
Accumulated amortization.................................... (5,402,667) (3,670,680)
----------- -----------
$21,616,893 $13,884,322
=========== ===========
As of March 28, 1997, approximate future minimum payments, by fiscal year
and in the aggregate, required under noncompete agreements are as follows:
1998........................................................ $2,312,000
1999........................................................ 1,736,000
2000........................................................ 550,000
2001........................................................ 85,000
2002........................................................ 42,000
Thereafter.................................................. 73,000
----------
$4,798,000
==========
Amortization expense aggregated approximately $2,471,000, $1,891,000, and
$1,997,000 for 1997, 1996, and 1995, respectively, and is included in general
and administrative expenses.
33
35
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The provisions for income taxes are detailed below:
1997 1996 1995
----------- ---------- ----------
Current tax provision:
Federal......................................... $ 5,481,000 $1,719,000 $1,982,000
State........................................... 1,250,000 394,000 439,000
----------- ---------- ----------
Total current........................... 6,731,000 2,113,000 2,421,000
----------- ---------- ----------
Deferred tax benefit:
Federal......................................... (3,755,000) (643,000) --
State........................................... (856,000) (146,000) --
----------- ---------- ----------
Total deferred.......................... (4,611,000) (789,000) --
----------- ---------- ----------
Total income tax provision.............. $ 2,120,000 $1,324,000 $2,421,000
=========== ========== ==========
The difference between income tax computed at the federal statutory rate
and the actual tax provision is shown below:
1997 1996 1995
---------- ---------- ----------
Income before provision for taxes.................. $6,493,000 $2,663,000 $1,574,000
========== ========== ==========
Tax provision at the statutory rate................ $2,208,000 $ 905,000 $ 535,000
---------- ---------- ----------
(Decrease) increase in taxes:
Change in valuation allowance for deferred
taxes......................................... (900,000) (956,000) 1,023,000
State income tax, net of federal benefit......... 370,000 329,000 94,000
Write-off of intangibles......................... -- -- 562,000
Meals and entertainment.......................... 163,000 134,000 162,000
Goodwill amortization............................ 8,000 8,000 10,000
Cash surrender value of life insurance........... 62,000 45,000 26,000
Nontaxable interest income....................... (660,000) (198,000) --
Merger costs and expenses........................ 721,000 2,216,000 --
Utilization of tax net operating losses.......... -- (776,000) --
LIFO reserve of pooled companies................. 121,000 -- --
Other, net....................................... 346,000 9,000 30,000
Income of S-corporation.......................... (319,000) (392,000) (21,000)
---------- ---------- ----------
Total (decrease) increase in taxes............ (88,000) 419,000 1,886,000
---------- ---------- ----------
Total income tax provision............... $2,120,000 $1,324,000 $2,421,000
========== ========== ==========
Effective tax rate................................. 32.7% 49.7% 153.8%
========== ========== ==========
34
36
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes for 1997 and 1996 reflect the impact of temporary
differences between the financial statement and tax bases of assets and
liabilities. The tax effect of temporary differences which create deferred tax
assets and liabilities at March 28, 1997 and March 29, 1996 are detailed below:
1997 1996
----------- -----------
Deferred tax assets:
Merger costs and expenses................................. $ 1,455,000 $ 204,000
Allowance for doubtful accounts and sales returns......... 1,359,000 717,000
Intangibles............................................... 617,000 681,000
Inventory uniform cost capitalization..................... 959,000 482,000
Net operating loss carryforwards.......................... 1,738,000 219,000
Accrued expenses.......................................... 435,000 399,000
Reserve for inventory obsolescence........................ 39,000 105,000
Long-term incentive plan.................................. 174,000 --
Other..................................................... 163,000 197,000
----------- -----------
Gross deferred tax assets......................... 6,939,000 3,004,000
----------- -----------
Deferred tax liabilities:
Excess of tax depreciation and amortization over book
depreciation and amortization.......................... (1,539,000) (1,179,000)
Other..................................................... -- (136,000)
----------- -----------
Gross deferred tax liabilities......................... (1,539,000) (1,315,000)
----------- -----------
5,400,000 1,689,000
Valuation allowance............................... -- (900,000)
----------- -----------
Net deferred tax asset............................ $ 5,400,000 $ 789,000
=========== ===========
A valuation allowance was provided in prior years for those temporary
differences for which utilization was uncertain. Based on an evaluation of the
realizability of deferred tax assets, the valuation allowance was reduced by
$900,000 and $956,000 during fiscal 1997 and 1996, respectively.
The income tax benefit related to the exercise or early disposition of
certain stock options reduces taxes currently payable and is credited to
additional paid-in capital. Such amounts approximated $1,832,000 and $2,687,000
for fiscal years 1997 and 1996, respectively.
At March 28, 1997, the Company had net operating loss carryforwards for
income tax purposes arising from mergers of approximately $4,486,000 which
expire from 2006 to 2011. The utilization of the net operating loss
carryforwards is subject to limitation in certain years.
8. RELATED-PARTY TRANSACTIONS
A member of the board of directors provides legal services as general
counsel to the Company. Fees for such legal services were approximately
$132,000, $136,000, and $124,000 in 1997, 1996, and 1995, respectively.
A member of the board of directors is chairman and CEO of the insurance
company that administered the Company's self-insurance program through December
31, 1995. Administrative fees paid to the company were approximately $484,000
during the first nine months of fiscal year 1996 and $339,000 for fiscal year
1995. The Company changed its self-insurance administrator as of January 1, 1996
to an unrelated party.
35
37
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK-BASED COMPENSATION PLANS
At March 28, 1997, the Company had five stock-based compensation plans as
described below:
INCENTIVE STOCK OPTION PLAN
Under the Company's qualified 1986 Incentive Stock Option Plan, 8,001,000
shares of the Company's common stock are reserved for sale to officers and key
employees. Options may be granted at prices not less than fair market value at
the date of grant and are exercisable during periods of up to five years from
that date. The exercisability of the options is not subject to future
performance.
Information regarding this plan is summarized below:
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- ----------------
Balance, March 31, 1994.................................... 1,540,497 $2.47
Granted.................................................... 648,000 4.18
Exercised.................................................. (817,899) 2.17
Canceled................................................... (12,000) 1.59
--------- ------
Balance, March 30, 1995.................................... 1,358,598 2.89
Granted.................................................... -- --
Exercised.................................................. (607,405) 2.68
Canceled................................................... (30,297) 1.48
--------- ------
Balance, March 29, 1996.................................... 720,896 2.94
Granted.................................................... -- --
Exercised.................................................. (345,570) 2.83
Canceled................................................... (12,000) 3.28
--------- ------
Balance, March 28, 1997.................................... 363,326 $3.05
========= ======
At March 31, 1994, March 30, 1995, March 29, 1996, and March 28, 1997,
1,411,542, 1,274,688, 682,031, and 363,326, respectively, of outstanding options
were exercisable. The weighted average remaining life of the options outstanding
at March 28, 1997 is approximately 1.7 years. No compensation expense has been
recorded because the options were granted at fair market value. As of March 28,
1997, approximately 2,388,000 shares of common stock are available for issuance
under the plan. The Company does not intend to issue any more options under this
plan.
OPTIONS ISSUED IN EXCHANGE FOR FORMER TAYLOR MEDICAL OPTIONS
In conjunction with the acquisition of Taylor Medical, Inc., the Company
assumed the nonqualified Taylor Medical Stock Option Plans of 1986 and 1993. The
options outstanding at the time of acquisition were converted to allow grantees
the right to acquire the Company's common stock at a rate consistent with the
merger's stock pooling agreement. All options under this plan are priced at
$5.08 per common share and are not subject to future performance.
36
38
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding these options is summarized below:
NUMBER OF
SHARES
---------
Balance, March 31, 1994..................................... 613,776
Granted..................................................... 15,747
Exercised................................................... (5,118)
Canceled.................................................... (8,268)
--------
Balance, March 30, 1995..................................... 616,137
Granted..................................................... 7,825
Exercised................................................... (538,815)
Canceled.................................................... --
--------
Balance, March 29, 1996..................................... 85,147
Granted..................................................... --
Exercised................................................... (37,509)
Canceled.................................................... --
--------
Balance, March 28, 1997..................................... 47,638
========
The Company does not intend to issue any more options under this plan.
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 1.8 years.
LONG TERM STOCK PLAN
In March 1994, the Company adopted the 1994 Long Term Stock Plan under
which the Compensation Committee has discretion to grant nonqualified stock
options and restricted stock to any employee of the Company. A total of
2,190,000 shares of the Company's common stock, as adjusted by stock splits,
consolidations, or other changes in capitalization, have been reserved for
issuance under this plan. The exercise price of options granted under this plan
may be no less than the fair market value of the Company's common stock on the
date of grant.
37
39
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding the stock option component of this plan is summarized
below:
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- ----------------
Balance, March 31, 1994..................................... -- --
Granted..................................................... 160,200 $ 5.32
Exercised................................................... -- --
Canceled.................................................... -- --
------- -------
Balance, March 30, 1995..................................... 160,200 5.32
Granted..................................................... 492,300 16.96
Exercised................................................... (37,500) 13.07
Canceled.................................................... -- --
------- -------
Balance, March 29, 1996..................................... 615,000 14.17
Granted..................................................... 203,179 23.90
Exercised................................................... (27,050) 13.35
Canceled.................................................... (3,000) 5.79
------- -------
Balance, March 28, 1997..................................... 788,129 $16.52
======= =======
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 5.6 years. As of March 28, 1997, approximately 1,340,000 shares of
common stock were available for issuance under the plan.
LONG TERM INCENTIVE PLAN
In March 1994, the Company adopted the 1994 Long Term Incentive Plan which
provides officers with performance awards, consisting of cash or registered
shares of common stock, or a combination thereof, based primarily upon the
Company's total shareholder return as ranked against the companies comprising
the NASDAQ Composite Index over a three-year period. The maximum payable under
this plan to an eligible employee, whether in the form of cash or common stock,
may not exceed $1 million per fiscal year. At March 28, 1997, the Company has
accrued approximately $448,000 related to awards granted under this plan.
The plan also provides for nonqualified stock options or restricted stock
to be granted at the full discretion of the Compensation Committee of the Board
of Directors. The exercise price of options granted under this plan may be no
less than the fair market value of the Company's common stock on the date of
grant, and accordingly, no compensation expense is recorded on the date the
stock options are granted. The aggregate number of shares of common stock,
including shares reserved for issuance pursuant to the exercise of options,
which may be granted or issued may not exceed 730,000 shares.
38
40
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding the stock option component of the plan is summarized
below:
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- ----------------
Balance, March 30, 1995..................................... -- --
Granted..................................................... 350,643 $14.88
Exercised................................................... (32,406) 14.88
Canceled.................................................... -- --
------- -------
Balance, March 29, 1996..................................... 318,237 14.88
Granted..................................................... 68,364 23.94
Exercised................................................... (61,158) 14.88
Canceled.................................................... -- --
------- -------
Balance, March 28, 1997..................................... 325,443 $16.78
======= =======
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 8.5 years. To date, no cash or restricted stock have been issued
under this plan.
DIRECTORS' STOCK PLAN
In March 1994, the Company adopted the Directors' Stock Plan under which
nonemployee directors receive an annual grant of an option to purchase 2,000
shares of common stock. A total of 200,000 shares of the Company's common stock,
as adjusted for stock splits, consolidations, or other changes in
capitalization, have been reserved for issuance under this plan. The exercise
price of options granted under this plan may be no less than the fair market
value of the Company's common stock on the date of grant, and accordingly, no
compensation expense has been recorded in connection with the stock options
granted. Each nonemployee director receives a grant of 2,000 restricted shares
upon initial election and reelection to the Board.
Information regarding the stock option component of this plan is summarized
below:
WEIGHTED AVERAGE
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 10.12
Granted..................................................... 12,000 23.94
Exercised................................................... (3,000) 5.48
Canceled.................................................... -- --
------ -------
Balance, March 28, 1997..................................... 54,000 $13.44
====== =======
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is 8.4
years. To date, 13,500 restricted shares have been issued under this plan.
39
41
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF STOCK OPTIONS
Under SFAS No. 123, the fair value of stock options granted in the years
ended March 28, 1997 and March 29, 1996 have been estimated using a
Black-Scholes option pricing model with the following weighted average
assumptions for grants: risk-free interest rate ranging from 5.8% to 6.8%,
expected option life ranging from 3.5 to 5 years, expected volatility of 40% for
1996 and 55% for 1997 and no expected dividend yield. Using these assumptions,
the estimated fair values of options granted for the years ended March 28, 1997
and March 29, 1996 were approximately $2.9 million and $6.0 million,
respectively, and such amounts would be included in compensation expense. Pro
forma net income and net income per share for the years ended March 28, 1997 and
March 29, 1996, assuming the Company had accounted for the plans under the fair
value approach, are as follows (in thousands, except per share data):
1997 1996
------ -------
Net income:
As reported............................................... $4,373 $ 1,339
Pro forma................................................. $2,599 $(2,315)
Net income per share:
As reported............................................... $ 0.12 $ 0.04
Pro forma................................................. $ 0.07 $ (0.07)
Because the fair value method of accounting has not been applied to options
granted prior to March 31, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
1997 1996
------ -----
Weighted average per share fair value of options granted:
Incentive Stock Option Plan............................... N/A N/A
Long Term Stock Plan...................................... $11.08 $6.91
Long Term Incentive Plan.................................. $11.08 $6.73
Directors' Stock Plan..................................... $13.22 $6.67
10. EMPLOYEE BENEFIT PLANS
The Company has an employee stock ownership plan ("ESOP") available to all
employees with at least one year of service. Effective January 1, 1996, the
Company amended the plan to allow participants to direct the investment of a
portion of their plan balances. Prior to this change, the trustees directed the
investment of the participants' balances. As of March 28, 1997, the ESOP owns
approximately 2,034,000 shares of the Company's common stock. Company
contributions to the plan were approximately $160,000, $120,000, and $85,000 for
1997, 1996, and 1995, respectively, and are made at the discretion of the
Company.
The Company also has an employee stock purchase plan available to employees
with at least one year of service. The plan allows eligible employees to
purchase company stock over the counter through payroll deductions.
11. BUSINESS ACQUISITIONS
POOLING WITH X-RAY GA
On December 20, 1996, the Company acquired X-ray GA in a merger pursuant to
which the Company issued 593,672 shares of common stock to the former
shareholders of X-ray GA (of which 52,675 shares are being held in escrow as of
March 28, 1997) in exchange for all of the outstanding shares of capital stock
of X-ray GA valued at $11.0 million at the time of the merger. The merger has
been accounted for as a pooling-
40
42
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of-interests, and accordingly, the Company's consolidated financial statements
have been restated to include the accounts and operations of X-ray GA for all
periods prior to the merger.
X-ray GA was an S-Corporation for income tax purposes, and therefore, did
not pay U.S. federal income taxes. X-ray GA will be included in the Company's
U.S. federal income tax return subsequent to the date of acquisition. Separate
net sales, net income (loss) and related per share amounts of merged entities
are presented in the following table. In addition, the table includes pro forma
net income (loss) and net income (loss) per share amounts which reflect pro
forma adjustments to present income taxes of X-ray GA on the basis on which they
will be reported in future periods.
MARCH 30
THROUGH
DECEMBER 31,
1996
(UNAUDITED) MARCH 29, 1996 MARCH 30, 1995
------------ -------------- --------------
(DOLLARS IN THOUSANDS)
Net sales
PSS and Taylor combined.............................. $470,357 $483,294 $366,285
X-ray GA............................................. 33,182 45,730 47,016
-------- -------- --------
Total........................................ $503,539 $529,024 $413,301
Net income (loss)
PSS and Taylor combined.............................. $ 6,139 $ 186 $ (909)
X-ray GA............................................. 938 1,153 62
-------- -------- --------
Net income (loss) as reported.......................... $ 7,077 $ 1,339 $ (847)
Pro forma tax provision for X-ray GA................... 357 438 23
-------- -------- --------
Pro forma net income (loss)............................ $ 6,720 $ 901 $ (870)
Net income (loss) per share
As reported............................................ $ 0.19 $ 0.04 $ (0.04)
Pro forma.............................................. $ 0.19 $ 0.03 $ (0.04)
Other changes in shareholders' equity
PSS and Taylor combined.............................. $ 1,446 $152,340 $ 24,101
X-ray GA............................................. (1,100) (455) (516)
-------- -------- --------
Total........................................ $ 346 $151,885 $ 23,585
POOLING WITH TAYLOR
On August 21, 1995, the Company issued approximately 3,790,000 shares of
its common stock in exchange for all of the outstanding common stock of Taylor,
including approximately 416,000 shares held in escrow to satisfy certain
obligations of Taylor related to its operations prior to the merger. Subsequent
to August 21, 1995, approximately 244,000 shares of common stock were returned
to the Company as settlement of the escrow and were canceled. These canceled
shares had no resulting impact on the net income per share calculation. The
merger has been accounted for as a pooling-of-interests, and accordingly, the
Company's consolidated financial statements have been restated to include the
accounts and operations of Taylor for all periods prior to the merger.
41
43
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate net sales, net income (loss) and other changes in shareholders'
equity of the merged entities prior to the merger are presented in the following
table:
APRIL 1 THROUGH
JUNE 30, 1995
(UNAUDITED) MARCH 30, 1995
--------------- --------------
(DOLLARS IN THOUSANDS)
Net sales
PSS..................................................... $ 73,670 $236,188
Taylor.................................................. 31,640 130,097
-------- --------
Combined.................................................. $105,310 $366,285
Net income
PSS..................................................... $ 980 $ 3,680
Taylor.................................................. 193 (4,589)
-------- --------
Combined.................................................. $ 1,173 $ (909)
Other changes in shareholders' equity
PSS..................................................... $ 1,036 $ 24,075
Taylor.................................................. 1 26
-------- --------
Combined.................................................. $ 1,037 $ 24,101
OTHER POOLINGS
During fiscal 1997, the Company merged with four other medical supply and
equipment distributors in stock mergers accounted for under the
pooling-of-interests method by issuing approximately 1,465,000 shares of PSS
common stock in exchange for all of the common stock of the acquired companies.
The accompanying consolidated financial statements have not been restated for
periods prior to these poolings due to immateriality. Accordingly, the results
of operations have been reflected in the consolidated financial statements
prospectively from the acquisition date and the accumulated deficit as of their
acquisition dates of approximately $4.7 million has been recorded as an
adjustment to the accumulated deficit of the Company.
During fiscal 1996, the Company merged with three other medical supply and
equipment distributors in stock mergers accounted for under the
pooling-of-interests method by issuing 290,586 shares of PSS common stock in
exchange for all of the common stock of the acquired companies. The accompanying
consolidated financial statements have not been restated for periods prior to
these poolings due to immateriality. Accordingly, the results of operations have
been reflected in the consolidated financial statements prospectively from the
acquisition date, and the accumulated retained earnings as of their acquisition
dates of approximately $1.3 million have been recorded as adjustments to the
accumulated deficit of the Company.
ASSET PURCHASES
During fiscal 1997, the Company acquired certain assets, accounted for by
the purchase method, including accounts receivable, inventories, equipment, and
other assets of five medical supplies and equipment distributors for
approximately $14.2 million. The aggregate purchase price paid consisted of cash
of approximately $6.8 million, assumption of accounts payable and accrued
liabilities of approximately $7.4 million, and the issuance of 2,700 shares of
common stock with a fair market value of approximately $40,000. The excess of
the purchase price over the estimated fair value of the net assets acquired of
approximately $2.8 million has been recorded as goodwill and will be amortized
over thirty years. In addition, the Company entered into noncompete agreements
with shareholders of the acquired companies which provide for payments of
approximately $220,000 through the year 2001. The operations of the acquired
companies have been included in the Company's results of operations subsequent
to the dates of acquisition.
42
44
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal 1996, the Company acquired certain assets, accounted for by
the purchase method, including accounts receivable, inventories, equipment, and
other assets of seven medical supplies and equipment distributors for
approximately $5.5 million. The aggregate purchase price paid consisted of cash
of approximately $2.8 million, assumption of accounts payable and accrued
liabilities of approximately $2.5 million, and the issuance of 5,700 shares of
common stock with a fair market value of $121,000. The excess of the purchase
price over the estimated fair value of the net assets acquired of approximately
$1.2 million has been recorded as goodwill and will be amortized over thirty
years. In addition, the Company entered into noncompete agreements with
shareholders of the acquired companies which provide for payments of $1.2
million through the year 2000. The operations of the acquired companies have
been included in the Company's results of operations subsequent to the dates of
acquisition.
During fiscal 1995, the Company acquired certain assets, including accounts
receivable, inventories, equipment, and other assets, of nine medical supplies
and equipment distributors for approximately $11.6 million. The aggregate
purchase price paid consisted of cash of approximately $6.9 million, assumption
of accounts payable and accrued liabilities of approximately $4.2 million, and
the issuance of approximately 70,000 shares of common stock with a fair market
value of approximately $0.5 million. The excess of the purchase price over the
estimated fair value of the net assets acquired of approximately $4.0 million
has been recorded as goodwill. In addition, the Company entered into noncompete
agreements with shareholders and an officer of the acquired companies which
provide for payments of approximately $2.3 million through the year 1998.
During fiscal 1995, Taylor acquired certain assets of three medical
supplies and equipment distributors for approximately $2.2 million.
For acquisitions accounted for as purchases, the results of operations
acquired have been included in the financial statements since the dates of
acquisition. Supplemental pro forma information is not presented because the
impact on the Company's results of operations would not be material.
12. COMMITMENTS AND CONTINGENCIES
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability. The
Company has not experienced any significant product liability claims and
maintains product liability insurance coverage. In addition, the Company is
party to various legal and administrative proceedings and claims arising in the
normal course of business. While any litigation contains an element of
uncertainty, management believes that the outcome of any proceedings or claims
which are pending or known to be threatened will not have a material adverse
effect on the Company's consolidated financial position, liquidity, or results
of operations.
The Company has employment agreements with certain executive officers which
provide that in the event of their termination or resignation, under certain
conditions, the Company may be required to continue salary payments and provide
insurance for a period ranging from 12 to 36 months for the chief executive
officer and from 3 to 12 months for other executives and to repurchase a portion
or all of the shares of common stock held by the executives upon their demand.
The period of salary and insurance continuation and the level of stock
repurchases are based on the conditions of the termination or resignation.
13. ABBOTT LABORATORIES DISTRIBUTION AGREEMENT
On March 27, 1995, the Company signed a Distribution Agreement with Abbott
Laboratories providing for the exclusive distribution of certain Abbott
diagnostic products. The Abbott Agreement, effective April 1, 1995, has a
five-year term, although it may be terminated earlier if the Company fails to
meet certain performance objectives. Under the Abbott Agreement, the Company has
become the exclusive distributor in the United States of certain Abbott
diagnostic products and reagents to office-based physician practices with
43
45
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
24 or fewer physicians per office site. The Abbott Agreement also provides the
Company's sales force with access to over 15,000 physician practices that were
not previously purchasing diagnostic products from the Company. Abbott products
constituted approximately 16% of the Company's sales in fiscal 1997 and 1996.
Simultaneous with the closing of the Abbott Agreement, Abbott purchased 825,000
unregistered, restricted shares of PSS common stock. A three-year irrevocable
proxy to the PSS Board of Directors and a perpetual stand still agreement were
provided by Abbott in the Stock Purchase Agreement.
14. SALES OF ASSETS
On July 1, 1994, Taylor sold the assets of its Taylor Home Health division
for $12,000,000 in cash and an escrow receivable of $1,051,000 based on
subsequent receivables collections and other factors, resulting in a gain on
sale of assets of approximately $2,078,000. In March 1995, Taylor negotiated a
final settlement of the escrowed receivable which included the return to Taylor
of certain receivables. Taylor recorded a $600,000 reduction in the gain
originally recognized to record these receivables at their estimated net
realizable value. The net gain of approximately $1,478,000 is included in other
income for fiscal year 1995.
On November 30, 1994, Taylor sold the assets of its Labcare division, whose
principal business was the repair of medical equipment, for $1,100,000,
resulting in a loss of approximately $403,000. In March 1995, Taylor recorded an
additional loss on the sale of approximately $154,000 related to the write-down
of certain notes receivable issued in conjunction with the sale. The net loss of
approximately $558,000 is included in other income for fiscal year 1995.
15. MERGER COSTS AND EXPENSES AND RESTRUCTURING CHARGES
The Company recorded merger costs and expenses of approximately $12,100,000
and $15,700,000 in fiscal 1997 and 1996, respectively, associated with mergers
accounted for as poolings-of-interests. Such costs include direct merger costs
consisting primarily of investment banking, legal, accounting, and filing fees
as well as consolidation costs from the closing of duplicate service center
locations, realigning regional and corporate functions, and reducing personnel.
At March 28, 1997, accrued merger costs were approximately $3.0 million.
During fiscal 1995, Taylor management concluded that recent industry
developments had affected Taylor's strategy and operations. Taylor assessed its
relative position in its major markets and determined that competitive pressures
on margins and cost structures in its Arizona, Indiana and Massachusetts
distribution centers as well as the prospects for its physician consulting
services and equipment repair businesses would not result in full realization of
the future benefits expected from the related intangible assets. Accordingly,
Taylor management concluded that the intangible assets were impaired and
recorded a $4,388,592 noncash charge to write off the intangible assets
associated with these markets and operations.
44
46
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS
ENDED MARCH 30, 1995, MARCH 29, 1996, AND MARCH 28, 1997
BALANCE AT PROVISION
VALUATION ALLOWANCE BEGINNING OF CHARGED TO TRANSFERS BALANCE AT
FOR ACCOUNTS RECEIVABLE PERIOD EXPENSE FROM POOLINGS WRITE-OFFS END OF PERIOD
----------------------- ------------ ---------- ------------- ---------- -------------
Year ended March 30, 1995........... $1,848,000 $1,651,000 $ -- $2,245,000 $1,254,000
Year ended March 29, 1996........... 1,254,000 1,448,000 400,000 884,000 2,218,000
Year ended March 28, 1997........... $2,218,000 $2,463,000 $881,000 $1,981,000 $3,581,000
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 28, 1997.
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 30, 1997 for its fiscal year 1997 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 30, 1997 for its fiscal year 1997 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 30, 1997 for its fiscal year 1997 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 30, 1997 for its fiscal year 1997 Annual Meeting of
Shareholders under the caption "Certain Relationships and Related Transactions".
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.
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47
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Amended and Restated Articles of Incorporation dated March
15, 1994.(1)
3.2 -- Amended and Restated Bylaws dated March 15, 1994.(1)
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 -- Amended and Restated Directors Stock Plan.(7)
10.9 -- Amended and Restated 1994 Long Term Incentive Plan.(7)
10.10 -- Amended and Restated 1994 Long Term Stock Plan.(7)
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)
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 -- Amendment to Employee Stock Ownership Plan.(7)
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)(6)
10.18 -- Agreement and Plan of Merger by and Among Physician Sales &
Service, Inc., PSS Merger Corp. and Treadway Enterprises,
Inc.(8)
21.1 -- Subsidiaries of the registrant
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, Registration 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.
(6) Incorporated by Reference to the Company's Report on Form 10-K for the
fiscal year ended March 30, 1996.
(7) Incorporated by Reference to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1996.
46
48
(8) Incorporated by Reference to the Company's Current Report on Form 8-K, filed
January 3, 1997.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended March
28, 1997:
(1) The Company reported on January 3, 1997 that on December 20, 1996,
the Company completed the merger of Treadway Enterprises, Inc. and that
financial statements would be filed by amendment.
(2) On February 7, 1997, the Company filed an amendment to its Form
8-K filed December 9, 1996, to delete reference to the inclusion of
financial statements for the acquisition of Diagnostic Imaging, Inc. since
it had been determined that at the time of acquisition such acquired
business did not constitute a "significant subsidiary" as defined in
Regulation S-X.
(3) The Company reported on March 4, 1997 certain financial results
for the month ended January 31, 1997.
(4) On March 5, 1997, the Company filed an amendment to its Form 8-K
filed January 3, 1997 to include financial information for each of the
fiscal years 1994 through 1996 giving retroactive effect to the mergers of
Taylor Medical, Inc. and Treadway Enterprises, Inc. (d/b/a X-Ray
Corporation of Georgia).
47
49
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 June 25, 1997.
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PATRICK C. KELLY Chairman of the Board of Directors, June 25, 1997
- --------------------------------------------------- Chief Executive Officer, and
Patrick C. Kelly Director (Principal Executive
Officer)
/s/ JOHN F. SASEN, SR. President, Chief Operating Officer June 25, 1997
- --------------------------------------------------- and Director
John F. Sasen, Sr.
/s/ DAVID A. SMITH Vice President, Chief Financial June 25, 1997
- --------------------------------------------------- Officer, Director, and Assistant
David A. Smith Secretary (Principal Financial
Officer) (Principal Accounting
Officer)
/s/ DELMER W. DALLAS Director June 25, 1997
- ---------------------------------------------------
Delmer W. Dallas
/s/ T. O'NEAL DOUGLAS Director June 25, 1997
- ---------------------------------------------------
T. O'Neal Douglas
/s/ FRED ELEFANT Director and Corporate Secretary June 25, 1997
- ---------------------------------------------------
Fred Elefant
/s/ DELORES KESLER Director June 25, 1997
- ---------------------------------------------------
Delores Kesler
/s/ WILLIAM C. MASON Director June 25, 1997
- ---------------------------------------------------
William C. Mason
/s/ JAMES L.L TULLIS Director June 25, 1997
- ---------------------------------------------------
James L.L Tullis
48