-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SJjO5b1+sCOGysIXMFIS/rz1Tc/jZVkETdewQ71V6eB9wntFgfPGxA4cHWDGZxL6 kh7YVKZ7MkrmbBhWa0BWAw== 0000931763-97-001342.txt : 19970814 0000931763-97-001342.hdr.sgml : 19970814 ACCESSION NUMBER: 0000931763-97-001342 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970812 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHYSICIAN SALES & SERVICE INC /FL/ CENTRAL INDEX KEY: 0000920527 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 592280364 STATE OF INCORPORATION: FL FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-33453 FILM NUMBER: 97657551 BUSINESS ADDRESS: STREET 1: 4345 SOUTHPOINT BLVD STREET 2: STE 250 CITY: JACKSONVILLE STATE: FL ZIP: 32216 BUSINESS PHONE: 9042961406 MAIL ADDRESS: STREET 1: 7800 BELFORT PARKWAY STREET 2: STE 250 CITY: JACKSONVILLE STATE: FL ZIP: 32256 S-4 1 FORM S-4 As filed with the Securities and Exchange Commission on August 12, 1997 Registration No. 333-_____ ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- PHYSICIAN SALES & SERVICE, INC. (Exact name of registrant as specified in its charter) Florida 5047 59-2280364 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of incorporation) Classification Code Number) Identification No.)
4345 Southpoint Boulevard Jacksonville, Florida 32216 (904) 332-3000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) PATRICK C. KELLY Chairman of the Board and Chief Executive Officer PHYSICIAN SALES & SERVICE, INC. 4345 Southpoint Boulevard Jacksonville, Florida 32216 (904) 332-3000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: J. VAUGHAN CURTIS, ESQ. FRED ELEFANT, ESQ. JEROME F. CONNELL, JR., ESQ. KIMBERLY A. KNIGHT, ESQ. General Counsel Kilpatrick Stockton LLP Alston & Bird Physician Sales & Service, Inc. 1100 Peachtree Street One Atlantic Center 1650 Prudential Drive Suite 2800 1201 West Peachtree Street Suite 105 Atlanta Georgia 30309-4530 Atlanta, Georgia 30309-3424 Jacksonville, Florida 32207 (404) 815-6500 (404) 881-7000 (904) 398-2277
Approximate date of commencement of proposed sale to the public: At the effective time of the merger of S&W X-Ray, Inc. with and into a wholly-owned subsidiary of the Registrant, as described in the Proxy Statement-Prospectus included herein. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] CALCULATION OF REGISTRATION FEE
================================================================================================================ Title of each class Proposed maximum Proposed maximum Amount of of securities Amount to be offering price aggregate offering registration to be registered (1) registered (2) per share (3) price (3) fee (3) - ---------------------------------------------------------------------------------------------------------------- Common Stock 2,123,558 shares $19.25 $5,073,973 $1,538 ================================================================================================================
(1) This Registration Statement relates to the securities of the Registrant issuable to holders of capital stock of S&W X-Ray, Inc., a New York corporation ("S&W"), in the proposed merger of S&W with and into a wholly owned subsidiary of the Registrant (the "Merger"). (2) The amount of common stock of the Registrant, par value $.01 per share ("PSS Common Stock") to be registered has been determined on the basis of the maximum aggregate number of shares of PSS Common Stock that may be issued in connection with the Merger. (3) Pursuant to Rule 457(f)(2), the registration fee was computed on the basis of the aggregate book value of the common stock of S&W, par value $.04 per share ("S&W Common Stock") to be exchanged in the Merger. ---------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ S&W X-RAY, INC. Cornerstone Center 2300 Buffalo Road Rochester, New York 14824 __________, 1997 Dear Stockholder: You are cordially invited to attend a special meeting of stockholders ("Special Meeting") of S&W X-Ray, Inc. ("S&W") to be held at S&W's executive office, located at Cornerstone Center, 2300 Buffalo Road, Rochester, New York 14824, at 10:00 a.m., Eastern Standard Time, on ________ __, 1997. At this important meeting, you will be asked to consider and vote upon the approval of the Agreement and Plan of Merger dated August 12, 1997 (the "Merger Agreement"), which provides for the merger of S&W with and into Diagnostic Imaging, Inc., a wholly owned subsidiary of Physician Sales & Service, Inc. ("PSS") which operates the diagnostic and imaging division of PSS. If the proposed merger (the "Merger") is consummated, each outstanding share of common stock of S&W, $.04 par value per share ("S&W Common Stock") and each share of S&W Common Stock to be issued pursuant to the S&W Supplemental Executive Retirement Plan (other than shares held by stockholders who perfect their dissenter's rights) will be converted into and exchanged for the right to receive that number of shares of PSS Common Stock and the contingent right to receive that number of shares of common stock of PSS, $.01 par value per share ("PSS Common Stock"), which combined are equal to (i) $26,000,000, subject to adjustment as provided in the Merger Agreement, (ii) divided by the number of shares of S&W Common Stock outstanding on a fully-diluted basis (the "Common Stock Per Share Purchase Price"), (iii) divided by the Base Period Trading Price (the "Common Stock Exchange Ratio"). Subject to an upper limit of $14.9644 and a lower limit of $12.2436, the "Base Period Trading Price" is the average of the daily closing prices for the shares of PSS Common Stock for the ten (10) consecutive trading days on which such shares are actually traded as over-the- counter securities and quoted on the Nasdaq National Market ending at the close of trading on the second trading day immediately prior to the date the Merger becomes effective. As part of the same proposal, you will also be asked to consider and vote upon the approval of an Escrow Agreement, and the appointment of stockholder representatives pursuant to such Escrow Agreement. The affirmative vote of the holders of a majority of the votes entitled to be cast by the holders of record of S&W Common Stock is required for approval of the Merger Agreement, the Escrow Agreement and the appointment of the stockholder representatives. Holders of approximately 66% of the outstanding votes represented by the S&W Common Stock have agreed to vote in favor of the Merger Agreement, the Escrow Agreement and the appointment of the stockholder representatives, and, therefore, approval of such matters is assured. Enclosed are the (i) Notice of Special Meeting, (ii) Proxy Statement- Prospectus, and (iii) Proxy for the Special Meeting. The Proxy Statement- Prospectus describes in more detail the Merger Agreement and the proposed Merger, including a description of the conditions to consummation of the Merger and the effects of the Merger on the rights of S&W stockholders. It also describes the Escrow Agreement, the appointment of the stockholder representatives, and financial and other information pertaining to PSS and S&W. Please give this information your careful attention. The Board of Directors has unanimously approved and adopted the Merger Agreement, the Escrow Agreement and consummation of the transactions contemplated therein, including the appointment of the stockholder representatives, and unanimously recommends that you vote FOR approval of the Merger Agreement, the Escrow Agreement and consummation of the transactions contemplated therein, including the appointment of the stockholder representatives. In view of the importance of the action to be taken, we urge you to complete, sign, and date the enclosed Proxy and to return it promptly in the enclosed envelope, whether or not you plan to attend the Special Meeting (if you attend the Special Meeting, you may vote in person, even if you previously returned your Proxy). We look forward to seeing you at the Special Meeting. Sincerely, Joseph E. Miller, Jr. President S&W X-RAY, INC. Cornerstone Center Rochester, New York 14824 ------------------------------------------------- NOTICE OF SPECIAL MEETING OF STOCKHOLDERS To be held at 10:00 a.m. on ________ __, 1997 ------------------------------------------------- ______ __, 1997 To the Stockholders of S&W X-Ray, Inc.: NOTICE IS HEREBY GIVEN that a special meeting of stockholders ("Special Meeting") of S&W X-Ray, Inc. ("S&W") will be held at S&W's executive office, located at Cornerstone Center, 2300 Buffalo Road, Rochester, New York 14824, on ______ __, 1997, at 10:00 a.m., Eastern Standard Time, for the following purposes: 1. The Merger. To consider and vote upon a proposal to: (i) approve the Agreement and Plan of Merger, dated as of August 12, 1997 (the "Merger Agreement"), by and among S&W, Physician Sales & Service, Inc. ("PSS"), and Diagnostic Imaging, Inc., a wholly owned subsidiary of PSS ("DI"), pursuant to which, among other matters, (a) S&W will merge with and into DI (the "Merger") and (b) the outstanding shares of common stock of S&W, $.04 par value per share ("S&W Common Stock"), and shares of S&W Common Stock to be issued pursuant to the S&W Supplemental Executive Retirement Plan will be converted into the right to receive shares of common stock of PSS, $.01 par value per share, and the contingent right to receive shares of common stock of PSS all on the terms set forth in the Merger Agreement; (ii) approve the form of Escrow Agreement (the "Escrow Agreement") by and between PSS and the stockholder representatives set forth therein; and (iii) appoint Joseph E. Miller, Jr., Bruce P. Ashby and the S&W X-Ray, Inc. Employee Stock Ownership Plan and Trust as the "Stockholder Representatives" in accordance with the Escrow Agreement, all as more fully described in the accompanying Proxy Statement- Prospectus. Copies of the Merger Agreement and the Escrow Agreement are set forth in Annex A and Annex B, respectively, to the accompanying Proxy Statement-Prospectus and are hereby incorporated by reference herein. 2. Other Business. To transact such other business as may properly come before the Special Meeting or any adjournments or postponements of the Special Meeting. Only stockholders of record at the close of business on August 10, 1997, are entitled to receive notice of and to vote at the Special Meeting or any adjournments or postponements thereof. Approval of the Merger Agreement, the Escrow Agreement and the consummation of the transactions contemplated thereby, including the appointment of Joseph E. Miller, Jr., Bruce P. Ashby and the S&W X-Ray, Inc. Employee Stock Ownership Trust as the Stockholder Representatives, requires the affirmative vote of the holders of a majority of the shares of S&W Common Stock entitled to vote at the Special Meeting, voting as a single class. Holders of approximately 66% of the outstanding votes represented by shares of S&W Common Stock have agreed to vote in favor of the Merger Agreement, the Escrow Agreement and the consummation of the transactions contemplated thereby, including the appointment of the Stockholder Representatives, and, therefore, approval of such matters is assured. THE BOARD OF DIRECTORS OF S&W UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT, THE ESCROW AGREEMENT AND CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE APPOINTMENT OF THE STOCKHOLDER REPRESENTATIVES. Each stockholder has the right to dissent from the Merger Agreement and demand payment of the fair value of his shares if the Merger is consummated. The right of any stockholder to receive such payment is contingent upon strict compliance with the requirements of Sections 623 and 910 of the New York Business Corporation Law. The full text of Sections 623 and 910 is set forth in Annex C to the Proxy Statement-Prospectus and is incorporated herein by reference. For a summary of the requirements of Sections 623 and 910, see "THE MERGER--Dissenters' Rights" in the accompanying Proxy Statement-Prospectus. BY ORDER OF THE BOARD OF DIRECTORS Joseph E. Miller, Jr. President Proxy Statement-Prospectus PROXY STATEMENT OF S&W X-RAY, INC. Special Meeting of Stockholders to be Held on __________, 1997 ------------------ PROSPECTUS OF PHYSICIAN SALES & SERVICE, INC. Common Stock Par Value $.01 Per Share This Prospectus relates to up to 2,123,558 shares of the Common Stock, par value $.01 per share (the "PSS Common Stock"), of Physician Sales & Service, Inc. ("PSS" or the "Company") issuable to the stockholders of S&W X- Ray, Inc. ("S&W") upon consummation of the Merger (as defined below). Such number of shares represents the maximum number of shares that may be issued, assuming that the Base Period Trading Price (as defined below) is equal to or less than $12.2436. This Prospectus also serves as the Proxy Statement of S&W for its special meeting of stockholders to be held on ________, 1997, and any adjournments and postponements thereof (the "Special Meeting"). See "General Information." -------------------------- This Proxy Statement-Prospectus describes the terms of a proposed business combination between PSS and S&W, pursuant to which PSS will acquire S&W by means of the merger (the "Merger") of S&W with and into Diagnostic Imaging, Inc., a wholly-owned subsidiary of PSS ("DI"), with DI being the surviving corporation. After the Merger, the combined operations of DI and S&W are expected to be conducted with DI as a wholly-owned subsidiary of PSS. The Merger will be effective pursuant to the terms and conditions of the Agreement and Plan of Merger dated August 12, 1997, among PSS, DI and S&W (the "Merger Agreement"). The Merger Agreement is attached to this Proxy Statement-Prospectus as Annex A and is incorporated herein by reference. Upon consummation of the Merger, except as described herein, each outstanding share of Common Stock of S&W, par value $.04 per share (the "S&W Common Stock") and each share of S&W Common Stock to be issued pursuant to the S&W Supplemental Executive Retirement Plan will be cancelled and the holders of such S&W Common Stock will be entitled to receive a number of shares of PSS Common Stock for each share of S&W Common Stock so held. The number of shares of PSS Common Stock to be received by each such holder of S&W Common Stock will be determined as set forth in the Merger Agreement. See "Merger Agreement - Exchange Ratio." This Proxy Statement-Prospectus and the form of Proxy are first being mailed to stockholders of S&W on or about ______ __, 1997. PSS Common Stock is traded in the over-the-counter market and is quoted on the Nasdaq National Market System. On August 12, 1997, the last trading day prior to public announcement that S&W and PSS had executed a merger agreement, the last reported sale price per share of PSS Common Stock on the Nasdaq National Market was $18.125. On __________, 1997, the last reported sale price per share of PSS Common Stock on the Nasdaq National Market was $_____. The PSS Common Stock offered hereby involves a high degree of risk. See "Risk Factors," beginning on page 16. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- The date of this Proxy Statement-Prospectus is ______ ___, 1997 AVAILABLE INFORMATION This Proxy Statement-Prospectus does not contain all of the information set forth in the Registration Statement on Form S-4, of which this Proxy Statement-Prospectus is a part, and exhibits thereto (together with any amendments thereto, the "Registration Statement"), which has been filed with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act"), certain portions of which have been omitted pursuant to the rules and regulations of the SEC and to which portions reference is hereby made for further information. Statements contained in this Proxy Statement-Prospectus concerning the provisions of certain documents filed as exhibits to the Registration Statement are necessarily brief descriptions thereof, and are not necessarily complete and each such statement is qualified in its entirety by reference to the full text of such document. PSS is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files periodic reports, proxy statements and other information with the SEC relating to its business, financial statements and other matters. Copies of the Registration Statement, as well as such reports, proxy statements and other information of PSS, may be inspected, without charge, at the principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and should be available at the Commission's Regional Offices at Seven World Trade Center, New York, New York 10007, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such material also may be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. PSS' Common Stock is traded on the Nasdaq National Market System and such reports, proxy statements and other information may also be inspected at the office of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. All information contained in this Proxy Statement-Prospectus with respect to PSS was supplied by PSS, and all information contained in this Proxy Statement-Prospectus with respect to S&W was supplied by S&W. No person has been authorized to give any information or to make any representation other than those contained in this Proxy Statement-Prospectus and, if given or made, such information or representation should not be relied upon as having been authorized by PSS or S&W. Neither the delivery of this Proxy Statement-Prospectus nor any distribution of the securities to which this Proxy Statement-Prospectus relates shall, under any circumstances, create any implication that there has been no change in the affairs of PSS, S&W, or any of their respective subsidiaries since the date hereof or that the information contained herein is correct as of any time subsequent to its date. This Proxy Statement-Prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, any securities other than the securities to which it relates or an offer to sell or a solicitation of an offer to purchase the securities offered by this Proxy Statement-Prospectus in any jurisdiction in which such an offer or solicitation is not lawful. SPECIAL CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS All statements contained herein that are not historical facts, including, but not limited to, statements regarding anticipated growth in revenue, gross margins and earnings, statements regarding PSS's current business strategy, PSS's projected sources and uses of cash, and PSS's plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause results to differ materially are the following: the availability of sufficient capital to finance PSS's business plans on terms satisfactory to it; competitive factors; changes in labor, equipment and capital costs; changes in regulations affecting PSS's business; future acquisitions or strategic partnerships; general business and economic conditions; and other factors described from time to time in PSS's reports filed with the SEC. PSS wishes to caution readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. -2- TABLE OF CONTENTS
Page ---- AVAILABLE INFORMATION............................................................................................. 2 SPECIAL CAUTIONARY NOTICE About Forward-Looking Statements........................................................ 2 SUMMARY........................................................................................................... 6 Parties to the Merger....................................................................................... 6 The Special Meeting......................................................................................... 7 The Merger.................................................................................................. 11 Market and Market Price..................................................................................... 12 Dividends................................................................................................... 13 Comparative Per Share Information........................................................................... 15 Summary Unaudited Pro Forma Condensed Combined Financial Information of PSS and S&W......................... 16 RISK FACTORS...................................................................................................... 16 Integration of Operations................................................................................... 16 Anticipated Expansion and Management of Expanded Operations................................................. 16 Management of International Operations...................................................................... 16 Dependence on Manufacturers................................................................................. 17 Regulation of and Change in Practice of Medicine............................................................ 17 Dependence on Third-Party Reimbursement..................................................................... 17 Two-Tier Pricing............................................................................................ 17 Sales Representatives....................................................................................... 17 Key Management.............................................................................................. 18 Competition................................................................................................. 18 Liability Exposure.......................................................................................... 18 Reliance on Data Processing................................................................................. 18 Anti-Takeover Provisions; Possible Issuance of Preferred Stock.............................................. 18 GENERAL INFORMATION............................................................................................... 19 Special Meeting............................................................................................. 19 Record Date and Quorum...................................................................................... 19 Solicitation of Proxies..................................................................................... 19 Voting and Revocability of Proxies.......................................................................... 19 Vote Required............................................................................................... 20 THE MERGER........................................................................................................ 21 General..................................................................................................... 21 Background of the Merger.................................................................................... 21 Reasons for the Merger...................................................................................... 23 Exchange Ratio.............................................................................................. 23 Escrow Agreement............................................................................................ 24 Covenants Not to Compete.................................................................................... 25 Fractional Shares........................................................................................... 25 Effective Time.............................................................................................. 25 Distribution of PSS Certificates............................................................................ 25 Certain Federal Income Tax Consequences..................................................................... 26 Management and Operations After the Merger.................................................................. 27 Interests of Certain Persons in the Merger.................................................................. 28 Conditions to Consummation.................................................................................. 28 Amendment, Waiver and Termination........................................................................... 29 Conduct of Business Pending the Merger...................................................................... 29 Stockholders Agreements..................................................................................... 30 Expenses and Fees........................................................................................... 31 Accounting Treatment........................................................................................ 31 Resales of PSS Common Stock................................................................................. 31
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Page ---- Dissenters' Rights.......................................................................................... 32 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS....................................................... 34 SELECTED FINANCIAL DATA OF PSS.................................................................................... 40 PSS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 41 Company Overview............................................................................................ 41 Company Growth.............................................................................................. 41 Sales Mix................................................................................................... 43 Exclusive Distribution Agreements........................................................................... 43 Other Marketing Programs.................................................................................... 44 Imaging Division............................................................................................ 44 International Division...................................................................................... 44 BUSINESS OF PSS................................................................................................... 52 General..................................................................................................... 52 Industry.................................................................................................... 52 Company Strategy............................................................................................ 52 Sales and Distribution...................................................................................... 53 Product and Sales Mix....................................................................................... 55 Recruitment and Development................................................................................. 56 Information Systems......................................................................................... 57 Purchasing and Vendor Relationships......................................................................... 58 Acquisitions................................................................................................ 59 Properties.................................................................................................. 60 Competition................................................................................................. 61 Regulatory Matters.......................................................................................... 62 Legal Proceedings........................................................................................... 62 Compensation Committee Interlocks and Insider Participation................................................. 66 Executive Compensation...................................................................................... 66 MANAGEMENT OF PSS................................................................................................. 63 Directors and Executive Officers............................................................................ 63 Option Grants in Fiscal 1997................................................................................ 68 Option Exercises and Holdings as of March 28, 1997.......................................................... 69 Employment Agreements....................................................................................... 70 PSS CERTAIN TRANSACTIONS.......................................................................................... 71 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PSS............................................. 71 SELECTED FINANCIAL DATA OF S&W.................................................................................... 72 S&W MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 73 Results of Operations....................................................................................... BUSINESS OF S&W................................................................................................... 76 General..................................................................................................... 76 Consumables/Accessories and Sales........................................................................... 76 Imaging Equipment........................................................................................... 77 Multi-Vendor Imaging Equipment Service...................................................................... 78 Competition................................................................................................. 78 Facilities.................................................................................................. 78 Employees................................................................................................... 79 Insurance................................................................................................... 79 Legal Proceedings........................................................................................... 79 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF S&W............................................. 80 DESCRIPTION OF PSS CAPITAL STOCK.................................................................................. 81 PSS Common Stock............................................................................................ 81
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Page ---- PSS Preferred Stock......................................................................................... 81 Certain Articles of Incorporation and Bylaw Provisions of PSS............................................... 81 Transfer Agent and Registrar................................................................................ 84 CERTAIN DIFFERENCES IN THE RIGHTS OF PSS AND S&W STOCKHOLDERS..................................................... 84 Authorized Capital Stock.................................................................................... 84 Size and Classification of Board of Directors............................................................... 85 Amendment of Articles or Certificate of Incorporation and Bylaws............................................ 85 Special Meetings of Stockholders............................................................................ 85 Removal of Directors........................................................................................ 85 Director Liability.......................................................................................... 86 Indemnification............................................................................................. 86 Dissenters' Rights.......................................................................................... 87 Dividends and Other Distributions........................................................................... 87 Mergers and Consolidations.................................................................................. 88 Fair Price Provision........................................................................................ 88 Control Share Acquisition Statute........................................................................... 88 EXPERTS........................................................................................................... 89 LEGAL MATTERS..................................................................................................... 89 OTHER MATTERS..................................................................................................... 89 INDEX TO PSS CONSOLIDATED FINANCIAL STATEMENTS.................................................................... 90 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS................................................................ 91 INDEX TO S&W FINANCIAL STATEMENTS................................................................................. 116 INDEPENDENT AUDITORS' REPORT...................................................................................... 117 ANNEXES: ANNEX A - Agreement and Plan of Merger ANNEX B - Form of Escrow Agreement ANNEX C - Sections 623 and 910 of the New York Business Corporation Law Relating to Appraisal Rights
-5- SUMMARY The following is a summary of certain information contained elsewhere in this Proxy Statement-Prospectus. This summary is not intended to be a complete description of the matters covered in this Proxy Statement-Prospectus and is subject to and qualified in its entirety by reference to the more detailed information and consolidated financial statements contained elsewhere in this Proxy Statement-Prospectus, including the Annexes hereto. Stockholders are urged to read carefully the entire Proxy Statement-Prospectus, including the Annexes. As used in this Proxy Statement-Prospectus, the terms "PSS" and "S&W" refer to such corporations, respectively, and where the context requires, such corporations and their respective subsidiaries. In addition, except where otherwise indicated, all information in this Proxy Statement-Prospectus assumes (i) no adjustment to the Aggregate Purchase Price (as defined below) and (ii) the distribution of all shares of PSS Common Stock subject to the Escrow Agreement. Parties to the Merger PSS. PSS is a leading distributor of medical supplies, equipment and pharmaceuticals to primary care and other office-based physicians based on net sales. PSS operates 61 physician office medical supply distribution service centers distributing to approximately 103,000 office sites in all 50 states. The primary market of PSS is the approximately 399,000 physicians who practice medicine in the approximately 198,000 office sites throughout the United States. PSS, through its subsidiary, Diagnostic Imaging, Inc. ("DI"), distributes medical diagnostic imaging supplies, chemicals, equipment and service to the acute and alternate care market. DI operates 20 imaging service centers in ten states. PSS also distributes medical supplies and equipment in Belgium, France, Germany and the Netherlands through its WorldMed International, Inc. subsidiary. PSS currently has three European operations service centers distributing to the acute and alternate care markets. For the fiscal year ended March 28, 1997, PSS reported net revenues of approximately $691.0 million and net income of approximately $4.4 million. As of March 28, 1997, PSS had total assets of approximately $298.3 million. PSS was incorporated under the laws of the State of Florida in April 1983. The principal executive offices of PSS are located at 4345 Southpoint Boulevard, Jacksonville, Florida 32216, and its telephone number is (904) 332- 3000. For additional information regarding PSS and its business, see "Selected Financial Data," "Risk Factors," "PSS Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business of PSS," "Management of PSS," and "Financial Statements." S&W. S&W was incorporated under the laws of the State of New York in April 1973. S&W's principal executive offices are located at Cornerstone Center, 2300 Buffalo Road, Rochester, New York 14824, and its telephone number is (716) 429-5480. For additional information regarding S&W and its business, see "Selected Financial Data," "S&W Management's Discussion and Analysis," "Business of S&W," "Management of S&W" and "Financial Statements." DI. DI is a wholly owned subsidiary of PSS which operates the diagnostic imaging and x-ray equipment division of PSS. Pursuant to the Merger Agreement, S&W will merge with and into DI, with DI remaining as the surviving corporation. DI's principal executive offices are located at 4345 Southpoint Boulevard, Jacksonville, Florida 32216, and its telephone number is (904) 332-3000. See "The Merger." The Special Meeting The Special Meeting of S&W's stockholders to consider and vote on the Merger Agreement (the "S&W Special Meeting") will be held at 10:00 a.m., Eastern Standard Time, at S&W's principal executive office, located at Cornerstone Center, 2300 Buffalo Road, Rochester, New York, 14824 on ______ __, 1997. At the S&W Special Meeting, S&W's stockholders will consider and vote upon approval of the Merger Agreement, the Escrow Agreement and the consummation of the transactions contemplated therein, including the appointment of the Stockholder Representatives. Only holders of record of S&W Common Stock at the close of business on August 10, -6- 1997 (the "S&W Record Date"), will be entitled to notice of and to vote at the S&W Special Meeting. As of such date, there were 259,574 shares of S&W Common Stock issued and outstanding which were entitled to be voted at the S&W Special Meeting and 4,009 shares of S&W Common Stock to be issued on the Closing Date pursuant to the S&W Supplemental Executive Retirement Plan. Holders of approximately 66% of the outstanding votes represented by the S&W Common Stock have agreed to vote in favor of the Merger Agreement, the Escrow Agreement and the consummation of the transactions contemplated therein, including the appointment of the Stockholder Representatives, and therefore approval of such matters is assured. For additional information with respect to the Special Meeting, including the S&W Record Date and votes required for approval, see "General Information." The Merger General. The Merger Agreement provides that S&W shall be merged with and into DI, a wholly owned subsidiary of PSS. DI shall be the surviving corporation of the Merger and shall remain a wholly owned subsidiary of PSS and shall continue to be governed by the laws of the State of Florida. At the time the Merger becomes effective, each outstanding share of S&W Common Stock (excluding shares held by stockholders who perfect their dissenters' rights) shall cease to be outstanding and shall be converted into and exchanged for the right to receive shares of PSS Common Stock and the contingent right to receive additional shares of PSS Common Stock on the "Final Settlement Date," as provided in the Escrow Agreement. If the Merger Agreement is approved at the Special Meeting, all required consents and approvals are obtained, and all of the other conditions to the obligations of the parties to consummate the Merger are either satisfied or waived (as permitted), the Merger will be consummated. A copy of the Merger Agreement is set forth in Annex A to this Proxy Statement- Prospectus and a copy of the Escrow Agreement is set forth in Annex B. See "The Merger." Exchange Ratio. The Merger Agreement provides that at the effective time of the Merger each outstanding share of S&W Common Stock and each share of S&W Common Stock to be issued pursuant to the S&W Supplemental Executive Retirement Plan (excluding shares held by stockholders who perfect their dissenter's rights) shall cease to be outstanding and shall be converted into and exchanged for (i) the right to receive that number of shares of PSS Common Stock equal to the Aggregate Purchase Price (as defined below) minus the Escrow Dollar Amount (as defined below), and the contingent right to receive that number of shares equal to the Escrow Dollar Amount; (ii) divided by the sum of all shares of S&W Common Stock issued and outstanding or issuable upon the conversion of all convertible securities or rights of any nature with respect to S&W Common Stock; (iii) which amount is divided by the Base Period Trading Price (as defined below) (the "Common Stock Exchange Ratio"). Pursuant to the Merger Agreement, the "Aggregate Purchase Price" is defined to be $26,000,000, minus any legal, accounting, consulting and investment advisory expenses in excess of $350,000 incurred by S&W or on S&W's behalf in connection with the transactions contemplated under the Merger Agreement; provided that such adjustment shall not exceed $200,000. In the event that the foregoing adjustment would result in a decrease to the Aggregate Purchase Price of more than $200,000 but for the foregoing provision, PSS shall have the right to terminate the Merger Agreement. Pursuant to the Merger Agreement, the "Escrow Dollar Amount" is defined to be $1,015,000 plus five percent of the Aggregate Purchase Price. The term "Base Period Trading Price" is defined in the Merger Agreement as the average of the daily closing prices for the shares of PSS Common Stock for the ten (10) consecutive trading days on which such shares are actually traded as over-the-counter securities and quoted on the Nasdaq National Market ending at the close of trading on the second trading day immediately prior to the Closing Date, provided, however, that for purposes of such calculation, the Base Period Trading Price shall be deemed to equal (i) $14.9644 in the event the Base Period Trading Price is greater than $14.9644 or (ii) $12.2436 in the event the Base Period Trading Price is less than $12.2436 (collectively, the "Base Period Trading Price Limitations"). The following table shows the resulting exchange ratio for each share of S&W Common Stock representing that number of shares of PSS Common Stock to be received in respect of each share of S&W Common Stock (including shares to be issued pursuant to the S&W Supplemental Executive Retirement Plan), (i) assuming -7- that the Aggregate Purchase Price is equal to $26,000,000, and (ii) assuming that all shares subject to the Escrow Agreement are distributed to the holders of shares of S&W Common Stock:
Base Period Trading Price(1) Common Stock Exchange Ratio ------------------------------ --------------------------- $11.00 8.0565 12.00 8.0565 13.00 7.5877 14.00 7.0458 15.00 6.5917 18.00 6.5917 20.00 6.5917
- --------------- (1) The Base Period Trading Price is the average of the daily closing prices for the shares of PSS Common Stock for the ten (10) consecutive trading days on which such shares are actually traded and quoted on the Nasdaq National Market System ending at the close of trading on the second trading day immediately prior to the Closing Date, subject to the Base Period Trading Price Limitations. The per share purchase price for the shares of S&W Common Stock is divided by the Base Period Trading Price to obtain the respective exchange ratios. The following table shows the exchange ratio for each share of S&W Common Stock representing that number of shares of PSS Common Stock to be received in respect of each share of S&W Common Stock (including shares to be issued pursuant to the S&W Supplemental Executive Retirement Plan), (i) assuming that the Aggregate Purchase Price is equal to $25,800,000 (reflecting the maximum adjustment to the Aggregate Purchase Price of $200,000), and (ii) assuming that no shares subject to the Escrow Agreement are distributed to the holders of shares of S&W Common Stock:
Base Period Trading Price(1) Common Stock Exchange Ratio ------------------------------ --------------------------- $11.00 7.2803 12.00 7.2803 13.00 6.8567 14.00 6.3669 15.00 5.9566 18.00 5.9566 20.00 5.9566
- --------------- (1) The Base Period Trading Price is the average of the daily closing prices for the shares of PSS Common Stock for the ten (10) consecutive trading days on which such shares are actually traded and quoted on the Nasdaq National Market System ending at the close of trading on the second trading day immediately prior to the Closing Date, subject to the Base Period Trading Price Limitations. The per share purchase price for the shares of S&W Common Stock is divided by the Base Period Trading Price to obtain the respective exchange ratios. See "The Merger -- Exchange Ratio" and "--Escrow Agreement." Votes Required. Approval of the Merger Agreement, the Escrow Agreement and consummation of the transactions contemplated therein, including the appointment of the Stockholder Representatives, requires the affirmative vote of the holders of a majority of the outstanding S&W Common Stock entitled to vote at the Special Meeting. The S&W X-Ray, Inc. Employee Stock Ownership Plan and Trust ("ESOP") owns 32.96% of the outstanding shares of S&W Common Stock. The ESOP has retained Consulting Fiduciaries, Inc. for the purposes of (i) determining what action the ESOP should take with respect to the Merger; (ii) administering any pass-through voting process with respect to any such proposal and receiving the directions of the participants and beneficiaries entitled to vote under the ESOP; (iii) with respect to any shares of Company stock held in the ESOP for which voting directions are not received from any participant or beneficiary, determining how such shares -8- should be voted; and (iv) taking whatever action it shall deem appropriate, including directing the Trustee of the Trust regarding voting of shares of S&W Common Stock. As of the S&W Record Date, S&W directors and executive officers, and their affiliates, held approximately 33% of the outstanding votes represented by the S&W Common Stock entitled to vote at the Special Meeting. Holders of approximately 66% of the outstanding votes represented by the S&W Common Stock have agreed to vote in favor of the Merger Agreement, the Escrow Agreement and the consummation of the transactions contemplated therein, including the appointment of the Stockholder Representatives, and therefore approval of such matters is assured. As of the S&W Record Date, PSS's directors and executive officers, and their affiliates, held no S&W Shares. See "General Information-- Votes Required," "The Merger--Stockholders Agreement" and "Ownership of Equity Securities--S&W." Recommendations of the Board of Directors. The Board of Directors of S&W has approved the Merger Agreement and has recommended a vote FOR the Merger Agreement. The Board of Directors believes the Merger Agreement is fair to and in the best interest of the stockholders of S&W. In addition, the Board of Directors of S&W has approved the Escrow Agreement and has recommended a vote FOR approval of the Escrow Agreement and the consummation of the transactions contemplated therein, including the appointment of the Stockholder Representatives. The Board of Directors of S&W believes that the Merger is in the best interest of the S&W stockholders based on a number of factors, including: (i) the value of the consideration to be received by the S&W stockholders, the fact that as PSS stockholders, the S&W stockholders would have more liquidity, and the fact that the Merger is expected to be treated as a tax-free reorganization; (ii) the opportunity for the S&W stockholders to continue to share in the potential for long-term gain in S&W through the ownership of PSS Common Stock after the Merger; (iii) the business reputation and capabilities of PSS and its management, the financial strength, prospects, market position and strategic objectives of PSS; and (iv) the perceived strengths of the combined entity, the belief that PSS and S&W are strategically complementary, and the belief that the combined companies will be able to compete more effectively in the marketplace. See "The Merger--Reasons for the Merger." Effective Time. If the Merger is approved by the requisite vote of the S&W stockholders, all required consents and approvals are obtained, and the other conditions to the obligations of the parties to consummate the Merger are either satisfied or waived (as permitted), the Merger will be consummated and will become effective on the date and at the time that Articles of Merger, reflecting the Merger, are filed with the Secretary of State of the State of Florida and the Secretary of State of the State of New York (the "Effective Time"). See "The Merger--Effective Time." Delivery of PSS Certificates. Promptly after the Effective Time, each record holder of S&W Common Stock outstanding at the Effective Time will be mailed a transmittal letter (with instructions) to use in effecting the surrender and cancellation of those certificates in exchange for PSS Common Stock. PSS shall not be obligated to deliver the consideration to which any former holder of S&W Common Stock is entitled until such holder surrenders such holder's certificate or certificates representing such holder's shares for exchange. The certificate or certificates so surrendered shall be duly endorsed as PSS may require. See "The Merger--Distribution of PSS Certificates." Certain Federal Income Tax Consequences. The Merger is intended to be a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Generally, no gain or loss should be recognized for federal income tax purposes by S&W stockholders as a result of the Merger, except that gain or loss will be recognized with respect to cash received by dissenters, if any, or cash received in lieu of fractional shares. See "The Merger--Certain Federal Income Tax Consequences." -9- BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER AND OTHER FACTORS, EACH HOLDER OF S&W COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISER TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS). Interests of Certain Persons in the Merger. Joseph E. Miller, Jr. and Bruce P. Ashby will receive aggregate cash payments of $1,900,000 and $1,4000,000, respectively, as additional consideration for his Covenant Not to Compete upon consummation of the Merger, payable in installments over the fifteen-year term of such agreements. In addition, George Privitera and Ron Cronin will receive aggregate payments of $700,000 each as additional consideration for his Covenant Not to Compete upon consummation of the Merger, payable in installments over the eight-year term of such agreements. See "The Merger--Covenants Not to Compete" and "--Interests of Certain Persons in the Merger." Conditions to Consummation of the Merger. The obligation of PSS to consummate the Merger is subject to, among others, the following conditions: (i) the representations and warranties of S&W set forth in the Merger Agreement shall be true and correct in all material respects as of the Effective Time; (ii) S&W shall have performed all of its agreements and covenants prior to the Effective Time as contemplated by the Merger Agreement; (iii) the S&W sales force shall not have decreased in number to less than 18 full-time sales persons and 70 full-time service technicians; (iv) there shall have been no material adverse change in the business, assets or results of operations of S&W between March 31, 1997 and the Closing Date; (v) the Escrow Agreement shall have been executed and delivered by a national bank as the Escrow Agent, (vi) PSS shall have received a letter from Arthur Andersen LLP to the effect that the Merger will qualify for pooling-of-interests accounting treatment; (vii) PSS shall have received the consent of its senior lender; (viii) PSS shall have received evidence that all indebtedness owed by the S&W X-Ray, Inc. Employee Stock Ownership Trust has been repaid or forgiven; and (ix) receipt by PSS of executed investment agreements, employment agreements and non-compete agreements from certain affiliates and employees of S&W. The obligation of S&W to consummate the Merger is subject to, among others, the following conditions: (i) the representations and warranties of PSS set forth in the Merger Agreement shall be true and correct in all material respects as of the Effective Time; (ii) PSS shall have performed all of its agreements and covenants prior to the Effective Time as contemplated by the Merger Agreement; (iii) there shall have been no material adverse change in the business, assets or results of operations of PSS between March 31, 1997 and the Closing Date; and (iv) the Escrow Agreement shall have been executed and delivered by a national bank as the Escrow Agent. The obligation of each of PSS, DI and S&W to consummate the Merger is subject to certain additional conditions, including the following: (i) the shareholders of S&W shall have approved the Merger Agreement; (ii) all consents and notifications to any regulatory authorities required for consummation of the Merger shall have been obtained or made; (iii) no court or governmental authority shall have enacted any law or order or taken any action which prohibits the transactions contemplated by the Merger Agreement; (iv) the Registration Statement shall have been declared effective under the Securities Act of 1933 and no stop orders suspending the effectiveness of the Registration Statement shall have been issued; and (v) at Closing, PSS shall have repaid the outstanding notes and bank and long-term debt of S&W. Regulatory Approvals. The Hart Scott Rodino Antitrust Improvements Act of 1974, as amended (the "HSR Act") provides that certain business mergers (including the Merger) may not be consummated until certain information has been furnished to the Department of Justice (the "DOJ") and the Federal Trade Commission (the "FTC") and certain waiting period requirements have been satisfied. On July 18, 1997, PSS and S&W made their respective filings with the DOJ and the FTC with respect to the Merger Agreement. On July 28, 1997, PSS received notification from the FTC that early termination of the waiting period required under the HSR Act had been granted. -10- Conduct of Business Pending the Merger. Each of PSS and S&W has agreed in the Merger Agreement to, among other things, operate their respective businesses substantially as presently operated and only in the ordinary course, provided that with respect to PSS, any business acquisition or incurrence of additional debt or issuance or sale of equity securities is deemed to be in the ordinary course. Termination. The Merger Agreement may be terminated, and the Merger abandoned, at any time prior to the Effective Time, notwithstanding approval of the Merger Agreement by the stockholders of S&W: (i) by mutual consent of the Boards of Directors of S&W and PSS, (ii) by either party in the event of certain breaches by the other party of any representation or warranty; (iii) by either party in the event that a consent or regulatory approval required by the Merger Agreement has been denied by final nonappealable action; (iv) by either party if the Merger is not consummated by October 31, 1997, if such failure is not caused by any breach of the Merger Agreement by the party electing to terminate; (v) by either party in the event that the Merger is not consummated by November 30, 1997; (vi) by either party, if any of the conditions precedent to the obligations of such party to consummate the Merger cannot be satisfied or fulfilled, if such failure is not caused by the party electing to terminate; (vii) by either party if the Base Period Trading Price is less than $10.8832 or greater than $16.3248 (in each case, calculated without regard to the Base Period Trading Price Limitations); and (viii) by PSS if the sum of all proposed adjustments to the Aggregate Purchase Price pursuant to the Merger Agreement would result in a decrease of the Aggregate Purchase Price by more than $200,000, but for the proviso that the adjustments may not exceed $200,000. See "The Merger--Amendment, Waiver, and Termination." Accounting Treatment. It is anticipated that the Merger will qualify as a "pooling of interests" for financial reporting purposes. It is a condition to the obligation of PSS to consummate the Merger that PSS shall have received from Arthur Andersen LLP a letter dated the closing date to the effect that the Merger may be accounted for as a pooling of interests by PSS for financial reporting purposes. See "The Merger--Conditions to Consummation" and "-- Accounting Treatment." Dissenters' Rights. In order for the Merger to qualify as a pooling-of- interests, which is a condition to the consummation of the Merger, no more than ten percent (10%) of the aggregate outstanding shares of S&W Common Stock shall have exercised dissenters' rights. Each holder of S&W Common Stock who dissents from the Merger is entitled to the rights and remedies of dissenting stockholders set forth in Sections 623 and 910 of the New York Business Corporation Law (the "NYBCL"), subject to compliance with the procedures set forth therein. Among other things, a dissenting stockholder is entitled to receive an amount in cash equal to the "fair value" of such holder's shares. A copy of Sections 623 and 910 is set forth in Annex C to this Proxy Statement- Prospectus, and a summary thereof is included under "The Merger--Dissenters' Rights." To perfect dissenters' rights, a stockholder must comply with Sections 623 and 910 of the NYBCL which requires, among other things, that the stockholder give S&W notice of such holder's intention to dissent from the Merger Agreement prior to the vote of the stockholders of S&W at the Special Meeting and that such stockholder not vote such holder's shares in favor of the Merger Agreement. Any S&W stockholder who returns a signed proxy but fails to provide instructions as to the manner in which such holder's shares are to be voted will be deemed to have voted in favor of the Merger Agreement and thus will not be entitled to assert dissenters' rights. Nasdaq National Market Quotation. PSS Common Stock is traded in the over- the-counter market and is quoted on the Nasdaq National Market. An application will be filed with the NASD to include for quotation the shares of PSS Common Stock to be issued to the holders of S&W Common Stock in the Merger. See "The Merger--Nasdaq National Market Quotation." Market and Market Price PSS Common Stock is traded in the over-the-counter market and is quoted on the Nasdaq National Market under the symbol PSSI. Set forth below are the closing prices per share of PSS Common Stock on the Nasdaq National Market on (i) August 12, 1997, the last business day preceding public announcement of the Merger, and (ii) __________, 1997: -11-
Closing Price Per Share Date of PSS Common Stock - ---- ----------------------- August 12, 1997 __________, 1997 $18.125
The following table sets forth the high and low closing prices per share of PSS Common Stock on the Nasdaq National Market since it began trading in May 1994.
Sales Price Per Share of PSS Common Stock(1) -------------------------------------------- Quarter Ended High Low - ------------- ---- --- Fiscal 1995: - ------------ June 30, 1994(2) $ 5.08 $ 4.42 September 30, 1994 6.00 5.08 December 31, 1994 6.08 5.04 March 30, 1995 10.67 5.58 Fiscal 1996: - ------------ June 30, 1995 13.83 10.33 September 30, 1995 18.67 13.50 December 31, 1995 28.50 13.92 March 29, 1996 30.75 21.00 Fiscal 1997: - ------------ June 30, 1996 33.00 22.75 September 30, 1996 25.63 15.00 December 31, 1996 26.88 13.75 March 28, 1997 19.75 13.00 Fiscal 1998: - ------------ June 30, 1997 19.00 12.00 September 30, 1997(3)
- ---------------- (1) Adjusted to give effect to a three-for-one stock split in fiscal year 1996. (2) Represents trading from May 4, 1994, the date of the Company's initial public offering, through June 30, 1994. (3) Represents trading from July 1, 1997 through August 12, 1997. Stockholders are advised to obtain current market quotations for PSS Common Stock. No assurance can be given as to the market price of PSS Common Stock at the Effective Time or at any other time. As of June 16, 1997, there were approximately 1,065 record holders of PSS Common Stock. There is no established public trading market for the shares of S&W Common Stock. As of the S&W Record Date, there were approximately ___ record holders of S&W Common Stock. Dividends It is the policy of both the Board of Directors of PSS and the Board of Directors of S&W to retain earnings to support operations and to finance continued growth of their respective businesses rather than to pay dividends. Neither PSS nor S&W has ever paid dividends on its capital stock and neither anticipates the payment of dividends in the near future. Any future payment of cash dividends of PSS or S&W would be determined by the their respective Boards of Directors in light of circumstances then existing, including the growth, profitability, financial -12- condition and results of operations of their respective companies, and such other factors as each Board deems relevant. The ability of each of PSS and S&W to declare and pay dividends is limited by certain restrictive covenants contained in each of their long-term debt agreements. Comparative Per Share Information The following summary presents selected comparative per share information on a historical basis for (i) PSS and S&W, (ii) on a pro forma combined basis per share of PSS Common Stock giving effect to the Merger on a pooling-of- interests basis assuming in one scenario the distribution to S&W stockholders of all shares of PSS Common Stock subject to the Escrow Agreement and in another scenario no distribution to S&W stockholders of the shares of PSS Common Stock subject to the Escrow Agreement, (iii) on a pro forma combined basis per share of S&W Common Stock giving effect to the Merger on a pooling-of-interests basis assuming in one scenario the distribution to S&W stockholders of all shares of PSS Common Stock subject to the Escrow Agreement and in another scenario no distribution to S&W stockholders of the shares of PSS Common Stock subject to the Escrow Agreement. Each calculation has also been made assuming that the exchange ratios are calculated at a maximum Base Period Trading Price of $14.9644 and that the exchange ratios are calculated at a minimum Base Period Trading Price of $12.2436. Neither PSS nor S&W has paid cash dividends on its respective common stock since inception. It is anticipated that PSS will retain all earnings for use in the expansion of the business and therefore does not anticipate paying any cash dividends in the foreseeable future. The payment of future dividends will be at the discretion of the Board of Directors of PSS and will depend, among other things, upon PSS' earnings, capital requirements and financial condition. The information shown below is not necessarily indicative of the combined results of operations or combined financial position that would have resulted had the Merger been consummated at the beginning of the periods indicated, nor is it necessarily indicative of the combined results of operations in future periods or future combined financial position. This information should be read in conjunction with the historical consolidated financial statements of PSS and S&W, including the respective notes thereto, and the pro forma financial information appearing elsewhere in this Proxy Statement-Prospectus. See "Pro Forma Condensed Combined Financial Data" and "Financial Statements."
Year Ended(1) ------------------------------ 1997 1996 1995 ---- ---- ---- Net income (loss) per common share: PSS Historical......................................... 0.12 0.04 (0.04) Pro forma combined, assuming distribution of all escrow shares(2)............................ 0.12 0.06 0.00 Pro forma combined, assuming distribution of no escrow shares(2).............................. 0.12 0.06 0.00 S&W Historical......................................... 0.23 3.65 4.43 Pro forma equivalent, assuming minimum exchange ratio and distribution of no escrow shares(3).............. 0.70 0.38 0.02 Pro forma equivalent, assuming minimum exchange ratio and distribution of all escrow shares(4)............. 0.77 0.42 0.02 Pro forma equivalent, assuming maximum exchange ratio and distribution of no escrow shares(5).............. 0.85 0.46 0.02 Pro forma equivalent, assuming maximum exchange ratio and distribution of all escrow shares(6)............. 0.94 0.51 0.02
-13-
At March 28, 1997 ----------------- Shareholders' equity per common share: PSS Historical......................................... 5.63 Pro forma combined (7):............................ 5.49 S&W Historical......................................... 21.11 Pro forma equivalent, assuming minimum exchange ratio and distribution of no escrow shares(3)............... 33.01 Pro forma equivalent, assuming minimum exchange ratio and distribution of all escrow shares(4).............. 36.39 Pro forma equivalent, assuming maximum exchange ratio and distribution of no escrow shares(5)............... 40.02 Pro forma equivalent, assuming maximum exchange ratio and distribution of all escrow shares(6).............. 44.08
- -------------- (1) PSS' fiscal year ends on the Friday closest to March 31 of each year. (2) Assumes no acquisition or restructuring costs or synergies associated with the Merger. (3) For comparative purposes, S&W pro forma equivalent per share data have been calculated by multiplying the pro forma PSS amounts by an assumed exchange ratio of 5.9566, which is the minimum exchange ratio, assuming the maximum adjustment of $200,000 to the Aggregate Purchase Price and no distribution to S&W shareholders of the shares of PSS Common Stock subject to the Escrow Agreement. See Summary - The Merger--Exchange Ratio. (4) For comparative purposes, S&W pro forma equivalent per share data have been calculated by multiplying the pro forma PSS amounts by an assumed exchange ratio of 6.5917, which is the minimum exchange ratio, assuming no adjustment to the Aggregate Purchase Price and distribution to S&W shareholders of all shares of PSS Common Stock subject to the Escrow Agreement. See Summary - The Merger-- Exchange Ratio. (5) For comparative purposes, S&W pro forma equivalent per share data have been calculated by multiplying the pro forma PSS amounts by an assumed exchange ratio of 7.2803, which is the maximum exchange ratio, assuming the maximum adjustment of $200,000 to the Aggregate Purchase Price and no distribution to S&W shareholders of the shares of PSS Common Stock subject to the Escrow Agreement. See Summary - The Merger--Exchange Ratio. (6) For comparative purposes, S&W pro forma equivalent per share data have been calculated by multiplying the pro forma PSS amounts by an assumed exchange ratio of 8.0565, which is the maximum exchange ratio, assuming no adjustment to the Aggregate Purchase Price and distribution to S&W shareholders of all shares of PSS Common Stock subject to the Escrow Agreement. See Summary - The Merger-- Exchange Ratio. (7) For comparative purposes, PSS pro forma combined per share data have been calculated by multiplying the pro forma PSS amounts by an assumed exchange ratio of 8.0565, which is the maximum exchange ratio, assuming distribution to S&W shareholders of all shares of PSS Common Stock subject to the Escrow Agreement. See Summary - The Merger--Exchange Ratio. -14- Summary Unaudited Pro Forma Condensed Combined Financial Information of PSS and S&W The following table sets forth unaudited selected pro forma condensed combined financial data of PSS and S&W assuming the Merger is consummated and accounted for under the pooling-of-interests method reflecting the distribution to S&W stockholders of all shares held pursuant to the Escrow Agreement. See "The Merger--Accounting Treatment." The pro forma financial data is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Merger had been consummated on the dates indicated, nor is it necessarily indicative of future operating results or financial position. The pro forma financial data has been derived from and should be read in conjunction with the pro forma financial data, including the notes thereto, appearing elsewhere in this Proxy Statement- Prospectus. See "Pro Forma Condensed Combined Financial Data."
For the Year Ended March --------------------------------------------- 1997 1996 1995 -------- -------- -------- (In thousands, except per share data) Income Statement Information (unaudited): Net sales................................................ $763,050 $589,120 $471,985 Gross profit............................................. 204,895 162,590 132,315 Income from operations................................... 3,874 4,848 5,686 Other income (expense)................................... 2,768 (794) (2,588) Net income............................................... 4,463 2,086 67 Net income per common and common equivalent share....................................... 0.12 0.06 0.00 Weighted average shares outstanding...................... 38,392 33,198 25,412 At March 28, 1997 ----------------- (In thousands) Balance Sheet Information (unaudited): Working capital.......................................... $172,228 Intangible assets, net of accumulated amortization....... 22,084 Total assets............................................. 321,270 Total long-term debt..................................... 4,908 Total shareholders' equity............................... 210,055
-15- RISK FACTORS In addition to the other information in this Proxy Statement-Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of PSS Common Stock offered by this Proxy Statement-Prospectus. Integration of Operations The success of the Merger will be determined by various factors, including management's ability to integrate effectively the operations of PSS and S&W and the financial performance of the companies' operations after the Merger. Factors which will affect management's ability to integrate successfully the operations of PSS and S&W include the ability to implement management systems that take advantage of marketing and cost saving opportunities and to minimize the financial impact or expenses associated with the integration of the centers. That can be no assurance that the Merger will not adversely affect the future operating results of PSS. See "The Merger," "Business of PSS," "S&W Management's Discussion and Analysis" and "Business of S&W." Anticipated Expansion and Management of Expanded Operations The Company intends to acquire additional distributors in markets it already services and expects to open additional service centers. The Company's ability to expand its operations is dependent upon a number of factors, including (i) the availability of suitable acquisition candidates on acceptable terms, (ii) the Company's ability to continue to consolidate and integrate its acquisitions with its existing operations, and (iii) the Company's ability to attract, train, and retain skilled sales representatives and management. Management anticipates that each start-up service center opened will generally incur operating losses for 18 months. Accordingly, the Company's planned expansion creates numerous risks, including the risk that the expansion may have an adverse effect on working capital and earnings during the expansion period and acquisition transition period, that substantial indebtedness may be incurred in connection with the expansion and that significant losses could result in the event of unsuccessful acquisitions or start-ups. The Company recently has expanded into new product areas, including radiology and imaging equipment, chemicals and supplies to the acute and alternate site markets. The integration and operation of this new division may place significant demands on the Company's management and other resources. There can be no assurance that there will be any operating efficiencies between the Company's businesses or that its diagnostic imaging division can be operated profitably, which could have a material adverse effect on the Company's business and future prospects. The Company plans to aggressively pursue additional expansion opportunities in this market, however, there can be no assurance that the Company will be successful in acquiring, operating or integrating additional operations. In addition, the radiology and imaging equipment market is heavily reliant on the hiring and retention of skilled service technicians to maintain such equipment. There is a current shortage of these skilled technicians, which may result in intense competition and increasing salaries. Any inability of the Company to hire or retain such skilled technicians could limit the Company's ability to expand and adversely affect its results of operations. Management of International Operations Through its WorldMed International subsidiary, the Company has recently acquired medical supply distributors serving physicians in Belgium, France, Germany and the Netherlands and plans to increase its presence in European markets. As the Company expands internationally, it will need to hire, train and retain qualified personnel in countries where language, cultural or regulatory impediments may exist. The Company has encountered and expects to encounter significant expense and delay in expanding its international operations because of language and cultural differences, and staffing, communications and related issues. There can be no assurance that the Company's services and business practices will be accepted by vendors, physicians or other involved parties in foreign markets. -16- International revenues are subject to inherent risks, including political and economic instability, difficulties in staffing and managing foreign operations and in accounts receivable collection, fluctuating currency exchange rates, costs associated with localizing service offerings in foreign countries, unexpected changes in regulatory requirements, difficulties in the repatriation of earnings and burdens of complying with a wide variety of foreign laws and labor practices. Dependence on Manufacturers The Company distributes over 35,000 products manufactured by approximately 3,000 vendors and is dependent on these vendors for the manufacture and supply of product. Additionally, the Company has entered into a significant contract with Abbott, which may be terminated by Abbott if the Company does not meet certain sales levels. The Company's ability to maintain good relations with these vendors will affect the profitability of its business. Currently, the Company relies on vendors to provide (i) field sales representatives' technical and selling support, (ii) agreeable purchasing and delivery terms, (iii) sales performance incentives, (iv) financial support of sales and marketing programs, and (v) promotional materials. There can be no assurance that the Company will maintain its good relations with its vendors. Regulation of and Change in Practice of Medicine The health care industry, including the practice of medicine by physicians, is subject to extensive government regulation, licensure and operating procedures. The Company cannot predict the impact that present or future regulations may have on operations of the Company or on its plan to expand its business activities. In addition, as consolidation among physician provider groups continues and provider networks are created, purchasing decisions may shift to individuals with whom the Company has not had prior selling relationships. The Company is increasingly focusing on national accounts where the purchasing decision may not be made by the Company's traditional physician customers. There can be no assurance that the Company will be able to maintain its customer relationships in such circumstances. Dependence on Third-Party Reimbursement The cost of a significant portion of medical care in the United States is funded by government and private insurance programs, such as Medicare, Medicaid and corporate health insurance plans. In recent years, government-imposed limits on reimbursement of hospitals and other health care providers have significantly impacted spending budgets in certain markets within the medical supply and equipment industry. Private third-party reimbursement plans are also developing increasingly sophisticated methods of controlling health care costs through redesign of benefits and exploration of more cost-effective methods of delivering health care. Accordingly, there can be no assurance that reimbursement for purchase and use of medical equipment and supplies by physicians' offices will not be limited or reduced and thereby adversely affect future sales by the Company. Two-Tier Pricing As a result of the Non-Profit Act of 1944, the medical supplies and equipment industry is subject to a two-tier pricing structure. Under this structure, certain institutions, originally limited to non-profit hospitals, can obtain more favorable prices for medical supplies and equipment than the Company. The two-tiered pricing structure continues to expand as many large integrated health care providers and others with significant purchasing power demand more favorable pricing terms. Although the Company is seeking to obtain similar terms from its manufacturers, there can be no assurance that such terms can be obtained. Such a pricing structure, should it persist, may put the Company at a competitive disadvantage. Sales Representatives The Company's sales growth has resulted to a significant degree from hiring and developing new sales representatives and adding, through acquisitions, established sales representatives whose existing customers -17- generally have become customers of the Company. The Company's continued growth will depend in part on its ability to continue to hire, train and retain sales representatives who agree to the Company's compensation plans and to maintain good relations with its existing sales representatives. Key Management The success of the Company is dependent upon the efforts and abilities of its senior management, including the Company's Chairman and Chief Executive Officer, Patrick C. Kelly, its President, John F. Sasen, Sr. and its Executive Vice President and Chief Financial Officer, David A. Smith. The loss of any such senior management may adversely affect the Company's business. The Company maintains key man life insurance on Mr. Kelly. Competition The marketing of medical supplies and equipment to physicians' offices is highly competitive. Some of the Company's competitors are larger and have greater financial resources than the Company. Also, the Company could encounter additional competition because many of the products it sells are readily obtainable by others from various sources of supply and such competitors could consolidate into regional or national networks. In addition, a competitor of the Company could obtain exclusive rights to market a certain product to the exclusion of the Company. There can be no assurance that the Company will not face increased competition in the future. Liability Exposure Although the Company is not a manufacturer, the distribution of medical supplies and equipment entails risks of product liability. Despite the fact that the Company has not to date experienced any significant product liability claims and currently maintains liability insurance coverage, such insurance is expensive, difficult to obtain and may be unobtainable in the future on acceptable terms, if at all. The Company operates approximately 700 trucks to deliver medical supplies and equipment on a same-day delivery basis. The Company has experienced various claims regarding motor vehicle accidents, all of which have been covered by insurance. The Company believes that it maintains adequate insurance coverage for such claims. Nevertheless, the amount and scope of any coverage may be inadequate in the event that a product liability or motor vehicle accident claim is successfully asserted against the Company. Reliance on Data Processing The Company's business is dependent upon its ongoing ability to obtain, process, analyze and manage data, and to maintain and upgrade its data processing capabilities. Interruption of data processing capabilities for any extended length of time, the failure to upgrade data services, difficulties in converting data and information systems after acquisitions, loss of stored data, programming errors or other computer problems could have a material adverse effect on the Company's business. Anti-Takeover Provisions; Possible Issuance of Preferred Stock The Company's Amended and Restated Articles of Incorporation and Bylaws contain various provisions that may make it more difficult for a third party to acquire, or may discourage acquisition bids for, the Company and could limit the price that certain investors might be willing to pay in the future for shares of the Common Stock. In addition, the rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of any holders of Preferred Stock that may be issued in the future and that may be senior to the rights of the holders of Common Stock. Furthermore, the Company has not opted out of certain provisions of the Florida Business Corporation Act, including the provisions relating to control-share acquisitions, which could have the effect of delaying, deferring or preventing a change in control of the Company without further action by its shareholders. See "Description of PSS Capital Stock." -18- GENERAL INFORMATION Special Meeting This Proxy Statement-Prospectus is being furnished by S&W to its stockholders in connection with the solicitation of proxies by the Board of Directors of S&W from holders of the outstanding shares of S&W Common Stock for use at the S&W Special Meeting and at any adjournments and postponements thereof, to consider and vote upon a proposal to approve the Merger Agreement, the Escrow Agreement and consummation of the transactions contemplated therein, including appointment of the Stockholder Representatives, and to transact such other business as may properly come before the S&W Special Meeting. This Proxy Statement-Prospectus is also being furnished by PSS to holders of S&W Common Stock as a Prospectus in connection with the issuance by PSS to them of shares of PSS Common Stock upon consummation of the Merger. The Merger Agreement provides for a transaction whereby S&W will merge with and into DI, a wholly owned subsidiary of PSS. DI shall be the surviving corporation of the Merger and shall remain a wholly owned subsidiary of PSS and continue to be governed by the laws of the State of Florida. At the Effective Time, each issued and outstanding share of S&W Common Stock shall cease to be outstanding and shall be converted into and exchanged for the right to receive shares of PSS Common Stock and a contingent right to receive additional PSS Common Stock, as provided in the Escrow Agreement. See "The Merger--Exchange Ratio." If the Merger Agreement is approved at the Special Meeting, any required regulatory approvals are obtained, and all of the other conditions to the obligations of the parties to consummate the Merger are either satisfied or waived (as permitted), the Merger will be consummated. See "The Merger-- Effective Time." Record Date and Quorum The S&W Board of Directors has fixed the close of business on August 10, 1997, as the record date for determining the S&W stockholders entitled to receive notice of and to vote at the Special Meeting. The presence, in person or by Proxy, of the holders of shares of S&W Common Stock entitled to cast a majority of the votes entitled to be cast at the S&W Special Meeting will constitute a quorum at the S&W Special Meeting. Solicitation of Proxies In addition to solicitation by mail, directors, officers and employees of S&W, who will not be specifically compensated for such services, may solicit proxies from the stockholders of S&W, personally or by telephone or telegram or other forms of communication. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward soliciting materials to beneficial owners and will be reimbursed for their reasonable expenses incurred in doing so. Voting and Revocability of Proxies Shares of S&W Common Stock represented by a properly executed proxy, if such proxy is received in time and is not subsequently revoked, will be voted in accordance with the instructions indicated on such proxy. If a proxy is properly executed and returned without indicating any voting instructions, shares of S&W Common Stock represented by such proxy will be voted FOR approval of the Merger Agreement, the Escrow Agreement and consummation of the transactions contemplated therein, including appointment of the Stockholder Representatives as provided in the Escrow Agreement. Any proxy given may be revoked by the person giving it at any time prior to its exercise at the Special Meeting by (i) giving written notice of revocation to the Secretary of S&W, (ii) properly submitting to S&W a duly executed proxy bearing a later date, or (iii) voting in person at the Special Meeting. All written notices of -19- revocation and other communications with respect to revocation of S&W proxies should be addressed to S&W as follows: S&W X-Ray, Inc., Cornerstone Center, 2300 Buffalo Road, Rochester, New York 14824, Attention: George R. Privitera. Vote Required As of the S&W Record Date, there were 259,574 shares of S&W Common Stock issued and outstanding and held by approximately ____ record holders and 4,009 shares of S&W Common Stock to be issued on the Closing Date pursuant to the S&W Supplemental Executive Retirement Plan. Each share of S&W Common Stock is entitled to one vote. Approval of the Merger Agreement, the Escrow Agreement and consummation of the transactions contemplated therein, including the appointment of the Stockholder Representatives, requires the affirmative vote of the holders of a majority of the outstanding shares of S&W Common Stock entitled to vote thereon at the Special Meeting. Accordingly, approval of the Merger Agreement will require the affirmative vote of the holders of shares of PSS Common Stock entitled to cast a minimum of 131,792 votes. The S&W X-Ray, Inc. Employee Stock Ownership Plan and Trust ("ESOP") owns 32.96% of the outstanding shares of S&W Common Stock. The ESOP has retained Consulting Fiduciaries, Inc. for the purposes of (i) determining what action the ESOP should take with respect to the Merger; (ii) administering any pass-through voting process with respect to any such proposal and receiving the directions of the participants and beneficiaries entitled to vote under the ESOP; (iii) with respect to any shares of S&W stock held in the ESOP for which voting directions are not received from any participant or beneficiary, determining how such shares should be voted; and (iv) taking whatever action it shall deem appropriate, including directing the Trustee of the Trust regarding voting of shares of S&W Common Stock. As of the S&W Record Date, S&W directors and executive officers, and their affiliates, held approximately 33% of the votes entitled to vote at the Special Meeting. Holders of approximately 66% of the outstanding votes represented by the S&W Common Stock have agreed to vote in favor of the Merger Agreement, the Escrow Agreement and the consummation of the transactions contemplated therein, including the appointment of the Stockholder Representatives, and, therefore, approval of such matters is assured. As of the S&W Record Date, PSS directors and executive officers, and their affiliates, held no S&W Shares. -20- THE MERGER The following information describes certain information pertaining to the Merger. This description does not purport to be complete and is qualified in its entirety by reference to the Annexes hereto, including the Merger Agreement and the Escrow Agreement, copies of which are set forth in Annex A and Annex B, respectively, to this Proxy Statement-Prospectus and are incorporated herein by reference. All stockholders are urged to read each Annex in its entirety. General The Merger Agreement provides that S&W shall merge with and into DI, a wholly owned subsidiary of PSS. DI shall be the surviving corporation of the Merger and shall remain a wholly owned subsidiary of PSS and continue to be governed by the laws of the State of Florida. At the time the Merger becomes effective, each share of issued and outstanding S&W Common Stock and each share of S&W Common Stock to be issued pursuant to the S&W Supplemental Executive Retirement Plan (excluding shares held by stockholders who perfect their dissenters' rights) shall cease to be outstanding and shall be converted into and exchanged for the right to receive shares of PSS Common Stock and a contingent right to receive additional PSS Common Stock, as provided in the Escrow Agreement. If the Merger Agreement is approved at the Special Meeting, all required consents and approvals are obtained, and all other conditions to the obligations of the parties to consummate the Merger are either satisfied or waived (as permitted), the Merger will be consummated. A copy of the Merger Agreement is set forth in Annex A of this Proxy Statement-Prospectus and a copy of the Escrow Agreement is set forth in Annex B. See "Exchange Ratio." Background of the Merger On January 7 and 8, 1997, the Board of Directors of S&W held meetings to discuss various strategic alternatives for S&W X-Ray, including the viability of leading an industry consolidation effort or the possible sale of the business. In its discussions, the Board noted that several of the companies it intended to consolidate had recently been acquired or entered into agreements with a new industry company named as a subsidiary of PSS. The general consensus was there a sale of S&W would be in the best interest of the shareholders and employees. The Board authorized the retention of Steve Cook as financial advisor to assist in the potential sale of the business. The Board of Directors believed that they could receive the best value for the Company from PSS or its subsidiary based on such companies prior acquisition activity. Mr. Cook had represented other companies in their respective sales to PSS. In January 1997, S&W retained Steve Cook as financial advisor in connection with the potential sale of the business. Based on the advice of Mr. Cook, it was decided that S&W would develop a presentation of its past and future financial performance. On February 4 and 5, 1997, a representative of DI, Rutherrford Deas, Vice President, visited the Syracuse location of S&W for the purpose of explaining the DI strategy and goals. The meeting was held with S&W representatives Joe Miller, George Privitera and Ron Cronin. On February 25, 1997 a S&W Board of Directors meeting included discussions of S&W's sale progress and presentations by the DI representative. The Board authorized a visit to the DI corporate offices to make a presentation of S&W and to learn more about DI. On March 8 through 11, 1997, Joe Miller, Bruce Ashby, George Privitera, Ron Cronin and Steve Cook visited and presented S&W to David Smith, Gene Dell, Rutherford Deas, Glenn Green and Bruce Treadway of PSS and DI PSS and DI representatives gave a presentation of the past performance and future strategies of PSS and DI. On March 17, 1997, Bruce Ashby at the direction of the S&W Board of Directors contacted telephonically another national x-ray distributor regarding their interest in purchasing S&W. -21- On April 10, 1997, S&W received an offer for the merger of S&W into with and DI and the receipt of shares of PSS common stock. Also on April 10, 1997, Joe Miller received a telephone call from the other national x-ray distributor that was contacted by Bruce Ashby. The discussions did not result in an offer. On April 15 and 16, 1997, the S&W Board of Directors met to discuss the offer from PSS. The Board concluded that further conversations were necessary before a decision was warranted. In addition, the Board authorized S&W to hire David Heald and Fiduciary Consultants, Inc. based on discussions and recommendations from S&W's benefits counsel, Menke and Associates. In April 1997, David Heald and Fiduciary Consultants, Inc. were engaged to consult with the Company regarding its ESOP. On April 17, 1997, Joe Miller, Bruce Ashby, George Privitera and Ron Cronin telephonically responded to David Smith at PSS regarding the merger offer. It was agreed that new additional financial information of S&W would be sent to PSS. On April 20, 1997, David Smith and Gene Dell of PSS and DI met in Rochester location of S&W with Joe Miller, George Privitera, Bruce Ashby, Ron Cronin and Steve Cook for due diligence and merger discussions. On April 21, 1997, George Privitera sent additional financial information to PSS. On April 29, 1997, S&W received a second offer of merger from PSS. On April 29, 1997, the executive committee of the PSS Board of Directors met telephonically to discuss the S&W merger offer. The executive committee authorized David Smith to extend the second offer of merger. On May 1, 1997, the S&W Board of Directors met to discuss the PSS offer and concluded that further discussions were necessary before a decision was warranted. In mid-May 1997, Joe Miller and Bruce Ashby telephonically responded to the PSS offer. During this call Joe Miller suggested that David Smith and Patrick Kelly should visit Rochester location of S&W for further discussions and due diligence. On May 23, 1997, Patrick Kelly, David Smith and Kathy Fehling visited the Syracuse location of S&W for additional due diligence and merger discussions. On May 29, 1997, PSS issued its final offer of merger. On May 29, 1997, the S&W Board of Directors met to discuss the PSS offer and decided after discussion that it was in the best interests of shareholders and employees to accept this offer. On May 29, 1997, the executive committee of the PSS Board of Directors met telephonically to discuss the S&W merger offer. The executive committee authorized David Smith to extend the final offer of merger. On June 14, 1997, the PSS Board of Directors met to discuss the S&W transactions, and on July 22, 1997, the PSS Board of Directors approved the merger offer to S&W. On July 29, 1997, the parties met telephonically to discuss due diligence findings and adjusted the offer of merger to reflect the same. On July 30, 1997, the S&W Board of Directors met and accepted the adjustments to the offer based on these findings. -22- Reasons for the Merger PSS. The PSS Board of Directors, after consideration of relevant business, financial, legal and market factors, including the compatibility of the operations and management of S&W and PSS, and the future prospects of S&W and PSS, has concluded that the Merger is in the best interests of PSS. The PSS Board believes that the Merger is desirable for the following reasons, among others: (i) S&W has distribution centers in desirable locations and will expand the distribution area for PSS' Diagnostic Imaging, Inc. medical diagnostic imaging division; (ii) S&W's existing business relationships will be enhanced by affiliation with the distribution networks of PSS and DI; and (iii) S&W has a strong management team and sales and service force, which is knowledgeable and experienced in the industry. S&W. The S&W Board of Directors, after consideration of relevant business, financial, legal and market factors, including the compatibility of the operations and management of S&W and PSS, and the financial condition, results of operations and future prospects of S&W and PSS, has concluded that the Merger is in the best interests of S&W and its stockholders. In reaching its decision to enter into the Merger Agreement and to recommend that the stockholders of S&W vote for the approval and adoption of the Merger Agreement, the Board of Directors considered a number of factors, including, without limitation and without assigning relative weights thereto, the following: (i) the terms and conditions of the proposed Merger, including the value of the consideration to be received by the stockholders of S&W, the fact that as PSS stockholders the S&W stockholders would have more liquidity, and the fact that the Merger is expected to be treated as a tax-free reorganization; (ii) the opportunity for holders of S&W shares to continue to share in the potential for long-term gains in S&W through the ownership of PSS Common Stock following the Merger; (iii) the business reputation and capabilities of PSS and DI and their management, and the financial strength, prospects, market position and strategic objectives of PSS and DI; and (iv) the perceived strengths of DI and S&W combined, the belief that DI and S&W are strategically complementary and that the combined companies will be able to compete more effectively in the marketplace. THE BOARD OF DIRECTORS OF S&W UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT, THE ESCROW AGREEMENT AND CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING THE APPOINTMENT OF THE STOCKHOLDER REPRESENTATIVES. Exchange Ratio The Merger Agreement provides that at the effective time of the Merger, each outstanding share of S&W Common Stock and each share of S&W Common Stock to be issued pursuant to the S&W Supplemental Executive Retirement Plan (excluding shares held by stockholders who perfect their dissenter's rights) shall cease to be outstanding and shall be converted into and exchanged for (i) the right to receive that number of shares of PSS Common Stock equal to the Aggregate Purchase Price (as defined below) minus the Escrow Dollar Amount (as defined below) and the contingent right to receive that number of shares equal to the Escrow Dollar Amount; (ii) divided by the sum of all shares of S&W Common Stock issued and outstanding or issuable upon the conversion of all convertible securities or rights of any nature with respect to S&W Common Stock; (iii) which amount is divided by the Base Period Trading Price (as defined below) (the "Common Stock Exchange Ratio"). Pursuant to the Merger Agreement, the "Aggregate Purchase Price" is defined to be $26,000,000, minus any legal, accounting, consulting and investment advisory expenses in excess of $350,000 incurred by S&W or on S&W's behalf in connection with the transactions contemplated under the Merger Agreement; provided that such adjustment shall not exceed $200,000. In the event that the foregoing adjustments would result in a decrease to the -23- Aggregate Purchase Price of more than $200,000 but for the foregoing proviso, PSS shall have the right to terminate the Merger Agreement. Pursuant to the Merger Agreement, the "Escrow Dollar Amount" is defined to be $1,015,000 plus five percent of the Aggregate Purchase Price. The term "Base Period Trading Price" is defined in the Merger Agreement as the average of the daily closing prices for the shares of PSS Common Stock for the ten (10) consecutive trading days on which such shares are actually traded as over-the-counter securities and quoted on the Nasdaq National Market ending at the close of trading on the second trading day immediately prior to the Closing Date, provided, however, that for purposes of such calculation, the Base Period Trading Price shall be deemed to equal (i) $14.9644 in the event the Base Period Trading Price is greater than $14.9644 or (ii) $12.2436 in the event the Base Period Trading Price is less than $12.2436 (collectively, the "Base Period Trading Price Limitations"). In the event S&W or PSS changes the number of shares of S&W Common Stock or PSS Common Stock, or other common stock equivalents, on a fully diluted basis, issued and outstanding prior to the Effective Time, or declares any stock split, stock dividend or similar recapitalization with respect to such stock and the record date therefor shall be prior to the Effective Time, the Exchange Ratio shall be proportionately adjusted; provided, however, that no such adjustment shall occur as a result of the conversion at or prior to the Effective Time of shares of PSS Series Preferred Stock into shares of PSS Common Stock or the exercise of any presently outstanding options or warrants of PSS or S&W. Escrow Agreement The aggregate number of shares of PSS Common Stock issuable by PSS under all contingent rights to receive PSS Common Stock (the "Escrow Shares") shall be issued and held by The Bank of New York, as Escrow Agent following the Effective Time pursuant to the terms of the Escrow Agreement. The aggregate number of Escrow Shares shall equal $1,015,000 plus five percent of the Aggregate Purchase Price, which amount is divided by the Base Period Trading Price. Subject to the terms of the Escrow Agreement, the Escrow Shares shall be used, if necessary, to indemnify PSS, DI and S&W (the "indemnitees") for (i) losses incurred by DI or PSS by reason of the failure of DI to receive by the first anniversary of the Closing Date the accounts receivable of S&W due to S&W as of the Closing Date in excess of $180,000; (ii) expenses up to $10,000 incurred by PSS or DI on behalf of the Representatives in connection with the performance of their obligations thereunder; (iii) one-half of expenses incurred by PSS or DI on behalf of the Escrow Agent in connection with the performance of its obligations thereunder in an amount up to $5,000 (collectively (i), (ii) and (iii), the "specific claims"); and (iv) losses incurred by DI or PSS as a result of a breach of any of the representations and warranties or covenants and agreements of S&W (the "general claims"). The time period for the general claims is until (i) the first publication by PSS of audited consolidated financial statements covering an accounting period after the Closing Date with respect to those items that would be discoverable in an audit, and (ii) one year with respect to all other claims, except to the extent that certain specific claims remain pending at the time the Escrow Agreement would otherwise terminate. For the duration of the escrow, all Escrow Shares may be used to satisfy a claim by the indemnitees, regardless of whether the claim is based upon specific or general claims. If a dispute about whether a particular loss is indemnifiable under the Escrow Agreement is unable to be resolved by the Stockholder Representatives and the indemnitee(s), such dispute is to be submitted to binding arbitration on an informal basis as provided in the Escrow Agreement. All cash dividends or other cash income with respect to the Escrow Shares shall also be held in escrow with the Escrow Shares pursuant to the terms of the Escrow Agreement. Each stockholder has the right to direct the voting of the Escrow Shares. In the event of any stock split or stock dividend with respect to PSS Common Stock that becomes effective during the term of the Escrow Agreement, the additional shares issued with respect to the Escrow Shares shall be added to the Escrow Shares and the terms of the Escrow Agreement will be adjusted accordingly to account for such additional shares. The Stockholder Representatives will have full power and authority to represent the S&W stockholders with respect to all matters arising under the Escrow Agreement and all action taken by the Stockholder Representatives under the Escrow Agreement shall be binding upon the S&W stockholders. Joseph E. Miller, Jr., Bruce P. Ashby and the S&W X-Ray, Inc. Employee Stock Ownership Trust are proposed to be the Stockholder Representatives. -24- Covenants Not to Compete It is a condition to the obligation of PSS to close the Merger that Joseph E. Miller, Jr. and Bruce P. Ashby shall enter into fifteen-year Covenants Not to Compete and George Privitera and Ron Cronin shall enter into eight-year Covenants Not to Compete pursuant to which, for the duration of such agreements, such person covenants and agrees not to (i) own, operate or be associated with a diagnostic imaging medical supply distribution company which competes with DI in the states of New York, New Jersey, Pennsylvania and Connecticut (a "Prohibited Business"), (ii) become financially interested in any person or entity engaged in a Prohibited Business, or (iii) solicit or attempt to solicit any employee or contractor away from PSS or DI. Each shareholder will also covenant (i) not to solicit or attempt to solicit any customer of S&W as of the date of Closing or any prospective customer to which a written or specific oral proposal was submitted during the twelve (12) month period prior to Closing, and (ii) not to copy, remove or disclose any confidential or proprietary information relating to the businesses of S&W, PSS, DI or their affiliates. Remedies for violation of any provision of the Covenant Not to Compete include injunctive relief and monetary damages. Joseph E. Miller, Jr. and Bruce P. Ashby will receive aggregate cash payments of $1,900,000 and $1,4000,000, respectively, as additional consideration for his Covenant Not to Compete upon consummation of the Merger, payable in installments over the fifteen-year term of such agreements. In addition, George Privitera and Ron Cronin will receive aggregate payments of $700,000 each as additional consideration for his Covenant Not to Compete upon consummation of the Merger, payable in installments over the eight-year term of such agreements. Fractional Shares Pursuant to the terms of the Merger Agreement, each holder of shares of S&W Common Stock and each holder of S&W Common Stock to be issued pursuant to the S&W Supplemental Executive Retirement Plan exchanged pursuant to the Merger, who would otherwise have been entitled to receive a fraction of a share of PSS Common Stock shall receive, in lieu thereof, a cash payment equal to the fractional amount due multiplied by the Base Period Trading Price, and each holder of shares of S&W Common Stock exchanged pursuant to the Merger, who would otherwise have been entitled to receive a contingent right to receive a fraction of a share of PSS Common Stock on the Final Settlement Date shall receive, in lieu thereof, a contingent right to receive one additional share of PSS Common Stock on the Final Settlement Date if such fraction is 0.5 or more and nothing if such fraction is less than 0.5. Effective Time If the Merger Agreement is approved by the requisite vote of the S&W stockholders, and all other required consents and approvals are received, and if the other conditions to the Merger are satisfied or waived (as permitted), the Merger will be consummated and effected on the date and at the time the Articles of Merger, reflecting the Merger, are filed with the Secretary of State of the State of Florida and the Secretary of State of the State of New York (the "Effective Time"). See "Conditions to Consummation." Distribution of PSS Certificates Promptly after the Effective Time, PSS shall distribute appropriate transmittal materials to use in effecting the surrender and cancellation of those certificates in exchange for PSS Common Stock (which shall contain an affidavit for lost or stolen stock certificates and which shall specify that delivery shall be effected, and risk of loss and title to the certificates theretofore representing shares of S&W Common Stock shall pass, only upon proper delivery of such certificates of PSS by the former stockholders of S&W). After the Effective Time, each holder of shares of S&W Common Stock issued and outstanding and each holder of S&W Common Stock to be issued pursuant to the S&W Supplemental Executive Retirement Plan at the Effective Time (other than shares as to which dissenters' rights have been perfected) shall surrender the certificate or certificates representing such shares to PSS, and the certificates thus surrendered will be canceled. PSS shall not be obligated to deliver the consideration to which any former holder of shares of S&W Common Stock is entitled until such holder surrenders such holder's certificate or certificates representing such holder's shares for exchange. The certificate or certificates so -25- surrendered shall be duly endorsed as PSS may require. No party shall be liable to a holder of shares of S&W Common Stock for any property delivered in good faith to a public official pursuant to any applicable abandoned property law. After the Effective Time, holders of certificates will have no rights with respect to the shares of S&W Common Stock represented thereby other than the right to surrender such certificates and receive in exchange therefor the shares of PSS Common Stock, if any, to which such holders are entitled, as described above, or the right to perfect their dissenters' rights. In addition, no dividend or other distribution payable to holders of record of PSS Common Stock will be paid to the holder of any S&W certificates until such holder surrenders such certificates for exchange as instructed. Subject to applicable law, upon surrender of the certificates, such holder will receive the certificates representing the shares of PSS Common Stock issuable upon the exchange or conversion of such shares of S&W Common Stock, all withheld dividends or other distributions (without interest), and any withheld cash payments (without interest) to which such stockholder is entitled. If any certificate for PSS Common Stock is to be issued in a name other than that in which the S&W certificate surrendered for exchange is issued, the S&W certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer, and the person requesting such exchange shall affix any requisite stock transfer tax stamps to the certificates surrendered, shall provide funds for their purchase, or shall establish to the exchange agent's satisfaction that such taxes are not payable. Certain Federal Income Tax Consequences The following is a discussion of certain federal income tax consequences of the Merger. This discussion is based on the provisions of the Code, the Treasury Regulations thereunder and rulings and court decisions as of the date hereof, all of which are subject to change, possibly retroactively. The discussion is included for general information purposes only, applies only to S&W stockholders, if any, who hold their stock as a capital asset, and may not apply to S&W stockholders, if any, who received S&W stock upon the exercise of employee stock options or otherwise as compensation. PSS, DI, and S&W have not requested a ruling from the Internal Revenue Service (the "Service") or a tax opinion from legal counsel in connection with the proposed transactions. The Merger is intended to be a tax-free reorganization within the meaning of Section 368(a) of the Code. Among other things, the following discussion is based on S&W stockholders maintaining sufficient equity ownership interest in PSS after the Merger. The Service takes the position for purposes of issuing an advance ruling on reorganizations, that the stockholders of an acquired corporation (i.e., S&W) must maintain a continuing equity ownership interest in the corporation controlling the acquiring corporation (i.e., PSS) equal, in terms of value, to at least 50 percent of their interest in such acquired corporation. Pursuant to this requirement, the management of S&W it believes that there is no plan or intention by any of the S&W stockholders who own one percent or more of the outstanding S&W Common Stock and, to the best knowledge of the management of S&W, the remaining S&W stockholders have no plan or intention to sell, exchange or otherwise dispose of a number of the shares of PSS Common Stock that they will receive in the Merger that would reduce on the part of S&W stockholders such stockholders' ownership to a number of shares of PSS Common Stock having an aggregate value as of the Effective Time of less than 50 percent of the aggregate value of all of the outstanding shares of S&W Common Stock immediately prior to such time. For this purpose, shares of S&W Common Stock exchanged for cash or other property, surrendered by dissenters or exchanged for cash in lieu of fractional shares of PSS Common Stock will be treated as outstanding S&W Common Stock at the Effective Time. Moreover, shares of S&W Capital Stock and PSS Common Stock held by S&W stockholders and otherwise sold, redeemed or disposed of prior or subsequent to such time are taken into account. In addition, management of PSS has no plan or intention to cause PSS to redeem or otherwise reacquire the shares of PSS Common Stock issued in the Merger. Furthermore, management of S&W has advised PSS it believes that in the Merger, the S&W stockholders will exchange an amount of stock representing "control" of S&W (meaning the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation) solely for PSS Common Stock. In addition to the foregoing requirements certain additional matters must be true with respect to the Merger. PSS and S&W believe that these additional factual matters will be satisfied. -26- Assuming the Merger is treated as a reorganization as defined in Section 368(a) of the Code, the following should be the material federal income tax consequences to the S&W stockholders: (i) Except for those shareholders who dissent to the proposed transaction and those who receive cash instead of a fractional share of PSS Common Stock, no gain or loss will be recognized for federal income tax purposes by S&W stockholders upon the exchange of their shares of S&W Common Stock for shares of PSS Common Stock. (ii) The basis of the shares of PSS Common Stock to be received by S&W stockholders will be the same as the basis of the shares of S&W Common Stock surrendered in exchange therefor. (iii) The holding period of the PSS Common Stock to be received by S&W stockholders will include the period during which the shares of S&W Common Stock surrendered in exchange therefor had been held, provided such shares were held by such stockholders as a capital asset at the Effective Time. (iv) Dissenting S&W stockholders who receive solely cash from S&W in exchange for their stock will be treated as having received such payments as distributions in redemption of their shares of such stock, subject to certain limitations. After such distribution, if a former S&W stockholder neither owns PSS capital stock nor is deemed to own PSS capital stock under constructive ownership rules, the redemption will be a complete termination of interest and will be treated as distribution in full payment in exchange for the shares of S&W Common Stock. Accordingly, such stockholder will recognize gain or loss measured by the difference between the amount of cash received and such stockholder's adjusted basis in stock surrendered. S&W stockholders electing to exercise dissenters' rights should consult their own tax advisers as to the tax treatment in their particular circumstances. (v) The payment of cash in lieu of fractional shares of PSS Common Stock will be treated as if the fractional shares were issued as part of the exchange and then redeemed by PSS. These cash payments will be treated as having been received as distributions in full payment in exchange for the fractional shares of PSS Common Stock redeemed as provided in Section 302(a) of the Code. Generally, any gain or loss recognized upon such exchange will be capital gain or loss, provided the fractional share would constitute a capital asset in the hands of the exchanging stockholder. Pursuant to the Merger Agreement, PSS has agreed to bear and pay reasonable expenses of S&W in connection with the negotiation and consummation of the transactions contemplated by the Merger Agreement, in an amount not to exceed $350,000 in the aggregate. The above discussion is based on the belief of management that all such expenses are properly expenses of S&W. If it is determined that some of these expenses are actually expenses of S&W stockholders, payment of such expenses could constitute constructive dividends to such stockholders. BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER AND OTHER FACTORS, EACH HOLDER OF S&W COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISER TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS). Management and Operations After the Merger DI shall be the surviving corporation resulting from the Merger and shall operate the business of S&W from and after the Closing Date as a wholly owned subsidiary of PSS. DI shall continue to be governed by the laws of the State of Florida, and shall operate in accordance with its Articles and Bylaws as in effect on the date of the Merger Agreement until otherwise amended or repealed after the Effective Time. -27- Interests of Certain Persons in the Merger Joseph E. Miller, Jr. and Bruce P. Ashby will receive aggregate cash payments of $1,900,000 and $1,4000,000, respectively, as additional consideration under a Covenant Not to Compete upon consummation of the Merger, payable in installments over the fifteen-year term of such agreements. In addition, George Privitera and Ron Cronin will receive aggregate payments of $700,000 each as additional consideration under a Covenant Not to Compete upon consummation of the Merger, payable in installments over the eight-year term of such agreements. As of the date hereof, no director or executive officer of PSS or S&W has any substantial interest, direct or indirect, in the Merger, other than an interest arising from the ownership of S&W Common Stock, in which case the director or officer receives no extra or special benefit not shared on a pro rata basis by all other holders of S&W Common Stock. For information as to the ownership of S&W Common Stock by those directors and executive officers, see "Ownership of Equity Securities--S&W." Conditions to Consummation The obligation of PSS to consummate the Merger is subject to, among others, the following conditions: (i) the representations and warranties of S&W set forth in the Merger Agreement shall be true and correct in all material respects as of the Effective Time; (ii) S&W shall have performed all of its agreements and covenants prior to the Effective Time as contemplated by the Merger Agreement; (iii) the S&W sales force shall not have decreased in number to less than 18 full-time sales persons and 70 full-time service technicians; (iv) there shall have been no material adverse change in the business, assets or results of operations of S&W between March 31, 1997 and the Closing Date; (v) the Escrow Agreement shall have been executed and delivered by a national bank as the Escrow Agent, (vi) PSS shall have received a letter from Arthur Andersen LLP to the effect that the Merger will qualify for pooling-of-interests accounting treatment; (vii) PSS shall have received the consent of its senior lender; (viii) PSS shall have received evidence that all indebtedness owed by the S&W X-Ray, Inc. Employee Stock Ownership Trust has been repaid or forgiven; and (ix) receipt by PSS of executed investment agreements, employment agreements and non-compete agreements from certain affiliates and employees of S&W. The obligation of S&W to consummate the Merger is subject to, among others, the following conditions: (i) the representations and warranties of PSS set forth in the Merger Agreement shall be true and correct in all material respects as of the Effective Time; (ii) PSS shall have performed all of its agreements and covenants prior to the Effective Time as contemplated by the Merger Agreement; (iii) there shall have been no material adverse change in the business, assets or results of operations of PSS between March 31, 1997 and the Closing Date; and (iv) the Escrow Agreement shall have been executed and delivered by a national bank as the Escrow Agent. The obligation of each of PSS, DI and S&W to consummate the Merger is subject to certain additional conditions, including the following: (i) the shareholders of S&W shall have approved the Merger Agreement; (ii) all consents and notifications to any regulatory authorities required for consummation of the Merger shall have been obtained or made; (iii) no court or governmental authority shall have enacted any law or order or taken any action which prohibits the transactions contemplated by the Merger Agreement; (iv) the Registration Statement shall have been declared effective under the Securities Act of 1933 and no stop orders suspending the effectiveness of the Registration Statement shall have been issued; and (v) at Closing, PSS shall have repaid the outstanding notes and bank and long-term debt of S&W as provided in the Merger Agreement. No assurances can be provided as to when or if all of the conditions precedent to the Merger can or will be satisfied or waived by the appropriate party. As of the date of this Proxy Statement-Prospectus, the parties know of no reason to believe that any of the conditions set forth above will not be satisfied. -28- The conditions to consummation of the Merger may be waived, in whole or in part, to the extent permissible under applicable law, by the party for whose benefit the condition has been imposed, without the approval of the PSS or S&W stockholders. See "Amendment, Waiver and Termination." Amendment, Waiver and Termination To the extent permitted by law, S&W and PSS, with the approval of their respective Boards of Directors, may amend the Merger Agreement by written agreement at any time without the approval of the stockholders of S&W, provided that after the approval of the Merger by S&W's stockholders, no amendment may alter the amount or type of consideration into which the S&W Common Stock will be exchanged without the requisite approval of S&W stockholders, and provided further that no amendment may alter the provisions requiring regulatory approval of the Merger. Prior to or at the Effective Time, either S&W or PSS, acting through its respective Board of Directors or its Chairman of the Board or President, may waive any default in the performance of any term of the Merger Agreement by the other party, may waive or extend the time for the fulfillment by the other party of any of its obligations under the Merger Agreement, and may waive any of the conditions precedent to the obligations of such party under the Merger Agreement, except any condition that, if not satisfied, would result in the violation of an applicable law or governmental regulation. The Merger Agreement may be terminated, and the Merger abandoned, at any time prior to the Effective Time, notwithstanding approval of the Merger Agreement by the stockholders of S&W: (i) by mutual consent of the Boards of Directors of S&W and PSS, (ii) by either party in the event of certain breaches by the other party of any representation or warranty; (iii) by either party in the event that a consent or regulatory approval required by the Merger Agreement has been denied by final nonappealable action; (iv) by either party if the Merger is not consummated by October 31, 1997, if such failure is not caused by any breach of the Merger Agreement by the party electing to terminate; (v) by either party in the event that the Merger is not consummated by November 30, 1997; (vi) by either party, if any of the conditions precedent to the obligations of such party to consummate the Merger cannot be satisfied or fulfilled, if such failure is not caused by the party electing to terminate; (vii) by either party if the Base Period Trading Price is less than $10.8832 or greater than $16.3248 (in each case, calculated without regard to the Base Period Trading Price Limitations); and (viii) by PSS if the sum of all proposed adjustments to the Aggregate Purchase Price pursuant to the Merger Agreement would result in a decrease of the Aggregate Purchase Price by more than $200,000, but for the proviso that the adjustments may not exceed $200,000. If the Merger Agreement is terminated as described above, PSS shall pay the costs and expenses incurred by it in connection with the Merger Agreement and up to $350,000 of the reasonable costs and expenses incurred by S&W in connection with the Merger Agreement. S&W expenses in excess of $350,000 shall be paid by the S&W stockholders. Other than as set forth above, no party (or any of its officers, directors, employees, agents, representatives, or stockholders) shall be liable to the other party or parties for any costs, expenses, damages (direct or indirect) or loss of anticipated profits; provided, however, that the foregoing shall not apply if the Merger Agreement is terminated because one party has breached a representation or warranty, or a covenant or agreement contained in the Merger Agreement. See "Expenses." Conduct of Business Pending the Merger Pursuant to the Merger Agreement, prior to the Closing Date, S&W and PSS have agreed that S&W shall restrict certain of its activities, except with the prior written consent of PSS and except as necessary to effect the transactions contemplated in the Merger Agreement. To this end, and without limitation, S&W shall: (i) conduct its business in substantially the same manner as it is presently being conducted and, except with respect to certain agreed matters, refrain from entering into any transaction or contract other than in the ordinary course of business and not make any material change in its methods of management, marketing or operations; (ii) consult with PSS prior to undertaking any material new business opportunity outside the ordinary course of business and, except with respect to certain agreed matters, not undertake such new business opportunity without the prior consent of -29- PSS, which consent will not be unreasonably withheld; (iii) confer on a regular basis with one or more designated representatives of PSS to report material operational matters and to report the general status of ongoing business operations; (iv) notify PSS of certain activities or events; (v) other than as disclosed by S&W to PSS, not enter into any new employment contract or, except in the ordinary course of business, any commitment to employees; (vi) not increase the compensation (including fringe benefits) payable or to become payable to any officer, director, employee, agent or independent contractor of either such company except general hourly rate increases and normal merit increases for employees other than officers made in the ordinary course of business and consistent with past practice; (vii) except in the ordinary course of business not create or incur any indebtedness, enter into or terminate any lease of real estate or release or create any liens of any nature; (viii) except in the ordinary course of business and except with respect to certain agreed matters and, even if in the ordinary course of business, then not in an amount to exceed $50,000 in the aggregate, make or commit to make any capital expenditure, or enter into any lease of capital equipment as lessee or lessor; (ix) not sell any material asset or make any material commitment relating to its assets other than in the ordinary course of business; (x) not amend the Certificate of Incorporation, Bylaws or other governing instruments of S&W; (xi) not make any changes in its accounting methods or practices, except for changes in its tax accounting methods or practices that may be necessitated by changes in generally accepted accounting principles or applicable tax laws; (xii) except for the Merger Agreement and 4,009 shares of S&W Common Stock to be issued simultaneously with the Closing of the Merger pursuant to the S&W Supplemental Executive Retirement Plan, issue, sell, pledge, encumber, authorize the issuance of, or otherwise permit to become outstanding, any additional shares of S&W capital stock or any other capital stock of its subsidiaries, or any stock appreciation rights, or any option, warrant, conversion, or other right to acquire any such stock, or any security convertible into any such stock, or pay or declare or agree to pay or declare any dividend with respect to any S&W capital stock; (xiii) other than in the ordinary course of business, not take any action, or omit to take any action, which would cause its representations and warranties under the Merger Agreement to be untrue or incorrect; (xiv) not make any loan to any person or increase the aggregate amount of any loan currently outstanding to any person, except for usual and customary advances to employees made in the ordinary course of business; and (xv) not make any agreement or commitment which will result in or cause to occur a violation of any of the foregoing items. Additionally, pursuant to the Merger Agreement, S&W and PSS have agreed prior to the Closing Date that PSS shall restrict certain of its activities except with the prior written consent of S&W. To this end, PSS has agreed (i) to operate its business substantially as presently operated and only in the ordinary course, except that any business acquisition by PSS or the incurrence of additional debt or the issuance or sale of equity securities shall be deemed to be in the ordinary course and (ii) except as previously disclosed in writing by PSS to S&W, it will not, and will not permit DI to, amend its Articles of Incorporation or Bylaws, and it will cause each of its subsidiaries to maintain its corporate existence and corporate powers. Stockholders Agreements Simultaneous with the execution of the Merger Agreement, Joseph E. Miller, Jr. and Bruce P. Ashby, each a stockholder of S&W, entered into Stockholders Agreements with PSS (each a "Stockholders Agreement"). Each Stockholders Agreement provides that each party thereto (a "Stockholder") will vote such Stockholder's S&W Shares in favor of the Merger, the execution and delivery by S&W of the Merger Agreement and the approval of the terms thereof and each of the other transactions contemplated by the Merger Agreement, including approval of the Escrow Agreement and appointment of the Stockholder Representatives, provided that the terms of the Merger Agreement shall not have been amended to reduce the consideration payable in the Merger to a lesser amount of PSS Common Stock. Each Stockholders Agreement also provides that the Stockholder will vote such Stockholder's S&W Shares against any of the following (each a "Competing Transaction"): any merger agreement or merger (other than the Merger Agreement and the Merger), consolidation, combination, sale of substantially all of the assets, reorganization, recapitalization, dissolution, liquidation or winding up of or by S&W or any amendment of S&W's Charter or Bylaws or other proposal or transaction involving S&W or any of its subsidiaries which amendment or other proposal or transaction would in any manner impede, frustrate, prevent or nullify the Merger, the Merger Agreement or any of the other transactions contemplated by the Merger Agreement. Each Stockholder has granted an irrevocable proxy to PSS and Patrick C. Kelly, Chief Executive Officer and Chairman of the Board of PSS, and David A. Smith, Executive Vice President and Chief Financial Officer of PSS, in their respective -30- capacities as officers of PSS, and any individual who shall succeed to any such office of PSS, to vote such Stockholder's shares of S&W Common Stock consistent with the foregoing agreements. Each Stockholder has also agreed not to, and not to permit any of its representatives to, directly or indirectly, solicit, initiate or encourage the submission of, any takeover proposal or participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any takeover proposal. Each Stockholders Agreement will terminate upon the earlier of the Effective Time or the date upon which the Merger Agreement is terminated in accordance with its terms. Notwithstanding the foregoing, if an "Extension Event" occurs as of or prior to the termination of the Merger Agreement, then for a period of one year following such termination, (i) each Stockholder's agreement to vote against any Competing Transaction, the irrevocable proxy granted by each Stockholder to vote against any Competing Transaction, and each Stockholder's agreement not to facilitate any takeover proposal will continue in effect and (ii) no Stockholder will be permitted to transfer any of such Stockholder's S&W Shares in connection with any Competing Transaction or takeover proposal. "Extension Event" is defined to mean any of the following events: (A) the meeting of S&W stockholders to approve the Merger Agreement shall not have been held or the approval of the Merger at such meeting shall not have been obtained; or (B) any person (other than PSS or any subsidiary of PSS) shall have made, or disclosed an intention to make, a takeover proposal or proposal for a Competing Transaction See "General Information--Votes Required." Expenses and Fees The Merger Agreement provides that PSS shall be responsible for its own costs and expenses incurred in connection with the negotiation and consummation of the transactions contemplated by the Merger Agreement. PSS further agrees to bear and pay reasonable costs and expenses incurred by S&W on S&W's behalf in connection with the transactions contemplated by the Merger Agreement in an amount not to exceed $350,000 in the aggregate. S&W expenses in excess of $350,000 shall be paid by the S&W stockholders through an adjustment to the Aggregate Purchase Price. See "Amendment, Waiver, and Termination." Accounting Treatment Consummation of the Merger is conditioned on the Merger being accounted for on a pooling-of-interests accounting basis and the receipt by PSS of a letter from Arthur Andersen LLP with respect thereto. See "Conditions to Consummation." Under this method of accounting, as of the Effective Time, the assets and liabilities of S&W would be added to those of PSS at their recorded book values and the stockholders' equity accounts of PSS and S&W would be combined on PSS's consolidated balance sheet. On a pooling-of-interests accounting basis, income and other financial statements of PSS issued after consummation of the Merger would be restated retroactively, if necessary, to reflect the combined consolidated financial position and results of operations of PSS and S&W as if the Merger had taken place prior to the periods covered by such consolidated financial statements and to reflect the accounting policies of PSS. The unaudited pro forma financial information contained in this Proxy Statement-Prospectus has been prepared using the pooling-of-interests accounting basis to account for the Merger. See "Summary" and "Pro Forma Condensed Combined Financial Data." Resales of PSS Common Stock The shares of PSS Common Stock issued in connection with the Merger will be freely transferable under the Securities Act, except for shares issued to any stockholder who may be deemed to be an "affiliate" (generally including, without limitation, directors, certain executive officers and beneficial owners of 10% or more of any class of capital stock) of S&W for purposes of Rule 145 under the Securities Act as of the date of the Special Meeting or for purposes of applicable interpretations regarding pooling-of-interests accounting treatment. Such affiliates may not sell their shares of PSS Common Stock acquired in connection with the Merger except pursuant -31- to an effective registration statement under the Securities Act or other applicable exemption from the registration requirements of the Securities Act and until such time as financial results covering at least 30 days of combined operations of PSS and S&W after the Merger have been published. PSS may place restrictive legends on certificates representing PSS Common Stock issued to all persons who are deemed to be "affiliates" of S&W under Rule 145. In addition, S&W has agreed to use its reasonable efforts to cause each person or entity that is an "affiliate" to enter into a written agreement in substantially the form attached to the Merger Agreement relating to such restrictions on sale or other transfer. This Proxy Statement-Prospectus does not cover resales of PSS Common Stock received by any person who may be deemed to be an affiliate of S&W. Dissenters' Rights The proposed Merger is a transaction which entitles stockholders of S&W who comply with the provisions of Sections 623 and 910 of the NYBCL (the "Dissenters Statute") to dissent from the Merger and to receive payment of the fair value of their shares of S&W Common Stock ("S&W Shares") as of the Effective Time, excluding any appreciation or depreciation in anticipation of the Merger. The Notice of the Special Meeting of S&W states that S&W stockholders are entitled to assert dissenters' rights under the Dissenters Statute and that the Dissenters Statute is set forth in Annex C to this Proxy Statement-Prospectus. The following summary does not purport to be a complete statement of dissenters' rights under Sections 623 and 910 of NYBCL. Following consummation of the Merger, a stockholder of record on the Record Date who has followed the procedures set forth under Sections 623 and 910 will be entitled to a proceeding in the supreme court in the judicial district in which the office of the corporation is located to determine the rights of dissenting stockholders and to fix the fair value of such stockholder's securities. Persons who are beneficial owners of S&W Shares but whose securities are held of record by another person, such as a broker, bank or nominee, should timely instruct the record holder to follow the procedures outlined below if such persons desire to seek appraisal with respect to any or all of their securities. Failure to take any necessary step may result in the termination or waiver of appraisal rights under Sections 623 and 910. Holders of S&W Shares who do not vote for approval of the Merger Agreement and who follow certain other procedures summarized below will have the right to dissent from and obtain payment in cash of the fair value of their shares in the event of the consummation of the Merger. The following is a summary of the procedures which must be followed by any S&W stockholder who wishes to dissent and demand payment for such holder's shares in the event of consummation of the Merger. Holders receiving cash upon exercise of dissenters' rights will recognize a gain or loss for federal income tax purposes. See "Certain Federal Income Tax Consequences." To exercise the right of dissent, a stockholder (i) must deliver to S&W, before the vote is taken at the Special Meeting, a written notice of such stockholder's objection to the action, including notice of his election to dissent, his name and residence address, the number and classes of shares as to which he dissents (which must be all shares he owns) and a demand for payment of the fair value of his shares if the Merger is effectuated, and (ii) must not vote such stockholder's shares (in person or by proxy) in favor of the Merger Agreement. Neither a vote against the Merger Agreement nor a specification in a proxy to vote against the Merger Agreement will in and of itself constitute the necessary notice of intent to dissent to the Merger Agreement. Moreover, by voting in favor of the Merger Agreement, or by returning the enclosed proxy without instructing the proxyholders to vote against the Merger Agreement, a stockholder waives the right to dissent under the Dissenters Statute. Following the filing of a notice of election to dissent, the surviving corporation shall make a written offer to such stockholder to pay for his shares at a specified price which the corporation considers to be their fair value. Once the corporation action has been consummated, the offer shall be accompanied or followed by an advance payment in an amount equal to eighty percent of the amount of such offer. If the corporation fails to make such written offer within a specified time period or if the corporation and the stockholder fail to agree within thirty days thereafter of the price to be paid for the shares, the corporation shall institute the special proceeding to fix the fair value in the supreme court of the appropriate judicial district. -32- Dissenting stockholders of S&W should direct any communications regarding their rights to S&W X-Ray, Inc., Cornerstone Center, 2300 Buffalo Road, Rochester, New York 14824, Attention: Corporate Secretary. All such communications should be signed by or on behalf of the dissenting stockholder in the form in which such stockholder's shares are registered on the books of S&W, except that a beneficial stockholder may assert dissenter's rights as to shares held on such stockholder's behalf only if such beneficial holder submits to S&W the record stockholder's written consent to the dissent by the time such beneficial holder asserts his rights. The foregoing summary of Sections 623 and 910 of the NYBCL is necessarily incomplete and is qualified in its entirety by reference to those Sections as set forth herein as Annex C. Because exercise of dissenters' rights requires strict adherence to the statutory provisions referred to above, each stockholder who may desire to exercise such rights should adhere to the provisions of such laws and consult with such stockholder's legal and financial advisors. -33- UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined financial statements are presented assuming the Merger has been consummated and accounted for as a pooling of interests. The unaudited pro forma condensed combined balance sheet as of March 28, 1997 has been prepared as if the Merger took place on that date. The unaudited pro forma condensed combined statements of operations for the three years ended March 28, 1997 have been prepared as if the Merger and other transactions requiring pro forma adjustments had occurred on April 1, 1994. The unaudited pro forma condensed combined financial statements are based on the separate historical condensed financial statements of PSS and S&W giving effect to the transactions under the assumptions and adjustments outlined in the accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements. The unaudited pro forma condensed combined financial statements are provided for comparative purposes only and are not necessarily indicative of the actual results that would have been obtained had the Merger occurred on the dates indicated or that may be achieved in the future. For all applicable periods presented in the unaudited pro forma condensed combined statements of operations, shares used in the computation of net income per common and common equivalent share give effect to the maximum exchange ratio for the S&W Common Stock, assuming distribution to S&W shareholders of all shares of PSS Common Stock subject to the Escrow Agreement and no adjustment to the Aggregate Purchase Price. The unaudited pro forma condensed combined financial statements should be read in conjunction with the separate audited consolidated financial statements, including the notes thereto, of PSS and S&W, appearing elsewhere in this Proxy Statement-Prospectus. See "Pss Consolidated Financial Statements" and "S&W Financial Statements." -34- Pro Forma Condensed Combined Balance Sheet March 28, 1997 (Unaudited)
Historical Pro Forma ---------------------- --------------------- PSS S&W Adjustments Combined --- --- ----------- -------- (In thousands) ASSETS Current Assets Cash and Cash Equivalents................... $ 28,740 $ 335 $ 29,075 Marketable securities....................... 15,045 -- 15,045 Accounts receivable, net.................... 119,293 11,133 130,426 Inventories................................. 67,895 7,291 75,186 Prepaid expenses and other.................. 21,972 2,149 24,121 -------- ------- -------- Total current assets.................... 252,945 20,908 273,853 Property and equipment, net................... 18,812 1,391 20,203 Intangibles, net.............................. 21,617 467 22,084 Other assets.................................. 4,912 218 5,130 -------- ------- -------- Total Assets............................ $298,286 $22,984 $321,270 ======== ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable............................ $ 64,064 $ 4,948 $ 69,012 Accrued expenses............................ 18,263 1,750 $ 500(5) 20,513 Notes payable to bank, Notes payable to related parties, and current maturities of long-term debt......................... -- 6,297 6,297 Other....................................... 5,165 638 5,803 -------- ------- ----- -------- Total current liabilities................ 87,492 13,633 $ 500 101,625 Long term debt and capital lease obligations, net of current maturities................... 560 4,396 4,956 Other liabilities............................. 4,634 -- 4,634 -------- ------- ----- -------- Total liabilities........................ 92,686 18,029 500 111,215 -------- ------- ----- -------- Shareholders' Equity: Common stock................................ 370 10 12(4) 392 Additional paid-in capital.................. 207,509 173 (12)(4) 207,670 (Accumulated Deficit) Retained Earnings..... (2,372) 6,140 (500)(5) 3,268 Cumulative foreign currency translation adjustment..................... 93 -- 93 -------- ------- ----- -------- 205,600 6,323 (500) 211,423 Loan to employee stock ownership plan....... -- (1,368) -- (1,368) -------- ------- ----- -------- Total shareholders' equity.............. 205,600 4,955 (500) 210,055 -------- ------- ----- -------- Total liabilities and shareholders' equity............................... $298,286 $22,984 -- $321,270 ======== ======= ===== ========
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements. -35- Pro Forma Condensed Combined Statement of Operations For the Year Ended March 28, 1997 (Unaudited)
Historical Pro Forma ----------------------- ------------------------- PSS S&W Adjustments Combined --- --- ----------- -------- (In thousands, except per share data) Net sales..................................... $691,020 $72,034 $763,054 Cost of goods sold............................ 502,904 55,260 558,164 ------- ------ ------- Gross profit................................ 188,116 16,774 204,890 Selling, general and administrative expenses.................................... 173,114 15,774 188,888 Merger costs and expenses................... 12,128 -- 12,128 ------- ------ ------- Income from operations..................... 2,874 1,000 3,874 ------- ------ ------- Other income (expense): Interest expense............................ (324) (865) (1,189) Interest and investment income.............. 2,406 14 2,420 Other income................................ 1,537 -- 1,537 ------- ------ ------- 3,619 (851) 2,768 ------- ------ ------- Income before income taxes................ 6,493 149 6,642 Provision for income taxes.................... (2,120) (96) $ 37(3) (2,179) ------- ------ --- ------- Net income.................................... $ 4,373 $ 53 $ 37 $ 4,463 ======= ====== === ======= Net income per common and common equivalent share..................... $ 0.12 $ 0.23 $ 0.12 ======= ====== ======= Pro forma tax adjustment on pooled S- corporation income.......................... 357 357 ------- -------- Pro forma net income.......................... $ 4,016 $ 4,106 ======= ======== Pro forma tax adjustment per common and common equivalent share on pooled S-corporation income................. $ (0.01) $ (0.01) ------- -------- Pro forma net income per common and common equivalent share....................................... $ 0.11 $ 0.11 ======= ======== Weighted average shares....................... 36,501 235 1,656(4) 38,392 ======= ====== ===== ========
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements. -36- Pro Forma Condensed Combined Statement of Operations For the Year Ended March 29, 1996 (Unaudited)
Historical Pro Forma ----------------------- ------------------------- PSS S&W Adjustments Combined --- --- ----------- -------- (In thousands, except per share data) Net sales..................................... $529,024 $60,096 $589,120 Cost of goods sold............................ 379,360 47,170 426,530 ------- ------ ------- Gross profit................................ 149,664 12,926 162,590 Selling, general and administrative expenses.................................... 130,966 11,044 142,010 Merger costs and expenses................... 15,732 -- 15,732 ------- ------ ------- Income from operations..................... 2,966 1,882 4,848 ------- ------ ------- Other income (expense): Interest expense............................ (3,068) (500) (3,568) Interest and investment income.............. 1,180 8 1,188 Other income................................ 1,585 1 1,586 ------- ------ ------- (303) (491) (794) ------- ------ ------- Income before income taxes................ 2,663 1,391 4,054 Provision for income taxes.................... (1,324) (601) $ (43)(3) (1,968) ------- ------ ----- ------- Net income.................................... $ 1,339 $ 790 $ (43) $ 2,086 ====== ===== ===== ======= Net income per common and common equivalent share..................... $ 0.04 $ 3.65 $ 0.06 ====== ===== ======= Pro forma tax adjustment on pooled S-corporation income................. 438 438 ------ ------- Pro forma net income.......................... $ 901 $ 1,648 ====== ======= Pro forma tax adjustment per common and common equivalent share on pooled S-corporation income................. $ (0.01) $ (0.01) ------ ------- Pro forma net income per common and common equivalent share....................................... $ 0.03 $ 0.05 ====== ======= Weighted average shares....................... 31,454 216 1,528(4) 33,198 ====== ===== ====== =======
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements. -37- Pro Forma Condensed Combined Statement of Operations For the Year Ended March 30, 1995 (Unaudited)
Historical Pro Forma ----------------------- ------------------------- PSS S&W Adjustments Combined --- --- ----------- -------- (In thousands, except per share data) Net sales.................................... $413,301 $58,684 $471,985 Cost of goods sold........................... 293,688 45,982 339,670 ------- ------ ------- Gross profit............................... 119,613 12,702 132,315 Selling, general and administrative expenses................................... 111,493 10,748 122,241 Restructuring charge....................... 4,388 -- 4,388 ------- ------ ------- Income from operations................... 3,732 1,954 5,686 ------- ------ ------- Other income (expense): Interest expense........................... (4,064) (441) (4,505) Interest and investment income............. -- 5 5 Other income............................... 1,906 6 1,912 ------- ------ ------- (2,158) (430) (2,588) ------- ------ ------- Income before income taxes............... 1,574 1,524 3,098 Provision for income taxes................... (2,421) (617) $ 7(3) (3,031) ------- ------ ----- ------- Net income (loss)............................ $ (847) $ 907 $ 7 $ 67 ======= ====== ===== ======= Net income (loss) per common and common equivalent share.................... $ (0.04) $ (4.43) $ -- ======= ====== ======= Pro forma tax adjustment on pooled S- corporation income......................... 23 23 ------- ------- Pro forma net income (loss).................. $ (870) $ 44 ======= ======= Pro forma tax adjustment per common and common equivalent share on pooled S-corporation income................ -- -- ======= ======= Pro forma net income (loss) per common and common equivalent share......... $ (0.04) $ -- ======= ------- Weighted average shares...................... 23,762 205 1,445(4) 25,412 ======= ====== ===== =======
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements. -38- NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (In Thousands) The unaudited pro forma condensed combined financial statements have been prepared by combining the historical balances of PSS and the historical balances of S&W as recast to a conforming March year end. The following notes describe the pro forma adjustments and other items relevant to such statements. (1) Purchase Business Combinations PSS completed certain immaterial acquisitions during fiscal years 1997, 1996, and 1995. The aggregate terms of these acquisitions have been disclosed in the PSS consolidated financial statements included elsewhere in this Proxy Statement-Prospectus. Pro forma information for the acquisitions is not presented in the pro forma financial statements because the impact on PSS' results of operations would not be material. S&W completed one immaterial acquisition in fiscal year 1996 which was accounted for as a purchase. (2) Merger Costs and Expenses and Anticipated Cost Savings Expenses are expected to be incurred in connection with the consolidation and restructuring of PSS and S&W. Such activities will include restructuring regional and corporate functions, consolidating information systems and reducing personnel. The expenses associated with these activities cannot be currently estimated with a reasonable degree of accuracy, but preliminary estimates indicate that these expenses may range between $8,000 and $10,000. Income tax benefits at the statutory rate resulting from these charges range between $2,700 and $3,400. The estimated costs associated with the restructuring activities will be expensed in the period in which the companies complete the restructuring plan. Efficiencies and net cost savings are expected to result from the consolidation and restructuring. The unaudited pro forma condensed combined financial statements do not reflect such savings. (3) Income Taxes The tax effects of the combined statements of operations have been reflected as pro forma adjustments assuming the statutory tax rate of PSS for each applicable year. (4) Shareholders' Equity and Earnings Per Share The weighted average common share amounts represent the aggregate weighted average shares of PSS after the pooling, adjusted to reflect the maximum exchange ratio of 8.0565 for the S&W Common Stock, which includes all shares to be held in escrow. (5) Transaction Fees Under the pooling of interests accounting method, direct transaction costs are expensed in the period in which the transaction is consummated. Such costs are not currently estimable with a reasonable degree of accuracy, but preliminary estimates indicate that these expenses may range between $400 to $500 and include investment banking, legal, accounting, printing, solicitation, filing fees and similar expenses. The March 28, 1997 unaudited pro forma condensed combined balance sheet reflects $500 of such expenses. These expenses have not been reflected in the unaudited pro forma condensed combined income statements. -39- SELECTED FINANCIAL DATA OF PSS The following selected financial data of PSS for fiscal years 1994 through 1997 has been derived from PSS' audited consolidated financial statements incorporated herein by reference which give retroactive effect to the mergers with Taylor Medical, Inc. ("Taylor") and X-ray of Georgia ("X-ray GA"). The selected financial data of PSS for fiscal year 1993 has been derived from the Company's unaudited consolidated financial statements incorporated herein by reference which give retroactive effect to the merger with Taylor and X-ray GA. See "Business of PSS - General," "PSS Management's Discussion and Analysis of Financial Condition and Results of Operations" and "PSS Consolidated Financial Statements."
Fiscal Year Ended 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (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, general and administrative 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 form 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. -40- PSS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of PSS' consolidated financial condition and results of operations should be read in conjunction with the more detailed information and the PSS Consolidated Financial Statements and the notes thereto appearing elsewhere in this Proxy Statement-Prospectus. Company Overview 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 ("Physician Supply Division") 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. In addition, the Company distributes medical diagnostic imaging supplies, chemicals, equipment and service to the acute care and alternate care market in ten states. The Company currently operates 20 imaging service centers through its wholly-owned subsidiary, DI. 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 European Operations service centers distributing to the acute and alternate care markets. 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 pre-acquisition revenues of Taylor and X-ray GA, grew at a compound annual rate of approximately 49%, and including pre-acquisition revenues of Taylor and X-ray GA, the Company's net sales grew at a compound annual rate of approximately 27%. The number of company service centers has grown from 2 at the end of fiscal 1984 to 80 currently, including Physician Supply Division service centers, 16 Imaging Division services centers and 3 European Operation service centers. In order of priority, the Company's growth has been accomplished through (i) acquiring regional and local Physician Supply Division 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 Physician Supply Division service centers. -41- The following table depicts the number of Physician Supply Division 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. See "Properties" for a list of the Physician Supply Division, Imaging Division and European Operations service centers.
Fiscal Year ------------------------------- 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) Excludes Taylor service centers prior to their acquisition. (2) Does not include two service centers that were opened but subsequently combined with existing service centers in fiscal 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 Physician Supply Division service centers, 31 were opened as start-ups and 30 resulted from acquisitions. A significant portion of the Company's growth occurred with the merger of Taylor in fiscal 1996. In connection with the integration of Taylor into PSS, the Company closed or merged into existing PSS service centers the majority of the Taylor locations. Additionally, the Company merged eight PSS service centers into the eight remaining Taylor locations and established two additional service centers. In addition to the opening of new service centers and the acquisition of local medical supply and equipment distributors, PSS sales growth is largely attributable to high levels of same center sales growth. PSS quantifies same center sales by aggregating the sales for service centers which have been in operation for at least two consecutive 12-month periods. The following table sets forth the same center sales growth of the Physician Supply Division for the periods indicated:
Fiscal Year ---------------------------------------- 1993(1) 1994(1) 1995(1) 1996 1997 ------- ------- ------- ----- ----- Number of centers per period 25 29 40 45 53 Same center sale 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. -42- Sales Mix The following table sets forth information regarding the Company's Physician Supply Division net sales mix and gross profit percentages by significant product category for the periods indicated:
Fiscal Year Ended March, ------------------------------ 1995 1996 1997 ---- ---- ---- Net sales: Physician Supply Division Supplies $151,588 $297,058 $404,859 Equipment 51,127 76,144 125,994 Pharmaceuticals 29,836 43,708 66,427 Other 3,637 3,845 4,030 Taylor 130,097 62,539 -- -------- -------- -------- Physician Supply Division total $366,285 $483,294 $601,310 Imaging division 47,016 45,730 74,003 European Operations -- -- 15,707 Company total $413,301 $529,024 $691,020 ======== ======== ======== Percentage of net sales (Physician Supply Division): (1) Supplies 64.2% 70.6% 67.3% Equipment 21.7 18.1 21.0 Pharmaceuticals 12.6 10.4 11.0 Other 1.5 0.9 0.7 -------- -------- -------- Total 100.0% 100.0% 100.0% ======== ======== ======== Gross profit percentage: (2) Physician Supply Division Supplies 33.3% 30.8% 29.8% Equipment 26.8 25.3 24.8 Pharmaceuticals 26.6 27.0 27.4 Other 28.2 32.3 37.9 Taylor 30.5 29.4 -- Physician Supply Division weighted average 30.8 29.4 28.6 Imaging division 14.2 16.9 19.1 European Operations -- -- 40.7 Company weighted average 28.9% 28.3% 27.8% - ------
(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. Exclusive Distribution Agreements The Company has focused on a comprehensive and consultative sales approach with an emphasis on diagnostic products, which includes sophisticated diagnostic equipment and supplies related to the use of such equipment. As a result, the Company has been able to expand and increase its diagnostic products sales in periods of uncertainty in the health care market. Additionally, as manufacturers search for means to reduce sales and marketing expenses, PSS has used its expertise and market reach to distribute products to physicians as evidenced by the increase in total sales dollars of diagnostic equipment and pharmaceuticals. -43- 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 Physician Supply Division 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 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, Axym Products(R) and the Abbott Testpack(R) line of rapid tests sold to physician offices with 24 or less physicians per geographic location. 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 Physician Supply Division and Imaging Division customers. Other Marketing Programs PSS plans to continue to focus on providing products and services to the primary care physician market whether the physician is a single practitioner or a member of a large group practice. In that effort, PSS developed Network Plus(SM), a comprehensive savings plan for physicians in which PSS offers special group purchasing contract pricing and provides periodic cost analyses to help manage the supply needs of each physician. Under this program, when a physician office guarantees at least 80% of its purchase volume to PSS, the Company will guarantee the lowest purchase prices on certain products as well as certain service guarantees. In addition to this program, the Company has recently signed distribution agreements with several national and regional integrated and managed care groups. 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. 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 specialists. Currently, the Imaging Division provides service to approximately 8,000 acute and alternate site customers through 20 service centers, 75 sales representatives and 252 field service specialists. The field service specialists service products ranging from processors to radiographic equipment. International Division The Company also distributes medical supplies and equipment in Belgium, France, Germany, and the Netherlands through its WorldMed International, Inc. subsidiary. This division began operations in April 1996 with the acquisition of its service center in Leuven, Belgium. The Company currently has three International Division service centers distributing to the acute and alternate care markets. -44- Results of Operations The table below sets forth for each of the fiscal years 1995 through 1997 certain financial information as a percentage of net sales. The following financial information includes the pre-acquisition financial information of Taylor and X-ray GA.
Fiscal Year Ended March, ---------------------------- 1995 1996 1997 ---- ---- ---- Income Statement Data: Net Sales 100% 100% 100% Gross Profit 28.9 28.3 27.2 Selling and G&A expenses 27.0 24.8 25.1 Restructuring charges(1) 1.1 -- -- Merger costs and expenses(2) -- 3.0 1.8 Net income (loss) (0.2) 0.3 0.6 Unaudited pro forma net income, 0.5 2.3 2.2 including pro forma tax adjustment on pooled S-corporation income and excluding merger costs and expenses, restructuring charges, and 1997 other operating charges(3) - -----
(1) The fiscal 1995 restructuring charge 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 $4,090,000 and accounts receivable of $500,000 at branches involved in mergers. 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 Physician Supply Division 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. Physician Supply Division 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 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 Physician Supply Division 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 Physician Supply Division into -45- 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 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. -46- 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. Physician Supply Division 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 Physician Supply Division 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 -47- for the fiscal years ended 1996 and 1995, respectively. These vendor incentives effectively raised the gross profit percentage by 1.3% and 1.1% during fiscal years 1996 and 1995, respectively. Although the Company plans and expects to continue to negotiate vendor performance incentives, there is no assurance that vendor performance incentives will continue to positively impact gross profit at the historical levels. General and Administrative Expenses. General and administrative expenses increased $12.4 million, or 17.6%, for the fiscal year ended 1996 compared to the fiscal year ended 1995. General and administrative expenses as a percentage of net sales, however, decreased to 15.6% for the fiscal year ended 1996 from 17.0% for the fiscal year ended 1995. The decrease in general and administrative expenses as a percentage of net sales was a result of (i) improved leveraging by PSS of its existing Physician Supply Division 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 Physician Supply Division 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 Physician Supply Division 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. -48- Other Income. Other income decreased approximately $0.3 million, or 16.9%, for the fiscal year ended 1996 compared to the fiscal year ended 1995. Other income decreased due to a net gain on sale of assets by Taylor recorded during fiscal 1995 of approximately $0.9 million. Excluding the gain, other income would have increased approximately $0.6 million primarily due to the increase in finance charge income on customer accounts. Provision for Income Taxes. Provision for income taxes decreased $1.1 million, or 45.3%, for the fiscal year ended 1996 compared to the fiscal year ended 1995 due to a tax adjustment for the utilization of Taylor net operating losses and a change in the valuation allowance. 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 Physician Supply Division centers and the leveraging of fixed costs through sales growth. Quarterly Results of Operations (Unaudited) The following table presents summarized unaudited quarterly results of operations for the Company for fiscal years 1997 and 1996, including pre- acquisition financial information of Taylor and X-ray GA. The Company believes all necessary adjustments have been included in the amounts stated below to present fairly the following selected information when read in conjunction with the Consolidated Financial Statements of the Company and notes thereto included elsewhere in this Offering Memorandum. Future quarterly operating results may fluctuate depending on a number of factors, including the timing of acquisitions of service centers, the timing of the opening of start-up service centers, and changes in physicians' buying patterns of supplies, diagnostic equipment and pharmaceuticals. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or any other quarter.
Fiscal 1997 Fiscal 1996 ------------------------------------------ ----------------------------------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 --------- -------- -------- --------- -------- --------- -------- -------- (dollars in thousands) Net sales......................... $151,568 $172,359 $179,612 $187,481 $116,082 $132,040 $137,600 $143,302 Gross profit...................... 41,385 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 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. -49- Liquidity and Capital Resources During the first quarter of the 1995 fiscal year, the Company completed an initial public offering of Common Stock resulting in proceeds, after deducting issuance costs, of approximately $15.8 million. The Company used all of the net proceeds to reduce outstanding debt. Also, in the third quarter of the 1995 fiscal year, the Company amended and restated its credit facility, thereby increasing the maximum availability under the credit facility to $60 million with the option, on the part of the Company, to increase such availability to $75 million. Effective November 13, 1995 the Company completed a secondary offering of 11.5 million shares of common stock at $17 per share, 8.8 million of which were offered by the Company. The Company used approximately $58.2 million of the total net proceeds of $142.9 million to repay debt in fiscal 1996. Management used approximately $50 million in connection with acquisitions of the Imaging Division, Physician Supply Division, International Division, 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. -50- 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 the next 12 months. As of June 30, 1997, the Company had no outstanding debt under its credit facility. -51- BUSINESS OF PSS General The Company is a leading distributor of medical supplies, equipment and pharmaceuticals to primary care and other office-based physicians. The Company currently operates 61 physician office medical supply distribution ("Physician Supply Division") 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. For fiscal 1997, the Company generated net revenues of $691.0 million. The Company, through its wholly-owned subsidiary, DI, distributes medical diagnostic imaging supplies, chemicals, equipment and service to the acute care and alternate care market ("Imaging Division"). DI currently operates 20 imaging service centers in ten states in the southeast and midwest. The Company is in the process of developing a separate information system for DI which will include the current ICON/SM/ and CustomerLink systems. The Company also distributes medical supplies and equipment in Belgium, France, Germany, and the Netherlands through its WorldMed International, Inc. subsidiary ("International Division"). The Company currently has three International Division service centers distributing to the acute and alternate care markets. The Company 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. Through its Network Plus/SM/ program, a comprehensive savings plan for physicians, the Company offers special group purchasing contract pricing and periodic cost analyses to help manage the supply needs of each physician. In addition, the Company has developed its ICON/SM/, a sales force automation technology that allows the Company's Physician Supply Business sales representatives to place orders immediately upon receipt and facilitates same- day delivery. Industry 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%. The Company believes that it 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 diagnostic imaging industry represents a $4.1 billion market, representing the sale and service of diagnostic imaging equipment and supplies to the acute care market, imaging centers and physician offices. Approximately $2.3 billion of the diagnostic imaging market is sold through independent distributors and the remainder is sold directly by manufacturers. The diagnostic imaging industry is highly fragmented with unconsolidated distributors representing approximately 70% of the market. The Company believes that a significant opportunity exists for the consolidation of this market. Company Strategy 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 -52- distribution company and to expand its presence in the European medical equipment and supply markets. The Company's strategies to achieve these objectives include the following: . Pursue Strategic Acquisitions of Physician Supply and Diagnostic Imaging Distributors. The Company has completed ten acquisitions since the beginning of fiscal 1997 in both its Physician Supply Division and Imaging Division. The Company's recent acquisitions, including its acquisition of General X- Ray, bring the Company closer to its goal to be the leading distributor in the diagnostic imaging distribution market. The Company intends to continue its efforts to acquire local, regional and other distributors in new and existing markets in the United States and Europe where it can leverage its distribution infrastructure, expand its geographic coverage and gain market share. . Provide Formalized Training for Sales Representatives and Service Specialists. The Company seeks to promote and further develop its consultative sales force through formalized training programs. The Company heavily recruits new sales representatives, each of whom participates in PSS University, and provides ongoing training to its representatives regarding new products available to its physician customers and methods to increase productivity. The Company is currently developing a similar training programs for the sales representatives and service technicians of its Imaging Division. . Pursue Distribution Agreements with Manufacturers. The Company seeks to provide a broad product line that includes sophisticated diagnostic equipment marketed by the Company on an exclusive or semi-exclusive basis. By promoting its extensive distribution network and same-day service, the Company seeks to be the point of entry to the market for new health care products and technologies developed by manufacturers. . New Service Center Openings. Due to its existing geographic market coverage, the Company plans to open substantially fewer new service centers in the future than it has historically opened in order to avoid the start-up losses associated with new centers. The Company intends to continue to focus more on acquisitions that do not entail such losses. Of the Company's 84 current service centers, 32 were new centers started by the Company. . Continue Investment in Information Systems. The Company has developed ICON/SM/ to enable Physician Supply Division sales representatives access to critical customer information from any location. In addition, during fiscal 1997 the Company test marketed and developed the CustomerLink or DIAL (Digital and Information and Access Line) system, which the Company believes is the first Internet based healthcare information system designed and used specifically for inventory management and purchasing for the medical practice. The Company is also developing and implementing a delivery automation software system, with electronic signature recognition , radio frequency communication in customer ordering and automated delivery routing for maximum efficiency of distribution . The Company is also developing a separate hardware and software system for its Imaging Division which will include the ICON/SM/ and CustomerLink system. The Company believes ICON/SM/, CustomerLink and its other proprietary information systems are important to its success, and accordingly intends to continue its investment in information systems to increase efficiency and overall profitability. Sales and Distribution PSS focuses on complete customer satisfaction, which it characterizes to its customers as "no hassle" service. Consistent with this approach, the Company 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, salable products for instant credit. -53- 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 Physician Supply Division 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 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 Physician Supply Division, 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 Physician Supply Division 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 fiscal 1997. The Company's Imaging Division operates in a similar decentralized format with 20 service centers operating a total of over 70 delivery vans throughout ten states. The delivery routes and customer service guarantees are currently being developed. While Imaging Division gross margins are lower than the Physician Supply Division gross margins, general and administrative expenses are also lower than the Physician Supply Division due in part to less products distributed, larger order size, less frequent deliveries and fewer personnel. The Imaging Division has over 75 sales representatives and 252 field service specialists who service customer equipment ranging from processors to radiographic equipment. This division has approximately 6,000 customers including 1,750 acute sites and 6,250 alternate care sites. The Company's International Division 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. -54- 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. Product and Sales 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 80% of its purchase volume to PSS, the Company will guarantee the lowest purchase prices on certain products as well as certain service guarantees. The Company has recently signed distribution agreements with several national and regional integrated and managed care groups. Through its Physician Supply Division, the Company distributes medical products consisting of medical supplies, diagnostic equipment, and pharmaceuticals. The following is a discussion of the types of products offered by the Company's Physician Supply Division. Medical Supplies PSS Physician Supply Division 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 Physician Supply Division 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 Physician Supply Division 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 -55- 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. Recruitment and Development The Company believes its managers and sales force are its most valuable corporate assets. Accordingly, the Company invests significant resources in recruiting, training and developing these employees. PSS spent approximately $2.6 million for training and development in fiscal 1997. Over the past ten years, the Company has refined its recruitment practices and development procedures for its Physician Supply Division and the Company is currently developing a similar training programs for the sales representatives and service specialists of its Imaging Division.. The Company's comprehensive program for its Physician Supply Division includes the following: Recruitment. The Company has developed a recruitment program to help provide it with a source of mobile and committed sales representatives. The Company believes that it is a leader in its industry in recruiting sales representatives on college and university campuses. The Company's recruiters use state-of-the-art marketing materials to attract candidates who demonstrate superior sales aptitude. The Company also recruits college graduates with up to five years experience in business, government or the military as operational management trainees. Initial Development. Each trainee is initially assigned to a service center. Under the supervision of local managers, training consists of a combination of self-study, individual instruction and interaction with customers and vendors. Such training includes 16 one-week courses providing instruction on products, procedures and selling skills. During this development program, the trainee attends the Jacksonville, Florida training center known as PSS University for a one-week training course titled "Impact Selling." Learning is measured weekly through formal testing and role playing, resulting in continued advancement to graduation, usually within 20 weeks. The Company designs the program to be strenuous and only approximately 70% of the trainees successfully complete the program. Upon graduation, the newly appointed sales representative assumes responsibility for the first available sales territory, within a preferred region regardless of location. The Company typically has approximately 30 sales candidates at various stages of the training process. The Company believes that the level of its expenditures in developing new sales representatives and its ability to place new sales representatives quickly in a new region is unique within the industry. The new sales graduate is placed on a 15 month salary-to-commission conversion program. Presently, approximately 95% of the Company's sales force is compensated on a straight commission basis. The Company's development program for its operational management trainees consists of approximately twelve months of intensive training and development. After recruitment, the operations management trainee is transferred to at least three service centers and is given various and gradually increasing levels of responsibility. The trainee is assigned to an operations management position when it becomes available at a service center, regardless of location. The Company continually maintains approximately five operations management trainees to provide for future expansion needs. Continued Development. The Company provides several programs to continue development of its sales and management organization. The programs provided by PSS University include a leadership program for management candidates, senior sales representatives and general managers, a program emphasizing creativity and innovation for first-year managers, and a management development program. In addition, the Company encourages its sales representatives to participate in industry-accredited self-study programs. Every sales representative routinely attends local sales meetings, annual sales and marketing meetings, key vendor product conferences and continuing education programs at PSS University. Additionally, the Company is developing training programs on customer service, purchasing and other field operations. -56- Information Systems PSS' Physician Supply Division 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 Physician Supply Division sales representatives access to critical customer information from any location. ICON/SM/ provides the sales representatives with customer pricing, contracts, backorders, inventory levels, account status and on the spot ordering through the use of a wireless network. ICON/SM/ has increased 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 -57- 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. Purchasing and Vendor Relationships The Company aggressively seeks to purchase the medical supplies and equipment it distributes at the lowest possible price through volume discounts, rebates and product line consolidation. The Company's corporate materials management department negotiates all of its contract terms with vendors. Individual orders are placed by the Company's purchasing agents, located at the Company's service centers, who are responsible for purchasing and maintaining the inventory. Supplies and equipment are delivered directly from vendors to the service centers. The Company aggressively pursues the opportunity to market and sell medical equipment and supplies on an exclusive basis. Manufacturers of medical diagnostic equipment and supplies typically offer distribution rights only to a selected group of distributors and are increasingly seeking to reduce the number of distributors selling their products to end users in an effort to reduce the cost associated with marketing and field support. The Company has been successful in assisting manufacturers in their development and marketing plans and in obtaining the exclusive right to sell certain products. In March 1995, the Company signed an exclusive distributorship agreement with Abbott Laboratories providing for the Company to be the exclusive distributor of certain Abbott diagnostic products to a segment of the office- based physician market. 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 believes that its ability to capture such distribution rights represents a significant barrier to the entry of competitors. Abbott may terminate the Abbott Agreement if the Company fails to meet certain sales levels. In addition, the Abbott Agreement provides for initially lower gross margins although these margins will increase over the life of the Abbott Agreement. Under the terms of its purchase agreement, Abbott agreed to certain restrictions, including prohibitions on additional purchases of Common Stock and granted the Company a three-year irrevocable proxy to vote its shares. Currently, the Company has contractual alliances with many vendors including Becton Dickinson & Company ("Becton Dickinson") and Roche Diagnostic Systems. These alliances provide the Company volume incentives, dedicated field support, and select relationships with world class manufacturers with strong brand name recognition. As a result of the Company's performance in selling their products, these entities participate with the Company in relationships ranging from exclusivity to shared market resources. In the office-based physician market, the Company is the worldwide leader of sales of hematology products for Becton Dickinson and the United States leader of sales of hematology and chemistry products for Roche Diagnostic Systems. The Company recently entered into four separate exclusive distribution agreements for products manufactured by Siemens Medical Systems, Inc. (cardiology and OB/GYN ultrasound equipment), Hologic, Inc. (bone densitometry analyzer), Bard Diagnostic Sciences, Inc. (bladder cancer diagnostic test) and Tanita Corporation of America, Inc. (body weight and fat analyzer). These strategic alliances should -58- continue to broaden the Company's product offerings to both the Physician Supply Division and Imaging Division customers. The Company has also entered into an exclusive distribution agreement with HumaScan, Inc. (non-invasive breast tumor detection screen). Acquisitions The Company's Physician Supply Division 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 20 Imaging Division service centers operating throughout ten states. 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 Physician Supply Division' 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. PSS has completed four acquisitions to date in fiscal 1998. In July 1997, the Company completed the acquisition of General X-Ray, Inc. and certain affiliated entities, distributors of radiology and imaging equipment which operated seven distribution centers and distributed to seven states, primarily in the Midwest. The Company completed ten acquisitions in fiscal 1997, including the acquisition of Diagnostic Imaging, Inc., a distributor based in Jacksonville, Florida which began the operations of its Imaging Division. Diagnostic Imaging, Inc. operated eight distribution centers with 24 sales representatives and 75 field service specialists. In fiscal 1997, the Company expanded its Imaging Division through the acquisitions of X-Ray of Georgia, Inc. and Rad-Tech X-Ray, Inc., both based in the Atlanta, Georgia area, which collectively served six states in the Southeast with 13 sales representatives and 51 field service specialists and the acquisition of Chesapeake X-Ray Corporation based in Roanoke, Virginia, which served four states in the Southeast with five sales representatives and 15 field service specialists. The Company acquired Taylor Medical, Inc. ("Taylor") in August 1995. A significant portion of the Company's growth occurred with the merger of Taylor. In connection with the integration of Taylor into PSS, the Company closed or merged into existing PSS service centers the majority of the Taylor locations. Additionally, the Company merged eight PSS service centers into the eight remaining Taylor locations and established two additional service centers. -59- Properties The Company maintains 84 service centers providing service to 50 states throughout the United States, as well as Belgium, France, Germany, and the Netherlands. All service center locations are leased by the Company, with the exception of the service centers located in Leuven, Belgium and Beaumont, Texas. The following tables set forth the service center locations and areas which they service for the Physician Supply Division, Imaging Division and International Division.
Physician Supply Division Service Center Location States Serviced Service Center Location States Serviced ----------------------- --------------- ----------------------- --------------- Albany, NY NY, CT, VT Louisville, KY IN, KY Albuquerque, NM NM, CO, TX Lubbock, TX TX Atlanta, GA GA, AL Memphis, TN AR, MS, TN Baltimore, MD MD, PA, VA, WV Milwaukee, WI WI Beaumont, TX TX Minneapolis, MN IA, MN, MT, ND, SD, WI Birmingham, AL AL, MS Mobile, AL AL, FL, MS Boise, ID ID, MT Nashville, TN IL, KY, TN Charlotte, NC NC, SC, VA, TN New Orleans, LA LA, MS, TX Chattanooga, TN AL, GA, TN Norfolk, VA NC, VA, WV Chicago, IL IL, IN, WI Omaha, NE CO, NE, IA, WY Cincinnati, OH KY, IN, OH, WV Orlando, FL FL Cleveland, OH OH Philadelphia, PA DE, NJ, NY, PA Columbia, SC SC, GA Phoenix, AZ AZ Dallas, TX TX, OK Pittsburgh, PA PA, WV, MD, OH, NY Davenport, IA IA, IL Portland, OR CA, OR, WA Deerfield Beach, FL FL Raleigh, NC NC, VA Denver, CO CO, NM, WY Richmond, VA VA Detroit, MI MI Roanoke, VA TN, VA Honolulu, HI HI Rochester, NY NY Houston, TX TX, OK Salt Lake City, UT CO, NV, UT Indianapolis, IN IN, IL San Antonio, TX TX Jackson, MS MS, LA San Diego, CA CA Jacksonville, FL FL, GA, SC San Francisco, CA CA Kansas City, KS IL, IA, KS, MO Seattle, WA WA, AK Knoxville, TN KY, NC, TN St. Louis, MO IL, MO Lafayette, LA LA St. Petersburg, FL FL Las Vegas, NV NV Tallahassee, FL AL, FL, GA Little Rock, AR TX, AR Tulsa, OK AK, OK, MO Long Island, NY MA, NJ, NY Union, NJ NJ, NY Los Angeles, CA (North) CA Wareham, MA RI, CT, ME, MA, NH Los Angeles, CA (South) CA
-60-
Imaging Division Service Center Locations States Serviced Service Center Locations States Serviced ------------------------ --------------- ------------------------ --------------- Atlanta, GA GA Mobile, AL AL, FL, MS Birmingham, AL AL, MS Nashville, TN(1) KY, TN Charlotte, NC NC Raleigh, NC NC, VA Columbia, SC SC, GA Richmond, VA VA Pompano Beach, FL FL Roanoke, VA TN, VA, WV Jacksonville, FL FL, GA Tallahassee, FL FL, GA Gainesville, FL FL Savannah, GA FL, GA, SC Memphis, TN AR, KY, TN Winston Salem, NC NC, VA Tampa, FL FL Chicago, IL IL, IN, IA, WI St. Louis, MO MO, IL, IA, AR Indianapolis, IN IN, OH, KY
International Division
Service Center Location Country Serviced ----------------------- ---------------- Leuven, Belgium Belgium, France, Germany Dusseldorf, Germany Germany Utrecht, Netherlands(1) Netherlands
------------------- (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. 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. -61- 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 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. 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. -62- MANAGEMENT OF PSS Directors and Executive Officers The directors and executive officers of the Company are as follows:
Name Age Position ---- --- -------- Patrick C. Kelly (1)............ 50 Chairman of the Board, Chief Executive Officer and Director John F. Sasen, Sr............... 55 President and Director David A. Smith.................. 37 Executive Vice President, Chief Financial Officer and Director James B. Stallings, Jr.......... 42 Chief Operating Officer Thomas A. Crowley, Jr........... 50 Executive Vice President, Investor Relations and Communications Charles E. Alvarez.............. 29 Vice President - Northern Region Jeffrey H. Anthony.............. 36 Vice President - Information Technology James E. Boyd................... 43 Vice President - Diagnostics Division Gary A. Corless................. 32 Vice President - Western Region Frederick E. Dell............... 36 Executive Vice President; President of Diagnostic Imaging, Inc. Edward D. Dienes................ 36 Vice President - Central Region Kathleen H. Fehling............. 37 Executive Vice President and Chief Operating Officer of Diagnostic Imaging, Inc. Douglas Harper.................. 45 Senior Vice President - Sales and Marketing Todd M. LaVelle................. 30 Vice President - Mid America Region Delmer W. Dallas(3)............. 66 Director T. O'Neal Douglas(1)(2)......... 61 Director Fred Elefant(1)(3).............. 50 General Counsel, Secretary and Director Delores Kesler(2)............... 56 Director William C. Mason(2)............. 59 Director James L.L. Tullis(3)............ 50 Director
_________________________________ (1) Member of the Executive Committee. (2) Member of the Audit Committee. (3) Member of the Compensation Committee. Patrick C. Kelly, a co-founder of the Company, has served as Chairman of the Board and Chief Executive Officer of the Company since its inception in May 1983 and as President of the Company from May 1983 to August 1995. Prior to founding the Company, from August 1976 to February 1983, Mr. Kelly served as Sales Manager, General Manager and Vice President of Intermedco, Inc., a Houston-based medical supply company. Mr. Kelly also serves as Chairman of the Board of Diagnostic Imaging, Inc. and WorldMed International, Inc., each wholly owned subsidiaries of PSS that operate the imaging and international businesses of PSS. John F. Sasen, Sr. has served on the Board of Directors of the Company since July 1993 and as President of the Company since August 1995. Mr. Sasen served as Chief Operating Officer of the Company from December 1993 to March 1997 and served as Executive Vice President of the Company from December 1993 to August 1995. From August 1990 to December 1992, he served the Company as Vice President-Sales and Marketing; from January 1993 to July 1993, as Regional Vice President, and from August 1993 to December 1993 as Executive Vice President. Prior to joining the Company, Mr. Sasen was Vice President-Sales, Marketing and Distributor Relations for a division of Becton Dickinson -63- & Company ("Becton Dickinson"), a manufacturer of health care products. In that position, Mr. Sasen directed product development and marketing efforts, technical services, product services and customer service. Mr. Sasen was with Becton Dickinson for over 20 years. In addition, Mr. Sasen serves as a director of Humascan, Inc., a manufacturer of a breast thermal detection device. David A. Smith has served on the Board of Directors of the Company since July 1993 and as Executive Vice President since April 1996 and Chief Financial Officer of the Company since April 1992. Mr. Smith served as a Vice President of the Company from April 1992 to April 1996. Prior to serving as Vice President and Chief Financial Officer, Mr. Smith served the Company as a Regional Manager, General Manager, Sales Manager and Operations Manager from July 1987 to June 1993. Prior to joining the Company, Mr. Smith was employed by Coopers & Lybrand from October 1985 through June 1987, and by Smoak, Davis and Nixon, C.P.A., from May 1983 through September 1985. James Stallings has served in the newly created position of Chief Operating Officer since July 1997. Prior to this position, Mr. Stallings served as Executive Vice President - Southern Region since March 1997 and Executive Vice President - Sales and Marketing from April 1996 to March 1997. From 1988 to 1996, Mr. Stallings held several positions with IBM Corporation, including Director of Worldwide Sales - AS/400 Division, Director of Business Re- engineering and General Manager. From 1984 to 1987, Mr. Stallings served as a manager of Rohm Corporation. In addition to his responsibilities with the Company, Mr. Stallings serves on the Board of Directors for Sun Bank of Northeast Florida. Thomas A. Crowley, Jr. has served in the newly created position of Executive Vice President, Investor Relations and Communications since July 1997. Prior to joining the Company, Mr. Crowley was employed by Hoffman La-Roche and by Becton Dickinson. Charles E. Alvarez has served as Vice President - Northern Region of the Company since April 1997. Prior to this position, Mr. Alvarez served as Vice President - Eastern Region from April 1995 until April 1997. Mr. Alvarez has served the Company in various other positions, including Regional Manager of the Eastern Region from April 1994 to March 1995, and sales manager and sales representative from January 1990 to March 1994. Jeffrey H. Anthony has served the Company as Vice President -Information Technology since March 1997. Prior to serving in this capacity, Mr. Anthony was Director of Information Technology from October 1996 to March 1997, Pacific Region Operations Leader from April 1996 to October 1996 and General Leader - PSS Delray Beach from November 1992 to March 1996. James E. Boyd has served as the Company's Vice President - Diagnostics Division since April 1996. Prior to such position, Mr. Boyd served the Company as a marketing manager from October 1994 to March 1995 and as the Vice President - Central Region from March 1992 to September 1994. Gary A. Corless has served as Vice President - Western Region since October 1996. Prior to serving in this position, Mr. Corless served as Vice President - Central Region from April 1996 to September 1996. Mr. Corless has served the Company as General Manager in various cities since February 1992. Frederick E. Dell has served as Executive Vice President of the Company and as President of Diagnostic Imaging, Inc. since November 1996. Prior to these positions, Mr. Dell served as Senior Vice President - Southern Region of the Company from April 1996 to November 1996 and served as Vice President- Southern Region from January 1994 to March 1996. Mr. Dell also served as director of the Company from July 1991 through July 1992. He served as Regional Manager and Vice President of the Company's Western Region from December 1989 to January 1994. From April 1984 through November 1989, Mr. Dell served the Company in various sales and management positions. -64- Edward D. Dienes has served as Vice President - Central Region since October 1996. Prior to this position, Mr. Dienes served as Vice President - Pacific Region beginning in April 1995. Prior to such time, Mr. Dienes served the Company as Director of Marketing from April 1993 to March 1995 and as General Manager, Sales Manager and Operational Manager from August 1988 to March 1993. Kathleen H. Fehling has served as Executive Vice President and Chief Operating Officer of Diagnostic Imaging, Inc. since February 1997. Prior to joining the Company, Ms. Fehling was employed by Picker International from 1983, serving most recently as Vice President of Marketing & Service from 1994 to 1997 and as National Service Manager from 1992 to 1994. Douglas Harper has served as Senior Vice President - Sales and Marketing since March 1997. Prior to this position, Mr. Harper served as Senior Vice President - Northern Region of the Company from April 1996 to March 1997 and served as Vice President - Northern Region from August 1995 to March 1996. He served as the Northeast Regional Manager for Taylor Medical, Inc. ("Taylor"), which was acquired by the Company in August 1995, from 1990 to August 1995. Mr. Harper has over 20 years experience in medical supply distribution. Mr. Harper founded Medco Systems/Quinoy Medical Supply, which was acquired by Taylor in 1990. Prior to such time, Mr. Harper was a General Manager for Foster Medical Supply. Todd M. LaVelle has served as Vice President - Mid America since June 1996. Prior to that time, Mr. LaVelle served as Vice President - Sales beginning in April 1996. In addition to these positions, Mr. LaVelle has served as Vice President - Sales & Marketing from July 1995 to April 1996, as Regional Manager for the Pacific Region from July 1994 to June 1995, as Diagnostic Market Leader from April 1994 to June 1994, and as Sales Manager and sales representative from August 1990 to March 1994. Delmer W. Dallas has served on the Board of Directors of the Company since October 1989. Since 1984, Mr. Dallas has been the Chairman of the Board of Acosta Sales Co., Inc. ("Acosta"), a food brokerage company operating in the Southeastern United States. He has also served on the Board of Directors of Acosta since 1966. T. O'Neal Douglas has served on the Board of Directors of the Company since July 1993. Mr. Douglas is the Chairman and Chief Executive Officer of American Heritage Life Insurance Co. and American Heritage Life Investment Company (collectively, "AHL"). He has been with AHL since 1983, serving as President since 1986 and Chief Executive Officer since 1990. In addition, Mr. Douglas serves as a director of Barnett Bank of Jacksonville, N.A. Fred Elefant has served on the Board of Directors of the Company and as Secretary of the Company since 1984. Mr. Elefant has been engaged in the private practice of law in Jacksonville, Florida since 1973. Since January 1989, he has practiced as Fred Elefant, P.A. He was a member of the law firm of Mahoney, Adams, Milam, Surface & Grimsley, P.A., now Mahoney Adams & Criser, P.A., from 1983 to 1989. Delores P. Kesler has served on the Board of Directors of the Company since July 1993. Ms. Kesler has been Chairman and CEO of Kesler, Pass & Associates, Inc. since 1996. Prior to that, Ms. Kesler was Chairman of Accustaff, Incorporated ("AccuStaff"), the successor to ATS Services, Inc. ("ATS"), a franchisor of temporary employment operations from January until June 1996. She founded ATS in May 1978 and served as its Chairman and Chief Executive Officer until its merger with three other temporary employment agencies in May 1992. Ms. Kesler is a past member of an executive committee with the National Association of Temporary Services and serves on the Board of Directors of Accustaff and Clay County Bank in Orange Park, Florida. -65- William C. Mason has served on the Board of Directors of the Company since April 1996. Mr. Mason is Vice Chairman and Chief Executive Officer of Baptist/St. Vincent's Health System, Inc. located in Jacksonville, Florida and has served in various positions throughout the organization since 1984. James L. L. Tullis has served on the Board of Directors of the Company since November 1989. Mr. Tullis was nominated to serve on the Board of Directors of the Company for a three year term beginning in 1994 pursuant to an agreement with the Company. Since September 1987, Mr. Tullis has been a general partner of Tullis-Dickerson Partners, the general partner of Tullis-Dickerson Capital Focus, L.P., a venture capital fund that invests in the health care industry and a shareholder of the Company. Mr. Tullis has served as Chairman of the Board of Directors and Chief Executive Officer of Tullis-Dickerson & Co., Inc., a venture capital company which acts as a management company for Tullis-Dickerson Capital Focus, L.P., since July 1986. Mr. Tullis also serves on the Board of Directors of American Consolidated Laboratories, Inc., a manufacturer of contact lenses, Scandipharm, Inc., a developer and manufacturer of pharmaceutical products and services, and Acme United, Inc., a manufacturer of scissors and other medical products. Executive officers of the Company are elected annually and serve at the discretion of the Board. There are no family relationships between or among any of the Company's directors or executive officers. Compensation Committee Interlocks and Insider Participation The Company's compensation committee for the fiscal year ended March 28, 1997 was comprised of Messrs. Dallas, Elefant and Tallis. Mr. Elefant provides legal services as general counsel to the Company. Fees for such legal services were approximately $132,000 in fiscal year 1997. Executive Compensation The following table sets forth certain summary information concerning compensation paid or accrued by the Company, for services rendered in all capacities for the fiscal years 1995 through 1997, for its Chief Executive Officer and the four other most highly compensated officers. -66- Summary Compensation Table
Annual Compensation Long-Term Compensation -------------------------------- --------------------------------- Securities Underlying All Other Name and Principal Position Year Salary(1) Bonus(2) Options(3) Compensation(4) --------------------------- ---- --------- ------- ---------- -------------- Patrick C. Kelly ................... 1997 $475,000 $ 76,000 -- $58,001 Chairman of the Board and Chief 1996 360,000 154,800 290,462 30,434 Executive Officer 1995 324,996 128,100 150,000 12,017 John F. Sasen, Sr. ................ 1997 300,000 36,000 13,157 46,693 President 1996 212,083 69,300 54,282 4,427 1995 175,008 48,027 30,000 4,424 David A. Smith .................... 1997 235,000 28,200 9,045 7,785 Executive Vice President and Chief 1996 145,799 47,850 31,251 2,628 Financial Officer 1995 135,000 37,049 15,000 2,622 Frederick E. Dell ................. 1997 170,000 21,591 4,217 9,114 Executive Vice President; President 1996 138,000 15,660 21,084 2,630 of Diagnostic Imaging, Inc. 1995 132,000 50,108 15,000 2,596 James B. Stallings, Jr.(5) ........ 1997 160,417 17,500 20,000 11,528 Executive Vice President - Southern Region
- --------------- (1) Total base salary earned during the fiscal years presented. The Company has established base salaries for its fiscal year ending March 27, 1998 as follows: Mr. Kelly, $535,000; Mr. Sasen, $330,000; Mr. Smith, $255,000; Mr. Dell, $200,000; and Mr. Stallings, $190,000. (2) Annual incentive award paid for results achieved during the fiscal years presented. Any amounts deferred at the election of the executive are included in the reported amounts. (3) Grants of stock options made during the fiscal years presented. These awards were made under the Company's 1994 Long Term Incentive Plan and 1994 Long Term Stock Plan. (4) All other compensation which is not included in the aforementioned categories. Amounts shown in this column include the following payments for fiscal year 1997: (i) for Mr. Kelly, $506 for PSS contributions to the Employee Stock Ownership Plan (the "ESOP"), $27,765 for total premiums under a ten year term life insurance policy and $29,730 for total premiums under a key-man life insurance policy; (ii) for Mr. Sasen, $493 for PSS contributions to the ESOP and $46,200 for total premiums under a split dollar life insurance policy; (iii) for Mr. Smith, $500 for PSS contributions to the ESOP and $7,285 for total premiums under a split dollar life insurance policy; (iv) for Mr. Dell, $319 for PSS contributions to the ESOP and $3,795 for total premiums under a split dollar life insurance policy; and (v) for Mr. Stallings, $11,528 for total premiums under a split dollar life insurance policy. (5) Mr. Stallings has served the newly created position of Chief Operating Officer since July 1977 and has been employed by the Company since April 1996. -67- Option Grants in Fiscal 1997 The following table sets forth information concerning the grant of stock options made during fiscal year 1997 pursuant to the Company's 1994 Long Term Incentive Plan and 1994 Long Term Stock Plan:
Individual Grants ---------------------------------------------------------------------- Percentage Potential Realized Value at of Total Assumed Actuarial Rates Number of Options of Stock Price Securities Granted to Appreciation Underlying Employees Exercise For Option Term (3) Options in Fiscal Price Expiration ------------------- Name Granted (1) Year 1997 ($/Sh)(2) Date 5% 10% - ---- ------------ ----------- --------- ----------- ----------- ----------- Patrick C. Kelly ........... -- --% -- -- -- -- John F. Sasen, Sr. ......... 13,157 4.8 $23.94 7/8/06 $198,088 $501,995 David A. Smith ............. 9,045 3.3 23.94 7/8/06 136,179 345,105 Frederick E. Dell .......... 4,217 1.6 23.94 7/8/06 63,490 160,896 James B. Stallings, Jr. .... 20,000 7.4 23.94 7/8/06 301,115 763,084
- ---------------------- (1) Issued from the Long Term Incentive Plan and the Long Term Stock Plan, each of which became effective in March 1994. The options issued in fiscal year 1997 to the named executive officers are nonqualified stock options for federal income tax purposes and accordingly are not entitled to special tax treatment under Section 422 of the Internal Revenue Code of 1986, as amended. The options granted in fiscal year 1997 to the named executive officers are exercisable immediately and expire ten years from the date of grant. (2) In fiscal year 1997, the named executive officers were granted options to acquire an aggregate of 46,419 shares of Common Stock at an exercise price of fair market value as of the date of grant. (3) The dollar amount under the columns assumes that the market price of the Common Stock from the date of the option grant appreciates at cumulative annual rates of 5% and 10%, respectively, over the term of each option granted in fiscal year 1997. The assumed rates of 5% and 10% were established by the Securities and Exchange Commission and therefore are not intended to forecast possible future appreciation, if any, of the price or value of the Common Stock. -68- Option Exercises and Holdings as of March 28, 1997 The following tables set forth information regarding stock options exercised in fiscal year 1997 by each of the named executive officers and the value of the unexercised options held by these individuals as of March 28, 1997, based on the market value of the Common Stock on that date:
Aggregated Option Exercises in Fiscal Year 1997 and Option Values as of March 28, 1997 ----------------------------------------------------------------------------------------------- Number of Securities Value of Unexercised Shares Underlying Options at In-the-Money Options Acquired Value March 28, 1997 at March 28, 1997(2) Name on Exercise Realized Exercisable(1) Exercisable(1) ---- ----------- -------- -------------- -------------- Patrick C. Kelly ......... 10,000 $2,105,625 630,462 $3,190,750 John F. Sasen, Sr. ....... 36,000 777,750 67,439 --(3) David A. Smith ........... 15,000 296,250 40,296 --(3) Frederick E. Dell ........ 6,000 192,000 40,301 139,995 James B. Stallings, Jr. .. -- -- 20,000 --(3)
- --------------- (1) All options held by the named executive officers are currently exercisable. (2) Based upon the closing price of $13.00 of the Common Stock on the Nasdaq National Market on March 27, 1997. (3) Based upon the closing price of $13.00 of the Common Stock on the Nasdaq National Market on March 27, 1997, the exercise prices for the options held by these officers exceed the closing price on such date.
Long Term Incentive Plans - Awards in Last Fiscal Year ------------------------------------------------------------- Estimated Future Payouts Under Number of Non-Stock Price-Based Plan Performance Period Until -------------------------------------- Name Units (1) Payout Threshold(2) Target(3) Maximum(4) - ---- --------- ----------------- ------------ -------- ---------- Patrick C. Kelly ......... 238 1/1/97 - 12/31/99 $119,000 $238,000 $714,000 John F. Sasen, Sr. ....... 150 1/1/97 - 12/31/99 75,000 150,000 450,000 David A. Smith ........... 118 1/1/97 - 12/31/99 59,000 118,000 354,000 Frederick E. Dell ........ 85 1/1/97 - 12/31/99 42,500 85,000 255,000 James B. Stallings, Jr. .. 80 1/1/97 - 12/31/99 40,000 80,000 240,000
- ----------------- (1) Under the Company's 1994 Long Term Incentive Plan, officers of the Company may be awarded a certain number of Performance Units each year equal to a percentage of the officer's salary. Each Performance Unit granted has a target value of $1,000 assuming the Company's total shareholder return result is in the 60th percentile of peer group companies. The actual value of each Performance Unit depends on the Company's performance over a period of three fiscal years, beginning on the effective date of the award. (2) The threshold amounts shown are based upon the Company achieving a total shareholder return result in the 50th percentile of peer group companies, at which point each Unit granted will have a value of $500. (3) The target amounts shown are based upon the Company achieving a total shareholder return result in the 60th percentile of peer group companies, at which point each Unit granted will have a value of $1,000. (4) The maximum amounts shown are based upon the Company achieving a total shareholder return result in the 90th percentile or greater of peer group companies, at which point each Unit granted will have a value of three times the target value, or $3,000. -69- Employment Agreements The Company has entered into employment agreements with each of its named executive officers, which include the terms described below: Term. Mr. Kelly's employment agreement was for an initial period of five years expiring June 1, 1997, was renewed for a five-year period ending June 1, 2002, and is automatically renewable for additional five year terms. The other executive officers' employment agreements are for terms of two years and are automatically renewable for additional two year terms. Covenants Not to Compete. Each executive officer has agreed not to compete with the Company for a period of 18 months following the termination of his employment within the territory in which the Company is then operating. The covenants not to compete are not valid upon the occurrence of certain events. In Mr. Kelly's employment agreement, such events include either Mr. Kelly not being re-elected to or resigning his position as a director of the Company or the acquisition of a voting majority of the issued and outstanding capital stock of the Company by an outside entity. In the other executive officers' employment agreements, such events include, in addition to those set forth in the previous sentence, Mr. Kelly no longer being employed by or resigning his employment with the Company or, following Mr. Kelly's death or disability, Fred Elefant being removed as a director of the Company. Termination. Each employment agreement includes several provisions requiring the Company to make certain payments upon the occurrence of certain events. Following Mr. Kelly's termination by the Company for any reason except for good cause or if Mr. Kelly resigns from the Company for good cause, the Company is required to pay Mr. Kelly's full salary for 24 months following such termination or resignation, and to provide Mr. Kelly with insurance coverage during that period. In addition, the Company is required to repurchase up to 50% of the Common Stock owned by Mr. Kelly at its market value within 30 days of demand by Mr. Kelly at any time during the 24 month period. During that period, Mr. Kelly is entitled to have his shares of Common Stock registered in the event that securities held by any persons who are at such time members of Board of Directors are registered. The other executive officers have similar rights as to payment of salary, provision of insurance benefits, repurchase of up to 20% of their Common Stock and registration of Common Stock for a period of six months. Upon a change in control of the Company, if the Company then terminates Mr. Kelly's employment or if Mr. Kelly resigns, the Company is required to pay Mr. Kelly's salary and provide Mr. Kelly with insurance coverage for a period of three years and to repurchase all of Mr. Kelly's Common Stock at its market value upon demand. A change in control of the Company is defined as the resignation, removal or failure to re-elect Mr. Kelly as a director of the Company, or following Mr. Kelly's death or disability, the resignation, removal or failure to re-elect Fred Elefant as a director of the Company. Mr. Kelly is also entitled to reimbursement of up to $100,000 per year for office, secretarial, and related expenses. In this case, Mr. Kelly also has registration rights as described above during such three year period. The other executive officers have similar rights for a period of one year in the event of their termination or resignation following a change in control of the Company. If the Company terminates Mr. Kelly for cause, or if Mr. Kelly resigns from the Company without good reason, Mr. Kelly is entitled to receive his salary and full insurance coverage for a period of 12 months or, if earlier, until his employment with another company. The other executive officers have similar rights for a period of three months or, if earlier, until their employment with another company. -70- PSS CERTAIN TRANSACTIONS Fred Elefant, a member of the Board of Directors and Secretary of the Company, provides legal services as general counsel to the Company. Fees for such legal services were approximately $132,000 in fiscal year 1997. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PSS The following table reflects the number of shares of Common Stock beneficially owned as of March 28, 1997, by (i) each person who is known by the Company to beneficially own more than 5% of the outstanding Common Stock, (ii) each of the executive officers named in the Summary Compensation Table, (iii) each director, and (iv) all of the Company's executive officers and directors as a group. Unless otherwise noted, all shares are owned directly with sole voting and dispositive powers.
Number of Percent of Name Shares Total(1) ---- ------ -------- Putnam Investments, IC(2)........................................... 3,429,284 8.8% Pilgrim Baxter & Associates, Ltd. (2)............................... 3,400,800 9.2 Patrick C. Kelly (3)(4)............................................. 1,335,466 3.5 John F. Sasen, Sr. (3).............................................. 187,177 * Frederick E. Dell (3)............................................... 213,590 * David A. Smith (3).................................................. 176,524 * James B. Stallings, Jr.(3).......................................... 23,000 * Delmer W. Dallas (3)................................................ 131,144 * T. O'Neal Douglas................................................... 18,000 * Fred Elefant (3)(5)................................................. 702,616 1.9 Delores P. Kesler (3)............................................... 1,500 * James L.L. Tullis (6)............................................... 217,860 * William C. Mason.................................................... -- -- All Executive Officers and Directors as a group (19 persons)(3)..... 3,300,718 8.7
- ---------------- * Less than 1% (1) Based upon 37,061,615 shares of Common Stock outstanding as of March 28, 1997. (2) The addresses for holders of five percent or more of the Common Stock outstanding are as follows: Putnam Investments, Inc., One PO Box Square, Boston, MA 02109; and Pilgrim Baxter & Associates, Ltd. is 1255 Drummers Lane, Suite 300, Wayne Pennsylvania 19087-1590. All information regarding the foregoing shareholders was obtained solely from a Schedule 13G filed by Putnam Investments, Inc. on January 31, 1997 and from a Schedule 13G/A filed by Pilgrim Baxter & Associates, Ltd. on March 12, 1997. (3) Included in such beneficial ownership are shares of Common Stock issuable upon the exercise of certain options exercisable immediately or within 60 days of March 28, 1997 as follows: Mr. Kelly, 630,462 shares; Mr. Sasen, 67,439 shares; Mr. Dell, 40,301 shares; Mr. Smith, 40,296 shares; Mr. Stallings, 20,000 shares; Mr. Elefant, 17,539 shares; Mr. Tullis, 14,296 shares; and executive officers and directors as a group, 886,515 shares. Also included in such beneficial ownership are shares held for the account of certain individuals by the ESOP as follows: Mr. Kelly, 154,974 shares; Mr. Sasen, 18,872 shares; Mr. Smith, 25,959 shares; Mr. Dell, 96,420 shares; and all executive officers and directors as a group, 386,830 shares. (4) Excludes 600,000 shares held in trust for Mr. Kelly's daughters. (5) Includes 600,000 shares held in trust for Mr. Kelly's daughters for which Mr. Elefant serves as co-trustee. (6) Includes 127,881 shares owned by Tullis Dickerson Capital Focus, L.P. and 11,200 shares owned by Tullis Dickerson Partners. Mr. Tullis is the general partner of Tullis-Dickerson Partners, the sole general partner of Tullis-Dickerson Capital Focus, L.P. -71- SELECTED FINANCIAL DATA OF S&W The selected financial data of S&W presented as of and for the periods ended March 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the audited and/or reviewed financial statements of S&W. See "Business of S&W -- General," "S&W Management's Discussion and Analysis of Financial Conditions and Results of Operations" and "S&W Financial Statements."
Fiscal Years Ended March 31, -------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- Statements of Income Data: (In thousands, except per share amounts) Revenue 50,042 54,332 58,684 60,096 72,034 Gross profit 10,590 10,895 12,702 12,926 16,774 General and administrative expenses 9,025 9,099 10,748 11,044 15,773 Depreciation and amortization 103 140 182 202 295 Earnings before interest and taxes 1,582 1,789 1,965 1,891 1,014 Net income 775 849 907 790 53 Net income per share $3.10 $4.40 $4.43 $3.65 $.23 Dividends per common share None None None None None Working capital 2,759 3,468 4,230 4,567 6,145 Total assets 11,383 12,440 14,398 16,912 22,984 Long-term indebtedness 540 3,879 3,224 2,682 3,266 Retained earnings and common stock 3,236 4,399 5,307 6,097 6,150 Less: Unearned ESOP shares 0 3,638 3,021 2,516 1,368 Add: Paid in capital 0 0 0 0 173 Total equity 3,236 761 2,286 3,581 4,955
-72- S&W MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of S&W's financial condition and results of operations should be read in conjunction with the more detailed information and the S&W Financial Statements and notes thereto appearing elsewhere in this Proxy Statement-Prospectus. General S&W is a leading distributor of x-ray chemicals, film, equipment and related medical products in hospitals, imaging centers, MRI offices, orthopedics, chiropractic, veterinary, and dental facilities. Founded in 1973, S&W has grown primarily through expanded sales territories with significant and growing equipment sales and service. S&W distributes products to its customers through five regional distribution centers located in Buffalo, Rochester, Syracuse, Albany and Newburgh, New York and three sales/service offices located in Erie and Scranton, Pennsylvania and Hartford, Connecticut. S&W's 94-person sales and service force calls on 3,000 hospital-physician customers in six states. S&W offers over 15,000 medical products, related supplies and diagnostic imaging equipment. Results of Operations The following table represents certain consolidated statements of operations data as a percentage of such items to revenues:
Fiscal Years Ended March 31, ------------------------------ 1995 1996 1997 -------- -------- -------- Statements of Income Data: Revenues 100.0% 100.0% 100.0% Costs and Expenses: Cost of Goods Sold 78.4 78.5 76.7 General Administration 18.3 18.4 21.9 Depreciation and Amortization 0.3 0.3 0.4 Interest 0.8 0.8 1.2 Income Before Income Taxes 2.5 2.3 0.2 Income Taxes 1.0 1.0 0.1 Net Income 1.5 1.3 0.0
Fiscal Year Ended March 31, 1997 Versus March 31, 1996 Revenues. Revenues for the fiscal year ended March 31, 1997 increased by 19.9% to $72 million, compared to $60 million for the fiscal year ended March 31, 1996. The increase is due to a full year effect of an acquisition and continued market penetration resulting in branch sales growth. Cost of Goods Sold. Cost of goods sold as a percent of revenues decreased slightly to 76.7% for the fiscal year ended March 31, 1997 from 78.5% for the fiscal year ended March 31, 1996. General and Administrative Expenses. General and administrative expenses as a percent of revenues for the fiscal year ended March 31, 1997 increased to 21.9% from 18.4% for the fiscal year ended March 31, 1996. The increase reflected an addition of 25 sales, service and support personnel during the most recent acquisition. -73- Depreciation and Amortization. Depreciation and amortization for the fiscal year ended March 31, 1997 increased slightly to $295,000 from $202,000 for the fiscal year ended March 31, 1996. The increase is primarily due to the goodwill amortization resulting from an acquisition that occurred in March 1996 and the purchase of computer equipment and software. Interest Expense. Interest expense increased to $865,000 in the fiscal year ended March 31, 1997 compared to $500,000 in the fiscal year ended March 31, 1996. The increase was primarily due to the increased use of borrowed funds to fund working capital requirements. Income Tax Expense. Income taxes for the fiscal year ended March 31, 1997 were $95,900 as compared to $601,100 for the fiscal year ended March 31, 1996. Net Income. Net income for the fiscal year ended March 31, 1997 was $53,275 as compared to $790,000 for the fiscal year ended March 31, 1996. Fiscal Year Ended March 31, 1996 Versus March 31, 1995 Revenues. Revenues for the fiscal year ended March 31, 1996 grew slightly to $60 million as compared to $58.7 million for the fiscal year ended March 31, 1995. Cost of Goods Sold. Cost of goods sold as a percent of revenues increased slightly to 78.5% for the fiscal year ended March 31, 1996 from 78.4% for the fiscal year ended March 31, 1995. General and Administrative Expenses. General and administrative expenses as a percent of revenues increased slightly to 18.4% for the fiscal year ended March 31, 1996 from 18.3% for the fiscal year ended March 31, 1995. Depreciation and Amortization. Depreciation and amortization for the fiscal year ended March 31, 1996 increased slightly to $202,000 from $182,000 for the fiscal year ended March 31, 1995. Interest Expense. Interest expense as a percent of revenues remained unchanged at approximately 0.8% for the fiscal years ended March 31, 1996 and 1995. Income Tax Expense. Income taxes for the fiscal year ended March 31, 1996 were $601,100 as compared to $616,582 for the fiscal year ended March 31, 1995. Net Income. Net income for the fiscal year ended March 31, 1996 was $790,000 as compared to $907,019 for the fiscal year ended March 31, 1995. Liquidity and Capital Resources As of March 31, 1997, total current assets were $20.9 million and total current liabilities were $14.7 million, resulting in working capital of $6.2 million, compared to $15.2 million in current assets and $10.6 million in current liabilities ($4.6 million in working capital) at March 31, 1996. The current ratio was 1.4 to 1 at March 31, 1997 and 1996. Operating Activities. Net cash used in operating activities was $438,000, $1.0 million, and $944,000 in fiscal years ended March 31, 1997, 1996, and 1995, respectively. The net cash used in fiscal 1996 and 1995 operating activities was a result of increasing inventories in anticipation of a manufacturer price increase and an increase in accounts receivable. Fiscal year ended March 31, 1997 operating activities were offset by increased accounts payables. Investing Activities. Net cash used in investing activities was $475,000, $585,000, and $247,000 in fiscal years ended March 31, 1997, 1996, and 1995, respectively. These funds were primarily used for -74- fixed asset purchases in fiscal years ended 1997 and 1995 and an acquisition in fiscal year ended March 31, 1996. Financing Activities. Net cash provided by financing activities was $1.1 million, $1.6 million, and $1.1 million in fiscal years ended 1997, 1996, and 1995, respectively. These funds were used for the borrowings and pay downs on the two working capital lines of credit. As of March 31, 1997, S&W had two working capital line of credit agreements and an equipment line of credit agreement with a local bank in the aggregate amount of $10,000,000. The revolving lines of credit are secured by S&W's accounts receivable, equipment and inventory, along with the personal guarantee of one of the shareholders. In addition, the agreements require S&W to maintain certain financial covenants and specified ratios. The primary credit line is available up to $3,500,000 for working capital requirements and bears interest at the prime rate (an effective rate of 8.5% at March 31, 1997). At March 31, 1997, there was $1,714,550 outstanding against this line. The equipment credit line is available for purchases of equipment for resale up to $500,000 and bears interest at the prime rate plus 1-1/4%. No amounts were outstanding under this credit line at March 31, 1997. S&W estimates that existing line of credit availability, working capital and cash from operations will be sufficient to fund operations for the next twelve months. -75- BUSINESS OF S&W General S&W offers imaging products and services to health care providers with the objective of satisfying technical imaging needs. S&W's headquarters is located in Rochester, New York and S&W maintains branch offices in Buffalo, Syracuse, Albany and Newburgh, New York. S&W also has sales/service satellite facilities in Erie, Pennsylvania, Scranton, Pennsylvania and Hartford, Connecticut. S&W services over 4,000 customers, including over 250 hospitals, 700 radiographic and imaging centers, and other industrial, alternate care and dental accounts. S&W serves customers throughout New York State (excluding Long Island), Northern Pennsylvania, Northern New Jersey and Western New England. S&W's sales representatives meet daily with health care professionals to provide solutions for a wide spectrum of needs. In the acute care market, S&W representatives interact with imaging and materials management department heads, as well as physicians and hospital administrators. Due to the pressure of health care reform, down sizing, managed care and capitated provider contracts, S&W sales representatives work with hospital administration staff to increase efficiency and reduce the cost of the products and services consumed by the facilities. S&W sales representatives also assist customers in complying with health department quality assurance policies and meeting EPA film processor effluent discharge regulations. In addition, S&W maintains relationships with Group Purchasing Organizations and Integrated Delivery Networks. These organizations and networks make decisions for as few as three to as many as 1,800 hospitals. S&W considers these organizations and networks to be very effective resources. Each S&W branch office consists of three teams: consumables/accessories sales, imaging equipment sales, and multi-vendor imaging equipment service. The team approach allows for a comprehensive understanding of customer goals. Frequent interaction among these teams allows S&W to service a variety of customer needs. Consumables/Accessories and Sales Film sales account for approximately 50% of S&W's revenues. Nearly half of the film sold by S&W is manufactured by Kodak. S&W distributes film and services film handling equipment manufactured by the world's major manufacturers - Kodak, Sterling, Imation, Konica, Fuji and Agfa. S&W provides its acute care and larger alternate care customers with pre-mixed developer and fixer solution. In addition to selling products to these customers, S&W assumes responsibility for ordering, inventory maintenance, and delivery, which saves its customers the time and cost associated with these processes and allows them to focus on providing health care services. All S&W processor service personnel must matriculate through the Kodak Imagewatch certification program, which includes general processing, mammography and silver management. Continuing technical education courses offered by other film handling manufacturers also are attended. In addition to film and film handling products, S&W offers thousands of imaging accessory products manufactured by hundreds of large and small companies, and include such products as paper filing envelopes, barium, lead and lead apparel, darkroom cabinets, grids, buckles, mew boxes, shelving, cassettes and markers. S&W offers three inventory management distribution programs: a stockless inventory program, a JIT program and a conventional program. S&W's inventory management programs are designed to increase efficiencies and decrease costs for customers through outsourcing the order procurement process to S&W. By integrating the entire inventory ordering and maintenance process, S&W helps customers -76- identify and eliminate duplicative and unnecessary costs, thus allowing imaging department managers to focus on patient care. S&W is EDT capable and utilizes an ANSI-X12 P.C. platform on-call system to further reduce ordering costs. S&W sells film, film handling products and accessories through a telemarketing division in its Rochester branch. This division services over 2,200 dental customers nationally and abroad, and accounted for approximately $1.3 million in revenue in fiscal 1997. Imaging Equipment Sales S&W distributes specialty lines of imaging equipment for several manufacturers, including Camtronics, Comdisco, CompuRad, Shimadzu, Infimed and Trex Medical Products. Trex distributes products through four subsidiaries: Bennett, Continental X-Ray, Lorad and XRE. Below is a brief description of these companies and certain of their products. Trex Medical Products - A leading manufacturer of mammography and stereotactic needle biopsy systems, and quality radiographic systems. Trex is an innovator with the new fill breast digital technology which is expected to be available in 1998. Bennett - Manufactures mammography (Contour) and general radiographic systems. The Contour product is a market leader in mammography due to its tilt feature which visualizes additional breast tissue. Bennett also manufactures stereotactic equipment. Continental X-Ray - Designs, manufactures and markets general purpose and specialty X-Ray systems, including radiographic/fluoroscopic and electrophysiologic systems. Continental's new flagship product, the DigiSpot R&F room, provides high quality imaging with low radiation to the patient. Lorad - Its breast imaging systems are regarded in the industry as the most technically advanced available, and provide the highest image resolution available. Products include M-IV & M-III Mammography Systems, StereoGuide prone stereotactic breast biopsy systems, DSM and StereoLoc II. Together with U.S. Surgical, Lorad developed the ABBI System, a minimally invasive breast biopsy instrument which decreases provider costs by eliminating certain surgical procedures. XRE - Through dealer organizations and private label agreements with several global medical imaging companies (including Philips, G.E. and Picker), XRE has become a leading designer and manufacturer of angiographic equipment. XRE's patented parallelogram positioner offers virtually unlimited angulations for complex cardiac imaging. Camtronics - Manufactures digital imaging systems for R/F, angio and cardiac applications. Its VP System includes a direct to disk technology that is new in the industry and allows for increased image storage and faster image review. Camtronics' products are distributed through an exclusive dealer network as well as OEM arrangements. Comdisco - Remanufactures state-of-the art diagnostic imaging equipment and specializes in high-end ISO-9002 certified MRI, CT, angio, cath lab, R&F and mobil vascular labs. CompaRad - Manufactures equipment for affordable image transmission to increase service levels and imaging efficiencies for the referring physician and the patient. CompuRad's non- -77- proprietary Windows NT software complies with industry dicom standards and is upgradeable and user friendly. Shimadzu - Manufactures high tech imaging equipment such as general X- ray, angio, CT and MRI. Infimed - Manufactures digital imaging systems for R/F, angio and cardiac applications. Infimed's products are based on Microsoft's Windows 95, and are primarily sold as "add on" systems through a dealership network. Multi-Vendor Imaging Equipment Service S&W's customers utilize equipment from a wide variety of vendors and S&W's multivendor service provides a cost efficient alternative to these customers who would otherwise be required to contract with a large number of servicing companies. S&W has 28 imaging equipment service personnel with various backgrounds and expertise. S&W's imaging equipment service personnel service all makes and models available from the manufacturers represented by S&W and from most other manufacturers. S&W personnel have the skill to repair a wide variety of equipment with a set of schematics and with the resources of second source vendors who assist S&W by supplying cost effective part and component alternatives. S&W provides multi-vendor service for the following types of imaging equipment: radiographic, portables, fluoroscopic, CT, tomographic, C-arm, special procedures and ultrasound. Competition The imaging equipment and services businesses are highly competitive. Many large, multi-national companies, such as G.E., Phillips, Siemens, Picker and Toshiba, compete with S&W in the imaging equipment marketplace and utilize a spectrum of resources ranging from designated equipment specialists to creative financial arrangements. S&W differentiates itself from large, original equipment manufacturers by offering a higher level of local customer service and lower delivered cost. S&W's local, decentralized structure allows flexibility to address customer needs and to create opportunities for future sales and services. S&W also encounters heavy competition in the area of consumable and accessory sales from Picker and from locally based firms. E. G. Baldwin Co., L. M. Goodyear X-Ray Co., and Buffalo X-Ray Co. compete in the Buffalo market; L. M. Goodyear X-Ray Co., V-Med, and Buffalo X-Ray Co. compete in the Rochester market; V-Med, Reliance X-Ray, and North Central X-Ray compete in the Syracuse market; Associated X-Ray, E. M. Parker Co., and Schiring Radiographic Imaging compete in the Albany market; and E. M. Parker Co., Standard Medical Imaging, and Parker X-Ray Solutions compete in the Newburgh market. Facilities S&W distributes products through its seven branch and satellite service centers, and operates a fleet of approximately 20 leased trucks to service customers. S&W believes that its facilities are adequate to support its current and anticipated business for the foreseeable future. The following table lists S&W's facilities by center, all of which are leased except for the Syracuse, New York center: -78-
Date Approximate ---- ----------- Location Opened Square Feet Service Area -------- ------ ----------- ------------ Rochester, NY 1973 12,000 Western and Southern NY, Northern PA Buffalo, NY 1985 12,000 Western NY and Northern PA Syracuse, NY 1976 20,000 Central NY and North Central PA Albany, NY 1984 14,000 Northern and Eastern NY, VT, CT, MA Hartford, CT 1996 3,000 West and Central CT Erie, PA 1993 3,000 Western PA Scranton, PA Newburgh, NY 1991 12,000 Downstate NY, CT, NJ, Eastern PA
Employees S&W employs approximately 175 persons (including 15 part-time employees), of whom 28 are engaged in management, administration and accounting, 24 are in direct sales, 70 are in equipment services, 25 are in customer service, and 28 are in warehouse and distribution operations (including drivers). Insurance S&W maintains general liability, product liability and automobile liability insurance. While S&W believes its insurance is adequate in amount and coverage, there can be no assurance that the coverage maintained by S&W is sufficient to cover all future claims or will be available in adequate amounts or at a reasonable cost. Legal Proceedings S&W is involved from time to time in various legal proceedings incidental to its business. In the opinion of S&W's management, no pending litigation is likely to have a material effect on S&W's financial position, results of operations or liquidity. -79- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF S&W The following table sets forth certain information with respect to the beneficial ownership of S&W Shares as of August 10, 1997, by (i) each person who is known by S&W to beneficially own more than 5% of any class of outstanding capital stock of S&W, (ii) each of the executive officers named in the S&W Summary Compensation Table above, (iii) each of S&W's directors, and (iv) all of S&W's executive officers and directors as a group. See "The Merger--Exchange Ratio."
Name Number of Shares Percent Owned ---- ---------------- -------------- Joseph E. Miller, Jr. 85,200 32.82% Bruce P. Ashby 85,200 32.82% William K. Luety, Jr. 1,820 * James F. Goldner 1,820 * Employee Stock Ownership Trust 85,534 32.96% All executive officers and directors as a group (3 persons)
- ---------------------- * Less than one percent. (1) The named stockholders have sole voting and investment power with respect to all shares shown as being beneficially owned by them, except as otherwise indicated. The addresses of those persons who are known to S&W to be the beneficial owners of 5% or more of the any outstanding class of S&W capital stock are as follows: Joseph E. Miller, Jr.: 340 Gateway Park Drive, North Syracuse, New York 13212; Bruce P. Ashby: 79 Brown Road, Stillwater, New York, 12170; and the S&W X-Ray, Inc. Employee Stock Ownership Trust: Cornerstone Center, 2300 Buffalo Road, Rochester, New York 14824. -80- DESCRIPTION OF PSS CAPITAL STOCK The authorized capital stock of PSS consists of 60,000,000 shares of common stock, $0.01 par value ("PSS Common Stock"), of which 37,087,601 shares were issued and outstanding on June 16, 1997, and 1,000,000 shares of preferred stock, $0.01 par value (the "PSS Preferred Stock"), of which no shares are issued and outstanding. There were approximately 1,065 record holders of PSS Common Stock as of June 16, 1997. PSS Common Stock Holders of PSS Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders of PSS and may not cumulate votes for the election of directors. Holders of PSS Common Stock have the right to receive dividends when, as, and if declared by the Board of Directors from funds legally available therefor. Upon the liquidation of PSS, holders of PSS Common Stock are entitled to share pro rata in any assets available for distribution to shareholders after payment of all obligations of PSS. Holders of PSS Common Stock have no preemptive rights and have no rights to convert their PSS Common Stock into any other securities. All shares of PSS Common Stock have equal rights and preferences. All shares of PSS Common Stock now outstanding are fully paid for and non-assessable. PSS Preferred Stock There are currently no shares of PSS Preferred Stock outstanding. The Board of Directors has the authority to establish, by amendment to the Articles of Incorporation in accordance with the Florida Business Corporation Act (the "FBCA") law, one or more series of PSS Preferred Stock, to designate each such series and to establish the variations in rights, preferences and limitations for each series, without further shareholder approval. Any issuance of PSS Preferred Stock could be used to dilute the stock ownership of persons seeking to gain control of PSS and could otherwise have the effect of delaying, deferring or preventing a change in control of PSS. Certain Articles of Incorporation and Bylaw Provisions of PSS The Amended and Restated Articles of Incorporation of PSS (the "PSS Articles") contain several provisions that may make more difficult the acquisition of control of PSS by means of a tender offer, open market purchase, proxy fight or otherwise. The Amended and Restated Bylaws of PSS (the "PSS Bylaws") also contain provisions that could have an anti-takeover effect. Classified Board of Directors. The PSS Articles and Bylaws provide for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. PSS believes that a classified Board of Directors will help to assure the continuity and stability of the Board of Directors and of the business strategies and policies as determined by the Board of Directors. The classified board provision could have the effect of making the removal of incumbent directors more time-consuming and difficult, and, therefore discouraging a third party from making a tender offer or otherwise attempting to obtain control of PSS, even though such an attempt might be beneficial to PSS and its shareholders. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. Number of Directors; Removal; Filling Vacancies. The PSS Articles and Bylaws provide that the number of directors will be fixed from time to time by the consent of three-fifths of the Board of Directors. Accordingly, any four members of the board could prevent a shareholder from obtaining representation on the board by enlarging the board and filling the new directorships with its own nominees. -81- Moreover, the PSS Articles provide that directors may be removed with or without cause only by the affirmative vote of holders of at least four-fifths of the outstanding shares of the capital stock of PSS entitled to vote on election of directors at a meeting called for that purpose ("PSS Voting Stock"), except that if the Board of Directors, by an affirmative vote of at least three- fifths of the entire Board of Directors recommends removal of a director to the shareholders, such removal may be effected by the affirmative vote of the holders of a majority of the PSS Voting Stock. This provision, when coupled with the provisions of the PSS Articles and the Bylaws authorizing the Board of Directors to fill vacant directorships only by a vote of three-fifths of the Board of Directors in office, will preclude shareholders having less than four- fifths of the PSS Voting Stock from removing incumbent directors with or without cause and filling the vacancies created by such removal with their own nominees, without the affirmative vote of three-fifths of the Board of Directors. Preferred Stock. As described above, the Board of Directors is authorized to provide for the issuance of shares of PSS Preferred Stock in one or more series, and to fix by amendment to the PSS Articles, as provided by the FBCA, the terms and conditions of each such series. PSS believes that the availability of the PSS Preferred Stock issuable in series will provide it with increased flexibility in structuring possible future financings and acquisitions and in meeting other corporate needs which might arise. Although the Board of Directors has no present intention of doing so, it could issue a series of PSS Preferred Stock that could, depending on its terms, either impede or facilitate the completing of a merger, tender offer or other takeover attempt. Certain Amendments. The PSS Articles provide that if the shareholders have adopted or amended a provision of the PSS Articles or the Bylaws that fixes a greater quorum or voting requirement for shareholders or voting groups of shareholders than is required by the FBCA law, the adoption or amendment of a provision in the PSS Articles or Bylaws that adds, changes, or deletes a greater quorum or voting requirement for shareholders must meet the same quorum requirement and be adopted by the same vote and voting groups required to take action under the quorum and voting requirements then in effect or proposed to be adopted, whichever is greater. The PSS Articles provide that a provision of the PSS Bylaws which fixes a greater quorum or voting requirement for shareholders may not be adopted, amended, or repealed by the Board of Directors. Fair Price Provision. The PSS Articles provide that, in addition to any affirmative vote required by law or other provisions of the Articles, the affirmative vote of the holders of at least 80% of the voting power of the PSS Voting Stock, voting together as a single class, is required for the approval or authorization of any Business Combination (as defined below) with an Interested Shareholder (as defined below) . However, the 80% voting requirement is not applicable if the Business Combination is approved by a two-thirds vote of the Disinterested Directors (as defined below), and if the Business Combination meets certain minimum price and procedural requirements. Generally, the consideration to be received in the Business Combination must not be less than the higher of (a) the highest per share price paid by the Interested Shareholder for any shares of PSS Common Stock acquired by it within the two-year period immediately prior to the first public announcement of the proposed Business Combination (the 'Announcement Date"), or in the transaction in which the Interested Shareholder became an interested Shareholder, whichever is higher; or (b) the fair market value per share of PSS Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder, whichever is higher. The consideration paid to a particular class of outstanding PSS Voting Stock shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class of PSS Voting Stock. After such Interested Shareholder has become an interested Shareholder and prior to the consummation of the Business Combination, except as approved by a majority of the Disinterested Directors, there shall have been no failure to pay quarterly dividends on the outstanding PSS Preferred Stock, if any, and no reduction in the annual rate of dividends paid on PSS Common Stock (and an increase in such annual rate of dividends as necessary to reflect any transaction which has the effect of reducing the number of outstanding shares of PSS Common Stock); and such Interested Shareholder shall not become the beneficial owner of any additional shares of PSS Voting Stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder. Such -82- Interested Shareholder, after becoming an Interested Shareholder, shall not have received the benefit, directly or indirectly (except proportionately as a shareholder) of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by PSS, whether in anticipation of or in connection with such Business Combination or otherwise. In the event these and other minimum price criteria and procedural requirements are met and the requisite approval of the Disinterested Directors Is obtained with respect to a particular Business Combination, then the requirements of the FBCA shall apply (which may require a majority vote of the shareholders, or in some instances, no vote of shareholders). A "Business Combination" is (a) any merger or consolidation of PSS with any Interested Shareholder or any other corporation which is or after such merger or consolidation would be an affiliate of the Interested Shareholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or disposition to or with any interested Shareholder or any affiliate of any Interested Shareholder, of any assets of PSS or any subsidiary having an aggregate fair market value of $1 million or more; or (c) the issuance or transfer by PSS or any subsidiary of any securities of PSS or any subsidiary to any Interested Shareholder or any affiliate of any Interested Shareholder in exchange for cash, securities or other property having an aggregate fair market value of $1 million or more; or (d) the adoption of any plan or proposal for the liquidation or dissolution of PSS proposed by or on behalf of any Interested Shareholder or any affiliate of any Interested Shareholder; or (e) any reclassification of securities or recapitilization of PSS, or any merger or consolidation of PSS with any of its subsidiaries, or any other transaction which has the effect of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of PSS or any subsidiary directly or indirectly owned by any Interested Shareholder or any affiliate of any interested Shareholder. An "Interested Shareholder" shall mean any person (other than PSS, any of its subsidiaries, PSS or any subsidiary acting as a trustee or in a similar fiduciary capacity, or any person who would have met the definition of an interested Shareholder as of March 1, 1994) who or which (a) is the beneficial owner of more than 10% of the voting power of the outstanding PSS Voting Stock; or (b) is an affiliate of PSS and at any time within the two-year period immediately prior to the date in question was the beneficial owner of 10% or more of the voting power of the then outstanding PSS Voting Stock; or (c) is an assignee of or has otherwise succeeded to any shares of PSS Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act. "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Shareholder and was a member of the Board of Directors prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Disinterested Director who is unaffiliated with the interested Shareholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. The PSS Articles provide that a vote of the holders of 80% or more of the voting power of the PSS Voting Stock would be required in order to amend, alter or repeal, or adopt any provisions inconsistent with, the foregoing fair price provisions. Control-Share Acquisition. PSS will be subject to the provisions of Section 607.0902 of the FBCA. In general, the statute denies voting rights to shares purchased by an acquiring person who has obtained or anticipates obtaining a specified level of voting control in shares of an issuing public corporation as part of a control-share acquisition, except to the extent to which voting rights are conferred by resolution approved by the shareholders of the issuing public corporation. A vote of the shareholders to confer voting power under the statute must meet the criteria set forth in the statute, including the requirement for approval by a majority of all votes entitled to be cast in each voting group entitled to vote separately, excluding all interested shares. For the purpose of the statute, an "issuing public corporation" is a corporation which has more than 100 shareholders, has its principal office and place of business or -83- substantial assets in the State of Florida, and either has (a) more than 10% of its shareholders resident in this state; or (b) more than 10% of its shares owned by residents of this state; or (c) 1,000 shareholders resident in this state. Provisions of the statute become effective when a person acquires or intends to acquire stock which, when added to all other shares owned by such person or in respect of which such person may exercise or direct voting power, either alone or as part of a group, would entitle such person to exercise at least 20% of the voting power of the stock of the issuing public corporation. The statute, when addressing the acquisition of voting power, makes no distinction between irrevocable proxies and revocable proxies. Arguably then, the provisions of the statute could be invoked by the solicitation of revocable proxies although PSS is unaware of any recorded instance where this has occurred. The statute is self-operative and, therefore, PSS need not assert the defense in order for the provisions of the statute to apply. This provision may have the effect of delaying, deferring or preventing a change in control of PSS without further action of its shareholders. Transfer Agent and Registrar The Transfer Agent and Registrar for PSS Common Stock is Continental Stock Transfer & Trust Company. CERTAIN DIFFERENCES IN THE RIGHTS OF PSS AND S&W STOCKHOLDERS PSS is a Florida corporation subject to the provisions of the Florida Business Corporation Act ("FBCA"). S&W is a New York corporation subject to the provisions of the New York Business Corporation Law ("NYBCL"). Stockholders of S&W whose rights are governed by the Certificate of Incorporation, as amended, (the "S&W Certificate) and Bylaws, as amended of S&W (the "S&W Bylaws"), and by the NYBCL will, upon consummation of the Merger, become stockholders of PSS. The rights of such stockholders as stockholders of PSS will then be governed by PSS's Articles and Bylaws and by the FBCA. Except as set forth below, there are no material differences between the rights of a PSS stockholder under the PSS Articles and Bylaws and under the FBCA, on the one hand, and the rights of a S&W stockholder under the S&W Certificate and Bylaws and under the NYBCL, on the other hand. This summary does not purport to be a complete discussion of, and is qualified in its entirety by reference to, the governing law and the Articles or Certificate of Incorporation and Bylaws of each corporation. Authorized Capital Stock PSS. The authorized capital stock of PSS consists of 60,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock. As of June 16, 1997, there were 37,087,601 shares of Common Stock outstanding and no shares of Preferred Stock outstanding. In addition, as of June 30, 1997 there were outstanding options under PSS stock option plans to purchase an additional 1,704,809 shares of PSS Common Stock. The Board of Directors of PSS has the authority to issue the PSS Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions for each such series (including, without limitation, the right to convert the shares of such PSS Preferred Stock into shares of PSS Common Stock or preferential voting, dividend, dissolution or other rights), without any further vote or action by the stockholders. The Board of Directors of PSS has no present intention of issuing shares of PSS Preferred Stock. S&W. S&W is authorized by its Certificate to issue up to 500,000 shares of Common Stock. There are 259,574 shares of S&W Common Stock outstanding and 4,009 shares of S&W Common Stock to be issued on the Closing Date pursuant to the S&W Supplemental Executive Retirement Plan. -84- Size and Classification of Board of Directors PSS. The PSS Articles and Bylaws provide that the number of directors will be fixed from time to time by the consent of three-fifths of the Board of Directors. The PSS Articles and Bylaws provide for the Board of Directors to be divided into three classes of directors, with each class consisting, as nearly as possible, of one-third of the total number of directors constituting the entire Board. The term of one class of officers expires every year, so that each director's term is for a period of three years. S&W. The S&W Bylaws provide that the number of directors which shall constitute the whole board shall be not less than three. Except for a decrease in the number of directors, the number of directors are from time to time fixed and determined by the directors and are to be set forth in the notice of any meeting of the shareholders held for the purpose of electing directors. The Board of Directors of S&W is not divided into classes. Amendment of Articles or Certificate of Incorporation and Bylaws PSS. The PSS Articles provide that if the shareholders have adopted or amended a provision of the PSS Articles or Bylaws that fixes a greater quorum or voting requirement for shareholders or voting groups of shareholders than is required by the FBCA law, the adoption or amendment of a provision in the PSS Articles or Bylaws that adds, changes, or deletes a greater quorum or voting requirement for shareholders must meet the same quorum requirement and be adopted by the same vote and voting groups required to take action under the quorum and voting requirements then in effect or proposed to be adopted, whichever is greater. The PSS Articles provide that a provision of the PSS Bylaws which fixes a greater quorum or voting requirement for shareholders may not be adopted, amended or repealed by the Board of Directors. S&W. The NYBCL provides that a certificate of incorporation may be amended by the vote of the majority of the shareholders of a corporation entitled to vote. The NYBCL provides that bylaws may be amended, repealed or adopted by the vote of the shares of a corporation entitled to vote on the election of directors. In addition, the NYBCL provides that bylaws may also be amended, repealed or adopted by the board of directors, provided that such bylaws may be amended by the shareholders entitled to vote on the election of directors. The S&W Bylaws do not alter the required vote. Special Meetings of Stockholders PSS. The PSS Bylaws provide that special meetings of stockholders may be called, as provided under the FBCA, by a corporation's board of directors or any other person as may be authorized by the corporation's articles or bylaws, or by the holders of not less than ten percent of the shares entitled to vote. S&W. The S&W Bylaws provide that special meetings of the shareholders may be called as provided under the NYBCL by a corporation's board of directors or by any other person authorized by a corporation's certificate of incorporation or bylaws. Removal of Directors PSS. The PSS Articles provide that directors may be removed with or without cause only by the affirmative vote of holders of at least four-fifths of the outstanding shares of the capital stock of PSS entitled to vote on election of directors at a meeting called for that purpose, except that if the Board of Directors, by an affirmative vote of at least three-fifths of the entire Board of Directors, recommends removal of a director to the shareholders, such removal may be effected by the affirmative vote of the holders of a majority of the PSS Common Stock entitled to vote at such meeting. The PSS Articles provide that the affirmative vote of the holders of at least four-fifths of the PSS Common Stock entitled to -85- vote at such meeting is required to alter, amend or adopt any provision inconsistent with, or to repeal, this provision. S&W. The S&W Bylaws provide that any director may be removed for cause by vote of the shareholders or by action of the board, and that directors may be removed without cause by vote of the shareholders. Director Liability PSS. Under the FBCA, a director is not personally liable for monetary damages to PSS or any other person for any statement, vote, decision or failure to act, regarding corporate management or policy, unless the director breached or failed to perform his duties as a director and the director's breach of, or failure to perform those duties constitutes (i) a violation of criminal law, unless the director had reasonable cause to believe his conduct was lawful or had no reason to believe his conduct was unlawful, (ii) a transaction from which the director derived an improper personal benefit, (iii) a violation of Section 607.0834 of the FBCA, which concerns unlawful payment of dividends, (iv) in a proceeding by or in the right of the corporation or a shareholder, conscious disregard for the best interest of the corporation, or willful misconduct, or (v) in a proceeding by or in the right of someone other than the corporation or a shareholder, recklessness or an act or omission which was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety or property. S&W. Under the NYBCL, a corporation may limit or eliminate the personal liability of directors to the corporation or its shareholders for damages for breach of duty in such capacity. This limitation on liability is not available for acts or omissions by a director which (i) were in bad faith, (ii) involved intentional misconduct or a knowing violation of law, (iii) involved financial profit or other advantage to which the director was not entitled, or (iv) resulted in a violation of Section 719 of the NYBCL, prohibiting certain dividend declarations, certain payments to shareholders after dissolution and particular types of loans. The S&W Certificate does not provide for exculpation of directors for breaches of fiduciary duty. Indemnification PSS. The PSS Articles state that PSS shall indemnify officers and directors to the fullest extent permitted by law. The FBCA provides that a person who is a party to a legal proceeding by reason of the fact that such person is or was a director, officer, employee or agent of a corporation shall be indemnified if such person is successful on the merits in a proceeding giving rise to the claim for indemnification. According to the FBCA, a director, officer, employee or agent of the corporation shall be indemnified if such person shall have acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to criminal proceedings, shall have no reason to believe his conduct was unlawful. The FBCA also provides that a person may not be indemnified nor may expenses be advanced if a judgment or final adjudication establishes that his actions or omissions to act were material to the cause of action so adjudicated and constitute: (a) a violation of criminal law, unless such person had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful; (b) a transaction from which the director, officer, employee or agent derived an improper personal benefit; (c) an unlawful distribution under Florida law; or (d) willful misconduct or conscious disregard for the best interests of the corporation in a proceeding by or in the right of the corporation to procure a judgment in its favor or in a proceeding by or in the right of a shareholder. The PSS bylaws provide that any indemnification or advance shall be made promptly and in any event within sixty (60) days upon the written request of the person to be indemnified. In the event the corporation does not pay such indemnification or advance on the basis that such person has not met the requisite standard of conduct, the burden of proof of such defense shall be on the corporation. PSS maintains insurance for PSS and its directors and officers against such liabilities. -86- S&W. Neither the S&W Certificate nor the S&W Bylaws provide for indemnification of directors, officers, employees or agents. S&W's directors and officers are covered by insurance policies providing them with coverage against any matter asserted against them solely by reason of their being directors and officers of S&W. Under the NYBCL, a corporation may indemnify any person made, or threatened to be made, a party to any action or proceeding except for shareholder derivative suits, by reason of the fact that he or she was a director or officer of the corporation, provided such director or officer acted in good faith for a purpose which he or she reasonably believed to be in the best interests of the corporation and, in criminal proceedings, in addition, had no reasonable cause to believe his or her conduct was unlawful. In the case of shareholder derivative suits, the corporation may indemnify any person who was a director or officer of the corporation if he or she acted in good faith for a purpose which he or she reasonably believed to be in the best interests of the corporation, except that no indemnification may be made for (i) a threatened action, or a pending action which is settled or otherwise disposed of, or (ii) any claim, issue or matter as to which such person has been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action was brought or, if no action was brought, any court competent jurisdiction, determines upon application that, in view of all circumstances, the person is fairly and reasonably entitled to an indemnity for such portion of the settlement amount and expenses as the court deems proper. The statutory provisions for indemnification and advancement of expenses are not exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled independently of the applicable statutory provision. Dissenters' Rights PSS. The FBCA sets forth procedures under which shareholders may dissent from, and receive payment of the fair value of their shares in connection with most mergers, consolidations and exchanges or sales of substantially all or all of a corporation's assets. Such dissenter's rights are not available with respect to a plan of merger, consolidation or sale or exchange of assets, to the holders of shares of any class or series which were either registered on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 shareholders. S&W. The NYBCL sets forth procedures under which stockholders may dissent from, and receive payment in the amount of the fair value of their shares in connection with, most mergers, consolidations and exchanges or sales of substantially all or all of a corporation's assets. Such dissenter's rights are not available with respect to a merger or consolidation if the shares entitled to receive notice of and to vote on the merger or consolidation are either listed on a national securities exchange, designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 stockholders ("Public Shares"), or where the corporation is the surviving corporation and no vote of its stockholders is required for such transaction, unless the holders thereof are required by the terms of an agreement of merger or consolidation to accept for their shares anything other than (i) shares of the surviving or resulting corporation, (ii) Public Shares of any corporation, (iii) cash in lieu of fractional shares of such corporations or, (iv) any combination of the consideration described in clauses (i), (ii) and (iii). The rights to dissent from the Merger under the NYBCL are summarized under "The Merger--Dissenters' Rights" and Sections 623 and 910 of the NYBCL regarding dissenters' rights is attached to this Proxy Statement-Prospectus as Annex C. Dividends and Other Distributions PSS. The FBCA provides that distributions may be made unless, after giving it effect, (i) the corporation would not be able to pay its debts as they become due in the usual course of business or (ii) the corporation's total assets would be less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights of any preferred shareholders of the company. -87- S&W. The NYBCL generally allows dividends to be paid out of surplus of the corporation or out of the net profits of the corporation for the current fiscal year and/or the prior fiscal year. The NYBCL requires a board of directors to make certain disclosure when paying dividends out of any account other than earned surplus. Mergers and Consolidations PSS. The FBCA provides that a vote of a majority of the shares of each class of stock outstanding and entitled to vote thereon is required to authorize a merger or consolidation of a corporation into any other corporation, unless the articles of incorporation require a greater vote or a vote by classes. S&W. The NYBCL provides that a vote of two-thirds of the shares entitled to vote is required to authorize a merger or consolidation of a corporation into any other corporation. Fair Price Provision PSS. The PSS Articles subject PSS to certain restrictions on business combinations with interested stockholders. See "Description of PSS Capital Stock - Certain Articles of Incorporation and Bylaw Provisions." S&W. Although the NYBCL contains a provision limiting certain business combinations with interested stockholders, such restrictions are not applicable to S&W in connection with the Merger. Control Share Acquisition Statute PSS. As a Florida corporation, PSS is subject to provisions of Section 607.0902 of the FBCA, which denies voting rights to shares purchased by an acquiring person who has obtained or anticipates obtaining a specified level of voting control in shares of an issuing public corporation as part of a control- share acquisition, except to the extent to which voting rights are conferred by resolution approved by the shareholders of the issuing public corporation. (See "Description of PSS Capital Stock - Certain Article and Bylaw Provisions.") S&W. The NYBCL does not have a similar statute. -88- EXPERTS The consolidated financial statements and schedule of PSS included elsewhere in this Proxy Statement-Prospectus as of March 28, 1997 and March 29, 1996, and for each of the three years for the period ended March 28, 1997, have been audited by Arthur Andersen LLP, independent certified public accountants, as set forth in their report thereon included therein, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The consolidated financial statements of S&W X-Ray, Inc. as of March 31, 1997 and 1996, and each of the three years in the period ended March 31, 1997, included in this Proxy Statement-Prospectus, have been so included in reliance upon the report of May, Robinson, Gordon & Penta, P.C., independent accountants, given on the authority of said firm as experts in auditing and accounting. LEGAL MATTERS The legality of the shares of PSS Common Stock being offered hereby is being passed upon for PSS by Fred Elefant, P.A., Jacksonville, Florida. OTHER MATTERS As of the date of this Proxy Statement-Prospectus, S&W's Board of Directors does not know of any matters that will be presented for consideration at the Special Meeting other than as described in this Proxy Statement- Prospectus. However, if any other matter shall come before the Special Meeting or any adjournments or postponements thereof and shall be voted upon, the proposed proxy will be deemed to confer authority to the individuals named as authorized therein to vote the shares represented by such proxy as to any such matters that fall within the purposes set forth in the Notice of Special Meeting as determined by a majority of the Board of Directors. -89- INDEX TO PSS CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Certified Public Accountants.................................................. 91 Financial Statements: Consolidated Balance Sheets-- March 28, 1997 and March 29, 1996................................ 92 Consolidated Statements of Operations for the Years Ended March 28, 1997, March 29, 1996, and March 30, 1995....................................................... 93 Consolidated Statements of Shareholders' Equity for the Years Ended March 28, 1997, March 29, 1996, and March 30, 1995....................................... 94 Consolidated Statements of Cash Flows for the Years Ended March 28, 1997, March 29, 1996, and March 30, 1995....................................................... 95 Notes to Consolidated Financial Statements..................................................... 96 Supplemental Schedule: Schedule II Valuation and Qualifying Accounts for the Years Ended March 30, 1995, March 29, 1996, and March 28, 1997....................................... 115
90 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Physician Sales & Service, Inc.: We have audited the accompanying consolidated balance sheets of Physician Sales & Service, Inc. (a Florida corporation) and subsidiaries as of March 28, 1997 and March 29, 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Physician Sales & Service, Inc. and subsidiaries as of March 28, 1997 and March 29, 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 28, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Valuation and Qualify Accounts is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Jacksonville, Florida May 27, 1997 (except with respect to Note 16, as to which the date is August 8, 1997) 91 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. 92 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. 93 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. 94 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. 95 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. 96 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Fiscal Year Beginning in fiscal year 1996, the Company's fiscal year ends on the Friday closest to March 31 of each year. The Company's fiscal year ended on the Thursday closest to March 31 of each year prior to fiscal year 1996. Fiscal years 1997, 1996, and 1995 consist of 52 weeks. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk The Company's trade accounts receivable are exposed to credit risk; however, the risk is limited, as the balance is comprised of numerous individual accounts, none of which is individually significant. The Company monitors the creditworthiness of its customers on an ongoing basis and provides reserves for estimated bad debt losses and sales returns. The Company had reserves for doubtful accounts of approximately $3,581,000 and $2,218,000 as of the end of fiscal years 1997 and 1996, respectively. Provisions for doubtful accounts were approximately $2,463,000, $1,448,000, and $1,651,000 for fiscal years ended 1997, 1996, and 1995, respectively. Cash Management The Company utilizes a zero balance bank account, and checks issued for cash disbursements are funded by advances from overnight investments. Outstanding checks are recorded as accounts payable until they are presented to the bank, at which time the payments are applied against the overnight investments. The Company had approximately $8,060,000 and $6,841,000 of outstanding checks recorded in accounts payable as of the end of fiscal years 1997 and 1996, respectively. Cash and Cash Equivalents Cash and cash equivalents generally consist of cash held at banks, short-term government obligations, and money market instruments. The Company invests its excess cash in high-grade investments and, therefore, bears minimal risk. These instruments have original maturity dates not exceeding three months. Marketable Securities The Company classifies its marketable securities as trading securities and carries such securities at fair market value. Net unrealized gains and losses on trading securities are included in net income. Marketable securities include municipal bond issues with maturity dates exceeding three months and equity securities classified as trading securities. Management's intent is to liquidate these securities within one year. 97 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments, including cash and cash equivalents, marketable securities, short-term trade receivables and payables, and long-term debt and capital lease obligations, approximate their fair values. Inventories Inventories are comprised principally of medical supplies and equipment and are stated at the lower of cost (first-in, first-out) or market. Market is defined as net realizable value. Property and Equipment Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to thirty years. Leasehold improvements are amortized over the lease terms or the estimated useful lives, whichever is shorter. Gain or loss upon retirement or disposal of property and equipment is recorded in other income in the accompanying consolidated statements of operations. Intangibles Noncompete agreements are amortized on a straight-line basis over the lives of the agreements, which range from three to ten years. Customer lists are amortized on a straight-line basis over ten years. The Company has classified as goodwill the cost in excess of the fair value of net identifiable assets purchased in business acquisitions which are accounted for as purchase transactions. Goodwill is being amortized over fifteen to thirty years using the straight-line method. Subsequent to the date of acquisition, the Company continually evaluates whether later events and circumstances have occurred that indicate a change in the estimated useful life or recoverability of goodwill. Self-Insurance Coverage The Company maintains a self-insurance program for employee health costs. Additional coverage is provided by a third party for stop-loss based on maximum costs of $100,000 per employee and approximately $5.3 million in the aggregate. Claims that have been incurred but not reported are recorded based on estimates of claims provided by a third-party administrator and are included in accrued expenses in the accompanying consolidated balance sheets. Income Taxes The Company uses the asset and liability method in accounting for income taxes. Deferred income taxes result primarily from the use of different bases for financial reporting and tax purposes. Shareholders' Equity On May 5, 1994, the Company completed an initial public offering of 5,100,000 shares of its common stock at $3.67 per share, of which 4,200,000 were offered by the Company. On June 3, 1994, the Company's underwriters exercised their overallotment option for an additional 765,000 shares of the Company's common stock at $3.67 per share. The proceeds of the sale after deducting issuance costs were approximately $15,800,000. The Company used all of the net proceeds to reduce outstanding bank debt. 98 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On March 27, 1995, the Company signed a Distributorship Agreement (the "Abbott Agreement") with Abbott Laboratories ("Abbott") providing for the exclusive distribution of certain Abbott diagnostic products. As part of the Abbott Agreement, Abbott purchased 825,000 unregistered, restricted shares of PSS common stock. The proceeds of approximately $5,900,000 were used to reduce outstanding bank debt. Effective November 13, 1995, the Company completed a secondary offering of 11,500,000 shares of common stock at $17 per share, 8,800,000 of which were offered by the Company. During fiscal 1996, the Company merged with three medical supply and equipment distributors in stock mergers accounted for under the pooling-of-interests method by issuing 290,586 shares of PSS common stock in exchange for all of the common stock of the acquired companies. During fiscal 1997, the Company merged with one core business medical supply and equipment distributor and three imaging division companies in stock mergers accounted for under the pooling-of-interests method by issuing approximately 1,465,000 shares of PSS common stock in exchange for all of the common stock of the acquired companies. The accompanying consolidated financial statements have not been restated for periods prior to these poolings due to immateriality. During 1997 and 1996, the Company realized an income tax benefit from the exercise or early disposition of certain stock options. This benefit results in a decrease in current income taxes payable and an increase in additional paid-in capital. Foreign Currency Translation Financial statements for the Company's subsidiary outside the United States are translated into U.S. dollars at year-end exchange rates for assets and liabilities and weighted average exchange rates for income and expenses. The resulting translation adjustments are recorded as a separate component of shareholders' equity. Stock-Based Compensation The Company accounts for its stock-based compensation plans using the intrinsic value method. The Company adopted the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." In accordance with SFAS No. 123, for footnote disclosure purposes only, the Company computes its earnings and earnings per share on a pro forma basis as if the fair value method had been applied. Net Income (Loss) Per Common and Common Equivalent Share Net income (loss) per common and common equivalent share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Weighted average shares outstanding for purposes of this calculation were approximately 36,501,000, 31,454,000, and 23,762,000 for 1997, 1996, and 1995, respectively. Statements of Cash Flows The Company issued stock in the amount of $40,000 and $121,000 related to acquisitions accounted for as purchases in fiscal 1997 and 1996, respectively. The Company assumed net liabilities of approximately $1,610,000 and recorded noncompete assets and liabilities of approximately $4,300,000 in connection with the mergers of four other medical supply and equipment distributors accounted for under the pooling-of-interests method in fiscal 1997. The Company also assumed net assets of approximately $1,278,000 in conjunction with the mergers of three other medical supply and equipment distributors accounted for under the pooling-of-interests method in fiscal 99 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 1996. Also, the Company incurred capital lease obligations to obtain equipment of approximately $514,000 in fiscal year 1995. All of the above items were excluded from the statements of cash flows as these items were noncash transactions. Accounting Standards Changes In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes new standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock and is effective for financial statements issued for periods ending after December 15, 1997. Management expects that the impact of SFAS No. 128 will not be material. In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information About Capital Structure." SFAS No. 129 establishes new standards for disclosing information about an entity's capital structure and applies to all entities. SFAS No. 129 is effective for financial statements for periods ending after December 15, 1997. Management expects that the impact of SFAS No. 129 will not be material. 2. MARKETABLE SECURITIES The Company's marketable securities are comprised of municipal bond issues and equity securities classified as trading securities and are carried at their fair values based upon the quoted market prices at March 28, 1997 and March 29, 1996. At March 28, 1997 and March 29, 1996, the aggregate fair market value of the municipal bonds was approximately $14,469,000 and $20,768,000, respectively, and the aggregate cost was approximately $14,552,000 and $20,800,000, respectively. The gross unrealized loss on municipal bonds for each year was approximately $83,000 and $32,000, respectively. Interest income, including realized gains, on the municipal bonds was approximately $626,000 and $195,000 for fiscal years 1997 and 1996, respectively. At March 28, 1997, the fair market value of equity securities was $576,000, with a cost of $56,000, and an unrealized gain of $520,000 which is included in investment income during fiscal year 1997. 3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations consist of the following:
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 100 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) option, on the part of the Company, to increase the availability to $75,000,000. There was no balance outstanding at March 28, 1997 and March 29, 1996. The loans are collateralized by all company assets. Interest accrues, subject to certain leverage ratio requirements, at a variable rate indexed on the London Interbank Offered Rate ("LIBOR") plus the applicable margin or the Bank's prime rate plus the applicable margin at the option of the Company. Interest rates may vary from prime to prime plus 75 basis points or from LIBOR plus 150 basis points to LIBOR plus 250 basis points, based on the Company's leverage ratio. The Agreement provides for a termination date of April 30, 1998, at which time the Agreement may be extended annually at the Bank's sole discretion upon request by the Company. The Agreement contains certain restrictive covenants which, among other things, require the Company to maintain a current ratio of 2 to 1, a debt service coverage ratio of 1.1 to 1 and a debt leverage ratio no greater than 5 to 1, all computed as defined in the Agreement. In addition, the Company must maintain minimum tangible net worth plus subordinated indebtedness, as defined in the Agreement, of $24,500,000 as of March 28, 1997, increasing by $1,000,000 as of the end of each subsequent fiscal year. The Agreement also contains restrictions on mergers, acquisitions, investments, capital expenditures, intangible assets, indebtedness, and stock transactions, among other things. Other Notes X-ray GA maintained various other notes which were repaid by the Company in fiscal 1997 in conjunction with the merger. Long-term debt outstanding at March 28, 1997 totaled $775,000. As of March 28, 1997, future minimum payments of long-term debt, by fiscal year and in the aggregate, are approximately as follows:
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 ===========
101 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 4. OPERATING LEASE COMMITMENTS The Company leases various facilities and equipment under operating leases which expire at various dates through 2005. Certain lease commitments provide that the Company pay taxes, insurance, and maintenance expenses related to the leased assets. Rent expense approximated $6,249,000, $5,369,000, and $5,230,000 for fiscal years 1997, 1996, and 1995, respectively. As of March 28, 1997, future minimum payments, by fiscal year and in the aggregate, required under noncancelable operating leases are as follows:
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 =============
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. 102 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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. 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 ============= ============ ============
103 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) The difference between income tax computed at the federal statutory rate and the actual tax provision is shown below:
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% ============ ============ ============
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 ============= =============
104 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A valuation allowance was provided in prior years for those temporary differences for which utilization was uncertain. Based on an evaluation of the realizability of deferred tax assets, the valuation allowance was reduced by $900,000 and $956,000 during fiscal 1997 and 1996, respectively. The income tax benefit related to the exercise or early disposition of certain stock options reduces taxes currently payable and is credited to additional paid-in capital. Such amounts approximated $1,832,000 and $2,687,000 for fiscal years 1997 and 1996, respectively. At March 28, 1997, the Company had net operating loss carryforwards for income tax purposes arising from mergers of approximately $4,486,000 which expire from 2006 to 2011. The utilization of the net operating loss carryforwards is subject to limitation in certain years. 8. RELATED-PARTY TRANSACTIONS A member of the board of directors provides legal services as general counsel to the Company. Fees for such legal services were approximately $132,000, $136,000, and $124,000 in 1997, 1996, and 1995, respectively. A member of the board of directors is chairman and CEO of the insurance company that administered the Company's self-insurance program through December 31, 1995. Administrative fees paid to the company were approximately $484,000 during the first nine months of fiscal year 1996 and $339,000 for fiscal year 1995. The Company changed its self-insurance administrator as of January 1, 1996 to an unrelated party. 9. STOCK-BASED COMPENSATION PLANS At March 28, 1997, the Company had five stock-based compensation plans as described below: Incentive Stock Option Plan Under the Company's qualified 1986 Incentive Stock Option Plan, 8,001,000 shares of the Company's common stock are reserved for sale to officers and key employees. Options may be granted at prices not less than fair market value at the date of grant and are exercisable during periods of up to five years from that date. The exercisability of the options is not subject to future performance. Information regarding this plan is summarized below:
Number of Weighted Average Shares Exercise Price 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 ============ ===========
105 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) At March 31, 1994, March 30, 1995, March 29, 1996, and March 28, 1997, 1,411,542, 1,274,688, 682,031, and 363,326, respectively, of outstanding options were exercisable. The weighted average remaining life of the options outstanding at March 28, 1997 is approximately 1.7 years. No compensation expense has been recorded because the options were granted at fair market value. As of March 28, 1997, approximately 2,388,000 shares of common stock are available for issuance under the plan. The Company does not intend to issue any more options under this plan. Options Issued in Exchange for Former Taylor Medical Options In conjunction with the acquisition of Taylor Medical, Inc., the Company assumed the nonqualified Taylor Medical Stock Option Plans of 1986 and 1993. The options outstanding at the time of acquisition were converted to allow grantees the right to acquire the Company's common stock at a rate consistent with the merger's stock pooling agreement. All options under this plan are priced at $5.08 per common share and are not subject to future performance. Information regarding these options is summarized below:
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. 106 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. 107 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 ========= =========
108 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) All options are fully vested at the date of grant; therefore, all outstanding options at the end of each period are exercisable. The weighted average remaining life of the options outstanding at March 28, 1997 is 8.4 years. To date, 13,500 restricted shares have been issued under this plan. Fair Value of Stock Options Under SFAS No. 123, the fair value of stock options granted in the years ended March 28, 1997 and March 29, 1996 have been estimated using a Black-Scholes option pricing model with the following weighted average assumptions for grants: risk-free interest rate ranging from 5.8% to 6.8%, expected option life ranging from 3.5 to 5 years, expected volatility of 40% for 1996 and 55% for 1997 and no expected dividend yield. Using these assumptions, the estimated fair values of options granted for the years ended March 28, 1997 and March 29, 1996 were approximately $2.9 million and $6.0 million, respectively, and such amounts would be included in compensation expense. Pro forma net income and net income per share for the years ended March 28, 1997 and March 29, 1996, assuming the Company had accounted for the plans under the fair value approach, are as follows (in thousands, except per share data):
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. 109 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 11. BUSINESS ACQUISITIONS Pooling With X-ray GA On December 20, 1996, the Company acquired X-ray GA in a merger pursuant to which the Company issued 593,672 shares of common stock to the former shareholders of X-ray GA (of which 52,675 shares are being held in escrow as of March 28, 1997) in exchange for all of the outstanding shares of capital stock of X-ray GA valued at $11.0 million at the time of the merger. The merger has been accounted for as a pooling-of-interests, and accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of X-ray GA for all periods prior to the merger. X-ray GA was an S-Corporation for income tax purposes, and therefore, did not pay U.S. federal income taxes. X-ray GA will be included in the Company's U.S. federal income tax return subsequent to the date of acquisition. Separate net sales, net income (loss) and related per share amounts of merged entities are presented in the following table. In addition, the table includes pro forma net income (loss) and net income (loss) per share amounts which reflect pro forma adjustments to present income taxes of X-ray GA on the basis on which they will be reported in future periods.
March 30 through December 31, 1996 (Unaudited) March 29, 1996 March 30, 1995 ----------- --------------- -------------- (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 ============== ========== ==========
110 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Pooling With Taylor On August 21, 1995, the Company issued approximately 3,790,000 shares of its common stock in exchange for all of the outstanding common stock of Taylor, including approximately 416,000 shares held in escrow to satisfy certain obligations of Taylor related to its operations prior to the merger. Subsequent to August 21, 1995, approximately 244,000 shares of common stock were returned to the Company as settlement of the escrow and were canceled. These canceled shares had no resulting impact on the net income per share calculation. The merger has been accounted for as a pooling-of-interests, and accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of Taylor for all periods prior to the merger. Separate net sales, net income (loss) and other changes in shareholders' equity of the merged entities prior to the merger are presented in the following table:
April 1 through June 30, 1995 (unaudited) March 30, 1995 ----------- -------------- (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. 111 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Asset Purchases During fiscal 1997, the Company acquired certain assets, accounted for by the purchase method, including accounts receivable, inventories, equipment, and other assets of five medical supplies and equipment distributors for approximately $14.2 million. The aggregate purchase price paid consisted of cash of approximately $6.8 million, assumption of accounts payable and accrued liabilities of approximately $7.4 million, and the issuance of 2,700 shares of common stock with a fair market value of approximately $40,000. The excess of the purchase price over the estimated fair value of the net assets acquired of approximately $2.8 million has been recorded as goodwill and will be amortized over thirty years. In addition, the Company entered into noncompete agreements with shareholders of the acquired companies which provide for payments of approximately $220,000 through the year 2001. The operations of the acquired companies have been included in the Company's results of operations subsequent to the dates of acquisition. During fiscal 1996, the Company acquired certain assets, accounted for by the purchase method, including accounts receivable, inventories, equipment, and other assets of seven medical supplies and equipment distributors for approximately $5.5 million. The aggregate purchase price paid consisted of cash of approximately $2.8 million, assumption of accounts payable and accrued liabilities of approximately $2.5 million, and the issuance of 5,700 shares of common stock with a fair market value of $121,000. The excess of the purchase price over the estimated fair value of the net assets acquired of approximately $1.2 million has been recorded as goodwill and will be amortized over thirty years. In addition, the Company entered into noncompete agreements with shareholders of the acquired companies which provide for payments of $1.2 million through the year 2000. The operations of the acquired companies have been included in the Company's results of operations subsequent to the dates of acquisition. During fiscal 1995, the Company acquired certain assets, including accounts receivable, inventories, equipment, and other assets, of nine medical supplies and equipment distributors for approximately $11.6 million. The aggregate purchase price paid consisted of cash of approximately $6.9 million, assumption of accounts payable and accrued liabilities of approximately $4.2 million, and the issuance of approximately 70,000 shares of common stock with a fair market value of approximately $0.5 million. The excess of the purchase price over the estimated fair value of the net assets acquired of approximately $4.0 million has been recorded as goodwill. In addition, the Company entered into noncompete agreements with shareholders and an officer of the acquired companies which provide for payments of approximately $2.3 million through the year 1998. During fiscal 1995, Taylor acquired certain assets of three medical supplies and equipment distributors for approximately $2.2 million. For acquisitions accounted for as purchases, the results of operations acquired have been included in the financial statements since the dates of acquisition. Supplemental pro forma information is not presented because the impact on the Company's results of operations would not be material. 12. COMMITMENTS AND CONTINGENCIES Although the Company does not manufacture products, the distribution of medical supplies and equipment entails inherent risks of product liability. The Company has not experienced any significant product liability claims and maintains product liability insurance coverage. In addition, the Company is party to various legal and administrative proceedings and claims arising in the normal course of business. While any litigation contains an element of uncertainty, management believes that the outcome of any proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations. 112 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company has employment agreements with certain executive officers which provide that in the event of their termination or resignation, under certain conditions, the Company may be required to continue salary payments and provide insurance for a period ranging from 12 to 36 months for the chief executive officer and from 3 to 12 months for other executives and to repurchase a portion or all of the shares of common stock held by the executives upon their demand. The period of salary and insurance continuation and the level of stock repurchases are based on the conditions of the termination or resignation. 13. ABBOTT LABORATORIES DISTRIBUTION AGREEMENT On March 27, 1995, the Company signed a Distribution Agreement with Abbott Laboratories providing for the exclusive distribution of certain Abbott diagnostic products. The Abbott Agreement, effective April 1, 1995, has a five-year term, although it may be terminated earlier if the Company fails to meet certain performance objectives. Under the Abbott Agreement, the Company has become the exclusive distributor in the United States of certain Abbott diagnostic products and reagents to office-based physician practices with 24 or fewer physicians per office site. The Abbott Agreement also provides the Company's sales force with access to over 15,000 physician practices that were not previously purchasing diagnostic products from the Company. Abbott products constituted approximately 16% of the Company's sales in fiscal 1997 and 1996. Simultaneous with the closing of the Abbott Agreement, Abbott purchased 825,000 unregistered, restricted shares of PSS common stock. A three-year irrevocable proxy to the PSS Board of Directors and a perpetual stand still agreement were provided by Abbott in the Stock Purchase Agreement. 14. SALES OF ASSETS On July 1, 1994, Taylor sold the assets of its Taylor Home Health division for $12,000,000 in cash and an escrow receivable of $1,051,000 based on subsequent receivables collections and other factors, resulting in a gain on sale of assets of approximately $2,078,000. In March 1995, Taylor negotiated a final settlement of the escrowed receivable which included the return to Taylor of certain receivables. Taylor recorded a $600,000 reduction in the gain originally recognized to record these receivables at their estimated net realizable value. The net gain of approximately $1,478,000 is included in other income for fiscal year 1995. On November 30, 1994, Taylor sold the assets of its Labcare division, whose principal business was the repair of medical equipment, for $1,100,000, resulting in a loss of approximately $403,000. In March 1995, Taylor recorded an additional loss on the sale of approximately $154,000 related to the write-down of certain notes receivable issued in conjunction with the sale. The net loss of approximately $558,000 is included in other income for fiscal year 1995. 15. MERGER COSTS AND EXPENSES AND RESTRUCTURING CHARGES The Company recorded merger costs and expenses of approximately $12,100,000 and $15,700,000 in fiscal 1997 and 1996, respectively, associated with mergers accounted for as poolings-of-interests. Such costs include direct merger costs consisting primarily of investment banking, legal, accounting, and filing fees as well as consolidation costs from the closing of duplicate service center locations, realigning regional and corporate functions, and reducing personnel. At March 28, 1997, accrued merger costs were approximately $3.0 million. 113 PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During fiscal 1995, Taylor management concluded that recent industry developments had affected Taylor's strategy and operations. Taylor assessed its relative position in its major markets and determined that competitive pressures on margins and cost structures in its Arizona, Indiana and Massachusetts distribution centers as well as the prospects for its physician consulting services and equipment repair businesses would not result in full realization of the future benefits expected from the related intangible assets. Accordingly, Taylor management concluded that the intangible assets were impaired and recorded a $4,388,592 noncash charge to write off the intangible assets associated with these markets and operations. 16. SUBSEQUENT EVENTS. Subsequent to March 28, 1997, the Company acquired four imaging and equipment distributors for aggregate consideration of approximately $2.5 million comprised of 1,275,681 shares of PSS common stock approximately $24.3 million. On August 12, 1997, the Company signed a definitive agreement to merge with S&W X-Ray, Inc. ("S&W"). As discussed further elsewhere in this Proxy Statement- Prospectus, the Company intends to acquire S&W in a stock-for-stock merger, to be accounted for as a pooling-of-interests by issuing shares of PSS common stock with a value of $26,000,000, subject to adjustment. 114 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
115 INDEX TO S&W FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report..................................... 117 Balance Sheets................................................... 118 Statements of Income ............................................ 120 Statements of Shareholders' Equity............................... 121 Statements of Cash Flows......................................... 122 Notes to Financial Statements.................................... 124
116 INDEPENDENT AUDITORS' REPORT To the Shareholders of S & W X-Ray, Inc. We have audited the accompanying balance sheet of S & W X-Ray, Inc. as of March 31, 1997, and the related statements of income, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of S & W X-Ray, Inc. as of March 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The 1996 and 1995 financial statements were reviewed by us and our reports thereon, dated May 29, 1996 and May 26, 1995, respectively, stated that we were not aware of any material modifications that should be made to those statements for them to be in conformity with generally accepted accounting principles. However, a review is substantially less in scope than an audit and does not provide a basis for the expression of an opinion on the 1996 and 1995 financial statements taken as a whole. MAY, ROBINSON, GORDON & PENTA, P.C. Rochester, New York July 31, 1997 117 S & W X-RAY, INC. BALANCE SHEETS
March 31, ---------------------------------- 1997 1996 ---- ---- (Audited) (Reviewed) ASSETS ------ CURRENT ASSETS - -------------- Cash.................................................................. $ 335,034 $ 115,153 Accounts receivable, less allowances for doubtful accounts of $653,000 and $100,000 in 1997 and 1996, respectively............. 11,133,430 9,547,463 Inventory ............................................................ 7,290,574 5,075,811 Prepaid expenses...................................................... 1,538,151 402,325 Deferred income taxes................................................. 611,000 71,200 ------------- ------------- TOTAL CURRENT ASSETS........................... 20,908,189 15,211,952 PROPERTY, PLANT AND EQUIPMENT - ----------------------------- Land.................................................................. 150,000 150,000 Building.............................................................. 681,066 667,866 Transportation equipment.............................................. 510,567 390,738 Equipment............................................................. 1,085,264 700,375 Furniture............................................................. 151,419 132,450 Leasehold improvements................................................ 56,448 47,638 ------------- ------------- ........................................................................ 2,634,764 2,089,067 Less: accumulated depreciation and amortization...................... 1,243,488 981,874 ------------- ------------- ........................................................................ 1,391,276 1,107,193 OTHER ASSETS - ------------ Goodwill (net of accumulated amortization of $33,333 in 1997)................................................... 466,667 500,000 Other assets.......................................................... 158,147 92,844 Deferred income taxes................................................. 59,400 - ------------- ------------- ........................................................................ 684,214 592,844 ------------- ------------- ........................................................................ $ 22,983,679 $ 16,911,989 ============= =============
118
March 31, -------------------------------- 1997 1996 ---- ---- (Audited) (Reviewed) LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES - ------------------- Notes payable to bank................................................. $ 5,214,550 $ 5,750,000 Current portion of long-term debt..................................... 1,082,360 284,167 Notes payable to related parties...................................... 1,130,000 1,245,000 Accounts payable...................................................... 4,947,746 1,813,375 Customer deposits..................................................... 376,362 348,083 Other current liabilities............................................. 262,092 26,209 Accrued salaries and pension.......................................... 1,749,759 1,177,711 ----------- ----------- TOTAL CURRENT LIABILITIES...................... 14,762,869 10,644,545 LONG-TERM LIABILITIES - --------------------- Long-term debt........................................................ 3,265,569 2,681,762 Deferred income taxes................................................. -- 4,800 ----------- ----------- ........................................................................ 3,265,569 2,686,562 COMMITMENTS AND CONTINGENCIES - ----------------------------- SHAREHOLDERS' EQUITY - -------------------- Common stock, $.04 par value Authorized, 500,000 shares Issued and outstanding, 259,574 shares............................ 10,383 10,383 Paid-in capital....................................................... 172,811 -- Retained earnings..................................................... 6,139,703 6,086,428 ----------- ----------- ........................................................................ 6,322,897 6,096,811 Less: Unearned ESOP shares .......................................... 1,367,656 2,515,929 ----------- ----------- ........................................................................ 4,955,241 3,580,882 ----------- ----------- ........................................................................ $ 22,983,679 $ 16,911,989 =========== ===========
The accompanying notes are an integral part of the financial statements. 119 S & W X-RAY, INC. STATEMENTS OF INCOME
Year ended March 31, ------------------------------------------------------- 1997 1996 1995 ---- ---- ---- (Audited) (Reviewed) (Reviewed) Sales............................................................ $72,034,238 $60,096,315 $58,683,889 Cost of sales.................................................... 55,260,054 47,170,205 45,981,570 ----------- ----------- ----------- GROSS PROFIT............................ 16,774,184 12,926,110 12,702,319 General and administrative expenses.............................. 15,773,740 11,044,352 10,747,621 ----------- ----------- ----------- INCOME FROM OPERATIONS.................. 1,000,444 1,881,758 1,954,698 Other income (expense): Interest expense............................................... (864,756) (499,985) (441,545) Interest income................................................ 13,037 8,208 4,540 Sundry......................................................... 450 450 248 Gain on disposal of equipment.................................. -- 669 5,660 ----------- ----------- ----------- ................................................................. (851,269) (490,658) (431,097) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES.............. 149,175 1,391,100 1,523,601 Income taxes: Federal........................................................ 623,100 452,000 571,500 States......................................................... 192,000 143,000 186,582 Deferred (credit).............................................. (719,200) 6,100 (141,500) ----------- ----------- ----------- ................................................................. 95,900 601,100 616,582 ----------- ----------- ----------- NET INCOME.............................. $ 53,275 $ 790,000 $ 907,019 =========== =========== =========== Share Data: Net income per common and common equivalent share: Primary.................................................... $ .23 $ 3.65 $ 4.43 =========== =========== =========== Fully diluted.............................................. $ .23 $ 3.65 $ 4.43 =========== =========== =========== Weighted average common shares outstanding: Primary.................................................... 234,779 216,463 204,819 =========== =========== =========== Fully diluted.............................................. 234,779 216,463 204,819 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. 120 S & W X-RAY, INC. STATEMENTS OF SHAREHOLDERS' EQUITY Year Ended March 31, 1997 (Audited), 1996 and 1995 (Reviewed)
COMMON STOCK UNEARNED ------------------------ PAID-IN RETAINED ESOP SHARES AMOUNT CAPITAL EARNINGS SHARES TOTAL ------- ------- -------- ---------- ----------- ---------- Balance, March 31, 1994 259,574 $10,383 $ -- $4,389,409 $(3,638,335) $ 761,457 Release of unallocated shares to employee stock ownership plan.. -- -- -- -- 617,410 617,410 Net income ............. -- -- -- 907,019 -- 907,019 ------- ------- -------- ---------- ----------- ---------- Balance, March 31, 1995 259,574 10,383 -- 5,296,428 (3,020,925) 2,285,886 Release of unallocated shares to employee stock ownership plan -- -- -- -- 504,996 504,996 Net income ............. -- -- -- 790,000 -- 790,000 ------- ------- -------- ---------- ----------- ---------- Balance, March 31, 1996. 259,574 10,383 -- 6,086,428 (2,515,929) 3,580,882 Release of unallocated shares to employee stock ownership plan -- -- 172,811 -- 1,148,273 1,321,084 Net income ............. -- -- -- 53,275 -- 53,275 ------- ------- -------- ---------- ----------- ---------- Balance, March 31, 1997. 259,574 $10,383 $172,811 $6,139,703 $(1,367,656) $4,955,241 ======= ======= ======== ========== =========== ==========
The accompanying notes are an integral part of the financial statements. 121 S & W X-RAY, INC. STATEMENTS OF CASH FLOWS
Year ended March 31, ------------------------------------------------- 1997 1996 1995 ---- ---- ---- (Audited) (Reviewed) (Reviewed) CASH FLOWS - OPERATING ACTIVITIES - --------------------------------- Net income for year........................................................ $ 53,275 $ 790,000 $ 907,019 Adjustments to reconcile net income to net cash (used for) operating activities: Depreciation and amortization.......................................... 294,947 201,871 182,258 Bad debts.............................................................. 577,548 15,758 29,585 Inventory, warranty and other.......................................... 301,732 -- -- Gain on disposal of equipment.......................................... -- (669) (5,660) Deferred income taxes (credit)......................................... (719,200) 6,100 (141,500) Changes in certain assets and liabilities affecting operations: Accounts receivable................................................ (2,163,515) (1,016,986) (676,621) Inventory.......................................................... (2,318,863) (624,209) (1,494,978) Prepaid expenses................................................... (1,135,826) (236,118) 309,814 Other assets....................................................... (65,303) (45,833) (46,542) Accounts payable................................................... 3,134,371 (541,946) 180,251 Customer deposits.................................................. 28,279 91,940 (2,233) Other current liabilities.......................................... 38,251 (99,054) 9,235 Accrued salaries and pension ...................................... 1,536,446 437,120 (194,964) ------------- ----------- ----------- NET CASH (USED FOR) OPERATING ACTIVITIES.................. (437,858) (1,022,026) (944,336) CASH FLOWS - INVESTING ACTIVITIES - --------------------------------- Purchases of property, plant and equipment................................. (474,630) (59,417) (255,667) Proceeds from disposal of equipment........................................ -- 9,050 9,150 Net asset acquisition...................................................... -- (535,055) -- ------------- ----------- ----------- NET CASH (USED FOR) INVESTING ACTIVITIES.................. (474,630) (585,422) (246,517) CASH FLOWS - FINANCING ACTIVITIES - --------------------------------- Net (payments) borrowings of short-term debt............................... (535,450) 2,100,000 1,350,000 Proceeds from long-term borrowings......................................... 2,471,886 504,996 617,410 Principal payments of long-term borrowings................................. (689,067) (542,496) (654,910) Additional borrowings from related parties................................. 1,059,350 350,094 1,109,224 Principal payments to related parties...................................... (1,174,350) (791,194) (1,275,150) ------------- ----------- ----------- NET CASH PROVIDED FROM FINANCING ACTIVITIES.................. 1,132,369 1,621,400 1,146,574 ------------- ----------- ----------- NET INCREASE (DECREASE) IN CASH....... 219,881 13,952 (44,279) Cash at beginning of year.................................................... 115,153 101,201 145,480 ------------- ----------- ----------- CASH AT END OF YEAR............... $ 335,034 $ 115,153 $ 101,201 ============= =========== ===========
122 S & W X-RAY, INC. STATEMENTS OF CASH FLOWS -- (Continued)
Year ended March 31, ----------------------------------------------------- 1997 1996 1995 ---- ---- ---- (Audited) (Reviewed) (Reviewed) SUPPLEMENTAL CASH FLOW INFORMATION - ---------------------------------- Cash paid during the year for: Interest.................................... $ 710,719 $ 499,050 $ 406,888 =========== =========== =========== Income taxes................................ $ 796,935 $ 663,805 $ 712,508 =========== =========== =========== NON-CASH INVESTING AND FINANCING ACTIVITY - ----------------------------------------- Seller financed vehicle purchase............ $ 71,067 $ -- $ -- =========== =========== ===========
The accompanying notes are an integral part of the financial statements. 123 S & W X-RAY, INC. NOTES TO FINANCIAL STATEMENTS March 31, 1997 (Audited), 1996 and 1995 (Reviewed) NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------------------------------- The Company - ----------- The Company, incorporated in the state of New York, is principally a distributor of x-ray chemicals, film, equipment and related products. The Company grants credit to its customers located principally in New York State. Estimates - --------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventory - --------- Inventory consists principally of film and x-ray chemicals and is valued at the lower of cost or market. At March 31, 1997 and 1996, the cost of the film inventory was determined by the last-in, first-out (LIFO) method, while the cost of the remaining inventory was determined by the first-in, first-out (FIFO) method. The cost of the Company's inventory consists of material purchase costs only. Prepaid expenses - ---------------- Prepaid expenses consist primarily of deposits paid to vendors for the purchase of imaging equipment for the Company's customers. Property, plant and equipment - ----------------------------- Property, plant and equipment is valued at cost and is depreciated or amortized for financial reporting purposes by straight-line and accelerated methods over the estimated useful lives of the various assets. Maintenance and repairs are charged to income when incurred. Additions and major betterments are capitalized. The cost and accumulated depreciation or amortization of assets sold or retired are removed from the respective accounts and any gain or loss is reflected in income for the year. Goodwill - -------- Goodwill is being amortized on the straight-line method over a fifteen year period. 124 S & W X-RAY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) March 31, 1997 (Audited), 1996 and 1995 (Reviewed) NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued - ------------------------------------------------------------------------------ Income taxes - ------------ Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statement and tax basis of assets and liabilities, as measured by the enacted rates which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or noncurrent depending on the classification of the assets and liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or noncurrent depending on the periods in which the temporary differences are expected to reverse. The principal types of temporary differences between assets and liabilities for financial statement and tax return purposes are described in Note L. Advertising costs - ----------------- Advertising costs are expensed as incurred. Advertising costs approximated $12,000, $14,000 and $8,000 for the years ended March 31, 1997, 1996 and 1995, respectively. NOTE B: CASH - ------------- The Company maintains cash balances at several branches of a financial institution located in the Northeast. The total of all accounts at the institution is insured by the Federal Deposit Insurance Corporation up to $100,000. Uninsured cash balances approximated $620,000 at March 31, 1997. NOTE C: INVENTORY - ------------------ At March 31, 1997, 1996 and 1995, inventory consisted of the following:
Year ended March 31, ---------------------------------------------- 1997 1996 1995 ---- ---- ---- (Audited) (Reviewed) (Reviewed) Film $4,810,420 $3,714,887 $3,071,646 X-ray chemicals and other 2,480,154 1,360,924 1,170,000 ---------- ---------- ---------- $7,290,574 $5,075,811 $4,241,646 ========== ========== ==========
Film inventory was stated at cost, determined by the last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method of accounting for this inventory had been utilized, this inventory would have been $447,797, $375,816 and $132,388 higher than reported for the years ended March 31, 1997, 1996 and 1995. 125 S & W X-RAY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) March 31, 1997 (Audited), 1996 and 1995 (Reviewed) NOTE D: NOTES PAYABLE TO BANK - ------------------------------ The Company has available two working capital line of credit agreements and an equipment line of credit agreement with a local bank in the aggregate amount of $10,000,000. The primary credit line is available up to $3,500,000 for working capital requirements and bears interest at the prime rate minus 1/4% or the LIBOR rate plus 2% (an effective rate of 7.56% at March 31, 1997). At March 31, 1997 and 1996 there was $3,500,000 outstanding against this credit line. The secondary credit line is available for bulk inventory purchases up to $6,000,000 and bears interest at the prime rate (an effective rate of 8.5% at March 31, 1997). At March 31, 1997 and 1996, there was $1,714,550 and $2,250,000, respectively, outstanding against this line. The equipment credit line is available for purchases of equipment for resale up to $500,000 and bears interest at the prime rate plus 1 1/4% (an effective rate of 9.75% at March 31, 1997). No amounts were outstanding under this credit line at March 31, 1997 and 1996. As collateral for the lines of credit, the bank has a security interest in the Company's accounts receivable, equipment and inventory, along with the personal guarantee of one of the shareholders. NOTE E: NOTES PAYABLE TO RELATED PARTIES - -----------------------------------------
March 31, ------------------------------------ 1997 1996 ---- ---- (Audited) (Reviewed) Demand notes payable to shareholders and other related parties bear interest at the prime plus 1% (effective rate of 9.5% at March 31, 1997). No formal repayment terms have been established. $1,130,000 $1,245,000
NOTE F: LONG-TERM DEBT Long-term debt of the Company is summarized as follows:
March 31, ------------------------------------ 1997 1996 ---- ---- (Audited) (Reviewed) Mortgage note payable to a bank due in monthly principal installments of $3,125 plus interest at the prime rate plus 1% (an effective rate of 9.5% at March 31, 1997), through March 31, 1998 at which time all remaining principal is due. This mortgage note is secured by the underlying property and the same collateral arrangements as described in Note D. 412,500 450,000 ------------ ------------ Balance brought forward $ 412,500 $ 450,000 ----------- -----------
126 S & W X-RAY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) March 31, 1997 (Audited), 1996 and 1995 (Reviewed) NOTE F: LONG-TERM DEBT, Continued
March 31, -------------------------------- 1997 1996 ---- ---- (Audited) (Reviewed) Balance brought forward $ 412,500 $ 450,000 Note payable to a bank for the Employee Stock Ownership Trust (see Note I) payable in minimum monthly principal installments of $20,555 plus interest at the LIBOR rate plus 1.5% (an effective rate of 7.06% at March 31, 1997), through February 1, 2001 at which time all remaining principal is due. This note is secured by company stock held within the ESOP and the same collateral arrangements as described in Note D. 2,044,043 2,515,929 Note payable to a bank due in monthly principal installments of $33,333 plus interest at the LIBOR rate plus 2.25% (an effective rate of 7.8% at March 31, 1997), through November 31, 2001. This note is secured by the same collateral arrangements as described in Note D. 1,833,334 -- ========== Note payable to financing institution due in monthly principal and interest (4.9%) installments of $2,127 through August 31, 1999. This note is secured by a certain vehicle. 58,052 -- ---------- ========== 4,347,929 2,965,929 Less current portion of long-term debt and notes payable to related parties 1,082,360 284,167 ---------- ---------- $3,265,569 $2,681,762 ========== ==========
Current maturities of long-term debt and notes payable to related parties are as follows:
Year ending March 31, Amount --------------------- ------ 1999 $ 671,022 2000 657,172 2001 1,704,041 2002 233,334 Thereafter -- =========== $3,265,569 ===========
127 S & W X-RAY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) March 31, 1997 (Audited), 1996 and 1995 (Reviewed) NOTE G: COMMITMENTS AND CONTINGENCIES - -------------------------------------- The Company acquired certain assets from Rossi Walling X-Ray Corp. as further described in Note K. In connection with this acquisition, the Company entered into a consulting agreement with James Walling commencing March 20, 1996 and expiring March 31, 1998. The agreement requires Walling to provide advisory and consulting services for the Company during this two year period. As consideration for these services, the Company agreed to pay Walling $125,000 on March 30, 1997 and March 30, 1998. In addition, Walling has entered into a five year non-compete agreement with the Company expiring March 31, 2001. As consideration for this agreement, the Company is obligated to pay to Walling a percentage of sales ranging from 2% to 3% per year relating to former customers of Rossi Walling X-Ray Corp. As consideration for this agreement, the Company charged $152,478 to operations for the year ended March 31, 1997. The Company leases office and warehouse space at branch locations in Rochester, Albany, Buffalo, and Newburgh, New York, under operating leases expiring in various years through 2001. The Rochester facility is leased on a month to month basis from an entity in which an officer of the Company has an ownership interest. Payments to this entity approximated $88,500, $84,000 and $80,000 for the years ending March 31, 1997, 1996, and 1995, respectively. Total rent expense for the years ended March 31, 1997, 1996, and 1995 was $384,780, $322,217, and $312,428, respectively. Minimum future rental payments under non-cancelable operating leases are as follows:
Year ending March 31, Amount --------------------- ------ 1998 $ 285,651 1999 243,493 2000 141,555 2001 80,055 ----------- $ 750,754 ===========
128 S & W X-RAY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) March 31, 1997 (Audited), 1996 and 1995 (Reviewed) NOTE G: COMMITMENTS AND CONTINGENCIES, Continued - ------------------------------------------------- The Company is a defendant in a lawsuit pending in the U.S. District Court for the Northern District of New York. The lawsuit has been brought about by a former employee of Rossi Walling X-Ray Corp. (see Note K) alleging age discrimination at the time S & W X-Ray, Inc. acquired Rossi Walling X-Ray Corp. In addition, the Company is a party in an age discrimination claim pending before the New York State Division of Human Rights. Outside counsel for the Company has advised that at this time the likelihood of an unfavorable judicial or administrative outcome is more remote than probable. Therefore, no provision for loss has been made in the accompanying financial statements. The Company believes that the suit and claim are without merit and is vigorously defending its position. However, should the judicial or administrative outcomes be unfavorable, the range of potential loss is approximated at $75,000 to $145,000. NOTE H: SHAREHOLDERS' AGREEMENTS - --------------------------------- The two majority shareholders of the Company are subject to an agreement which stipulates the terms under which the Company's shares can be sold, transferred or pledged. Among other things, the agreement gives each majority shareholder an option to acquire the shares of the other shareholder wishing to sell his shares, and may require mandatory redemption by the Company of the shares of a deceased shareholder at a price specified in the agreement. The majority shareholders have personally purchased life insurance on the lives of each other in the amount of $2,500,000, respectively. In the event of the death of one of the shareholders, the other would be required to purchase the outstanding shares held by the estate of the deceased at a price specified in the agreement. However, the remaining shareholder shall not be required to purchase more shares than there is insurance money available. Any shares which the remaining shareholder does not agree to purchase will be purchased by the Company. As of March 31, 1997, the maximum redemption amount that the Company could be liable for under such agreement, assuming complete redemption upon the death of either of its two majority shareholders, would approximate $1,800,000, payable over a period not to exceed ten years. 129 S & W X-RAY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) March 31, 1997 (Audited), 1996 and 1995 (Reviewed) NOTE I: EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) - --------------------------------------------- The Company sponsors a leveraged employee stock ownership plan (ESOP) that covers all employees with one year of service. Contributions to the plan are at the discretion of the Board of Directors and are deposited under a trust agreement in the form of cash or Company stock. The number of shares of Company stock to be contributed or purchased is based upon the fair market value of the common stock as determined by an independent appraisal. The ESOP shares are pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. The Company accounts for its ESOP in accordance with Statement of Position 93-6. Accordingly, the debt of the ESOP is recorded as debt and the shares pledged as collateral are reported as unearned ESOP shares in the balance sheet. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings-per-share (EPS) computation. At March 31, 1997, 1996 and 1995, approximately 85,000 shares of the Company's common stock was held by the Employee Stock Ownership Trust, which was established to fund the plan. The trust purchased these shares with the proceeds of a $3,700,000 loan from the Company. The Company, in turn, obtained a $3,700,000 loan from a bank. Under the loan agreement, the Company is obligated to make minimum monthly principal payments to the bank of $20,555 plus interest at the LIBOR rate plus 1.5% (an effective rate of 7.06% at March 31, 1997). Total contributions to the plan for the years ended March 31, 1997, 1996, and 1995 totaled $1,446,060, $849,596, and $837,903, respectively. The ESOP shares as of March 31 were as follows:
March 31, 1997 March 31, 1996 March 31, 1995 -------------- -------------- -------------- Allocated shares 42,423 30,779 18,881 Shares released for allocation 18,316 11,644 11,898 Unreleased shares 24,795 43,111 54,755 -------- -------- -------- Total ESOP shares 85,534 85,534 85,534 ======== ======== ======== Fair value of unreleased shares at March 31, $1,512,495 $2,392,661 $2,885,589 ========== ========== ==========
130 S & W X-RAY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) March 31, 1997 (Audited), 1996 and 1995 (Reviewed) NOTE J: MAJOR SUPPLIERS - ------------------------ For the year ended March 31, 1997, four suppliers comprised approximately 63% of the Company's purchases and for each of the years ended March 31, 1996 and 1995, three suppliers comprised approximately 62% of the purchases. Purchases from these suppliers approximated $35 million at March 31, 1997 and $29 million for each of the years ended March 31, 1996 and 1995. NOTE K: ASSET ACQUISITION - -------------------------- On March 20, 1996, the Company acquired certain assets and assumed certain liabilities from Rossi Walling X-Ray Corp. in a business combination accounted for as a purchase. Rossi Walling X-Ray Corp. is primarily engaged in the sale and service of x-ray supplies and imaging equipment. The accompanying financial statements for the years ended March 31, 1997 and 1996, include the results of operations of Rossi Walling X-Ray Corp. since the date of acquisition. Sales, costs and expenses, and results of operations for the acquired operation are not significant to S&W X-Ray, Inc.'s total sales, costs and expenses, and results of operations. The following is a summary of the net assets acquired: Inventory $ 209,956 Fixed assets 35,100 Goodwill 500,000 ----------- 745,056 Liabilities assumed 210,001 ----------- Net acquisition cost $ 535,055 ===========
NOTE L: INCOME TAXES - --------------------- Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts measured by tax law. 131 S & W X-RAY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) March 31, 1997 (Audited), 1996 and 1995 (Reviewed) NOTE L: INCOME TAXES, Continued - -------------------------------- Deferred taxes resulting from temporary differences are as follows:
Assets/(Liabilities) ------------------------------ March 31, ------------------------------ 1997 1996 ----------- ------------ (Audited) (Reviewed) Excess of tax depreciation over book depreciation $ (2,000) $ (4,800) Inventory uniform cost capitalization 47,700 31,200 Allowance for doubtful accounts 261,200 40,000 Reserve for inventory obsolescence 41,600 -- Accrued expenses 365,800 -- Intangibles 56,900 -- Deferred revenue 14,400 -- ----------- ------------ $ 785,600 $ 66,400 =========== ============ Classification of deferred taxes: Current asset $ 611,000 $ 71,200 Non-current asset 59,400 -- Non-current liability -- (4,800) Reduction of paid-in capital 115,200 -- ----------- ------------ $ 785,600 $ 66,400 =========== ============
The difference between income tax computed at the federal statutory rate and the actual tax provision is shown below:
1997 1996 1995 ---- ---- ---- (Audited) (Reviewed) (Reviewed) Income before provision for taxes $ 149,175 $1,391,100 $1,523,601 =========== =========== ============ Tax provision at the statutory rate $ 50,720 $ 472,974 $ 518,024 Increase in taxes: State income tax, net of federal benefit 18,624 95,295 77,532 Meals and entertainment 16,779 32,831 21,026 Other non-deductible expenses 9,777 -- -- ----------- ----------- ------------ TOTAL INCREASE IN TAXES 45,180 128,126 98,558 ----------- ----------- ------------ TOTAL INCOME TAX PROVISION $ 95,900 $ 601,100 $ 616,582 =========== =========== ============ Effective tax rate 64.3% 43.2% 40.5% ========== ========== ===========
132 S & W X-RAY, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) March 31, 1997 (Audited), 1996 and 1995 (Reviewed) NOTE M: FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------- The fair value of cash, accounts receivable, accounts payable, and accrued expenses are estimated to approximate their carrying value because of the short-term maturity of these instruments. Based on borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of the Company's notes payable to bank and long-term debt approximates stated values aggregating approximately $10,700,000. Estimates of the fair values of financial instruments are subjective in nature and involve uncertainties and judgments and, as such, cannot be determined with precision. Any change in assumptions would effect these changes. NOTE N: SUBSEQUENT EVENT - ------------------------- On August 12, 1997, the Company signed a definitive agreement to merge with Physician Sales & Service, Inc. ("PSS"), one of the leading distributors of medical supplies and equipment to the physician market. Under the agreement, PSS will acquire the Company in a stock-for-stock merger with a value of $26,000,000, subject to adjustment. The consummation of the merger is contingent upon the transaction qualifying for pooling of interests accounting treatment and is subject to customary closing conditions. Upon consummation of the merger, in connection with the consolidation and restructuring of PSS and S & W X-Ray, Inc., expenses related to closing duplicate service center locations, restructuring regional and corporate functions, consolidating information systems and reducing personnel are expected to be incurred. The costs associated with these activities will be expensed in the period in which the merger is consummated. 133 AGREEMENT AND PLAN OF MERGER ---------------------------- THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered into as of August 12, 1997, by and among S&W X-RAY, INC. ("S&W"), a New York corporation having its principal office located in Rochester, New York; DIAGNOSTIC IMAGING, INC. ("DI"), a Florida corporation having its principal office located in Jacksonville, Florida; and PHYSICIAN SALES & SERVICE, INC. ("PSS"), a Florida corporation having its principal office located in Jacksonville, Florida. Preamble -------- The Boards of Directors of PSS, DI, a wholly owned subsidiary of PSS, and S&W are of the opinion that the transactions described herein are in the best interests of the parties and their respective shareholders. This Agreement provides for the acquisition of S&W by PSS pursuant to the Merger of S&W with and into DI. At the Effective Time of such Merger, the outstanding shares of the capital stock of S&W shall be converted into the right to receive shares of the common stock of PSS (except as provided herein). As a result, shareholders of S&W shall become shareholders of PSS and DI shall conduct the business and operations of S&W as a wholly owned subsidiary of PSS. It is the intention of the parties to this Agreement that the Merger shall qualify (i) as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code for federal income tax purposes, and (ii) for treatment as a pooling of interests for accounting purposes. NOW, THEREFORE, in consideration of the above and the mutual warranties, representations, covenants and agreements set forth herein, the parties agree as follows: ARTICLE I TRANSACTIONS AND TERMS OF MERGER -------------------------------- 1.1 Merger. Subject to the terms and conditions of this Agreement, at ------ the Effective Time, S&W shall be merged with and into DI (the "Merger") in accordance with the applicable provisions of the Florida Business Corporation Act ("FBCA") and the New York Business Corporation Law ("NYBCL"). DI shall be the Surviving Corporation resulting from the Merger and shall continue to be governed by the Laws of the State of Florida. The Merger shall be consummated pursuant to the terms of this Agreement, which has been approved and adopted by the respective Boards of Directors of S&W, DI and PSS. 1.2 Time and Place of Closing. The closing (the "Closing") will take ------------------------- place at 10:00 A.M. on a date to be specified by the parties (the "Closing Date"), which (subject to the satisfaction or waiver of the conditions set forth in Sections 9.2 and 9.3) shall be no later than the second business day after the satisfaction of the conditions set forth in Section 9.1. The place of Closing shall be at the offices of Alston & Bird, One Atlantic Center, 1201 West Peachtree Street, Atlanta, Georgia 30309-3424, or such other place as may be mutually agreed upon by the Parties. 1.3 Effective Time. Subject to the provisions of this Agreement, the -------------- parties shall file a Certificate of Merger and Articles of Merger executed in accordance with the relevant provisions of the NYBCL and FBCA, respectively, and shall make all other filings or recordings required under the NYBCL and FBCA as soon as practicable on the Closing Date. The Merger and other transactions contemplated by this Agreement shall become effective on the Closing Date and at later of the time the Certificate of Merger or Articles of Merger reflecting the Merger become effective with the Secretary of State of the State of New York or Florida, respectively (the "Effective Time"). A-1 ARTICLE II TERMS OF MERGER --------------- 2.1 Charter. The Articles of Incorporation of DI in effect immediately ------- prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation until otherwise amended or repealed. 2.2 Bylaws. The Bylaws of DI in effect immediately prior to the ------ Effective Time shall be the Bylaws of the Surviving Corporation until otherwise amended or repealed. 2.3 Tax-Free Reorganization. The parties intend this Agreement to be a ----------------------- tax-free plan of reorganization under Section 368(a) of the Internal Revenue Code. ARTICLE III MANNER OF CONVERTING SHARES --------------------------- 3.1 Conversion of Shares. Subject to the provisions of this Article -------------------- III, at the Effective Time, by virtue of the Merger and without any action on the part of the Parties or the shareholders of any of the Parties, the shares of the constituent corporations of the Merger shall be converted as follows: (a) Each share of S&W Common Stock (excluding treasury shares, excluding shares held by shareholders who perfect their statutory dissenters' rights as provided in Section 3.4 of this Agreement and shares converted pursuant to Section 3.1(a) above) issued and outstanding at the Effective Time, and each such share to be issued under S&W's Supplemental Executive Retirement Plan in accordance with Section 8.16, shall cease to be outstanding and shall be converted into and exchanged for: (i) the right to receive that number of shares of PSS Common Stock obtained by dividing the Common Stock Per Share Purchase Price by the Base Period Trading Price, and (ii) a contingent right to receive that portion of the Escrow Shares, that are attributable to each such share of S&W Common Stock, that are deposited into escrow by PSS pursuant to Section 4.3 of this Agreement. The sum of clause (i) and (ii) of the preceding sentence is the "Common Stock Exchange Ratio." The Base Period Trading Price is defined to mean the average of the daily closing prices for the shares of PSS Common Stock for the ten (10) consecutive trading days on which such shares are actually traded as over-the-counter securities and quoted on the Nasdaq National Market System (as reported by The Wall Street Journal or, if not reported thereby, any other authoritative source) ending at the close of trading on the second trading day immediately prior to the Closing Date; provided, that for purposes of this calculation, the Base Period Trading Price shall be deemed to equal (i) $14.9644 in the event the Base Period Trading Price is greater than $14.9644 and (ii) $12.2436 in the event the Base Period Trading Price is less than $12.2436 (collectively, $14.9644 and $12.2436 are referred to as the "Base Period Trading Price Limitations"). (b) Subject to adjustment as set forth below, the Aggregate Purchase Price shall equal $26,000,000, minus any expenses incurred by S&W or on S&W's ----- behalf in connection with the transactions contemplated hereunder in excess of $350,000, determined in accordance with Section 11.2 hereof; provided, that such adjustment shall not exceed $200,000. 3.2 Anti-Dilution Provisions. In the event S&W or PSS changes the number ------------------------ of shares of S&W Common Stock or PSS Common Stock, respectively, issued and outstanding prior to the Effective Time as a result of a stock split, stock dividend, combination of shares or similar recapitalization with respect to such stock (an "Anti-Dilution Event") and the record date therefor (in the case of a stock dividend) or the effective date thereof (in the case of a stock split, share exchange or similar recapitalization for which a record date is not established) shall be prior to the Effective Time, the Common Stock Exchange Ratio shall be proportionately adjusted to insure that holders of S&W Common Stock shall receive PSS Common Stock having the same value as they would have received prior to the Anti-Dilution Event. In the event PSS has an Anti-Dilution Event and the record date therefor (in the A-2 case of a stock dividend) or the effective date thereof (in the case of a stock split, share combination, share exchange or similar recapitalization for which a record date is not established) shall be prior to the Effective Time, the Base Period Trading Price shall be adjusted to appropriately adjust the ratio under which shares of S&W Common Stock will be converted into shares of PSS Common Stock pursuant to Section 3.1(b) of this Agreement to insure that holders of S&W Common Stock shall receive PSS Common Stock having the same value as they would have received prior to the Anti-Dilution Event. 3.3 Shares Held by S&W. Each share of S&W Common Stock held in treasury ------------------ by S&W, shall be canceled and retired at the Effective Time and no consideration shall be issued in exchange therefor. 3.4 Dissenting Shareholders. Any holder of shares of S&W Capital Stock ----------------------- who perfects his or her dissenters' rights in accordance with and as contemplated by Sections 623 and 910, et. seq., of the NYBCL shall be entitled to receive the value of such shares in cash from S&W after the Effective Time as determined pursuant to such provision of Law; provided, that no such payment shall be made to any dissenting shareholder unless and until such dissenting shareholder has complied with the applicable provisions of the NYBCL and surrendered to S&W the certificate or certificates representing the shares for which payment is being made. In the event that a dissenting shareholder of S&W fails to perfect, or effectively withdraws or loses, its right to appraisal and of payment for its shares, PSS shall issue and deliver the consideration to which such holder of shares of S&W Capital Stock is entitled under this Article 3 (without interest) upon surrender by such holder of the certificate or certificates representing such shares held by such holder. 3.5 Fractional Shares. No certificates representing fractional shares ----------------- of PSS Common Stock will be issued as a result of the Merger. Each holder of shares of S&W Common Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of PSS Common Stock shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of PSS Common Stock multiplied by the Base Period Trading Price. No such holder will be entitled to dividends, voting rights, or any other rights as a shareholder in respect of any fractional shares. ARTICLE IV EXCHANGE OF SHARES ------------------ 4.1 Exchange Procedures. On the Closing Date, PSS shall mail to the ------------------- former holders of S&W Common Stock appropriate transmittal materials (which shall specify that delivery shall be effected, and risk of loss and title to the certificates theretofore representing shares of S&W Common Stock shall pass, only upon proper delivery of such certificates to PSS). After the Effective Time, each holder of shares of S&W Common Stock (other than shares cancelled pursuant to Sections 3.3 and 3.4 of this Agreement) issued and outstanding at the Effective Time shall surrender the certificate or certificates representing such shares to PSS and shall promptly upon surrender thereof receive in exchange therefor the consideration provided in Section 3.1 of this Agreement. PSS shall not be obligated to deliver the consideration to which any former holder of S&W Common Stock is entitled as a result of the Merger until such holder surrenders his certificate or certificates representing the shares of S&W Common Stock for exchange as provided in this Section 4.1 or such holder provides an appropriate affidavit regarding loss of such certificate and an indemnification for loss in favor of PSS. The certificate or certificates of S&W Common Stock so surrendered shall be duly endorsed as PSS may require. 4.2 Rights of Former S&W Shareholders. At the Effective Time, the stock --------------------------------- transfer books of S&W shall be closed and no transfer of S&W Common Stock by any such holder shall thereafter be made or recognized. Until surrendered for exchange in accordance with the provisions of Section 4.1 of this Agreement, each certificate theretofore representing shares of S&W Common Stock (other than shares to be canceled pursuant to Sections 3.3 and 3.4 of this Agreement) shall from and after the Effective Time represent for all purposes only the right to receive the consideration provided in Sections 3.1 and 3.5 of A-3 this Agreement in exchange therefor. To the extent permitted by Law, former shareholders of record of S&W shall be entitled to vote after the Effective Time at any meeting of PSS shareholders the number of whole shares of PSS Common Stock into which their respective shares of S&W Common Stock are converted, regardless of whether such holders have exchanged their certificates representing S&W Common Stock for certificates representing PSS Common Stock in accordance with the provisions of this Agreement. Whenever a dividend or other distribution is declared by PSS on the PSS Common Stock, the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all shares issuable pursuant to this Agreement, but no dividend or other distribution payable to the holders of record of PSS Common Stock as of any time subsequent to the Effective Time shall be delivered to the holder of any certificate representing shares of S&W Common Stock issued and outstanding at the Effective Time until such holder surrenders such certificate for exchange as provided in Section 4.1 of this Agreement. However, upon surrender of such certificate, both the PSS Common Stock certificate (together with all such undelivered dividends or other distributions without interest) and any undelivered cash payments to be paid for fractional share interests (without interest) shall be delivered and paid with respect to each share represented by such certificate. 4.3 Escrow Shares. At the Effective Time, and pursuant to the terms of -------------- the Escrow Agreement attached hereto as Exhibit 4.3, PSS shall issue an ----------- aggregate number of shares of PSS Common Stock equal to the sum of (A) with respect to the specific indemnity, (i) $1,000,000, the amount of the Receivables Claim, (ii) $5,000, the amount of the Escrow Agent Expenses, and (iii) $10,000, the amount of the Representative Expenses; and (B) five percent (5%) of the Aggregate Purchase Price ((A) and (B) collectively, the "Escrow Dollar Amount"); the sum of which is divided by the Base Period Trading Price. ARTICLE V REPRESENTATIONS AND WARRANTIES OF S&W ------------------------------------- S&W hereby represents and warrants to PSS and DI as follows: 5.1 Organization, Standing, and Power. S&W is a corporation duly --------------------------------- organized, validly existing, and in good standing under the Laws of the State of New York, and has the corporate power and authority to carry on its business as it has been and is now being conducted and to own, lease and operate its Assets. S&W is duly qualified or licensed to transact business as a foreign corporation and is in good standing in all jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions in which the failure to be so qualified or licensed will not have, in the aggregate, a Material Adverse Effect on S&W. Copies of the articles of incorporation and all amendments thereto of S&W and the bylaws, as amended, of S&W and copies of the corporate minutes (or resolutions adopted by the shareholders or Board of Directors) of S&W, which have been made available to PSS for review, are true and complete, in all Material respects, as in effect on the date of this Agreement, and accurately reflect all proceedings of the shareholders and Board of Directors of S&W. The stock record books of S&W, which have been made available to PSS for review, contain true and complete records of the stock ownership of S&W and all prior transfers of the shares of its capital stock. 5.2 Authorization of Agreement; No Breach. The execution, delivery and ------------------------------------- performance of this Agreement has been duly authorized by all necessary corporate action of S&W. This Agreement constitutes, and all agreements and other instruments and documents to be executed and delivered by S&W pursuant to this Agreement will constitute, legal, valid and binding obligations of S&W enforceable against S&W in accordance with their respective terms. The execution, delivery and performance of this Agreement and the agreements and other documents and instruments to be executed and delivered by S&W pursuant to this Agreement and the consummation of the transactions contemplated hereby and thereby will not, subject to obtaining the consents identified herein, (i) violate or result in a breach of or Default under the certificate of incorporation or bylaws of S&W or any other Material instrument or agreement to which S&W is a party or is bound; (ii) to the knowledge of S&W, violate any Law, A-4 administrative decision or award of any court, arbitrator, mediator, tribunal, administrative agency or governmental body applicable to or binding upon S&W or upon its securities, property or business; (iii) except as set forth on Schedule 5.2 or 5.16 conflict with or constitute a Default under any ------------ ---- Material Contract to which S&W is a party or by which S&W is bound; or (iv) create a Lien upon the securities, property or business of S&W. 5.3 Capital Stock. The authorized capital stock of S&W consists of ------------- 500,000 shares of S&W Common Stock, of which 259,574 shares are issued and outstanding as of the date of this Agreement and none of which are issued and held as treasury shares. All of such shares are duly and validly issued and outstanding, are fully paid and non-assessable, and were issued pursuant to a valid exemption from registration under the 1933 Act and all applicable state securities laws. Except as set forth on Schedule 5.3, there are no ------------- outstanding warrants, options, rights (including outstanding rights to demand registration or to sell in connection with a registration by S&W under the 1933 Act), calls or other commitments of any nature relating to the S&W Common Stock, and there are no outstanding securities of S&W convertible into or exchangeable for shares of S&W Common Stock or any other capital stock. S&W is not obligated to issue or repurchase any shares of its capital stock for any purpose, and to the knowledge of S&W no person or entity has entered into any Contract or option or any right or privilege (whether preemptive or contractual) capable of becoming a Contract or option for the purchase, subscription or issuance of any unissued shares, or other securities of S&W. S&W's Fully Diluted Common Equivalents represent 263,583 shares of S&W Common Stock. 5.4 S&W Subsidiaries. S&W has no Subsidiaries. ---------------- 5.5 Financial Statements. (a) Schedule 5.5 contains true and correct -------------------- ------------ copies of the balance sheets of S&W as of March 31, 1996 and 1997, and the statements of income for the fiscal years ended March 31, 1995, 1996 and 1997 (the "Financial Statements"), which Financial Statements have been audited for the period ended March 31, 1997. (b) The Financial Statements (i) are in accordance with the books and records of S&W, which books and records have been maintained in accordance with reasonable business practices; (ii) present fairly the consolidated financial condition, assets and liabilities of S&W as of the respective dates indicated and the results of operations and cash flows for the respective periods indicated; (iii) have been consistently prepared throughout the periods involved; and (iv) reflect adequate reserves for all known Material Liabilities and reasonably anticipated losses. The Financial Statements contain no untrue statements of any Material fact nor omit to state any Material fact required to be stated to make the Financial Statements as a whole not misleading. 5.6 Absence of Undisclosed Liabilities. Except as disclosed on Schedule ---------------------------------- -------- 5.6, as of the date hereof, S&W does not have any Undisclosed Liabilities --- except for unpaid liabilities and obligations incurred since March 31, 1997, in the ordinary course of business and not involving Funded Debt. 5.7 Absence of Changes. Except as disclosed on Schedule 5.7, since ------------------- ------------ March 31, 1997 there has not been any Material transaction or Material occurrence (or, in the case of subparagraphs (i), (l) and (m) below, any transaction or occurrence) in which S&W has: (a) issued or delivered or agreed to issue or deliver any capital stock or other securities (whether stock, bonds, debentures or other corporate securities) or granted or agreed to grant any options or rights to purchase any securities or borrowed or agreed to incur any Funded Debt; (b) knowingly incurred or become subject to, or agreed to incur or become subject to, any Material Liability other than in the ordinary course of business; (c) discharged or satisfied any Lien or paid any Material Liability other than (i) current liabilities shown on the balance sheet as of March 31, 1997 included in the Financial Statements, (ii) A-5 current liabilities incurred since that date in the ordinary course of business, or (iii) Funded Debt shown on such balance sheet or incurred since March 31, 1997; (d) except as permitted elsewhere in this Agreement or disclosed in Schedule 5.7, declared, set aside or made, or agreed to declare, set aside or ------------ make any payments or dividends or any distribution to shareholders or purchased, redeemed or otherwise acquired, directly or indirectly, or agreed to purchase, redeem or acquire, any shares of its capital stock or other securities; (e) mortgaged, pledged, subjected or agreed to subject any of its assets, tangible or intangible, to any Lien, except for any liens regarding current real and personal property taxes not yet due and payable; (f) sold, assigned or transferred (or agreed so to do) any of its tangible assets, or canceled or agreed to cancel any debts or claims, except, in each case, in the ordinary course of business; (g) sold, assigned or transferred any patents, trademarks, trade names, copyrights or other intangible assets; (h) suffered any Material damage, destruction or loss, whether or not covered by insurance, which would have a Material Adverse Effect on the properties or business thereof, or suffered any extraordinary losses or waived any rights of substantial value, whether or not in the ordinary course of business; (i) increased the rate of compensation payable or to become payable by it to any of its officers, directors, employees or agents over the rate being paid to them at March 31, 1997, or agreed so to do, except general hourly rate increases and normal merit increases for employees other than officers; (j) terminated or amended any Material Contract, License or other instrument to which it is a party or suffered any loss or termination or threatened loss or termination, of any existing business arrangement or Material supplier, the termination or loss of which would have a Material Adverse Effect on S&W; (k) through negotiation or otherwise, made any commitment or incurred any Liability, whether or not enforceable, to any labor organization; (l) except as specifically provided elsewhere in this Agreement and except for any year-end compensation bonuses to be paid consistent with past practice, if any, made or agreed to make any accrual or arrangement for or payment of any bonus or special compensation of any kind to any officer, director, employee or agent; (m) directly or indirectly paid or entered into a Contract to pay any severance or termination pay to any officer, director, employee or agent; (n) changed any of the accounting principles followed by it or the methods of applying such principles; (o) reclassified its shares of capital stock into a different number of shares; (p) except in the ordinary course of business or as otherwise disclosed in writing to PSS, offered or extended more favorable prices, discounts or other allowances than were offered or extended regularly on and prior to March 31, 1997; (q) made or approved the making of any capital expenditure exceeding the amount of $25,000; A-6 (r) except in the ordinary course of business, loaned funds to or increased the aggregate amount of existing loans to any Person; (s) suffered or experienced any other event or condition that would have a Material Adverse Effect on the business, operations, assets, properties or condition of S&W, financial or otherwise. 5.8 Indebtedness. Schedule 5.8 lists all Funded Debt of S&W as of the ------------ ------------ date hereof, setting forth the principal amounts outstanding, per annum interest rates and maturity dates for all such indebtedness. All of the indebtedness (including Funded Debt) of S&W as of the respective dates of the Financial Statements and as of the date of this Agreement is accurately reflected in the Financial Statements, and with respect to any Funded Debt, S&W is not in breach or Default under any of the terms or conditions set forth in the loan documents or any other document or instrument related thereto. Except as disclosed on Schedule 5.8, all of the Funded Debt of S&W is ------------ prepayable at any time without penalty or premium at the option of S&W. Except as disclosed on Schedule 5.8, (i) the transactions contemplated in this ------------ Agreement will not result in any penalty or incurrence of any additional obligation or change of any terms with respect to any such indebtedness, and (ii) S&W has no obligations, Liabilities or indebtedness to any Affiliate. 5.9 Tax Matters. (a) S&W has filed all federal and state income tax ----------- returns for all periods prior to the date hereof which were required to be filed, and, except as described on Schedule 5.9, no audit has been conducted ------------ by the IRS or any state agency with respect to any such period since 1990. Except as listed on Schedule 5.9, S&W has not received notice of any Material ------------ Tax claims being asserted or any proposed assessment by any taxing authority and no Tax returns thereof have been audited by the IRS or the appropriate state agencies for any fiscal year or period ended prior to the date hereof for which the applicable statute of limitations period has not expired, and S&W is not presently under, nor has it received notice of any contemplated, investigation or audit by the IRS or any state agency concerning any fiscal year or period ended prior to the date hereof for which the applicable statute of limitations period has not expired. Except as listed on Schedule 5.9, S&W ------------ has not executed any extension or waivers of any statute of limitations on the assessment or collection of any Tax due that is currently in effect. (b) As of the date hereof, S&W has filed all Tax returns required to be filed at this date, taking into account any extensions of the filing deadlines which have been validly granted to it, and such returns are true and correct in all Material respects and properly reflect the Tax Liabilities of S&W for the periods, property or events covered thereby, and S&W has paid all Taxes (including penalties and interest in respect thereof, if any) that have become or are due with respect to any period through the date hereof whether shown on such returns or not. (c) Adequate provision has been made in the Financial Statements in accordance with GAAP as of March 31, 1997, for all Tax Liabilities not required to be paid prior to such date and for all current and deferred Taxes. (d) S&W and its predecessors have withheld or collected from each payment made to each of their employees the amount of all Taxes required to be withheld or collected therefrom and has paid the same to the proper tax depositories or collecting authorities. (e) All ad valorem property taxes for years prior to 1996 imposed on S&W or its Predecessors have been paid in full or adequately reserved in the Financial Statements, as appropriate. (f) Neither S&W nor to the knowledge of S&W, its Predecessors, has ever made an election under Section 341(f) of the Internal Revenue Code and no such entity is a United States real property holding corporation as defined in Section 897 of the Internal Revenue Code. 5.10 Real Property. (a) Schedule 5.10 identifies all real property ------------- ------------- owned by S&W and describes generally all structures located thereon. Except as shown on Schedule 5.10, S&W has good and ------------- A-7 marketable title to all real property owned by it, free and clear of all Liens and other imperfections of title, other than easements which do not materially and adversely affect the ownership or use of such real property. True and correct copies of all documents evidencing the Liens upon the real property described on Schedule 5.10 and copies of all title insurance policies relating ------------- thereto have been provided or made available to PSS. (b) True and correct copies of all real property leases of S&W have been provided or made available to PSS. Each of such leases is in full force and effect on the date hereof, except as the validity of such leases may be affected by actions, events or conditions involving only the other party thereto, none of which actions, events or conditions have occurred or exist to the knowledge of S&W. No Default under any of the terms or conditions set forth in any of the foregoing leases or any other documents or instruments related thereto has occurred or been asserted by any party. Except as disclosed on Schedule 5.10, the continuation, validity and effectiveness of ------------- the terms and conditions of such leases will not be affected in any way by the transactions contemplated by this Agreement. (c) To the knowledge of S&W, all improvements on the real estate owned by, leased to or used by S&W conform in all Material respects to all applicable state and local laws. (d) Each of the buildings, structures, improvements and leased premises is in satisfactory condition and repair consistent with the uses to which they are being put. (e) No proceedings for the taking of any of such real property by eminent domain by any governmental authority are pending or, to the knowledge of S&W, threatened. 5.11 Personal Property. (a) True and correct copies of all leases for ----------------- personal property (except miscellaneous leases of office machinery, medical equipment, or any leases having future minimum lease payments of less than $5,000) used or employed by S&W have been provided or made available to PSS. Each of such leases is in full force and effect on the date hereof, except as the validity of such leases may be affected by actions, events or conditions affecting the other party thereto, none of which actions, events or conditions exists of has occurred to the knowledge of S&W. No Default under any of the terms or conditions set forth in any of the foregoing leases or any document or instrument related thereto has occurred or been asserted by any party. Except as disclosed on Schedule 5.11, the continuation, validity and ------------- effectiveness of such leases will not be affected in any way by the transactions contemplated by this Agreement. Except as disclosed on Schedule -------- 5.11, S&W does not lease any personal property as lessor. ---- (b) All Material items of personal property and leasehold improvements owned or leased by S&W are shown on or reflected in the audited balance sheet of S&W as of March 31, 1997, included in the Financial Statements, are in satisfactory operating condition and in a state of reasonable maintenance and repair, consistent in all Material respects with the uses to which they are being put, and all such personal property, and leasehold improvements are considered adequate and usable for the continued operation of the business of S&W as the same is presently being conducted and are physically located either at one of the principal places of business of S&W or at S&W's principal business office. 5.12 Intellectual Property. (a) Schedule 5.12 contains a true and --------------------- ------------- complete list of all Intellectual Property owned by, registered in the name of, or used by S&W in its businesses on the date hereof, or for which application has been made. All such Intellectual Property rights are in full force and effect and constitute legal, valid and binding obligations of S&W and to S&W's knowledge, of the other parties thereto; and there have not been, and to the knowledge of S&W, there currently are not any Defaults thereunder by any party. S&W owns or is a valid licensee of all such Intellectual Property rights free and clear of all Liens or claims of infringement. Neither S&W or, to the knowledge of S&W, its Predecessors have knowingly infringed the Intellectual Property rights of others and none of the Intellectual Property rights as used in the business conducted by any such entity infringes upon or otherwise violates the rights of others, nor has any person asserted a claim of such infringement. S&W is A-8 not obligated to pay any royalties to any person or entity with respect to any such Intellectual Property. S&W owns or has the valid right to use all of the Intellectual Property rights which it is presently using, or in connection with the performance of any Material contract or proposal to which it is a party. (b) To the knowledge of S&W, except as described on Schedule 5.12, no ------------- officer, director or employee of S&W has entered into any Contract which requires such officer, director or employee to assign any interest in any Intellectual Property or keep confidential any trade secrets, proprietary data, customer lists or other business information or which restricts or prohibits such officer, director or employee from engaging in activities competitive with S&W. 5.13 Accounts Receivable. Except as set forth on Schedule 5.13, the ------------------- ------------- accounts receivable and receivables from Affiliates of S&W as of March 31, 1997, as reflected in the Financial Statements (net of reserves reflected in such Financial Statements), to the extent uncollected on the date hereof, and the accounts receivable and receivables from Affiliates reflected on the books of S&W on the date hereof, are validly existing and represent monies due for goods sold and delivered or services performed, and the value of such accounts receivable as shown in the Financial Statements are, in the aggregate, net of adequate reserves (based on past experience) for doubtful and uncollectible accounts as determined in accordance with GAAP. Except as set forth in Schedule 5.13 and except for returns in the ordinary course of business, there ------------- are no refunds, discounts or other adjustments payable with respect to any such accounts receivable and receivables from Affiliates, and, to S&W's knowledge, there are no defenses, rights of set-off, assignments, restrictions, encumbrances, or conditions enforceable by third parties on or affecting any of the foregoing. 5.14 Inventories. All items of inventory of S&W reflected on the March ----------- 31, 1997 audited balance sheet contained in the Financial Statements consisted, and all such items on hand on the date of this Agreement consist, of items of a quality and quantity usable and saleable in the ordinary course of business and conform to generally accepted standards in the industry in which S&W is a part. The inventory of S&W as reflected in the Financial Statements is net of adequate reserves for damaged, excess, slow moving, obsolete and unsalable items as determined in accordance with GAAP. Except as set forth on Schedule 5.14, purchase commitments are not materially in excess ------------- of normal requirements, and none of such purchase commitments is at a price in excess of the prevailing market prices at the time of the commitment. Except as set forth on Schedule 5.14, since March 31, 1997, no inventory items have ------------- been sold or disposed of, except through sales in the ordinary course of business, and in no event at prices less than the book value of such inventory items as of March 31, 1997 to S&W. 5.15 Insurance. All of the properties and business of S&W of an --------- insurable nature and of a character usually insured by companies of similar size and in similar businesses are insured in such amounts and against such losses, casualties or risks as is usual in such companies and for such properties and business. A complete and accurate list of all insurance policies held by S&W or its Subsidiaries and now in force (including, without limitation, property damage, public liability, worker's compensation, fidelity bonds, errors and omissions, theft, forgery and other coverage) is attached hereto as Schedule 5.15, and true and correct copies of all such insurance ------------- policies have been provided or made available to PSS. All such policies are in full force and effect and the premiums due thereon have been timely paid. S&W is not now in Default regarding the provisions of any such policy, nor has it failed to give any notice or present any Material claim thereunder in due and timely fashion. The consummation of the transactions contemplated by this Agreement will not constitute a Default under, or otherwise affect the coverage under, any such insurance policies. 5.16 Compliance with Laws. (a) To the best of its knowledge, S&W has in -------------------- effect all Permits necessary for it to own, lease or operate its Assets and to carry on its business as now conducted, except for those Permits the absence of which are not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on S&W. S&W is not in violation of any Laws, Orders or Permits applicable to its business or employees conducting its business, except for violations which are not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on S&W. No notice or warning from A-9 any Regulatory Authority with respect to any failure or alleged failure of S&W to comply with any Law has been received, nor, to S&W's knowledge, is any such notice or warning proposed or threatened. (b) Except as set forth on Schedule 5.16, no consent or approval of, ------------- prior filing with or notice to, or other action by, any Regulatory Authority or any other third party is required in connection with the execution and delivery of this Agreement or any assignment, agreement or other instrument to be executed and delivered pursuant to this Agreement by S&W or the consummation of the transactions provided for herein or therein except for such consents and approvals that have been obtained and filings, notices and other actions that have been taken or made. (c) To the knowledge of S&W, there are no Material capital expenditures that S&W anticipates will be required to be made in connection with the business of S&W as now conducted in order to comply with any existing Laws or other governmental requirements applicable to the business of S&W as now conducted, including, without limitation, requirements relating to occupational health and safety and protection of the environment. "Capital Expenditures" shall have the same meaning as it has in the Financial Statements if and to the extent that the treatment thereof is in accordance with GAAP. (d) Neither S&W nor, to the knowledge of S&W, any officer, director, employee, agent or other representative thereof acting or purporting to act on behalf of any such entity or any business enterprise with which S&W has been associated or affiliated, has, directly or indirectly, made or authorized any payment, contribution or gift of money, property, or services, in violation of applicable Law (i) as a kickback or bribe to any person, or (ii) to any political organization or the holder of, or any aspirant to, any elective or appointive office of any nation, state, political subdivision thereof, or other governmental body or instrumentality. 5.17 Environmental Matters. (a) Except as set forth on Schedule 5.17, --------------------- ------------- there are no claims, actions, suits, proceedings or investigations related to Environmental Laws with respect to the ownership, use, condition or operation of any of the assets held for use or sale by S&W or, to the knowledge of S&W, any of its Predecessors in any court or before or by any federal, state or other governmental agency or private arbitration tribunal (hereinafter collectively referred to as "Environmental Litigation"). Except as set forth on Schedule 5.17, there are no existing Material violations of federal, state ------------- or local Environmental Laws related to Environmental Matters by S&W with respect to the ownership, use, condition, lease or operation of any Assets thereof or, to the knowledge of S&W, any property formerly held for use or sale by any of its Predecessors. Neither S&W nor, to the knowledge of S&W, any of its Predecessors has used any of its assets or premises for the handling, treatment, storage, or disposal of any Hazardous Substances except in Material compliance with all applicable Environmental Laws. Except as set forth on Schedule 5.17, no written or oral notice, or other communication from ------------- any court or governmental agency, official or instrumentality, of any alleged violation of any Environmental Law related to Environmental Matters has been filed or communicated to S&W or, to the knowledge of S&W, any of its Predecessors with respect to the use, ownership, condition, operation, or disposal of any of the Assets of S&W or any property formerly held for use or sale by S&W or, to the knowledge of S&W, any of its Predecessors. To the knowledge of S&W, no basis exists for the allegation of any such violations; (b) Except as set forth on Schedule 5.17, no Material release, discharge, ------------- spillage or disposal of any Hazardous Substances in violation of any Law has occurred or is occurring at any assets or premises of S&W or, to the knowledge of S&W, any of its Predecessors while or before such premises were owned leased, operated, or managed, directly or indirectly, by any such entity; (c) Except as set forth on Schedule 5.17, no soil or water in, under or ------------- adjacent to any of the premises of S&W or property formerly held for use or sale by S&W or, to the knowledge of S&W, its Predecessors, has been contaminated by any Hazardous Substance while or, to the knowledge of S&W, before such assets or premises were owned, leased, operated or managed, directly or indirectly, by S&W or any of its Predecessors; A-10 (d) Except as set forth on Schedule 5.17, all waste containing any ------------- Hazardous Substances generated, used, handled, stored, treated or disposed of (directly or indirectly) by S&W or, to the knowledge of S&W, any of its Predecessors. has been released or disposed of in compliance with all applicable reporting requirements under CERCLA and RCRA and other applicable legal requirements; (e) S&W and, to the knowledge of S&W, its Predecessors have complied with all applicable reporting requirements under CERCLA and RCRA concerning the disposal or release of Hazardous Substances, and except as set forth on Schedule 5.17, neither S&W, nor to the knowledge of S&W, its Predecessors, has ------------- made a report concerning any of their premises, operations or activities; (f) Except as set forth on Schedule 5.17, to the knowledge of S&W, no ------------- building or other improvement or any premises owned, leased, operated or managed by S&W contains any asbestos-containing materials; and (g) Copies of any environmental audits or environmental surveys of any real estate owned or leased by S&W are attached to Schedule 5.17. ------------- 5.18 Litigation and Claims. There are no outstanding Court Orders or --------------------- administrative decisions to which S&W is subject, and, except as disclosed on Schedule 5.18, there is no Litigation pending or threatened against or ------------- relating to S&W or its Assets or businesses, and to the knowledge of S&W, there is no specific event which has occurred for which any such action or any state of facts or occurrence of any event which might give rise to the foregoing. Except as disclosed on Schedule 5.18, S&W has not been advised by ------------- any attorney representing any such entity that there are any "loss contingencies" (as defined in Statement of Financing Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975 ("FASB 5")), which would be required by FASB 5 to be disclosed or accrued in the financial statements of S&W. 5.19 Contracts and Commitments. (a) Schedule 5.19 sets forth a true, ------------------------- ------------- correct and complete list of Contracts to which S&W is a party or by which their assets are bound, and which involve payment by or the receipt of payment by S&W of any amounts in excess of $25,000, all of which, to the extent they are in writing, have been made available to PSS for review: (i) any Contract for the employment of any officer, director, employee or consultant; (ii) any Contract for the purchase, sale, production or supply, whether on a continuing basis or otherwise, of goods or services of any type except those made in the ordinary course of business; (iii) any distributor, sales agency or vendor Contract or sub- contract or any license agreement, except those made in the ordinary course of business; (iv) any Contract not made in the ordinary course of business, including but not limited to any covenants not to compete; (v) any continuing Contract for the purchase of materials, supplies, equipment or services in excess of normal operating requirements; (vi) any Contracts that are, in the reasonable opinion of S&W, materially adverse, onerous or otherwise harmful to any of S&W's businesses, properties, operations or assets; (vii) any Contract pursuant to which such entity receives a management fee or a billings and collections fee; or A-11 (viii) any Contracts, leases, quotas, restrictions or trade conditions upon which the business, rights or assets, or condition, financial or otherwise, of S&W depends or is or would be Materially affected. (b) Except as set forth on Schedule 5.19 or as to Contracts that are ------------- cancelable at will or upon 30 days' notice or less, (i) each of the Contracts described in this Section 5.19 is in full force and effect on the date hereof, except as the validity of such Contracts may be affected by actions, events or conditions involving only the other party thereto, none of which actions, events or conditions have occurred or exist to the knowledge of S&W, (ii) no Default under any of the terms or conditions set forth in any of the Contracts to which S&W is a party or any document or instrument related thereto has occurred or been asserted by any party, and (iii) the continuation, validity and effectiveness of such Contracts, and all other Material terms thereof, will not be affected by the transactions contemplated by this Agreement. (c) Except as set forth on Schedule 5.19, S&W is not a party to any ------------- covenant not to compete or other agreement which restricts the ability of S&W or Affiliates to engage in any business. 5.20 Powers of Attorney. Except as disclosed on Schedule 5.20, S&W has ------------------ ------------- not given or granted any power of attorney, whether limited or general, to any Person that is continuing in effect. 5.21 Benefit Plans. (a) Schedule 5.21.1 lists (i) every pension, ------------- --------------- retirement, profit-sharing, deferred compensation, stock option, employee stock ownership, severance pay, vacation, bonus or other incentive plan, any other written or unwritten employee program, arrangement, agreement or understanding, whether arrived at through collective bargaining or otherwise; (ii) any medical, vision, dental or other health plan, any life insurance plan; or (iii) any other employee benefit plan or fringe benefit plan, including, without limitation, any "employee benefit plan," as that term is defined in Section 3(3) of ERISA, currently or expected to be adopted, maintained by, sponsored in whole or in part by, or contributed to by S&W under Internal Revenue Code Sections 414(b) or 414(c) for the benefit of employees, former employees, retirees, directors, independent contractors, spouses or dependents of any of the foregoing or any other beneficiaries and under which such employees, retirees, dependents, spouses, directors, independent contractors, or other beneficiaries are eligible to participate (collectively, the "Benefit Plans"). Any Benefit Plan that is an "employee pension benefit plan," as that term is defined in Section 3(2) of ERISA, or an "employee welfare benefit plan" as that term is defined in Section 3(1) of ERISA, is referred to herein as an "ERISA Plan." On or after September 26, 1980, neither S&W nor any entity aggregated therewith under Internal Revenue Code Section 414(b) or 414(c) has had an "obligation to contribute" (as defined in ERISA Section 4212) to a "multiemployer plan" (as defined in ERISA Sections 4001(a)(3) and 3(37)(A)) ("Multiemployer Plan"). S&W has not incurred, nor is reasonably expected to incur prior to the Closing Date, any liability under Title I or Title IV of ERISA or under Internal Revenue Code Section 412 other than routine funding obligations and routine claims for benefits. Except as described on Schedule 5.21.2, all Liabilities arising out --------------- of or related to Benefit Plans and ERISA Plans of S&W are reflected in the Financial Statements in accordance with GAAP. Neither S&W nor any entity aggregated therewith under Internal Revenue Code Sections 414(b), (c), (m), and (o) have at any time sponsored, maintained, contributed to or been obligated to contribute to a defined benefit plan as that term is defined in Internal Revenue Code Section 414(j) and ERISA Section 3(35). (b) True, correct and complete copies of all written Benefit Plans, as currently in effect (or as otherwise requested by PSS), listed on Schedule -------- 5.21.1 and all trust agreements or other funding arrangements, including ------ insurance contracts, all amendments thereto and, where applicable, with respect to any such plans or plan amendments, the most recent determination letters issued by the IRS, all advisory opinions issued by the United States Department of Labor after December 31, 1974, the annual reports or returns, audited or unaudited financial statements, actuarial valuations, and summary annual reports for the most recent three plan years, the most recent summary plan descriptions and any Material modifications thereto have been provided or made available to PSS. A-12 (c) Except as listed on Schedule 5.21.2, all the Benefit Plans and the --------------- related trusts subject to ERISA comply with and have been administered in all Material respects in compliance with, the provisions of ERISA, all provisions of the Internal Revenue Code relating to qualification and tax exemption under Internal Revenue Code Section 401(a) and 501(a) or otherwise applicable to secure intended tax consequences, and all other applicable laws, rules and regulations and collective bargaining agreements in all Material respects. Except as listed on Schedule 5.21.2, all governmental approvals for the --------------- Benefit Plans have been obtained (to the extent such approvals may be obtained), including, but not limited to, timely determination letters on the qualification of the ERISA Plans that are "employee benefit plans," as defined in Section 3(2) of ERISA, and tax exemption of related trusts, as applicable under the Internal Revenue Code, and all such governmental approvals continue in full force and effect. Neither S&W nor, to the knowledge of S&W, any administrator or fiduciary of any such Benefit Plan (or agent of any of the foregoing) has engaged in any transaction or acted or failed to act in any manner which could subject any such entity to any direct or indirect liability (by indemnity or otherwise) for a breach of any fiduciary, co-fiduciary or other duty under ERISA. No oral or written representation or communication with respect to any aspect of the Benefit Plans has been made by S&W or its management to employees of S&W or any of its predecessors prior to or on the Closing Date that is not in accordance with the written or otherwise preexisting terms and provisions of such Benefit Plans in effect immediately prior to the Closing Date. There are no unresolved claims or disputes under the terms of, or in connection with, the Benefit Plans and no action, legal or otherwise, has been commenced with respect to any claim other than processing of claims in the ordinary course of business. (d) Except as described on Schedule 5.21.2, all annual reports or --------------- returns, audited or unaudited financial statements, actuarial valuations, summary annual reports and summary plan descriptions issued with respect to the Benefit Plans are correct and accurate in all Material respects. (e) Since December 31, 1974, no "party in interest" (as defined in Section 3(14) of ERISA) or "disqualified person" (as defined in Section 4975(e)(2) of the Internal Revenue Code) of any ERISA Plan has engaged in any "prohibited transaction" (within the meaning of Section 4975(c) of the Internal Revenue Code or Section 406 of ERISA) unless exempt under Section 4975(d) of the Internal Revenue Code or Section 407 of ERISA. (f) Except as set forth in the Financial Statements, no Liability exists and no event that could result in a Liability has occurred with respect to any Benefit Plan that individually or in the aggregate could have a Material Adverse Effect on S&W. (g) S&W has not maintained and does not currently maintain a Benefit Plan providing welfare benefits (as defined in ERISA Section 3(1)) to employees after retirement or other separation of service except to the extent required under Part 6 of Title I of ERISA and Internal Revenue Code Section 4980B(f). (h) Except as set forth on Schedule 5.21.3, the consummation of the --------------- transactions contemplated by this Agreement will not entitle any current or former employee of S&W or any of its predecessors whose employment is not terminated as a result of such transactions, to severance pay, unemployment compensation or any similar payment, and will not accelerate the time of payment or vesting, or increase the amount, of compensation due any such employee or former employee. (i) All Benefit Plans subject to Section 4980B of the Internal Revenue Code or Part 6 of Title I of ERISA, or both, have been maintained in compliance in all Material respects with the requirements of such laws and any regulations (proposed or otherwise) issued thereunder. (j) S&W represents that based on current compensation levels for participants in the S&W X-Ray, Inc. Employee Stock Ownership Plan ("ESOP"), sufficient compensation has been earned by participants through the plan year ended March 31, 1997 and is projected to be earned by participants through the plan year ending March 31, 1998 such that S&W may fully repay the ESOP indebtedness as A-13 described in Section 8.1 of this Agreement and nevertheless satisfy Internal Revenue Code Sections 404 and 415 (measured as of March 31, 1997 and March 31, 1998, respectively). 5.22 Remuneration. Schedule 5.22 contains a complete and accurate ------------ ------------- schedule of the direct compensation (including wages, salaries and actual or anticipated bonuses), plus a description of other annual benefits not made available to the other employees generally, paid in fiscal 1997 and to be paid in the current fiscal year to (i) all of the officers and directors of S&W; and (ii) all of the employees of S&W who received or will be receiving in excess of $25,000 base salary during such year. No unpaid salary, other than for the immediately preceding pay period and other than pursuant to the existing deferred compensation plans of S&W, is now payable to any of such officers, directors or employees. 5.23 Union and Employment Agreements. Except as set forth on Schedule ------------------------------- -------- 5.23, S&W is not a party to any union agreement, nor does S&W have any ---- written or oral agreement that is not terminable by it at will with any of its officers, directors, employees, consultants, agents, or any other person performing services therefor, relating to their employment by or performance of services for S&W or their compensation therefor. To S&W's knowledge, no union attempts to organize the employees of S&W have been made nor are any such attempts now threatened. Except as set forth on Schedule 5.23, S&W has ------------- not received notice that any of the officers or directors of S&W will terminate or contemplates terminating his or her employment currently or at any time within sixty (60) days of the Closing Date. 5.24 Interested Transactions. (a) Except as set forth on Schedule 5.24, ----------------------- ------------- S&W is not currently a party to any Contract, loan or other transaction with any of the following persons, or in which any of the following persons have any direct or indirect interest (other than as a shareholder or employee of S&W): (i) Any director, officer, employee of S&W or any of the shareholders of S&W; (ii) Any of the spouses, parents, siblings, children, aunts, uncles, nieces, nephews, in-laws and grandparents of any of the persons described in clause (i); or (iii) Any corporation, trust, partnership or other entity in which any of the persons described in clauses (i) or (ii) has a beneficial interest (other than in a corporation whose shares are publicly traded and in which such persons own beneficially in the aggregate no more than 5% of the equity interest). (b) Except as set forth on Schedule 5.24, none of the shareholders of ------------- S&W is an employee, consultant, partner, principal, director or shareholder of any business entity which is engaged in a business which competes with or is similar to the business of S&W. 5.25 Brokers and Finders. No broker, agent, finder or consultant (other ------------------- than Stephen C. Cook of Fieldstone Partners, Inc.) or other person has been retained by or on behalf of S&W (other than legal or accounting advisors), or is entitled to be paid based upon any agreements or understandings made by S&W in connection with the transactions contemplated hereby. Neither PSS nor S&W shall have any Liability for any broker's fee, finder's fee, consultant's fee or similar third party remuneration by reason of any action of S&W. 5.26 Statements True and Correct. No statement, certificate, instrument, --------------------------- or other writing furnished or to be furnished by S&W to PSS pursuant to this Agreement or any other document, agreement, or instrument referred to herein furnished by S&W contains or will contain any untrue statement of Material fact or will omit to state a Material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the information supplied by or to be supplied by S&W or any Affiliate thereof for inclusion in the Registration Statement to be filed by PSS with the SEC will, when the Registration Statement becomes effective, be false or misleading with respect to any Material fact, or omit to state any Material fact necessary to make the statements therein not misleading. None of the information supplied or to be supplied by S&W or any Affiliates thereof for A-14 inclusion in the Proxy Statement-Prospectus to be mailed to S&W's shareholders in connection with the Shareholders' Meeting, and any other documents to be filed by S&W with the SEC or any other Regulatory Authority in connection with the transactions contemplated hereby, will, at the respective time such documents are filed, and with respect to the Proxy Statement-Prospectus, when first mailed to the shareholders of S&W, be false or misleading with respect to any Material fact, or omit to state any Material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or in the case of the Proxy Statement-Prospectus or any amendment thereof or supplement thereto, at the time of the Shareholders' Meeting, be false or misleading with respect to any Material fact, or omit to state any Material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for the Shareholders' Meeting. All documents that S&W is responsible for filing with any Regulatory Authority in connection with the transactions contemplated hereby will comply as to form in all Material respects with the provisions of applicable Law. 5.27 Accounting, Tax and Regulatory Matters. Other than actions -------------------------------------- permitted or required to be taken under the terms of this Agreement, neither S&W nor any Affiliate thereof has taken any action or has any knowledge of any fact or circumstance that is reasonably likely to (i) prevent the transactions contemplated hereby, including the Merger, from qualifying for pooling-of- interests accounting treatment or as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code, or (ii) materially impede or delay receipt of any Consents of Regulatory Authorities. 5.28 Schedules. All Schedules attached hereto are true, correct and --------- complete as of the date of this Agreement. Matters disclosed on each Schedule shall be deemed disclosed only for purposes of the matters to be disclosed on such Schedule and shall not be deemed to be disclosed for any other purpose unless expressly provided therein. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PSS ------------------------------------- PSS hereby represents and warrants to S&W as follows: 6.1 Organization, Standing, and Power. Each of PSS and its Subsidiaries --------------------------------- is a corporation duly organized, validly existing, and in good standing under the Laws of the state of its incorporation, and has the power and authority to carry on its business as it has been and is now being conducted and to own, lease and operate its Assets. Each of PSS and its Subsidiaries is duly qualified or licensed to transact business as a foreign corporation and is in good standing in all jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions in which the failure to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on PSS or such Subsidiary. 6.2 Authorization of Agreement; No Breach. The execution, delivery and ------------------------------------- performance of this Agreement has been duly authorized by all necessary corporate action of PSS. This Agreement constitutes, and all agreements and other instruments and documents to be executed and delivered by PSS pursuant to this Agreement will constitute, legal, valid and binding obligations of PSS enforceable against PSS in accordance with their respective terms. The execution, delivery and performance of this Agreement and the agreements and other documents and instruments to be executed and delivered by PSS pursuant to this Agreement and the consummation of the transactions contemplated hereby and thereby will not, subject to obtaining the consents identified herein, (i) violate or result in a breach of or Default under the articles or certificate of incorporation or bylaws of PSS or any of its Subsidiaries or any other Material instrument or agreement to which PSS or any of its Subsidiaries is a party or is bound; (ii) to the knowledge of PSS and its Subsidiaries, violate any Law, administrative decision or award of any court, arbitrator, mediator, tribunal, administrative agency or governmental body applicable to or binding upon PSS or its Subsidiaries or upon their respective securities, property or business; (iii) conflict with or constitute a Default under any Material Contract to which PSS or any of its Subsidiaries is a party or by A-15 which PSS or any of its Subsidiaries is bound; or (iv) create a Lien upon the securities, property or business of PSS or any of its Subsidiaries. 6.3 PSS Capital Stock. The authorized capital stock of PSS consists of ----------------- (i) 60,000,000 shares of Common Stock, approximately 37,061,615 of which shares were issued and outstanding as of March 28, 1997, and none of which are issued and held as treasury shares, and (ii) 1,000,000 shares of Preferred Stock, none of which shares are issued and outstanding as of the date of this Agreement and none of which are issued and held as treasury shares. All of such shares are duly and validly issued and outstanding, and are fully paid and non-assessable and were issued pursuant to an effective registration statement under the 1933 Act and all applicable state securities laws or pursuant to an exemption from registration under the 1933 Act and all applicable state securities laws. Except as set forth on Schedule 6.3 and as ------------ contemplated by this Agreement, there are no outstanding warrants, options, rights (including outstanding rights to demand registration or to sell in connection with a registration by PSS under the 1933 Act), calls or other commitments of any nature relating to the PSS Common Stock or any other capital stock of PSS, and there are no outstanding securities of PSS convertible into or exchangeable for shares of PSS Common Stock or any other capital stock of PSS. PSS and its Subsidiaries have no knowledge of any voting agreements or voting trusts between or among any Person or Persons relating to PSS, the PSS Common Stock or any of its Subsidiaries (if not wholly owned by PSS). Except as set forth on Schedule 6.3, PSS is not ------------ obligated to issue or repurchase any shares of its capital stock for any purpose, and no person or entity has entered into any Contract or option or any right or privilege (whether preemptive or contractual) capable of becoming a Contract or option for the purchase, subscription or issuance of any unissued shares, or other securities of PSS. 6.4 PSS Subsidiaries. Schedule 6.4 attached hereto is a true and ---------------- ------------ correct list of each Subsidiary of PSS. All of the outstanding shares of capital stock of each such Subsidiary are duly and validly issued and outstanding, are fully paid and non-assessable, and were issued pursuant to a valid exemption from registration under the 1933 Act, and all applicable state securities laws, and, except as set forth on Schedule 6.4, are owned of record ------------ and beneficially by PSS, free and clear of any and all Liens. No shares of capital stock of any Subsidiary are reserved for issuance and there are no outstanding options, warrants, rights, subscriptions, claims of any character, Contracts, obligations, convertible or exchangeable securities or other commitments, contingent or otherwise, relating to the capital stock of any Subsidiary, pursuant to which any Subsidiary is or may become obligated to issue or exchange any share of capital stock. Neither PSS nor any Subsidiary owns, directly or indirectly, any capital stock or other equity or ownership or proprietary interest in any corporation, partnership, or other entity, except as set forth on Schedule 6.4. ------------ 6.5 PSS Documents. PSS has heretofore furnished the following documents ------------- to S&W: (a) its final Prospectus, dated November 13, 1995, contained in its Registration Statement on Form S-3 (Registration No. 33-97524); (b) its Annual Report on Form 10-K for the fiscal year ended March 28, 1997; and (c) its Proxy Statement dated June 27, 1997. Documents (a) - (c) above are collectively referred to herein as the "PSS Documents." As of their respective dates, the PSS Documents complied in all Material respects with all applicable Laws. Since May 5, 1994, PSS has filed all reports and statements, together with any amendments required to be made with respect thereto, that it was required to file with the SEC, including, but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K, and proxy statements. The PSS Documents did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a Material fact or omit to state a Material fact required to be stated in such PSS Document, in light of the circumstances under which they were made, not misleading. The consolidated financial statements (including, in each case, any related notes) contained in the PSS A-16 Documents, complied as to form in all material respects with the applicable published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by the published rules and regulations of the SEC with respect thereto) and fairly presented the consolidated financial position of PSS and its Subsidiaries, taken as a whole, at the respective dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements do not include notes and are subject to normal year end adjustments which will not, in the aggregate, be Material. There have been no changes in PSS' accounting policies and practices between the dates of the PSS Documents and the date hereof that have had or are likely to have a Material Adverse Effect on the present or future financial performance of PSS, and no such change is contemplated as of the date hereof. 6.6 Absence of Undisclosed Liabilities. Except as disclosed on Schedule ---------------------------------- -------- 6.6, as of the date hereof neither PSS nor any of its Subsidiaries has any --- Undisclosed Liabilities in excess of $1,000,000 in the aggregate, except for unpaid liabilities and obligations incurred since March 28, 1997, in the ordinary course of business and not involving Funded Debt. 6.7 Absence of Certain Changes or Events. Since March 28, 1997, except ------------------------------------ as disclosed on Schedule 6.7, (i) there have been no events, changes or ------------ occurrences which have had, or are reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on PSS or its Subsidiaries taken as a whole, and (ii) neither PSS nor any of its Subsidiaries has taken any action, or failed to take any action, prior to the date of this Agreement, which action or failure, if taken after the date of this Agreement, would represent or result in a Material breach or violation of any of the covenants and agreements of PSS or its Subsidiaries provided in Article 8 of this Agreement. 6.8 Legal Proceedings. There are no outstanding Court Orders or ----------------- administrative decisions to which PSS or any of its Subsidiaries is subject, and there is no Litigation pending or threatened against or relating to PSS or any of its Subsidiaries or their respective assets or businesses, which if resolved adversely to PSS would have a Material Adverse Effect on PSS and its Subsidiaries, taken as a whole. Neither PSS nor any of its Subsidiaries have been advised by any attorney representing any such entity that there are any "loss contingencies" as defined in FASB 5, which would be required by FASB 5 to be disclosed or accrued in the consolidated financial statements of PSS and which are not so disclosed or accrued. 6.9 Brokers and Finders. No broker, agent, finder or consultant or ------------------- other person has been retained by or on behalf of PSS (other than legal or accounting advisors), or is entitled to be paid based upon any agreements or understandings made by PSS in connection with the transactions contemplated hereby. Neither S&W nor PSS shall have any Liability for any broker's fee, finder's fee, consultant's fee or similar third party remuneration by reason of any action of PSS or DI 6.10 Statements True and Correct. No statement, certificate, instrument --------------------------- or other writing furnished or to be furnished by PSS or any Affiliate thereof to S&W pursuant to this Agreement or any other document, agreement or instrument referred to herein contains or will contain any untrue statement of Material fact or will omit to state a Material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the information supplied by or to be supplied by PSS or any Affiliate thereof for inclusion in the Registration Statement to be filed by PSS with the SEC will, when the Registration Statement becomes effective, be false or misleading with respect to any Material fact, or omit to state any Material fact necessary to make the statements therein not misleading. None of the information supplied or to be supplied by PSS or any Affiliate thereof for inclusion in the Proxy Statement-Prospectus to be mailed to S&W's shareholders in connection with the Shareholders' Meeting, and any other documents to be filed by PSS or any Affiliate thereof with the SEC or any other Regulatory Authority in connection with the transactions contemplated hereby, will, at the respective time such documents are filed, and with respect to the Proxy Statement-Prospectus, when first A-17 mailed to the shareholders of S&W, be false or misleading with respect to any Material fact, or omit to state any Material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or in the case of the Proxy Statement-Prospectus or any amendment thereof or supplement thereto, at the time of the Shareholders' Meeting, be false or misleading with respect to any Material fact, or omit to state any Material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for the Shareholders' Meeting. All documents that S&W is responsible for filing with any Regulatory Authority in connection with the transactions contemplated hereby will comply as to form in all Material respects with the provisions of applicable Law. 6.11 Authority of DI DI is a corporation duly organized, validly --------------- existing and in good standing under the Laws of the State of Florida as a wholly owned Subsidiary of PSS. The authorized capital stock of DI consists of 1,000 shares of DI Common Stock, 100 shares of which are validly issued and outstanding, fully paid and nonassessable. DI has the corporate power and authority necessary to execute, deliver and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein, including the Merger, have been duly and validly authorized by all necessary corporate action in respect thereof on the part of DI. This Agreement represents a legal, valid, and binding obligation of DI, enforceable against DI in accordance with its terms. 6.12 Schedules. All Schedules attached hereto are true, correct and --------- complete as of the date of this Agreement. Matters disclosed on each Schedule shall be deemed disclosed only for purposes of the matters to be disclosed on such Schedule and shall not be deemed to be disclosed for any other purpose unless expressly provided therein. ARTICLE VII CONDUCT OF BUSINESS PENDING CONSUMMATION ---------------------------------------- 7.1 Conduct of S&W Business. Except as set forth on Schedule 7.1, prior ----------------------- ------------ to the Closing Date, except with the prior written consent of PSS, and except as necessary to effect the transactions contemplated in this Agreement, S&W shall: (a) conduct its business in substantially the same manner as presently being conducted and refrain from entering into any transaction or Contract other than in the ordinary course of business, and not make any Material change in its methods of management, marketing, accounting, or operations; (b) consult with PSS prior to undertaking any Material new business opportunity outside the ordinary course of business and not undertake such new business opportunity without the prior written consent of PSS, which consent will not be unreasonably withheld; (c) confer on a regular basis with one or more designated representatives of PSS to report Material operational matters and to report the general status of ongoing business operations; (d) notify PSS of any unexpected Material change in the normal course of business or in the operation of its properties, and of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), adjudicatory proceedings or submissions involving any Material property, and S&W agrees to keep PSS fully informed of such events and permit PSS's representatives prompt access to all materials prepared in connection therewith; (e) Except as set forth on Schedule 7.1, not enter into any new ------------ employment Contract or, except in the ordinary course of business, any commitment to employees (including any commitment to pay retirement or other benefits); A-18 (f) not increase the compensation (including fringe benefits) payable or to become payable to any officer, director, employee, agent or independent contractor of either such company, except general hourly rate increases and normal merit increases for employees other than officers made in the ordinary course of business and consistent with past practice; (g) except in the ordinary course of business, not (i) create or incur any indebtedness, (ii) enter into (other than renewals of) or terminate any lease of real estate, or (iii) release or create any Liens of any nature whatsoever; (h) except in the ordinary course of business and, even if in the ordinary course of business, then not in an amount to exceed $50,000 in the aggregate, make or commit to make any capital expenditure, or enter into any lease of capital equipment as lessee or lessor; (i) not sell any Material asset or make any Material commitment relating to its assets other than in the ordinary course of business; (j) not amend the Certificate of Incorporation, Bylaws or other governing instruments of S&W, or (k) not make any changes in its accounting methods or practices, except for changes in its tax accounting methods or practices that may be necessitated by changes in generally accepted accounting principles or applicable tax laws; (l) except for this Agreement and the issuance of 4,009 shares of S&W Common Stock under the S&W Supplemental Executive Retirement Plan simultaneously with the Closing of the Merger, issue, sell, pledge, encumber, authorize the issuance of, enter into any Contract to issue, sell, pledge, encumber, or authorize the issuance of, or otherwise permit to become outstanding, any additional shares of S&W Capital Stock, or any stock appreciation rights, or any option, warrant, conversion, or other right to acquire any such stock, or any security convertible into any such stock, or pay or declare or agree to pay or declare any dividend with respect to any S&W Capital Stock; (m) other than in the ordinary course of business, not take any action, or omit to take any action, which would cause the representations and warranties contained in Article V to be untrue or incorrect; (n) not make any loan to any Person or increase the aggregate amount of any loan currently outstanding to any Person, except for usual and customary advances to employees made in the ordinary course of business; and (o) not make any agreement or commitment which will result in or cause to occur a violation of any of the items contained in paragraphs (a) through (n). 7.2 Conduct of PSS Business. PSS agrees that from the date hereof to ------------------------ the Effective Time, except to the extent that S&W shall otherwise consent by an instrument in writing signed on behalf of S&W by its President: (a) Operation of Business. It will operate its business ---------------------- substantially as presently operated and only in the ordinary course, except that any business acquisition by PSS or the incurrence of additional debt or the issuance or sale of equity securities shall be deemed to be in the ordinary course. (b) No Amendments; Corporate Existence. Except as previously ----------------------------------- disclosed in writing by PSS to S&W, it will not, and it will not permit DI to, amend its Articles of Incorporation or By-Laws; and it will maintain its corporate existence and corporate powers. A-19 7.3 Adverse Changes in Condition. Each Party agrees to give written ---------------------------- notice promptly to the other Party upon becoming aware of the occurrence or impending occurrence of any event or circumstance relating to it or any of its Subsidiaries which (i) is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on it, or (ii) would cause or constitute a Material breach of any of its representations, warranties, or covenants contained herein, and to use its reasonable efforts to prevent or promptly to remedy the same. 7.4 Reports. Each Party and its Subsidiaries shall file all reports ------- required to be filed by it with Regulatory Authorities between the date of this Agreement and the Effective Time and shall deliver to the other Party copies of all such reports promptly after the same are filed. If financial statements are contained in any such reports filed with the SEC, such financial statements will fairly present the consolidated financial position of the entity filing such statements as of the dates indicated and the consolidated results of operations, changes in shareholders' equity, and cash flows for the periods then ended in accordance with GAAP (subject in the case of interim financial statements to normal recurring year-end adjustments that are not Material). As of their respective dates, such reports filed with the SEC will comply in all Material respects with the Securities Laws and will not contain any untrue statement of a Material fact or omit to state a Material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statements contained in any other reports to another Regulatory Authority shall be prepared in accordance with Laws applicable to such reports. ARTICLE VIII ADDITIONAL AGREEMENTS --------------------- 8.1 Contributions to ESOP and Repayment of Indebtedness. Prior to the --------------------------------------------------- Closing Date, in addition to amounts previously accrued and not yet paid, S&W shall contribute an additional amount of approximately $358,000 for the Plan Year ending March 31, 1997 to its Employee Stock Ownership Plan ("ESOP") for the repayment of indebtedness of the ESOP. In addition, prior to the Closing Date, S&W shall make the maximum contribution to the ESOP permitted under Sections 404 and 415 of the Internal Revenue Code for the repayment of indebtedness of the ESOP for the period between April 1, 1997 and March 31, 1998. Immediately prior to the Effective Time, all remaining indebtedness of the ESOP shall be paid. Furthermore, immediately prior to the Effective Time, S&W shall fully repay all remaining indebtedness to Fleet Bank of New York, the proceeds of which were loaned by S&W to the ESOP for the ESOP to acquire stock of S&W. 8.2 Applications; Antitrust Notification. PSS shall promptly prepare ------------------------------------ and file, and S&W shall cooperate in the preparation and, where appropriate, filing of, applications with all Regulatory Authorities having jurisdiction over the transactions contemplated by this Agreement seeking the requisite Consents necessary to consummate the transactions contemplated by this Agreement. Each of the Parties will promptly file with the United States Federal Trade Commission and the United States Department of Justice the notification and report form required for the transactions contemplated hereby and any supplemental or additional information which may reasonably be requested in connection therewith pursuant to the HSR Act and will comply in all Material respects with the requirement of the HSR Act. 8.3 Filings with State Offices. Upon the terms and subject to the -------------------------- conditions of this Agreement, S&W and DI shall execute and file the Articles of Merger with the Secretary of State of the State of Florida and a Certificate of Merger with the Secretary of State of the State of New York in connection with the Closing. 8.4 Agreement as to Efforts to Consummate. Subject to the terms and ------------------------------------- conditions of this Agreement, each Party agrees to use, and to cause its Subsidiaries to use, its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper, or advisable under applicable Laws to consummate and make effective, as soon as practicable after the date of this A-20 Agreement, the transactions contemplated by this Agreement, including using its reasonable best efforts to lift or rescind any Order adversely affecting its legal ability to consummate the transactions contemplated herein and to cause to be satisfied the conditions referred to in Article IX of this Agreement; provided, that nothing herein shall preclude either Party from exercising its rights under this Agreement. Each Party shall use, and shall cause each of its Subsidiaries to use, its reasonable efforts to obtain all Consents necessary or desirable for the consummation of the transactions contemplated by this Agreement. 8.5 Investigation and Confidentiality. --------------------------------- (a) Prior to the Effective Time, each party shall keep the other party advised of all Material developments relevant to its business and to consummation of the Merger. S&W shall provide PSS open and exclusive access to S&W, its records and employees in order for PSS to make or cause to be made such investigation of the business and properties of S&W and its Subsidiaries and of its financial and legal condition as PSS reasonably requests, provided that such investigation shall not interfere unnecessarily with normal operations. No investigation by a Party shall affect the representations and warranties of the other Party. (b) Each Party shall, and shall cause its advisers and agents to, maintain the confidentiality of all confidential information not otherwise in the public domain furnished to it by the other Party concerning its and its Subsidiaries' businesses, operations, customers and financial positions and shall not use such information for any purpose except in furtherance of the transactions contemplated by this Agreement. If this Agreement is terminated prior to the Effective Time, each Party shall promptly return or certify the destruction of all documents and copies thereof, and all work papers containing confidential information received from the other Party. (c) Each Party agrees to give the other Party notice as soon as practicable after any determination by it of any fact or occurrence relating to the other Party which it has discovered through the course of its investigation and which represents, or is reasonably likely to represent, either a Material breach of any representation, warranty, covenant or agreement of the other Party herein or in an agreement or certificate delivered pursuant hereto, or which has had or is reasonably likely to have a Material Adverse Effect on the other Party. 8.6 Press Releases. Prior to the Effective Time, S&W and PSS shall -------------- consult with each other as to the form and substance of any press release or other public disclosure materially related to this Agreement or any other transaction contemplated hereby; provided, that nothing in this Section 8.6 shall be deemed to prohibit any Party from making any disclosure which its counsel deems necessary or advisable in order to satisfy such Party's disclosure obligations imposed by Law. 8.7 No Shopping. Until the termination of this Agreement pursuant to ----------- Article X, except with respect to this Agreement and the transactions contemplated hereby, neither S&W nor any of its Affiliates, nor any Representatives thereof shall directly or indirectly solicit or respond (other than to say that it has entered into a definitive agreement with another party) to any Acquisition Proposal by any Person. None of S&W or any Affiliate or Representative thereof shall furnish any non-public information, negotiate with respect to, or enter into any Contract with respect to, any Acquisition Proposal. S&W shall promptly notify PSS orally and in writing in the event that it receives any inquiry or proposal relating to any such transaction. S&W shall (i) immediately cease and cause to be terminated any existing activities, discussions or negotiations with any Persons conducted heretofore with respect to any of the foregoing, and (ii) direct and use its reasonable best efforts to cause all of its Representatives not to engage in any of the foregoing. 8.8 Accounting and Tax Treatment. Each of the Parties undertakes and ---------------------------- agrees to use its reasonable efforts to cause the Merger, and to take no action which would cause the Merger not, to qualify for pooling-of-interests accounting treatment and treatment as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code for federal income tax purposes. A-21 8.9 Investment Agreement. S&W shall use its reasonable best efforts to -------------------- cause each Person whom it reasonably believes is an "affiliate" of S&W for purposes of Rule 145 under the 1933 Act, as disclosed on Schedule 8.9 hereto, ------------ to deliver to PSS not later than 10 days prior to the Effective Time, a written agreement, substantially in the form of Exhibit 8.9, providing that ----------- such Person will not sell, pledge, transfer, or otherwise dispose of the shares of S&W Common Stock held by such Person except as contemplated by such agreement or by this Agreement and will not sell, pledge, transfer, or otherwise dispose of the shares of PSS Common Stock to be received by such Person upon consummation of the Merger except in compliance with applicable provisions of the 1933 Act and the rules and regulations thereunder and until such time as financial results covering at least 30 days of combined operations of PSS and S&W have been published within the meaning of Section 201.01 of the SEC's Codification of Financial Reporting Policies. If the Merger will qualify for pooling-of-interests accounting treatment, shares of PSS Common Stock issued to such affiliates of S&W in exchange for shares of S&W Common Stock shall not be transferable until such time as financial results covering at least 30 days of combined operations of PSS and S&W have been published within the meaning of Section 201.01 of the SEC's Codification of Financial Reporting Policies, regardless of whether each such person has provided the written agreement referred to in this Section 8.9 (and PSS shall be entitled to place restrictive legends upon certificates for shares of PSS Common Stock issued to affiliates of S&W pursuant to this Agreement to enforce the provisions of this Section 8.9). PSS shall not be required to maintain the effectiveness of the Registration Statement under the 1933 Act for the purposes of resale of PSS Common Stock by such affiliates. 8.10 Conditional Releases. Simultaneously with the execution and delivery -------------------- of this Agreement, each officer and director of S&W has executed and delivered a Conditional Release, in the form of Exhibit 8.10 to this Agreement, to be ------------ effective only if the Effective Time occurs. 8.11 Registration Statement; Proxy Statement; Shareholder Approval. As ------------------------------------------------------------- soon as practicable after execution of this Agreement, PSS shall file the Registration Statement with the SEC, and shall use its commercially reasonable best efforts to cause the Registration Statement to become effective under the 1933 Act and take any action required to be taken under the applicable state Blue Sky or Securities Laws in connection with the issuance of the shares of PSS Common Stock upon consummation of the Merger. The information supplied by PSS and S&W for inclusion in the Registration Statement shall not at the time the Registration Statement is declared effective by the SEC contain any untrue statement of material fact or omit to state any material fact required to be stated in the Registration Statement or necessary in order to make the statements in the Registration Statement, in the light of the circumstances under which they were made, not misleading. S&W shall cooperate with PSS and furnish PSS with all information concerning it and the holders of its capital stock as PSS may reasonably request in connection with such action. S&W shall call a Shareholders' Meeting (or vote by written consent), to be held as soon as practicable after the Registration Statement is declared effective by the SEC, for the purpose of voting upon approval of this Agreement, the appointment of the "Representatives," as such term is defined in the Escrow Agreement, and such other related matters as it deems appropriate. In connection with the Shareholders' Meeting, (i) S&W and PSS shall prepare and file with the SEC a Proxy Statement-Prospectus and mail such Proxy Statement- Prospectus to the shareholders of S&W, (ii) the Parties shall furnish to each other all information concerning them as they may reasonably request in connection with such Proxy Statement-Prospectus, (iii) unless this Agreement is terminated in accordance with its terms, the Board of Directors of S&W shall recommend to its shareholders the approval of this Agreement, and (iv) unless this Agreement is terminated in accordance with its terms, the Board of Directors and officers of S&W shall use its reasonable efforts to obtain such shareholders' approval. 8.12 Repayment of Indebtedness. PSS agrees to repay on the Closing Date ------------------------- notes and bank and long-term debt of S&W in the aggregate amount of approximately $7,000,000, together with accrued interest and such additional principal outstanding through the Closing Date (other than a payment owed by reason of a default or penalty under the loan documents), such final amount subject to the approval and satisfaction of PSS. A-22 8.13 ESOP Termination. As soon as appropriate approvals have been ---------------- received from the Internal Revenue Service, the ESOP shall be terminated and ESOP accounts shall be distributed in accordance with the ESOP and applicable legal requirements and PSS shall adopt all resolutions and take all such actions as are required to properly effect such termination. 8.14 COBRA Requirements. S&W shall, at all times through the Closing ------------------ Date, comply in all Material respects with the applicable requirements for its ERISA Plans as set forth in the Internal Revenue Code and ERISA, including, without limitation, Section 4980B of the Code (as well as its predecessor provision, Section 162(k) of the Code) and Sections 601 through 608, inclusive, of ERISA. Employees of S&W who become employees of PSS or DI shall be entitled to participate in PSS' welfare, qualified retirement and benefit plans on the same terms as PSS' current employees, and such S&W employees shall receive credit for their full periods of service with S&W, and, to the extent allowed by PSS' insurance company, all preexisting condition requirements shall be waived for such employees. S&W maintains a fully insured medical plan ("Medical Plan"). To the extent permitted by the insurance carrier to such Medical Plan and to the extent permitted by law, PSS will continue the Medical Plan through March 31, 1998 for S&W employees, former employees and their dependents, each of whom is covered by the Medical Plan as of the Closing Date. 8.15 Conditions to Closing. S&W and PSS agree to use their commercially --------------------- reasonable efforts to satisfy the closing conditions set forth in Article IX of this Agreement by August 31, 1997, and if not by such time, as soon thereafter as possible. 8.16 Retirement Plan Interests. Simultaneous with the Closing of the ------------------------- Merger, S&W shall issue 4,009 shares of its Common Stock in exchange for full cancellation of all rights of the participants in the S&W Supplemental Executive Retirement Plan, which shares have been represented in the Fully Diluted Common Equivalents. ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE ------------------------------------------------- 9.1 Conditions to Obligations of Each Party. The respective --------------------------------------- obligations of each Party to perform this Agreement and consummate the Merger and the other transactions contemplated hereby are subject to the satisfaction of the following conditions, unless waived by both Parties pursuant to Section 11.6 of this Agreement: (a) Regulatory Approvals. All Consents of, filings and -------------------- registrations with, and notifications to, all Regulatory Authorities required for consummation of the Merger shall have been obtained or made and shall be in full force and effect and all waiting periods required by Law shall have expired. No Consent so obtained which is necessary to consummate the transactions contemplated hereby shall be conditioned or restricted in a manner which in the reasonable judgment of the Board of Directors of PSS or S&W would so materially adversely impact the economic or business benefits of the transactions contemplated by this Agreement so as to render inadvisable the consummation of the Merger. (b) Consents and Approvals. Except as set forth on Schedule 9.1, ---------------------- ------------ each Party shall have obtained any and all Consents required for consummation of the Merger or for the preventing of any Default under any Contract or Permit of such Party which, if not obtained or made, is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on such Party. Except as set forth on Schedule 9.1, no Consent so obtained which is ------------ necessary to consummate the transactions contemplated hereby shall be conditioned or restricted in a manner which in the reasonable judgment of the Board of Directors of PSS would so materially adversely impact the economic or business benefits of the transactions contemplated by this Agreement so as to render inadvisable the consummation of the Merger. A-23 (c) Legal Proceedings. No court or governmental or regulatory ----------------- authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any Law or Order (whether temporary, preliminary or permanent) or taken any other action which prohibits, restricts or makes illegal consummation of the transactions contemplated by this Agreement. (d) Payoff of Long-Term Debt. At the Closing, PSS shall have paid ------------------------ by wire transfer the balance of the outstanding principal and accrued interest as set forth in Section 8.12 hereof. (e) Shareholder Approval. The shareholders of S&W shall have -------------------- approved this Agreement, and the consummation of the transactions contemplated hereby, including the Merger, and the appointment of the "Representatives" as defined in the Escrow Agreement, as and to the extent required by Law or by the provisions of any governing instruments. (f) Registration Statement. The Registration Statement shall be ---------------------- effective under the 1933 Act, no stop orders suspending the effectiveness of the Registration Statement shall have been issued, no action, suit, proceeding or investigation by the SEC to suspend the effectiveness thereof shall have been initiated and be continuing, and all necessary approvals under state securities Laws or the 1933 Act or 1934 Act relating to the issuance or trading of the shares of PSS Common Stock issuable pursuant to the Merger shall have been received. 9.2 Conditions to Obligations of PSS. The obligations of PSS to perform -------------------------------- this Agreement and consummate the Merger and the other transactions contemplated hereby are subject to the satisfaction of the following conditions, unless waived by PSS pursuant to Section 11.6(a) of this Agreement: (a) Representations and Warranties. The representations and ------------------------------ warranties of S&W set forth or referred to in this Agreement shall be true and correct in all Material respects (except that those representations and warranties which are qualified as to materiality shall be true and correct in all respects) as of the date of this Agreement and as of the Effective Time with the same effect as though all such representations and warranties had been made on and as of the Effective Time (provided that representations and warranties which are confined to a specified date shall speak only as of such date). (b) Performance of Agreements and Covenants. Each and all of the --------------------------------------- agreements and covenants of S&W to be performed and complied with pursuant to this Agreement and the other agreements contemplated hereby prior to the Effective Time shall have been duly performed and complied with in all Material respects. (c) Certificates. S&W shall have delivered to PSS (i) a ------------ certificate, dated as of the Effective Time and signed on its behalf by its chief executive officer and its chief financial officer, to the effect that the conditions of its obligations set forth in Section 9.2(a) and 9.2(b) of this Agreement have been satisfied, and (ii) certified copies of resolutions duly adopted by S&W's Board of Directors and shareholders evidencing the taking of all corporate action necessary to authorize the execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, all in such reasonable detail as PSS and its counsel shall request. (d) Investment Agreements. PSS shall have received from each --------------------- shareholder of S&W listed on Schedule 8.9 the investment agreement referred to ---------------------- in Section 8.9 of this Agreement, to the extent necessary to assure in the reasonable judgment of PSS that the transactions contemplated hereby will qualify for pooling-of-interests accounting treatment. (e) Pooling Letters. PSS shall have received a letter, dated as of --------------- the Effective Time, in form and substance reasonably acceptable to PSS, from Arthur Andersen to the effect that the Merger will qualify for pooling-of- interests accounting treatment. PSS and Arthur Andersen also shall have received a letter, dated within two weeks of the date hereof and as of the Effective Time, in form and substance A-24 reasonably acceptable to such Party, from May, Robinson, Gordon & Penta, P.C. to the effect that S&W qualifies for pooling-of-interests accounting treatment. (f) Cold Comfort Letters. PSS shall have received from Arthur -------------------- Andersen LLP letters dated not more than five days prior to (i) the date of the Proxy Statement-Prospectus and (ii) the Effective Time, with respect to certain financial information of PSS contained in or incorporated by reference into the Proxy Statement-Prospectus, in form and substance reasonably satisfactory to PSS, which letters shall be based upon customary specified procedures undertaken by such firm in accordance with Statement of Auditing Standard No. 72. PSS shall have received from May, Robinson, Gordon & Penta, P.C. letters dated not more than five days prior to (i) the date of the Proxy Statement-Prospectus and (ii) the Effective Time, with respect to certain financial information of S&W contained in the Proxy Statement-Prospectus, in form and substance reasonably satisfactory to PSS, which letters shall be based upon customary specified procedures undertaken by such firm in accordance with Statement of Auditing Standards No. 72. (g) Noncompetition Agreements. Joseph E. Miller, Jr., Bruce P. ------------------------- Ashby, George Privatera and Ron Cronin shall have entered into noncompetition agreements in substantially the form of Exhibits 9.2(g)(i), (ii), (iii) and ----------------------------------- (iv), respectively. ---- (h) Retention of Sales Force. At the Effective Time, S&W shall ------------------------ have retained at least eighteen (18) full-time sales persons and seventy (70) full-time service technicians, which persons shall have entered into employment and noncompetition agreements with PSS, in substantially the form of Exhibit 9.2(h) hereto. -------------- (i) Delivery of Documents. S&W shall have delivered all of its --------------------- books and records to PSS including, but not limited to, (i) all corporate and other records of S&W and its Predecessors, including the minute books, stock books, stock transfer registers, books of account, leases and Contracts, deeds and title documents, and Financial Statements; and (ii) such other documents or certificates as shall be reasonably requested by PSS. (j) Resignation of S&W Directors. S&W shall have delivered to PSS ---------------------------- evidence satisfactory to PSS of the resignation of the directors of S&W effective as of the Closing Date. (k) Statements for Services Rendered. S&W shall have received -------------------------------- final statements for all legal, accounting and advisory fees for which it is responsible for payment in connection with the transactions contemplated by this Agreement (through the Closing), together with an acknowledgment by each such legal counsel, accountant or advisor that such statement represents its final bill for all services rendered to S&W through the Closing in connection with the transactions contemplated by this Agreement, and that any statement for follow-up services shall not exceed $2,000. (l) No Material Adverse Change. There shall not have been any --------------------------- Material adverse change in the business, assets, Liabilities, financial condition, or results of operations of S&W and its Subsidiaries, taken as a whole, between March 31, 1997 and the Closing Date, and S&W shall have delivered to PSS a certificate, dated as of the Closing Date, signed by its chief executive officer and chief financial officer certifying to such effect. (m) Consent of Lender. PSS shall have received from NationsBank, ------------------ as agent bank under PSS' senior credit facility, its written consent to the consummation of the Merger and the other transactions contemplated by this Agreement. (n) Escrow Agreement. The Escrow Agreement shall have been ----------------- executed and delivered by S&W and a national bank as the Escrow Agent in substantially the form of Exhibit 4.3 hereto, with the specific escrow items ----------- included in form and substance satisfactory to PSS. A-25 (o) Satisfactory Due Diligence. PSS shall in all aspects be -------------------------- satisfied in its reasonable discretion with its due diligence investigation of S&W, including its continuing review of matters contained or not contained in the schedules. (p) Repayment of Indebtedness. PSS shall have received evidence ------------------------- satisfactory to it of the repayment of all outstanding indebtedness of the ESOP as provided in Section 8.1 hereof. 9.3 Conditions to Obligations of S&W. The obligations of S&W to perform -------------------------------- this Agreement and consummate the Merger and the other transactions contemplated hereby are subject to the satisfaction of the following conditions, unless waived by S&W pursuant to Section 11.6(b) of this Agreement: (a) Representations and Warranties. The representations and ------------------------------ warranties of PSS set forth or referred to in this Agreement shall be true and correct in all Material respects (except that those representations and warranties which are qualified as to materiality shall be true and correct in all respects) as of the date of this Agreement and as of the Effective Time with the same effect as though all such representations and warranties had been made on and as of the Effective Time (provided that representations and warranties which are confined to a specified date shall speak only as of such date). (b) Performance of Agreements and Covenants. Each and all of the --------------------------------------- agreements and covenants of PSS to be performed and complied with pursuant to this Agreement and the other agreements contemplated hereby prior to the Effective Time shall have been duly performed and complied with. (c) Certificates. PSS shall have delivered to S&W (i) a ------------ certificate, dated as of the Effective Time and signed on its behalf by its chief executive officer and its chief financial officer, to the effect that the conditions of its obligations set forth in Section 9.3(a) and 9.3(b) of this Agreement have been satisfied, and (ii) certified copies of resolutions duly adopted by PSS's Board of Directors and DI's Board of Directors and sole shareholder evidencing the taking of all corporate action necessary to authorize the execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, all in such reasonable detail as S&W and its counsel shall request. (d) No Material Adverse Change. There shall not have been any --------------------------- Material adverse change in the business, assets, Liabilities, financial condition, or results of operations of PSS and its Subsidiaries, taken as a whole, between March 31, 1997 and the Closing Date, and PSS shall have delivered to S&W a certificate, dated as of the Closing Date, signed by its chief executive officer and chief financial officer certifying to such effect. (e) Escrow Agreement. The Escrow Agreement shall have been ----------------- executed and delivered by PSS and a national bank as the Escrow Agent in substantially the form of Exhibit 4.3 hereto, with the specific escrow items ----------- included in form and substance satisfactory to S&W. (f) Employment and Noncompetition Agreements. PSS shall have ---------------------------------------- entered into the employment and noncompetition agreements described in Section 9.2(h). PSS and DI shall have agreed to employ all S&W sales representatives and service technicians that become PSS or DI employees, on an at-will basis, under the same compensation, commission and other incentive terms as are currently in effect for such employees through August 31, 1998 and PSS and DI shall have agreed to employ the S&W employees that become PSS and DI employees, including George Privatera and Ron Cronin, on an at-will basis, under the same salary terms as are currently in effect for such employees through August 31, 1998. (g) Noncompetition Agreements. PSS shall have entered into ------------------------- noncompetition agreements with Joseph E. Miller, Jr., Bruce P. Ashby, George Privatera and Ron Cronin in substantially the form of Exhibits 9.2(g)(i), (ii), (iii) and (iv), respectively. A-26 ARTICLE X TERMINATION ----------- 10.1 Termination. Notwithstanding any other provision of this ----------- Agreement, this Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time: (a) By mutual consent of the Board of Directors of PSS and the Board of Directors of S&W; or (b) By the Board of Directors of either Party (provided that the terminating Party is not then in Material breach of any representation, warranty, covenant, or other agreement contained in this Agreement) in the event of a breach by the other Party of any representation or warranty contained in this Agreement which cannot be or has not been cured within 30 days after the giving of written notice to the breaching Party of such breach and which breach is reasonably likely, in the reasonable opinion of the non- breaching Party, to have, individually or in the aggregate, a Material Adverse Effect on the breaching Party; or (c) By the Board of Directors of either Party (provided that the terminating Party is not then in Material breach of any representation, warranty, covenant, or other agreement contained in this Agreement) in the event of a Material breach by the other Party of any covenant or agreement contained in this Agreement which cannot be or has not been cured within 30 days after the giving of written notice to the breaching Party of such breach; or (d) By the Board of Directors of either Party (provided that the terminating Party is not then in Material breach of any representation, warranty, covenant, or other agreement contained in this Agreement) in the event any Consent of any Regulatory Authority required for consummation of the Merger and the other transactions contemplated hereby shall have been denied by final nonappealable action of such authority or if any action taken by such authority is not appealed within the time limit for appeal; or (e) By the Board of Directors of either Party in the event that the Merger shall not have been consummated by October 31, 1997, if the failure to consummate the transactions contemplated hereby on or before such date is not caused by any breach of this Agreement by the Party electing to terminate pursuant to this Section 10.1(e); or (f) By the Board of Directors of either Party in the event that the Merger shall not have been consummated by November 30, 1997; or (g) By the Board of Directors of either Party if any of the conditions precedent to the obligations of such person to consummate the Merger cannot be satisfied or fulfilled, if such failure is not caused by the party electing to terminate; or (h) By the Board of Directors of either Party if the Base Period Trading Price is less than $10.8832 or greater than $16.3248 (in each case, calculated without regard to the Base Period Trading Price Limitations); or (i) By the Board of Directors of PSS if the sum of all adjustments to the Aggregate Purchase Price as set forth in Section 3.1(b) hereof would result in a reduction by more than $200,000, but for the proviso at the end of Section 3.1(b). 10.2 Effect of Termination. In the event of the termination and --------------------- abandonment of this Agreement pursuant to Section 10.1 of this Agreement, this Agreement shall become void and have no effect, except that (i) the provisions of this Section 10.2 and Section 8.5(b) of this Agreement shall survive any such termination and abandonment, and (ii) a termination of this Agreement shall not relieve a A-27 breaching Party from Liability for an uncured willful breach of a representation, warranty, covenant, or agreement giving rise to such termination. 10.3 Non-Survival of Representations and Covenants. The respective --------------------------------------------- representations, warranties, obligations, covenants, and agreements of the Parties shall not survive the Effective Time except Articles 2, 3, 4 and 11 and Sections 8.5(b), 8.8, 8.11, 10.2 and 10.3 this Agreement, and except with respect to the indemnification obligations in the Escrow Agreement. ARTICLE XI MISCELLANEOUS ------------- 11.1 Definitions. ----------- (a) Except as otherwise provided herein, the capitalized terms set forth below shall have the following meanings: "Acquisition Proposal" with respect to a Party shall mean any tender offer or exchange offer or any proposal for a merger, acquisition of all of the stock or assets of, or other business combination involving such Party or any of its Subsidiaries or the acquisition of a substantial equity interest in, or a substantial portion of the assets of, such Party or any of its Subsidiaries. "Affiliate" of a Person shall mean: (i) any other Person directly, or indirectly through one or more intermediaries, controlling, controlled by or under common control with such Person; (ii) any officer, director, partner, employer, or direct or indirect beneficial owner of any 10% or greater equity or voting interest of such Person; or (iii) any other Person for which a Person described in clause (ii) acts in any such capacity. "Agreement" shall mean this Agreement and Plan of Merger, including the Exhibits and Schedules delivered pursuant hereto and incorporated herein by reference. "Articles of Merger" shall mean the Articles of Merger to be executed by DI and S&W and filed with the Secretary of State of the State of Florida relating to the Merger as contemplated by Section 1.3 of this Agreement. "Assets" of a Person shall mean all of the assets, properties, businesses and rights of such Person of every kind, nature, character and description, whether real, personal or mixed, tangible or intangible, accrued or contingent, or otherwise relating to or utilized in such Person's business, directly or indirectly, in whole or in part, whether or not carried on the books and records of such Person, and whether or not owned in the name of such Person or any Affiliate of such Person and wherever located. "Certificate of Merger" shall mean the Certificate of Merger to be executed by DI and S&W and filed with the Secretary of State of the State of New York relating to the Merger as contemplated by Section 1.3 of this Agreement. "Common Stock Per Share Purchase Price" shall mean the quotient obtained by dividing (i) the Aggregate Purchase Price minus the Escrow Dollar Amount by (ii) the Fully Diluted Common Equivalents. "Consent" shall mean any consent, approval, authorization, clearance, exemption, waiver, or similar affirmation by any Person pursuant to any Contract, Law, Order, or Permit. "Contract" shall mean any Material written or oral agreement, arrangement, authorization, commitment, contract, indenture, instrument, lease, obligation, plan, practice, restriction, A-28 understanding or undertaking of any kind or character, or other document to which any Person is a party or that is binding on any Person or its capital stock, Assets or business. "Default" shall mean (i) any breach or violation of or default under any Contract, Order or Permit, (ii) any occurrence of any event that with the passage of time or the giving of notice or both would constitute a breach or violation of or default under any Contract, Order or Permit, or (iii) any occurrence of any event that with or without the passage of time or the giving of notice would give rise to a right to terminate or revoke, change the current terms of, or renegotiate, or to accelerate, increase, or impose any Liability under, any Contract, Order or Permit. "DI Common Stock" shall mean the $0.01 par value common stock of DI. "Environmental Laws" shall mean all Laws relating to pollution or protection of human health or the environment (including ambient air, surface water, ground water, land surface or subsurface strata) and which are administered, interpreted or enforced by the United States Environmental Protection Agency and state and local agencies with jurisdiction over, and including common law in respect of, pollution or protection of the environment, including the Comprehensive Environmental Response Compensation and Liability Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"), and other Laws relating to emissions, discharges, releases or threatened releases of any Hazardous Material, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any Hazardous Material. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Escrow Agreement" shall mean the Escrow Agreement attached to this Agreement as Exhibit 4.3. ----------- "Escrow Shares" shall mean the shares of PSS Common Stock issued pursuant to Section 4.3 hereof. "Exhibits" shall mean the Exhibits so marked, copies of which are attached to this Agreement. Such Exhibits are hereby incorporated by reference herein and made a part hereof, and may be referred to in this Agreement and any other related instrument or document without being attached hereto. "FBCA" shall mean the Florida Business Corporation Act. "Fully Diluted Common Equivalents" shall mean the sum of (i) all issued and outstanding shares of S&W Common Stock, and (ii) all shares of S&W Common Stock issuable upon the exercise of all outstanding S&W options and the conversion of all other convertible securities of S&W and the issuance of all S&W Common Stock issuable pursuant to any other rights or commitments of any nature. "Funded Debt" shall mean any outstanding indebtedness (including leases required to be capitalized under GAAP) of such party or its Subsidiaries, except Funded Debt between such parties, representing borrowing, but excluding trade payables. "GAAP" shall mean generally accepted accounting principles, consistently applied during the periods involved. "Hazardous Material" shall mean any of the following that are regulated under Environmental Laws: (i) any hazardous substance, hazardous material, hazardous waste, regulated A-29 substance or toxic substance (as those terms are defined by any applicable Environmental Laws) and (ii) any chemicals, pollutants, contaminants, petroleum, petroleum products, or oil (and specifically shall include asbestos requiring abatement, removal or encapsulation pursuant to the requirements of Regulatory Authorities and any polychlorinated biphenyls). "HSR Act" shall mean Section 7A of the Clayton Act, as added by Title II of the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "Intellectual Property" shall mean the copyrights, patents, trademarks, service marks, service names, tradenames, applications therefor, technology rights and licenses, computer software (including, without limitation, any source or object codes therefor or documentation relating thereto), trade secrets, franchises, know-how, inventions and other intellectual property rights. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "Law" shall mean any code, law, ordinance, regulation, reporting or licensing requirement, rule, or statute applicable to a Person or its Assets, Liabilities or business, including those promulgated, interpreted or enforced by any Regulatory Authority. "Liability" shall mean any direct or indirect, primary or secondary, liability, indebtedness, obligation, penalty, cost or expense (including costs of investigation, collection and defense), claim, deficiency, guaranty or endorsement of or by any Person (other than endorsements of notes, bills, checks, and drafts presented for collection or deposit in the ordinary course of business) of any type, whether accrued, absolute or contingent, liquidated or unliquidated, matured or unmatured, or otherwise. "Lien" shall mean any conditional sale agreement, default of title, easement, encroachment, encumbrance, hypothecation, infringement, lien, mortgage, pledge, reservation, restriction, security interest, title retention or other security arrangement, or any adverse right or interest, charge, or claim of any nature whatsoever of, on, or with respect to any property or property interest, other than (i) Liens for current property Taxes not yet due and payable and (ii) Liens which are not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on a Party. "Litigation" shall mean any action, arbitration, cause of action, claim, complaint, criminal prosecution, demand letter, governmental or other examination or investigation, hearing, inquiry, administrative or other proceeding, or notice (written or oral) by any Person alleging potential Liability or requesting information relating to or affecting a Party, its business, its Assets (including Contracts related to it), or the transactions contemplated by this Agreement. "Material" for purposes of this Agreement shall be determined in light of the facts and circumstances of the matter in question; provided that any specific monetary amount stated in this Agreement shall determine materiality in that instance. "Material Adverse Effect" on a Party shall mean an event, change or occurrence which, individually or together with any other event, change or occurrence, has a Material adverse impact on (i) the financial position, business, or results of operations of such Party and its Subsidiaries, taken as a whole, or (ii) the ability of such Party to perform its obligations under this Agreement or the transactions contemplated by this Agreement, provided that Material Adverse Effect shall not be deemed to include the impact of (x) changes in Laws of general applicability or interpretations thereof by courts or governmental authorities, (y) changes in generally accepted accounting principles, and (z) the Merger and compliance with the provisions of this Agreement on the operating performance of the Parties or actions taken pursuant to or required by this Agreement. A-30 "NASD" shall mean the National Association of Securities Dealers, Inc. "NYBCL" shall mean the New York Business Corporation Law. "1933 Act" shall mean the Securities Act of 1933, as amended. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. "Order" shall mean any administrative decision or award, decree, injunction, judgment, order, quasi-judicial decision or award, ruling, or writ of any federal, state, local or foreign or other court, arbitrator, mediator, tribunal, administrative agency or Regulatory Authority. "Party" shall mean any of S&W, DI or PSS, and "Parties" shall mean all of S&W, DI and PSS. "Permit" shall mean any federal, state, local, and foreign governmental approval, authorization, certificate, easement, filing, franchise, license, notice, permit, or right to which any Person is a party or that is or may be binding upon or inure to the benefit of any Person or its securities, Assets or business. "Person" shall mean a natural person or any legal, commercial or governmental entity, such as, but not limited to, a corporation, general partnership, joint venture, limited partnership, limited liability company, trust, business association, group acting in concert, or any person acting in a representative capacity. "Predecessor" shall mean any entity acquired by, or substantially all of the assets of which were acquired by, S&W or any entity merged or consolidated with or into S&W. "PSS Capital Stock" shall mean, collectively, the PSS Common Stock, the PSS Preferred Stock and any other class or series of capital stock of PSS. "PSS Common Stock" shall mean the $0.01 par value common stock of PSS. "PSS Preferred Stock" shall mean the $0.01 par value preferred stock of PSS. "Regulatory Authorities" shall mean, collectively, all federal and state regulatory agencies having jurisdiction over the Parties and their respective Subsidiaries, including the NASD, and the SEC. "Representative" shall mean any investment banker, financial advisor, attorney, accountant, consultant, or other representative of a Person. "S&W Common Stock" shall mean the common stock, $.04 par value per share, of S&W. "SEC" shall mean the Securities and Exchange Commission. "Securities Laws" shall mean the 1933 Act, the 1934 Act, the Investment Company Act of 1940, as amended, the Investment Advisers Act of 1940, as amended, the Trust Indenture Act of 1939, as amended, and the rules and regulations of any Regulatory Authority promulgated thereunder. "Subsidiaries" shall mean all those corporations, partnerships, associations, or other entities of which the entity in question owns or controls 50% or more of the outstanding equity securities A-31 either directly or through an unbroken chain of entities as to each of which 50% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, there shall not be included any such entity acquired through foreclosure or any such entity the equity securities of which are owned or controlled in a fiduciary capacity. "Surviving Corporation" shall mean DI as the surviving corporation resulting from the Merger. "Tax" or "Taxes" shall mean any federal, state, county, local, or foreign income, profits, franchise, gross receipts, payroll, sales, employment, use, property, withholding, excise, occupancy, and other taxes, assessments, charges, fares, or impositions, including interest, penalties, and additions imposed thereon or with respect thereto. "Undisclosed Liabilities" shall mean any liability or obligation of a Party to this Agreement, whether accrued, liquidated, unliquidated, absolute, contingent, matured, unmatured or otherwise, as of the Closing Date, that is not fully reflected or reserved against in their respective financial statements or fully disclosed in a Schedule. (b) In addition to the terms defined in Section 11.1(a) above, the terms set forth below shall have the meanings ascribed thereto in the referenced sections: Benefit Plans - Section 5.21 Escrow Dollar Amount - Section 3.4 Capital Expenditures - Section 5.16(c) FASB 5 - Section 5.18 Closing - Section 1.2 Financial Statements - Section 5.5 Closing Date - Section 1.2 Merger - Section 1.1 Effective Time - Section 1.3 Merger Consideration - Section 3.1(b) Environmental Litigation - Section 5.7 Multiemployer Plan - Section 5.21(a) ERISA Plan - Section 5.21(a) PSS Documents - Section 6.5
(c) Any singular term in this Agreement shall be deemed to include the plural, and any plural term the singular. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed followed by the words "without limitation." 11.2 Expenses. PSS shall bear and pay all direct costs and expenses -------- incurred by it or on its behalf in connection with the transactions contemplated hereunder, including filing, registration and application fees, printing fees, and fees and expenses of its own financial or other consultants, investment bankers, accountants (including any audit or investigation pursuant to Section 8.1), and counsel. Upon consummation of the Merger, PSS shall bear and pay reasonable costs and expenses for fees and expenses of S&W's counsel, consultants, financial advisors and accountants, incurred by S&W or on S&W's behalf in connection with the transactions contemplated hereunder in an amount not to exceed $200,000 in the aggregate. 11.3 Brokers and Finders. Each of the Parties represents and warrants ------------------- that neither it nor any of its officers, directors, employees, or Affiliates has employed any broker or finder or incurred any Liability for any financial advisory fees, investment bankers' fees, brokerage fees, commissions, or finders' fees in connection with this Agreement or the transactions contemplated hereby, except for Stephen Cook of Fieldstone Partners, who has been retained by S&W and for whom any unpaid fees shall be paid in accordance with Section 11.2 and, if necessary, Section 3.1(b). In the event of a claim by any broker or finder based upon his or its representing or being retained by or allegedly representing or being retained by S&W or PSS, each of S&W and PSS, as the case may be, agrees to indemnify and hold the other Party harmless of and from any Liability in respect of any such claim. A-32 11.4 Entire Agreement. Except as otherwise expressly provided herein, ---------------- this Agreement (including the documents and instruments referred to herein) constitutes the entire agreement between the Parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereto, written or oral. Nothing in this Agreement, expressed or implied, is intended to confer upon any Person, other than the Parties or their respective successors, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, other than as provided in Section 11.11 of this Agreement. 11.5 Amendments. To the extent permitted by Law, this Agreement may be ---------- amended by a subsequent writing signed by each of the Parties upon the approval of the Boards of Directors of each of the Parties, whether before or after shareholder approval of this Agreement has been obtained; provided, that after any such approval by the holders of S&W Common Stock, there shall be made no amendment that pursuant to the NYBCL requires further approval by such shareholders without the further approval of such shareholders. 11.6 Waivers. ------- (a) Prior to or at the Effective Time, PSS, acting through its Board of Directors, chief executive officer or other authorized officer, shall have the right to waive any Default in the performance of any term of this Agreement by S&W, to waive or extend the time for the compliance or fulfillment by S&W of any and all of its obligations under this Agreement, and to waive any or all of the conditions precedent to the obligations of PSS under this Agreement, except any condition which, if not satisfied, would result in the violation of any Law. No such waiver shall be effective unless in writing signed by a duly authorized officer of PSS. (b) Prior to or at the Effective Time, S&W, acting through its Board of Directors, chief executive officer or other authorized officer, shall have the right to waive any Default in the performance of any term of this Agreement by PSS, to waive or extend the time for the compliance or fulfillment by PSS of any and all of its obligations under this Agreement, and to waive any or all of the conditions precedent to the obligations of S&W under this Agreement, except any condition which, if not satisfied, would result in the violation of any Law. No such waiver shall be effective unless in writing signed by a duly authorized officer of S&W. (c) The failure of any Party at any time or times to require performance of any provision hereof shall in no manner affect the right of such Party at a later time to enforce the same or any other provision of this Agreement. No waiver of any condition or of the breach of any term contained in this Agreement in one or more instances shall be deemed to be or construed as a further or continuing waiver of such condition or breach or a waiver of any other condition or of the breach of any other term of this Agreement. 11.7 Assignment. Except as expressly contemplated hereby, neither this ---------- Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any Party hereto (whether by operation of Law or otherwise) without the prior written consent of the other Party. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the Parties and their respective successors and assigns. 11.8 Notices. All notices or other communications which are required ------- or permitted hereunder shall be in writing and sufficient if delivered by hand, by facsimile transmission, by registered or certified mail, postage pre- paid, or by courier or overnight carrier, to the persons at the addresses set forth below (or at such other address as may be provided hereunder), and shall be deemed to have been delivered as of the date so delivered: A-33 S&W: S&W X-Ray, Inc. Cornerstone Center 2300 Buffalo Road Rochester, NY 14824 Attention: Mr. Joseph E. Miller, Jr. Copy to Counsel: Kilpatrick Stockton LLP 1100 Peachtree Street, Suite 2800 Atlanta, Georgia 30309-4530 Telecopy Number: (404) 815-6555 Attention: Jerome F. Connell, Jr., Esq. PSS or DI: c/o Physician Sales & Service, Inc. 4345 Southpoint Boulevard Jacksonville, Florida 32216 Telecopy Number: (904) 332-3000 Attention: Mr. David A. Smith Copy to Counsel: Alston & Bird One Atlantic Center 1201 W. Peachtree Street Atlanta, Georgia 30309 Telecopy Number: (404) 881-7777 Attention: J. Vaughan Curtis, Esq. 11.9 Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the Laws of the State of Florida. 11.10 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 11.11 Captions. The captions contained in this Agreement are for -------- reference purposes only and are not part of this Agreement. 11.12 Enforcement of Agreement. The Parties hereto agree that ------------------------ irreparable damage would occur in the event that any of the provisions of this Agreement was not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the Parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 11.13 Severability. Any term or provision of this Agreement which is ------------ invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 11.14 Further Assurances. Each Party covenants that at any time, and ------------------ from time to time, after the Closing Date, without additional consideration, it will execute such additional instruments and take such actions as may be reasonably requested by the other Parties to confirm or perfect or otherwise to carry out the intent and purposes of this Agreement. A-34 IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed on its behalf and its corporate seal to be hereunto affixed and attested by officers thereunto on the day and year first above written. ATTEST: S&W X-RAY, INC. By: /s/ Joseph E. Miller, Jr. ----------------------- ------------------------------ Secretary President [CORPORATE SEAL] ATTEST: PHYSICIAN SALES & SERVICE, INC. By: /s/ David A. Smith ----------------------- ------------------------------ Title: Title: Executive Vice President and ---------------- Chief Financial Officer [CORPORATE SEAL] ATTEST: DIAGNOSTIC IMAGING, INC. By: /s/ Rutherford C. Deas ----------------------- ------------------------------ Title: Title: Vice President Business Development ---------------- [CORPORATE SEAL] A-35 ANNEX B ESCROW AGREEMENT ---------------- THIS ESCROW AGREEMENT (this "Agreement") is made and entered into this ____ day of __________, 1997, by and among Physician Sales & Service, Inc., a Florida corporation ("PSS"), The Bank of New York, as the escrow agent (the "Escrow Agent"), and Joseph E. Miller, Jr., Bruce P. Ashby and The S&W X-Ray, Inc. Employee Stock Ownership Trust as representatives (the "Representatives") appointed by the shareholders ("Shareholders") of S&W X- Ray, Inc., a New York corporation ("S&W"). W I T N E S E T H : - - - - - - - - - DI ("DI") is a wholly owned subsidiary of PSS and each is a party to an Agreement and Plan of Merger with S&W, dated of even date herewith (the "Merger Agreement"), pursuant to which S&W has on this date merged (the "Merger") with and into DI with DI surviving the merger and remaining a wholly owned subsidiary of PSS. Under the Merger Agreement, the Shareholders received contingent rights to receive, in the aggregate, shares of common stock of PSS ("PSS Common Stock") as provided in Section 3.1(b) of the Merger Agreement. In accordance with the Merger Agreement, the PSS Common Stock issuable pursuant to the contingent rights of Shareholders has been issued and will be held by the Escrow Agent pursuant to the terms of this Agreement until termination of this Agreement as provided herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE 1 ESTABLISHMENT OF ESCROW ----------------------- On this date, PSS has executed a stock certificate in negotiable form representing the Escrow Shares and naming the Escrow Agent as the registered holder for the benefit of the Shareholders. Schedule 1 to this Agreement ---------- shows for each Shareholder (i) the respective percentage interest (the "Percentage Interest") of each such Shareholder in the General Escrow Shares and the Specific Escrow Shares, and (ii) the corresponding aggregate maximum number of shares of PSS Common Stock issuable to each Shareholder, subject to the adjustments provided herein. The Escrow Agent shall hold the Escrow Shares on behalf of, and as a convenience to PSS and the Shareholders with the same force and effect as if such shares had been delivered by PSS to each Shareholder and subsequently delivered by such Shareholder to the Escrow Agent. The Escrow Agent shall hold the Escrow Shares, together with any and all future cash dividends or cash income with respect to the Escrow Shares (as provided in Section 5.1 hereof) ("Cash"), for the benefit of PSS, DI and the Shareholders, as the case may be, pursuant to the terms of this Agreement. Cash shall be held by the Escrow Agent in the Nations Fund - Treasury Portfolio, a prospectus of which is hereby acknowledged and received by PSS and the Representatives. PSS and the Representatives acknowledge that Escrow Agent may receive a reasonable fee from the manager of its money market fund for acting as sub-administrator. Any income or interest realized from the investments made by the Escrow Agent pursuant hereto shall be included in Cash and paid in accordance with this Agreement. ARTICLE 2 INDEMNIFICATION --------------- 2.1 Definitions. As used in this Agreement, the following terms shall ----------- have the following meanings: B-1 (a) "Accounts Receivable Claim" shall mean any Loss in excess of ------------------------- $180,000 incurred by reason of the failure of PSS or DI to receive cash or checks by __________, 1998 in payment of the accounts receivable of S&W outstanding as of the Closing Date. (b) "Closing Date" shall mean the date of the closing of the ------------ transactions contemplated by the Merger, which shall be the date on which the Effective Time occurs. (c) "Effective Time" shall mean the time that the Articles of Merger -------------- reflecting the Merger becomes effective with the Secretary of State of the States of New York and Florida. (d) "Disputed Loss Notice" shall mean a Loss Notice that is disputed by -------------------- the Representatives by delivery of a Protest Notice. (e) "Escrow Agent Expenses" shall mean one-half of the expenses of the --------------------- Escrow Agent which the Representatives is obligated to bear under Section 6.4 hereof, in an amount up to $5,000, incurred in connection with the obligations of the Escrow Agent under this Agreement. (f) "Escrow Shares" shall mean the General Escrow Shares and the ------------- Specific Escrow Shares. (g) "General Escrow Shares" shall mean _________ shares of PSS Common --------------------- Stock issued and placed in Escrow. (h) "Indemnifiable Loss" shall mean any Loss for which an Indemnitee ------------------ may be indemnified pursuant to Section 2.2 or 2.3 hereof. (i) "Indemnitee" shall mean a party entitled to indemnification under ---------- Section 2.2 hereof. (j) "Loss" shall mean any direct or indirect demand, claim, payment or ---- failure to receive payment, obligation, action or cause of action, assessment, loss, liability, cost or expense, including without limitation, penalties, interest on any amount payable to a third party as a result of the foregoing, and any legal or other expense reasonably incurred in connection with investigating or defending any claim or action, whether or not resulting in any liability. (k) "Loss Notice" shall mean a written notice, as prescribed in Section ----------- 2.4 hereof, provided by an Indemnitee to the Escrow Agent and the Representatives setting forth in reasonable detail the nature and amount of an Indemnifiable Loss or potential Indemnifiable Loss and the number of Escrow Shares sought to be canceled in respect of such Indemnifiable Loss. (l) "Representative Expenses" shall mean expenses of the ----------------------- Representatives, in an amount up to $10,000, incurred in connection with their obligations under this Agreement. (m) "Protest Notice" shall mean a written notice, as prescribed in -------------- Section 2.4 hereof, provided by the Representatives to an Indemnitee if he disputes any Loss Notice received from an Indemnitee. (n) "Shareholders" shall mean the former holders of the issued and ------------ outstanding shares of capital stock of S&W. (o) "Specific Escrow Shares" shall mean _________ shares of PSS Common ---------------------- Stock issued and placed in Escrow in respect of the Accounts Receivable Claim, the Representative Expenses, and the Escrow Agent Expenses. (p) "Value Per Share" shall mean $___________. --------------- B-2 2.2 General Indemnity by Representatives. The Representatives, as the ------------------------------------ representatives of the Shareholders, shall, to the fullest extent permitted by law, indemnify, defend, and hold harmless PSS, DI and S&W (an "Indemnitee") from and against any Loss suffered or incurred by such Indemnitee, as and when due, which arises out of or results from a breach of any of the representations, warranties or covenants (except to the extent such covenants are waived by PSS) and agreements of S&W set forth in the Merger Agreement or in any document or agreement made or executed by S&W pursuant to the Merger Agreement. The disclosure provided on Schedule -------- 5.21.2 to the Merger Agreement is for information purposes only and shall ------ not impair or otherwise affect the ability of an Indemnitee to recover for any Loss related to such disclosure under the terms hereof. 2.3 Specific Indemnity by Representative. In addition to the ------------------------------------- indemnification obligations in Section 2.2 above, the Representatives, as the representatives of the Shareholders, shall, to the fullest extent permitted by law, indemnify, defend, and hold harmless the Indemnitees from and against any Loss suffered or incurred by such Indemnitee, as and when due, which arises out of or results from an Accounts Receivable Claim, any Representative Expenses and the Escrow Agent Expenses paid by an Indemnitee. 2.4 Notice of Claim. If an Indemnitee incurs an Indemnifiable Loss, or --------------- should an Indemnitee negotiate a proposed settlement in satisfaction of a potential Indemnifiable Loss, it shall promptly provide a Loss Notice to the Representatives and the Escrow Agent. If the Representatives disputes the amount sought under any such Loss Notice or otherwise disputes the right of the Indemnitee to be indemnified hereunder, he shall provide the Indemnitee and the Escrow Agent a Protest Notice within thirty (30) days of the date any such Loss Notice is received by the Representative. If no Protest Notice is received by the Indemnitee and the Escrow Agent within thirty (30) days from the date on which any Loss Notice is received by the Representatives, or if a Protest Notice is received and the dispute is resolved in favor of the Indemnitee after following the procedures set forth below, then the Escrow Agent shall cause to be delivered to PSS and PSS shall promptly cancel and retire that number of Escrow Shares as shall equal the number of Escrow Shares (rounded to the next highest whole number) that, when multiplied by the Value Per Share, equals the amount sought by or awarded to the Indemnitee. To the extent that Cash is held in escrow, and at the option of the Indemnitee, the Escrow Agent shall pay any Indemnifiable Loss, in whole or in part, with such Cash. In its Loss Notice, PSS shall set forth for the Escrow Agent (i) the number of Escrow Shares, and/or (ii) the amount of Cash, if any, to be delivered to the Indemnitee in accordance with this paragraph. If the Indemnitee and the Escrow Agent receive a Protest Notice within such 30-day period, the Escrow Agent shall not deliver any Escrow Shares until receipt by it of written instructions (i) signed by a majority of the Representatives and a duly authorized officer of the Indemnitee; or (ii) signed by an arbitration panel that has considered and resolved such dispute as provided in Section 2.5 below, which sets forth (i) the number of Escrow Shares, and/or (ii) the amount of Cash, if any, to be delivered to the Indemnitee in accordance with this paragraph. After delivery of any Escrow Shares to the Indemnitee in accordance with this paragraph, the Escrow Agent shall be reissued a certificate in respect of any remaining Escrow Shares. 2.5 Procedure With Respect to Disputed Indemnifiable Loss. A Disputed ----------------------------------------------------- Loss Notice may be resolved by the agreement of a majority of the Representatives and the Indemnitee, in which case written notice of such agreement shall be promptly provided to the Escrow Agent, together with a statement of the agreed upon amount to be reimbursed to the Indemnitee. If a majority of the Representatives and the Indemnitee are unable to resolve a Disputed Loss Notice, then such Disputed Loss Notice shall be submitted to arbitration in accordance with the then-current commercial arbitration rules of the American Arbitration Association. If a Disputed Loss Notice is to be arbitrated, a majority of the Representatives shall select one arbitrator, the Indemnitee shall select one arbitrator, and the two arbitrators so chosen shall select a third. Any decision of the arbitration panel shall require the vote of at least two (2) of such arbitrators and shall be deemed conclusive and each party shall be deemed to have waived any rights to appeal therefrom. Any resolution of a Disputed Loss Notice, whether by agreement of the parties or by arbitration, must be made within sixty (60) days of the date of the Protest Notice in regard to which the dispute relates. That percentage of the reasonable legal and other expenses incurred by the Indemnitee in the arbitration proceeding as equals the percentage of the claim sought which is actually awarded, shall be B-3 added to the amount of the Indemnifiable Loss. If resolution of a Disputed Loss Notice is not made within sixty (60) days of the date of the Protest Notice as provided in this Section 2.5, then the Escrow Agent may, in its sole discretion, either (i) continue to hold the Escrow Shares undisbursed until such time as the disputing parties agree in writing as to a proper disposition of such Escrow Shares, or (ii) if such agreement is not forthcoming, the Escrow Agent shall be entitled to tender into the registry or custody of any court of competent jurisdiction all money or property in its hand under the terms of this Agreement, and, upon the advice of counsel, may take such other legal action as may be appropriate or necessary, whereupon the parties hereto agree Escrow Agent shall be discharged from all further duties under this Agreement. The filing of any such legal proceedings shall not deprive Escrow Agent of its compensation earned prior to such filing. 2.6 Employment of Counsel. The Representatives may control the defense --------------------- of any third party claim with respect to which an Indemnifiable Loss has been asserted. Notwithstanding the foregoing, if the aggregate amount of all such third party and general indemnity claims plus the aggregate good faith estimates of the reasonable expenses to defend such claims exceed the number of Escrow Shares multiplied by the Value Per Share, the Indemnitees may control the defense of all such third party and general indemnity claims which have been brought under this Agreement, provided that the Indemnitees may not settle a third party claim without the approval of a majority of the Representatives, which approval shall not be unreasonably withheld. When the Indemnitee is in control of the defense of such a claim, the Representatives may, at their expense, and when the Representatives are in control of the defense of a claim, the Indemnitee may, at its expense (which expenses shall not be treated as a Loss hereunder), participate in the defense of any litigation or claim. The Representatives shall control the matters relating to any Accounts Receivable Claim and the Representative Expenses. 2.7 Exclusive Remedy. If an Indemnitee incurs an Indemnifiable Loss, ---------------- the sole and exclusive means of recovery shall be as set forth in this Agreement and the escrow established hereunder. Any claim pursuant to Section 2.2 or 2.3 hereof may be satisfied from either or both of the General Escrow Shares or Specific Escrow Shares, whichever is available. Neither the Representatives nor the Shareholders have any obligation or liability to an Indemnitee beyond the several interest of such Shareholders in the Escrow Shares. Each Indemnitee agrees that if it incurs any Indemnifiable Loss it will not sue or seek recourse against the Representatives or the Shareholders, or any of them, other than as provided in this Agreement. ARTICLE 3 TERM; EXPIRATION; LIMITS ------------------------ 3.1 Term - General Indemnity. With respect to the indemnification ------------------------ obligations set forth in Section 2.2 hereof, the term of escrow for the General Escrow Shares shall commence on the Closing Date of the Merger and shall terminate upon the occurrence of (i) the first publication by PSS of audited consolidated financial statements covering an accounting period after the Closing Date for those items that would be expected to be encountered in the audit process or (ii) one (1) year after the Closing Date for all other items. PSS and the Representatives shall provide written notice to the Escrow Agent upon expiration of the escrow for the General Escrow Shares. 3.2 Term - Specific Indemnity. With respect to the indemnification -------------------------- obligations set forth in Section 2.3 hereof, the term of escrow for the Specific Escrow Shares shall commence on the Closing Date of the Merger and shall terminate with respect to each type of claim indemnified under Section 2.3 hereof upon a final determination that S&W can incur no Indemnifiable Loss for an Accounts Receivable Claim, Escrow Agent Expenses or Representative Expenses, as the case may be. PSS and the Representatives shall provide written notice to the Escrow Agent upon expiration of the escrow for the Specific Escrow Shares. Notwithstanding the foregoing, with respect to the Specific Escrow Shares related to the Accounts Receivable Claim, the Representatives may elect on one occasion between six months following the Closing Date and the expiration of the term for the Accounts Receivable Claim, to end such term and to have delivered to the shareholders the Specific Escrow Shares related to such Accounts Receivable B-4 Claim less that portion required to satisfy any Indemnifiable Loss related to the Accounts Receivable Claim. 3.3 Expiration of Term - No Claim Pending. If at the expiration of an ------------------------------------- escrow term provided in Section 3.1 or 3.2 above, either (i) no Loss Notice has been received with respect to an Indemnifiable Loss covered by the escrow which term is expiring; or (ii) any Loss Notice that has been received has been resolved in accordance with this Agreement; or (iii) no litigation or claim is pending for which an Indemnitee may be entitled to indemnification hereunder, the Escrow Agent shall (i) deliver to the transfer agent for PSS Common Stock for issuance to each Shareholder, a certificate representing the number of shares of PSS Common Stock equal to the aggregate number of the Escrow Shares subject to the escrow which term is expiring and then remaining in escrow times the Percentage Interest for such Shareholder, and (ii) deliver to each Shareholder, any Cash times the Percentage Interest for such Shareholder. The Representatives and PSS shall provide written notice to the Escrow Agent which sets forth the number of Escrow Shares to be delivered as provided in the foregoing sentence. Any such delivery of PSS Common Stock shall be of full shares and any fractional portions shall be rounded to a whole number by the Escrow Agent so that the number of shares remaining in escrow to be delivered will be fully allocated among such Shareholders. 3.4 Expiration of Term - Claim Pending. If at the expiration of an ---------------------------------- escrow term provided in Section 3.1 or 3.2 above, any claim is pending under Section 2.2 or Section 2.3 for which an Indemnitee would be entitled to indemnification if such claim were resolved adversely to them, then the Escrow Agent shall retain in such escrow that number of shares of PSS Common Stock as shall equal the number of Escrow Shares (rounded to the next highest whole number) that, when multiplied by the Value Per Share, equals the amount set forth by such Indemnitee in the Loss Notice with respect to such claims (the "Retained Shares"). The Representatives and PSS shall provide written notice to the Escrow Agent which sets forth the Retained Shares as determined in the foregoing sentence. The number of Escrow Shares, less the number of Retained Shares, shall then be distributed to the Shareholders as set forth in Section 3.3 above. Upon the resolution of any claim for which shares were retained in escrow at the expiration of the term of this Agreement and receipt of written notice from PSS and the Representatives to such effect, the Escrow Agent shall cancel the appropriate number of Retained Shares (if any) and shall distribute any remaining Retained Shares to the Shareholders as set forth in Section 3.3 above. 3.5 Effect of Final Delivery. Notwithstanding the expiration of the ------------------------ term of the escrow, this Agreement shall continue in full force and effect until the Escrow Agent has delivered all of the Escrow Shares pursuant to the terms hereof. After all of such shares have been so delivered, all rights, duties and obligations of the respective parties hereunder shall terminate. If any cash is held in escrow at the expiration of the term of the escrow, such cash shall be distributed pro rata with the Escrow Shares as provided in Sections 3.3 and 3.4 above. ARTICLE 4 ESCROW STOCK CERTIFICATES ------------------------- The Escrow Agent may at any time request the transfer agent for PSS Common Stock to issue new certificates representing the Escrow Shares in such denominations as may be necessary or appropriate in carrying out the Escrow Agent's obligations under this Agreement. ARTICLE 5 DIVIDENDS; VOTING RIGHTS ------------------------ 5.1 Cash Dividends; Voting Rights. Any and all cash dividends or other ----------------------------- cash income with respect to the Escrow Shares shall be held in escrow with the Escrow Shares pursuant to the terms of this Agreement. By written notice signed by the Representatives, the Representatives shall have the right to direct the Escrow Agent as to the exercise of voting rights with respect to such Escrow Shares held by the B-5 Escrow Agent on behalf of the Shareholders, and the Escrow Agent shall comply with such directions if received from the Representatives at least five (5) days prior to the date of the meeting at which such vote is to be taken. 5.2 Stock Splits; Stock Dividends. In the event of any stock split, ----------------------------- stock dividend, recapitalization or similar transaction with respect to PSS Common Stock that becomes effective during the term of this Agreement, the additional shares so issued with respect to the Escrow Shares shall be added to the Escrow Shares and any other references herein to a specific number of shares of PSS Common Stock and the Value Per Share shall be adjusted accordingly. ARTICLE 6 THE ESCROW AGENT ---------------- 6.1 Liability. In performing any of its duties under this Agreement, or --------- upon the claimed failure to perform its duties hereunder, Escrow Agent shall not be liable to anyone for any damages, losses or expenses which they may incur as a result of the Escrow Agent so acting, or failing to act; provided, however, that Escrow Agent shall be liable for damages arising out of its willful default or gross negligence under this Agreement. Accordingly, the Escrow Agent shall not incur any such liability with respect to (i) any action taken or omitted to be taken in good faith upon advice of its counsel or counsel for PSS or the Representatives given with respect to any questions relating to the duties and responsibilities of the Escrow Agent hereunder; or (ii) any action taken or omitted to be taken in reliance upon any document, including any written notice or instructions provided for in this Agreement, not only as to its due execution and to the validity and effectiveness of its provisions, but also as to the truth and accuracy of any information contained therein, which the Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by the purported proper person or persons and to conform with the provisions of this Agreement. Written instructions provided to Escrow Agent hereunder by PSS and/or the Representatives shall be signed by an "Authorized Representative" of PSS as identified on Schedule 2 attached hereto and a ---------- majority of the Representatives. The limitation of liability provisions of this Section 6.1 shall survive the termination of this Agreement and the resignation or removal of the Escrow Agent. 6.2 Indemnification of Escrow Agent. PSS and the Representatives (on ------------------------------- behalf of the Shareholders, but not personally) hereby, jointly and severally, agrees to indemnify and hold harmless the Escrow Agent against any and all losses, claims, damages, liabilities and expenses, including, without limitation, reasonable costs of investigation and counsel fees and disbursements (both at the trial and appellate levels) which may be imposed on Escrow Agent or incurred by it in connection with its acceptance of this appointment as Escrow Agent hereunder or the performance of its duties hereunder (except in connection with the willful default or gross negligence of the Escrow Agent hereunder), including, without limitation, any litigation arising from this Escrow Agreement, or involving the subject matter thereof. The indemnity provisions of this Section 6.2 shall survive the termination of this Agreement and the resignation or removal of the Escrow Agent. 6.3 Resignation. The Escrow Agent may resign at any time from its ----------- obligations under this Agreement by providing written notice to the parties hereto. Such resignation shall be effective not later than sixty (60) days after such written notice has been given. The Escrow Agent shall have no responsibility for the appointment of a successor escrow agent. If a successor escrow agent is not selected within sixty (60) days of the resignation of Escrow Agent, the Escrow Agent shall have the right to institute a Bill of Interpleader or other appropriate judicial proceeding in any court of competent jurisdiction, and shall be entitled to tender into the registry or custody of any court of competent jurisdiction all money or property in its hand under the terms of this Agreement, whereupon the parties hereto agree Escrow Agent shall be discharged from all further duties under this Agreement. The filing of any such legal proceedings shall not deprive Escrow Agent of its compensation earned prior to such filing. The Escrow Agent may be removed for cause by PSS or the Representatives. The removal of the Escrow Agent shall not deprive the Escrow Agent of its compensation earned prior to such removal. B-6 6.4 Expenses of Escrow Agent. The Representatives (on behalf of the ------------------------ Shareholders and out of the Escrow Shares, but not personally) and PSS shall share equally the expenses of the Escrow Agent in an amount up to $5,000 each, and thereafter any remaining expenses of the Escrow Agent shall be borne by PSS. Escrow Agent's fees and expenses are set forth on Schedule 3 ---------- attached hereto and made a part hereof and Escrow Agent shall bill PSS for the amount of such fees and expenses. PSS shall pay the amount of its fees and expenses to Escrow Agent, and the Escrow Agent Expenses. The Escrow Agent Expenses shall constitute an Indemnifiable Loss pursuant to Section 2.3 hereof. As security for such Escrow Agent Expenses, Escrow Agent is hereby given a lien upon all assets held by Escrow Agent hereunder, which lien shall be prior to all other liens or claims against such assets. ARTICLE 7 REPRESENTATIVES --------------- 7.1 Power and Authority. The Representatives shall have full power and ------------------- authority to represent the Shareholders and their successors with respect to all matters arising under this Agreement, and all action taken by the Representatives hereunder shall be binding upon such Shareholders and their successors as if expressly ratified and confirmed in writing by each of them. Without limiting the generality of the foregoing, the Representatives shall have full power and authority, on behalf of all the Shareholders and their successors, to interpret all the terms and provisions of this Agreement, to dispute or fail to dispute any claim of Indemnifiable Loss against the Escrow Shares made by an Indemnitee, to negotiate and compromise any dispute which may arise under this Agreement, to sign any releases or other documents with respect to any such dispute, and to authorize payments to be made with respect thereto. Any action or notice hereunder may be taken or given by a majority of the Representatives. 7.2 Resignation; Successors. A Representative, or any successor ----------------------- hereafter appointed, may resign and shall be discharged of his duties hereunder upon the appointment of a successor Representative as hereinafter provided. In case of such resignation, or in the event of the death or inability to act of a Representative, a successor shall be named from among the Shareholders by a majority of the members of the Board of Directors of S&W who served on such board prior to the Merger. Each such successor Representative shall have all the power, authority, rights and privileges hereby conferred upon the original Representative, and the term "Representative" as used herein shall be deemed to include such successor Representative. 7.3 Liability. In performing any of his duties under this Agreement, or --------- upon the claimed failure to perform his duties hereunder, the Representatives shall not be liable to the Shareholders or anyone else for any damages, losses or expenses which they may incur as a result of any act, or failure to act under this Agreement; provided, however, that the Representatives shall be liable for damages arising out of actions or omissions that both (i) were taken or omitted not in good faith and (ii) constituted willful default or gross negligence under this Agreement. Accordingly, the Representatives shall not incur any such liability with respect to (i) any action taken or omitted to be taken in good faith upon advice of his counsel given with respect to any questions relating to the duties and responsibilities of the Representatives hereunder; or (ii) any action taken or omitted to be taken in reliance upon any document, including any written notice or instructions provided for in this Agreement, not only as to its due execution and to the validity and effectiveness of its provisions, but also as to the truth and accuracy of any information contained therein, which the Representatives shall in good faith believe to be genuine, to have been signed or presented by the purported proper person or persons and to conform with the provisions of this Agreement. The limitation of liability provisions of this Section 7.3 shall survive the termination of this Agreement and the resignation of any or all of the Representatives. 7.4 Representative Expenses. PSS shall pay any Representative Expenses ----------------------- in amount up to $10,000, which amounts shall constitute an Indemnifiable Loss pursuant to Section 2.3 hereof. Any expenses of the Representatives in excess of $10,000 shall be the borne by the Representatives and the Shareholders as agreed to among themselves. B-7 ARTICLE 8 MISCELLANEOUS ------------- 8.1 Transferability. The contingent right to receive Escrow Shares --------------- shall not be transferable by the Shareholders otherwise than by will or by the laws of descent and distribution. 8.2 Notices. Each party shall keep each of the other parties hereto ------- advised in writing of all transactions pursuant to this Agreement. Any notices or other communications required or permitted under this Agreement shall be in writing and shall be sufficiently given if sent by registered or certified mail, postage prepaid, addressed as follows, or if sent by facsimile to the facsimile numbers identified below: If to PSS or DI: Physician Sales & Service, Inc. 4345 Southpoint Boulevard Jacksonville, Florida 32216 Attn: Mr. David A. Smith Tel: (904) 332-3000 Facsimile: (904) 332-3210 with a copy to: Alston & Bird One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 Attn: J. Vaughan Curtis, Esq. Tel: (404) 881-7397 Facsimile: (404) 881-7777 If to Representatives: c/o Joseph E. Miller, Jr. ---------------------------------- ---------------------------------- Tel: ------------------------------ Fax: ------------------------------ With a copy to: ---------------------------------- ---------------------------------- ---------------------------------- Tel: ------------------------------ Fax: ------------------------------ B-8 If to Escrow Agent: The Bank of New York Corporate Trust Department 101 Barclay Street, 12E New York, New York 10286 Attn: Thomas Hacker Tel: (212) 815-7182 Fax: (212) 815-7181 or such other person or address as shall be furnished in writing by any of the parties and any such notice or communication shall be deemed to have been given as of the date so mailed. 8.3 Construction. The validity, enforcement and construction of this ------------ Agreement shall be governed by the laws of the State of Florida, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 8.4 Binding Effect. This Agreement shall be binding upon and inure to -------------- the benefit of the parties hereto and their respective heirs, legatees, assigns and transferees, as the case may be. Escrow Agent shall be bound only by the terms of this Agreement and shall not be bound by or incur liability with respect to the Merger Agreement or any other agreement or understanding between PSS and the Shareholders. The Escrow Agent shall not be charged with notice or knowledge of any such ancillary document, fact or information not specifically set forth herein. The Escrow Agent shall undertake to perform only such duties as are expressly set forth herein and no additional or implied duties or obligations shall be read into this Agreement against the Escrow Agent. 8.5 Separability. If any provision or section of this Agreement is ------------ determined to be void or otherwise unenforceable, it shall not affect the validity or enforceability of any other provisions of this Agreement which shall remain enforceable in accordance with their terms. 8.6 Headings. The headings and subheadings contained in this Agreement -------- are for reference only and for the benefit of the parties and shall not be considered in the interpretation or construction of this Agreement. 8.7 Execution in Counterparts. This Agreement may be executed in any ------------------------- number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 8.8 Amendments. This Agreement may be amended from time to time but ---------- only by written agreement signed by all of the parties hereto. 8.9 Third-Party Beneficiaries. S&W, DI and the former shareholders of ------------------------- S&W are expressly intended to be third-party beneficiaries of the indemnities and obligations of the Representatives as if they were parties to this Agreement. B-9 IN WITNESS WHEREOF, the parties have executed this Escrow Agreement as of the day and year first above written. PHYSICIAN SALES & SERVICE, INC. By: ------------------------------------- Title: ---------------------------------- "ESCROW AGENT" THE BANK OF NEW YORK By: ------------------------------------- "REPRESENTATIVES" ---------------------------------------- Joseph E. Miller, Jr. ---------------------------------------- Bruce P. Ashby By: ------------------------------------- George R. Privatera, Trustee The S&W X-Ray, Inc. Employee Stock Ownership Trust B-10 ANNEX C SECTIONS 623 AND 910 OF THE NEW YORK BUSINESS CORPORATION LAW RELATING TO APPRAISAL RIGHTS MCKINNEY'S CONSOLIDATED LAWS OF NEW YORK ANNOTATED BUSINESS CORPORATION LAW CHAPTER 4 OF THE CONSOLIDATED LAWS ARTICLE 6--SHAREHOLDERS (S)623. Procedure to enforce shareholder's right to receive payment for shares (a) A shareholder intending to enforce his right under a section of this chapter to receive payment for his shares if the proposed corporate action referred to therein is taken shall file with the corporation, before the meeting of shareholders at which the action is submitted to a vote, or at such meeting but before the vote, written objection to the action. The objection shall include a notice of his election to dissent, his name and residence address, the number and classes of shares as to which he dissents and a demand for payment of the fair value of his shares if the action is taken. Such objection is not required from any shareholder to whom the corporation did not give notice of such meeting in accordance with this chapter or where the proposed action is authorized by written consent of shareholders without a meeting. (b) within ten days after the shareholders, authorization date, which term as used in this section means the date on which the shareholders' vote authorizing such action was taken, or the date on which such consent without a meeting was obtained from the requisite shareholders, the corporation shall give written notice of such authorization or consent by registered mail to each shareholder who filed written objection or from whom written objection was not required, excepting any shareholder who voted for or consented in writing to the proposed action and who thereby is deemed-to have elected not to enforce his right to receive payment for his shares. (c) Within twenty days after the giving of notice to him, any shareholder from whom written objection was not required and who elects to dissent shall file with the corporation a written notice of such election, stating his name and residence address, the number and classes of shares as to which he dissents and a demand for payment of the fair value of his shares. Any shareholder who elects to dissent from a merger under section 905 (Merger of subsidiary corporation) or paragraph (c) of section 907 (Merger or consolidation of domestic and foreign corporations) or from a share exchange under paragraph (g) of section 913 (Share exchanges) shall file a written notice of such election to dissent within twenty days after the giving to him of a copy of the plan of merger or exchange or an outline of the material features thereof under section 905 or 913. (d) A shareholder may not dissent as to less than all of the shares, as to which he has a right to dissent, held by him of record, that he owns beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial owner as to less than all of the shares of such owner, as to which such nominee or fiduciary has a right to dissent, held of record by such nominee or fiduciary. (e) Upon consummation of the corporate action, the shareholder shall cease to have any of the rights of a shareholder except the right to be paid the fair value of his shares and any other rights under this section. A notice of election may be withdrawn by the shareholder at any time prior to his acceptance in writing of an offer made by the corporation, as provided in paragraph (g), but in no case later than sixty days from the date of consummation of the corporate action except that if the corporation fails to make a timely offer, as provided in paragraph (g), the time for withdrawing a notice of election shall be extended until sixty days from the date an offer is made. Upon expiration of such time, withdrawal of a notice of election shall require the written consent of the corporation. In order to be effective, withdrawal of a notice of election must be accompanied by the return to the corporation of any advance payment made to the shareholder as provided in paragraph (g). If a notice of election is withdrawn, or the corporate action is rescinded, or a court shall determine that the shareholder is not entitled to receive payment for his shares, or the shareholder shall otherwise lose his dissenter's rights, he shall not have the right to receive payment for his shares and he shall be reinstated to all his rights as a shareholder as of the consummation of the corporate action, including any intervening preemptive rights and the right to payment of any intervening dividend or other distribution or, if any such rights have expired or any such dividend or distribution other than in cash has C-1 been completed, in lieu thereof, at the election of the corporation, the fair value thereof in cash as determined by the board as of the time of such expiration or completion, but without prejudice otherwise to any corporate proceedings that may have been taken in the interim. (f) At the time of filing the notice of election to dissent or within one month thereafter the shareholder of shares represented by certificates shall submit the certificates representing his shares to the corporation, or to its transfer agent, which shall forthwith note conspicuously thereon that a notice of election has been filed and shall return the certificates to the shareholder or other person who submitted them on his behalf. Any shareholder of shares represented by certificates who fails to submit his certificates for such notation as herein specified shall, at the option of the corporation exercised by written notice to him within forty-five days from the date of filing of such notice of election to dissent, lose his dissenter's rights unless a court, for good cause shown, shall otherwise direct. Upon transfer of a certificate bearing such notation, each new certificate issued therefor shall bear a similar notation together with the name of the original dissenting holder of the shares and a transferee shall acquire no rights in the corporation except those which the original dissenting shareholder had at the time of transfer. (g) Within fifteen days after the expiration of the period within which shareholders may file their notices of election to dissent, or within fifteen days after the proposed corporate action is consummated, whichever is later (but in no case later than ninety days from the shareholders' authorization date), the corporation or, in the case of a merger or consolidation, the surviving or new corporation, shall make a written offer by registered mail to each shareholder who has filed such notice of election to pay for his shares at a specified price which the corporation considers to be their fair value. Such offer shall be accompanied by a statement setting forth the aggregate number of shares with respect to which notices of election to dissent have been received and the aggregate number of holders of such shares. If the corporate action has been consummated, such offer shall also be accompanied by (1) advance payment to each such shareholder who has submitted the certificates representing his shares to the corporation, as provided in paragraph (f), of an amount equal to eighty percent of the amount of such offer, or (2) as to each shareholder who has not yet submitted his certificates a statement that advance payment to him of an amount equal to eighty percent of the amount of such offer will be made by the corporation promptly upon submission of his certificates. If the corporate action has not been consummated at the time of the making of the offer, such advance payment or statement as to advance payment shall be sent to each shareholder entitled thereto forthwith upon consummation of the corporate action. Every advance payment or statement as to advance payment shall include advice to the shareholder to the effect that acceptance of such payment does not constitute a waiver of any dissenters, rights. If the corporate action has not been consummated upon the expiration of the ninety day period after the shareholders' authorization date, the offer may be conditioned upon the consummation of such action. Such offer shall be made at the same price per share to all dissenting shareholders of the same class, or if divided into series, of the same series and shall be accompanied by a balance sheet of the corporation whose shares the dissenting shareholder holds as of the latest available date, which shall not be earlier than twelve months before the making of such offer, and a profit and loss statement or statements for not less than a twelve month period ended on the date of such balance sheet or, if the corporation was not in existence throughout such twelve month period, for the portion thereof during which it was in existence. Notwithstanding the foregoing, the corporation shall not be required to furnish a balance sheet or profit and loss statement or statements to any shareholder to whom such balance sheet or profit and loss statement or statements-were previously furnished, nor if in connection with obtaining the shareholders, authorization for or consent to the proposed corporate action the shareholders were furnished with a proxy or information statement, which included financial statements, pursuant to Regulation 14A or Regulation 14C of the United States Securities and Exchange Commission. If within thirty days after the making of such offer, the corporation making the offer and any shareholder agree upon the price to be paid for his shares, payment therefor shall be made within sixty days after the making of such offer or the consummation of the proposed corporate action, whichever is later, upon the surrender of the certificates for any such shares represented by certificates. (h) The following procedure shall apply if the corporation fails to make such offer within such period of fifteen days, or if it makes the offer and any dissenting shareholder or shareholders fail to agree with it within the period of thirty days thereafter upon the price to be paid for their shares: (1) The corporation shall, within twenty days after the expiration of whichever is applicable of the two periods last mentioned, institute a special proceeding in the supreme court in the judicial district in which the office of the corporation is located to determine the rights of dissenting shareholders and to fix the fair value of their shares. If, in the case of merger or consolidation, the surviving or new corporation is a foreign corporation C-2 without an office in this state, such proceeding shall be brought in the county where the office of the domestic corporation, whose shares are to be valued, was located. (2) If the corporation fails to institute such proceeding within such period of twenty days, any dissenting shareholder may institute such proceeding for the same purpose not later than thirty days after the expiration of such twenty day period. If such proceeding is not instituted within such thirty day period, all dissenter's rights shall be lost unless the supreme court, for good cause shown, shall otherwise direct. (3) All dissenting shareholders, excepting those who, as provided in paragraph (g), have agreed with the corporation upon the price to be paid for their shares, shall be made parties to such proceeding, which shall have the effect of an action quasi in rem against their shares. The corporation shall serve a copy of the petition in such proceeding upon each dissenting shareholder who is a resident of this state in the manner provided by law for the service of a summons, and upon each nonresident dissenting shareholder either by registered mail and publication, or in such other manner as is permitted by law. The jurisdiction of the court shall be plenary and exclusive. (4) The court shall determine whether each dissenting shareholder, as to whom the corporation requests the court to make such determination, is entitled to receive payment for his shares. If the corporation does not request any such determination or if the court finds that any dissenting shareholder is so entitled, it shall proceed to fix the value of the shares, which, for the purposes of this section, shall be the fair value as of the close of business on the day prior to the shareholders, authorization date. In fixing the fair value of the shares, the court shall consider the nature of the transaction giving rise to the shareholder's right to receive payment for shares and its effects on the corporation and its shareholders, the concepts and methods then customary in the relevant securities and financial markets for determining fair value of shares of a corporation engaging in a similar transaction under comparable circumstances and all other relevant factors. The court shall determine the fair value of the shares without a jury and without referral to an appraiser or referee. Upon application by the corporation or by any shareholder who is a party to the proceeding, the court may, in its discretion, permit pretrial disclosure, including, but not limited to, disclosure of any expert's reports relating to the fair value of the shares whether or not intended for use at the trial in the proceeding and notwithstanding subdivision (d) of section 3101 of the civil practice law and rules. (5) The final order in the proceeding shall be entered against the corporation in favor of each dissenting shareholder who is a party to the proceeding and is entitled thereto for the value of his shares so determined. (6) The final order shall include an allowance for interest at such rate as the court finds to be equitable, from the date the corporate action was consummated to the date of payment. In determining the rate of interest, the court shall consider all relevant factors, including the rate of interest which the corporation would have had to pay to borrow money during the pendency of the proceeding. If the court finds that the refusal of any shareholder to accept the corporate offer of payment for his shares was arbitrary, vexatious or otherwise not in good faith, no interest shall be allowed to him. (7) Each party to such proceeding shall bear its own costs and expenses, including the fees and expenses of its counsel and of any experts employed by it. Notwithstanding the foregoing, the court may, in its discretion, apportion and assess all or any part of the costs, expenses and fees incurred by the corporation against any or all of the dissenting shareholders who are parties to the proceeding, including any who have withdrawn their notices of election as provided in paragraph (e), if the court finds that their refusal to accept the corporate offer was arbitrary, vexatious or otherwise not in good faith. The court may, in its discretion, apportion and assess all or any part of the costs, expenses and fees incurred by any or all of the dissenting shareholders who are parties to the proceeding against the corporation if the court finds any of the following: (A) that the fair value of the shares as determined materially exceeds the amount which the corporation offered to pay; (B) that no offer or required advance payment was made by the corporation; (C) that the corporation failed to institute the special proceeding within the period specified therefor; or (D) that the action of the corporation in complying with its obligations as provided in this section was arbitrary, vexatious or otherwise not in good faith. In making any determination as provided in clause (A), the court may consider the dollar amount or the percentage, or both, by which the fair value of the shares as determined exceeds the corporate offer. (8) within sixty days after final determination of the proceeding, the corporation shall pay to each dissenting shareholder the amount found to be due him, upon surrender of the certificates for any such shares represented by certificates. C-3 (i) Shares acquired by the corporation upon the payment of the agreed value therefor or of the amount due under the final order, as provided in this section, shall become treasury shares or be cancelled as provided in section 515 (Reacquired shares), except that, in the case of a merger or consolidation, they may be held and disposed of as the plan of merger or consolidation may otherwise provide. (j) No payment shall be made to a dissenting shareholder under this section at a time when the corporation is insolvent or when such payment would make it insolvent. In such event, the dissenting shareholder shall, at his option: (1) Withdraw his notice of election, which shall in such event be deemed withdrawn with the written consent of the corporation; or (2) Retain his status as a claimant against the corporation and, if it is liquidated, be subordinated to the rights of creditors of the corporation, but have rights superior to the non-dissenting shareholders, and if it is not liquidated, retain his right to be paid for his shares, which right the corporation shall be obliged to satisfy when the restrictions of this paragraph do not apply. (3) The dissenting shareholder shall exercise such option under subparagraph (1) or (2) by written notice filed with the corporation within thirty days after the corporation has given him written notice that payment for his shares cannot be made because of the restrictions of this paragraph. If the dissenting shareholder fails to exercise such option as provided, the corporation shall exercise the option by written notice given to him within twenty days after the expiration of such period of thirty days. (k) The enforcement by a shareholder of his right to receive payment for his shares in the manner provided herein shall exclude the enforcement by such shareholder of any other right to which he might otherwise be entitled by virtue of share ownership, except as provided in paragraph (e), and except that this section shall not exclude the right of such shareholder to bring or maintain an appropriate action to obtain relief on the ground that such corporate action will be or is unlawful or fraudulent as to him. (l) Except as otherwise expressly provided in this section, any notice to be given by a corporation to a shareholder under-this section shall be given in the manner provided in section 605 (Notice of meetings of shareholders). (m) This section shall not apply to foreign corporations except as provided in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and foreign corporations). C-4 MCKINNEY'S CONSOLIDATED LAWS OF NEW YORK ANNOTATED BUSINESS CORPORATION LAW CHAPTER 4 OF THE CONSOLIDATED LAWS ARTICLE 9--MERGER OR CONSOLIDATION; GUARANTEE; DISPOSITION OF ASSETS; SHARE EXCHANGES (S)910. Right of shareholder to receive payment for shares upon merger or consolidation, or sale, lease, exchange or other disposition of assets, or share exchange (a) A shareholder of a domestic corporation shall, subject to and by complying with section 623 (Procedure to enforce shareholder's right to receive payment for shares), have the right to receive payment of the fair value of his shares and the other rights and benefits provided by such section, in the following cases: (1) Any shareholder entitled to vote who does not assent to the taking of an action specified in subparagraphs (A), (B) and C. (A) Any plan of merger or consolidation to which the corporation is a party; except that the right to receive payment of the fair value of his shares shall not be available: (i) To a shareholder of the parent corporation in a merger authorized by section 905 (Merger of parent and subsidiary corporations), or paragraph (c) of section 907 (Merger or consolidation of domestic and foreign corporations); and (ii) To a shareholder of the surviving corporation in a merger authorized by this article, other than a merger specified in subparagraph (i), unless such merger effects one or more of the changes specified in subparagraph (b)(6) of section 806 (Provisions as to certain proceedings) in the rights of the shares held by such shareholder. (B) Any sale, lease, exchange or other disposition of all or substantially all of the assets of a corporation which requires shareholder approval under section 909 (Sale, lease, exchange or other disposition of assets) other than a transaction wholly for cash where the shareholders, approval thereof is conditioned upon the dissolution of the corporation and the distribution of substantially all of its net assets to the shareholders in accordance with their respective interests within one year after the date of such transaction. (C) Any share exchange authorized by section 913 in which the corporation is participating as a subject corporation; except that the right to receive payment of the fair value of his shares shall not be available to a shareholder whose shares have not been acquired in the exchange. (2) Any shareholder of the subsidiary corporation in a merger authorized by section 905 or paragraph (c) of section 907, or in a share exchange authorized by paragraph (g) of section 913, who files with the corporation a written notice of election to dissent as provided in paragraph (c) of section 623. C-5 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers The Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws of the Registrant set forth the extent to which the Registrant's directors and officers may be indemnified against liabilities they may incur while serving in such capacities. Such indemnification will be provided to the fullest extent allowed by the Florida Business Corporation Act, as amended from time to time, and judicial or administrative decisions. Under these indemnification provisions, the Registrant is required to indemnify any of its directors and officers against any reasonable expenses (including attorneys' fees) incurred by him in the defense of any action, suit or proceeding, whether civil, criminal, administrative or investigative, to which he was made a party, or in defense of any claim, issue or matter therein, by reason of the fact that he is or was a director or officer of the Registrant or who, while a director or officer of the Registrant, is or was serving at the Registrant's request as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise to the extent that such director or officer has been successful, on the merits or otherwise, in such defense. The Registrant also may indemnify any of its directors or officers against any liability incurred in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Registrant, in which event, additional determinations must be made before indemnification is provided) by reason of the fact that he is or was a director or officer of the Registrant who, while a director or officer of the Registrant, is or was serving at the Registrant's request as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, if such director or officer acted in good faith and in a manner he believed to be in, or not opposed to, the best interests of the Registrant, and with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. The Registrant may also provide advancement of expenses incurred by a director or officer in defending any such action, suit or proceeding upon receipt of a written affirmation of such officer or director that he has met certain standards of conduct and an understanding by or on behalf of such officer or director to repay such advances unless it is ultimately determined that he is entitled to indemnification by the Registrant. Notwithstanding the foregoing, the Amended and Restated Bylaws of the Registrant provide that the Registrant shall not be required to indemnify any of its directors or officers in connection with a proceeding initiated by such person unless such authorization for such proceeding was not denied by the Board of Directors of the Registrant prior to sixty (60) days after receipt of notice thereof from such person stating his or her intent to initiate such proceeding and only upon such terms and conditions as the Board of Directors may deem appropriate. The Florida Business Corporation Act contains a provision which limits the personal liability for monetary damages to the corporation or any other person for any statement, vote, decision, or failure to act, regarding corporate management or policy, by a director, unless the director breached or failed to perform his duties as a director and such breach constitutes (i) a violation of criminal law, unless the director has reasonable cause to believe his conduct was unlawful; (ii) a transaction from which the director received an improper personal benefit; (iii) an unlawful distribution under Florida law, (iv) in a proceeding by or in the right of a corporation to procure a judgment in its favor or by or in the right of a shareholder, conscious disregard for the best interest of the corporation, or willful misconduct; or (v) in a proceeding by or in the right of someone other that the corporation or a shareholder, recklessness or an act or omission which was committed in bad faith or with malicious purpose or in a manner exhibiting wanton or willful disregard of human rights, safety or property. The Registrant maintains an insurance policy insuring the Registrant and directors and officers of the Registrant against certain liabilities, including liabilities under the Securities Act of 1933. II-1 Item 21. Exhibits and Financial Statement Schedules (a) Exhibits (See Exhibit Index immediately preceding the exhibits for the page number where each exhibit can be found) Exhibit Number Description of Exhibit ------ ---------------------- 2.1 - Agreement and Plan of Merger, dated as of August 12, 1997, among PSS, DI and S&W (included in Annex A to the Proxy Statement- Prospectus and incorporated by reference herein (schedules omitted -- the Registrant agrees to furnish a copy of any schedule to the Commission upon request)). 2.2 - Form of Escrow Agreement among PSS, S&W and the Stockholder Representatives (included in Annex B to the Proxy Statement- Prospectus and incorporated by reference herein). 5.1 - Opinion of Fred Elefant, P.A., including consent. 23.1 - Consent of Fred Elefant, P.A. (contained in Exhibit 5.1). 23.2 - Consent of Arthur Andersen LLP. 23.3 - Consent of May, Robinson, Gordon & Penta, P.C. 24.1 - Powers of Attorney (see the signature pages to this Registration Statement on Form S-4). 99.1 - Form of Proxy of S&W. (b) Financial Statement Schedules Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. II-2 Item 22. Undertakings (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers for sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3 or Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the Registrant's Certificate of Incorporation or Bylaws, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefor, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment for the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. (d) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. II-3 (e) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (f) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (g) The registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jacksonville, State of Florida, on August 12, 1997. PHYSICIAN SALES & SERVICE, INC. By: /s/ Patrick C. Kelly -------------------------------------- Patrick C. Kelly Chairman of the Board and Chief Executive Officer II-5 POWER OF ATTORNEY We the undersigned officers and directors of Physician Sales & Service, Inc., do hereby constitute and appoint Patrick C. Kelly and David A. Smith, and each of them, our true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments or supplements to this Registration Statement, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby, ratifying and confirming all that each of said attorneys-in- fact and agents, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on August 12, 1997.
Signature Title --------- ----- /s/ Patrick C. Kelly Chairman of the Board and Chief Executive -------------------------- Officer (principal executive officer) Patrick C. Kelly /s/ John F. Sasen President and Director -------------------------- John F. Sasen, Sr. /s/ David A. Smith Executive Vice President, Chief Financial -------------------------- Officer and Assistant Secretary and Director David A. Smith (principal financial and accounting officer) Director -------------------------- Delmer W. Dallas /s/ William C. Mason Director -------------------------- William C. Mason /s/ T. O'Neal Douglas Director -------------------------- T. O'Neal Douglas /s/ Fred Elefant Director -------------------------- Fred Elefant /s/ Delores Kesler Director -------------------------- Delores Kesler /s/ James L.L. Tullis Director -------------------------- James L.L. Tullis
II-6 EXHIBIT INDEX
Exhibit Number Description of Exhibit Page - ------- ---------------------- 2.1 Agreement and Plan of Merger, dated as of August 12, 1997, among PSS, DI and S&W (included in Annex A to the Proxy Statement-Prospectus and incorporated by reference herein (schedules omitted -- the registrant agrees to furnish a copy of any schedule to the Commission upon request)) 2.2 Form of Escrow Agreement among PSS, S&W and the Stockholder Representatives (included in Annex B to the Proxy Statement- Prospectus and incorporated by reference herein). 5.1 Opinion of Fred Elefant, P.A., including consent. 23.1 Consent of Fred Elefant, P.A. (contained in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP 23.3 Consent of May, Robinson, Gordon & Penta, P.C. 24.1 Powers of Attorney (see the signature pages to this Registration Statement on Form S-4). 99.1 Form of Proxy of S&W.
EX-5.1 2 OPINION OF FRED ELEFANT, P.A. Exhibit 5.1 FRED ELEFANT, P.A. 1650 Prudential Drive, Suite 105 Jacksonville, Florida 32207 August 12, 1997 Physician Sales & Service, Inc. 4345 Southpoint Boulevard Jacksonville, Florida 32216 Ladies and Gentlemen: This opinion is given in connection with the filing by Physician Sales & Service, Inc., a corporation organized and existing under the laws of the State of Florida (the "Company"), of a Registration Statement on Form S-4 (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") with respect to the registration under the Securities Act of 1933, as amended, of up to 2,123,558 shares of the Company's common stock, $.01 par value per share (the "Shares") to be issued in connection with the proposed merger of S&W X-Ray, Inc. with and into Diagnostic Imaging, Inc., a wholly owned subsidiary of the Company. In the capacity described above, I have considered such matters of law and of fact, including the examination of originals or copies, certified or otherwise identified to my satisfaction, of such records and documents of the Company, certificates of public officials and such other documents as I have deemed appropriate as a basis for the opinions hereinafter set forth. In conducting my examination, I have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as certified or photostatic copies, and the authenticity of the originals of such documents. The opinions set forth herein are limited to the laws of the State of Florida. Based upon the foregoing, it is my opinion that the Shares have been duly authorized and are validly issued, fully paid, and non-assessable by the Company under the Business Corporation Act of the State of Florida as in effect on the date hereof. This opinion is provided to you for your benefit and for the benefit of the Commission, in each case, solely with regard to the Registration Statement, may be relied upon by you and the Commission only in connection with the Registration Statement, and may not be relied upon by any other person or for any other purpose without my prior written consent. I consent to the use of this opinion as an exhibit to the Registration Statement and to the reference made to my firm under the caption "Legal Matters" in the Prospectus constituting part of the Registration Statement. FRED ELEFANT, P.A. By: /s/ Fred Elefant ----------------- Fred Elefant EX-23.2 3 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP Jacksonville, Florida August 12, 1997 EX-23.3 4 CONSENT OF MAY ROBINSON GORSON & PENTA, P.C. Exhibit 23.3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. /s/ May, Robinson, Gordon & Penta, P.C. Rochester, New York August 11, 1997 EX-99.1 5 PROXY CARD Exhibit 99.1 S&W X-RAY, INC. This Proxy is Solicited on Behalf of the Board of Directors The undersigned hereby appoints Joseph E. Miller, Jr. and George R. Privitera as Proxies, each with the power to appoint his substitute, and hereby authorizes either one or both of them to represent and to vote, as designated below, all the shares of Common Stock of S&W X-Ray, Inc. held of record by the undersigned on August 10, 1997, at the Special Meeting of Stockholders to be held on _______, 1997. 1. PROPOSAL TO: (i) approve the Agreement and Plan of Merger, dated as of August 12, 1997 (the "Merger Agreement"), by and among S&W X-Ray, Inc. ("S&W"), Physician Sales & Service, Inc. ("PSS"), and Diagnostic Imaging, Inc., a wholly owned subsidiary of PSS ("DI"), pursuant to which, among other matters, (a) S&W will merge with and into DI (the "Merger") and (b) each outstanding share of S&W Common Stock will be converted into the right to receive and the contingent right to receive shares of common stock of PSS; (ii) approve the Escrow Agreement (the "Escrow Agreement") by and between PSS and the Stockholder Representative; and (iii) appoint Joseph E. Miller, Jr., Bruce P. Ashby and the S&W X-Ray, Inc. Employee Stock Ownership Trust as the Stockholder Representatives in accordance with the Escrow Agreement, all as more fully described in the accompanying Proxy Statement-Prospectus. FOR [_] AGAINST [_] ABSTAIN [_] 2. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. ------------------------------------------------- THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 ABOVE. Please sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. DATED: , 1997 -------------------- ----------------------------------- Signature ----------------------------------- Signature if held jointly -----END PRIVACY-ENHANCED MESSAGE-----