<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-23832
-------
PSS WORLD MEDICAL, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Florida 59-3500595
------- ----------
(State or other jurisdiction (IRS employer
of incorporation) identification number)
4345 Southpoint Blvd.
Jacksonville, Florida 32216
--------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number (904) 332-3000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
As of November 11, 1998 a total of 70,380,238 shares of common stock,
par value $.01 per share, of the registrant were outstanding.
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1998 and April 3, 1998 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 30
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 3,
1998 1998
------------- -----------
(UNAUDITED) *
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 61,059 $ 82,491
Marketable securities 21,684 81,550
Accounts receivable, net 249,064 210,042
Inventories 126,341 122,502
Prepaid expenses and other 61,659 45,699
---------- ----------
Total current assets 519,807 542,284
Property and equipment, net 34,820 24,871
Other Assets:
Intangibles, net 124,458 90,134
Other 19,676 19,493
----------
Total assets $ 698,761 $ 676,782
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 102,460 $ 105,642
Accrued expenses 54,195 42,657
Current maturities of long-term debt and capital lease obligations 3,920 2,794
Other 11,949 7,058
----------- ----------
Total current liabilities 172,524 158,151
Long-term debt and capital lease obligations, net of current portion 127,960 128,113
Other 1,713 2,621
Total liabilities 302,197 288,885
----------- ----------
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized,
no shares issued and outstanding
Common stock, $.01 par value; 150,000,000 shares authorized,
70,248,588 and 69,563,937 shares issued and outstanding at
September 30, 1998 and April 3, 1998, respectively 702 696
Additional paid-in capital 345,312 341,679
Retained earnings 50,550 45,522
----------- ----------
Total shareholders' equity 396,564 387,897
Total liabilities and shareholders' equity $ 698,761 $ 676,782
=========== ==========
</TABLE>
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
statements.
3
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30,
1998 1997 1998 1997
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $366,071 $320,123 $708,608 $608,306
Cost of goods sold 263,090 233,507 510,944 444,905
-------- -------- -------- --------
Gross profit 102,981 86,616 197,664 163,401
General and administrative expenses 49,960 50,586 98,564 92,901
Selling expenses 29,576 23,906 56,076 46,326
-------- -------- -------- --------
Income from operations 23,445 12,124 43,024 24,174
-------- -------- -------- --------
Other income (expense):
Interest expense (2,996) (336) (6,033) (612)
Interest and investment income 1,397 555 3,142 1,385
Other income 1,263 738 2,007 1,131
-------- -------- -------- --------
(336) 957 (884) 1,904
-------- -------- -------- --------
Income before provision for income taxes 23,109 13,081 42,140 26,078
Provision for income taxes 9,258 5,323 16,995 10,400
-------- -------- -------- --------
Net income $ 13,851 $ 7,758 $ 25,145 $ 15,678
======== ======== ======== ========
Earnings per share:
Basic $ 0.20 $ 0.11 $ 0.36 $ 0.23
======== ======== ======== ========
Diluted $ 0.20 $ 0.11 $ 0.35 $ 0.23
======== ======== ======== ========
Weighted average shares outstanding (in thousands):
Basic 70,145 68,385 70,003 67,961
======== ======== ======== ========
Diluted 70,961 69,191 70,846 68,720
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
4
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
--------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 25,145 $ 15,678
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 7,117 5,354
Provision for doubtful accounts 1,037 929
Deferred compensation 222 --
Changes in operating assets and liabilities, net of effects from business acquisitions:
Accounts receivable, net (31,225) (13,766)
Inventories 12,762 8,898
Prepaid expenses and other current assets (4,180) (3,928)
Other assets (2,408) (2,493)
Accounts payable, accrued expenses and other liabilities (23,770) 7,913
---------- ----------
Net cash (used in) provided by operating activities (15,300) 18,585
---------- ----------
Cash Flows From Investing Activities:
Purchases, maturities, and sales of marketable securities, net 53,343 30,236
Capital expenditures (9,981) (4,930)
Purchases of businesses, net of cash acquired (44,412) (4,890)
Payments on noncompete agreements (1,412) (1,465)
---------- ----------
Net cash (used in) provided by investing activities (2,462) 18,951
---------- ----------
Cash Flows From Financing Activities:
Repayments of borrowings (4,690) (54,765)
Principal payments under capital lease obligations (212) --
Proceeds from issuance of common stock 1,582 870
---------- ----------
Net cash used in financing activities (3,320) (53,895)
---------- ----------
Foreign currency translation adjustment -- 187
---------- ----------
Net decrease in cash and cash equivalents (21,082) (16,172)
Cash and cash equivalents, beginning of period 82,141 39,099
---------- ----------
Cash and cash equivalents, end of period $ 61,059 $ 22,927
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
5
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements of PSS World Medical, Inc.
("PSS" or the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position and results of operations for
the periods indicated and give retroactive effect to the mergers with S&W X-Ray,
Inc. (''S&W'') and Gulf South Medical Supply, Inc. ("Gulf South"). These
transactions were accounted for under the pooling-of-interests method of
accounting, and accordingly, the accompanying condensed consolidated financial
statements have been retroactively restated as if PSS, S&W, and Gulf South had
operated as one entity since inception.
Prior to April 4, 1998, PSS' year end was the Friday closest to March 31,
while Gulf South's year end was December 31. Due to the different fiscal year
ends of Gulf South and PSS prior to April 4, 1998, the three and six months
ended June 30, 1997 of Gulf South were consolidated with the three and six
months ended September 30, 1997 of the Company. In addition, Gulf South's
balance sheet as of December 31, 1997 was consolidated with PSS' balance sheet
as of April 3, 1998. Effective April 4, 1998, Gulf South's fiscal year end was
changed to conform to the Company's fiscal year end. As a result of this change
in fiscal year ends, the three and six months ended September 30, 1998 reflect
the operating results of PSS World Medical, Inc. and all subsidiaries, including
Gulf South, for the same months. The results of operations for Gulf South for
the period January 1 to April 3, 1998, are not included in any of the periods
presented in the statements of operations, but are reflected as an adjustment to
retained earnings of the consolidated Company as of April 4, 1998. During the
period January 1 to April 3, 1998, Gulf South recorded a net loss of $20.9
million, which includes pre-tax unusual operating charges of $37.4 million.
Refer to the section titled Gulf South's Results of Operation for the Three
Months Ended April 3, 1998 and March 31, 1997 included in Management's
Discussion and Analysis of Results of Operations for further clarification. The
following table provides a rollforward of retained earnings from April 3, 1998
to September 30, 1998 (in millions):
<TABLE>
<CAPTION>
Rollforward of
Retained Earnings
-----------------
<S> <C>
Retained earnings, 4/3/98 $ 45.5
Gulf South results of operations, 1/1/98 to 4/3/98 (20.9)
Net income for the six months ended 9/30/98 25.1
Pooling-of-interests business combination 0.9
Retained earnings, 9/30/98 $ 50.6
======
</TABLE>
The accompanying condensed consolidated financial statements should be read in
conjunction with the financial statements and related notes in the Company's
1998 Annual Report on Form 10-K. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to the Securities and
Exchange Commission rules and regulations.
Financial statements for the Company's subsidiary outside the United States
are translated into U.S. dollars at quarter-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are immaterial and reflected in additional
paid-in capital.
The results of operations for the interim periods covered by this report may
not necessarily be indicative of operating results for the full fiscal year.
Certain items have been reclassified to conform to the current year
presentation.
6
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
NOTE 2 - BUSINESS ACQUISITIONS
On September 21, 1998, the Company acquired certain assets, including accounts
receivable, inventories, and equipment, of an imaging supply and equipment
distributor, accounted for under the purchase method of accounting. The acquired
company had aggregate annual revenues of approximately $80.0 million. The
aggregate consideration consisted of approximately $40.0 million cash. The
excess of the purchase price paid over the estimated fair value of the net
assets acquired of approximately $28.0 million, in aggregate, has been recorded
as goodwill and will be amortized on a straight-line basis over 30 years.
The operations of the acquired company have been included in the Company's
results of operations subsequent to the date of acquisition. Supplemental pro
forma information is not presented as the impact on the Company's results of
operations is not material.
As this acquisition was consummated close to September 30, 1998, management
did not formalize their plan to exit certain activities or involuntarily
terminate or relocate employees of the acquired company prior to quarter end.
Management anticipates that the plan will be formalized during the third quarter
of fiscal 1999 and such plan will include facility closures and consolidations,
involuntary employee terminations, and relocation of acquired company employees.
As a result, additional liabilities totaling approximately $3.0 million may be
recorded as an adjustment to goodwill during the third quarter of fiscal 1999.
NOTE 3 - CHARGES IN CONTINUING OPERATIONS
Charges Included In General and Administrative Expenses
General and administrative expenses include unusual operating charges related
to merger costs and expenses resulting from merger activity, restructuring costs
and expenses, and other unusual items. The following table summarizes the
components of the unusual operating charges included in general and
administrative expenses (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------------- ------------- ------------- -------------
Merger costs and expenses:
<S> <C> <C> <C> <C>
Direct transaction costs $ -- $ 713 $ -- $ 713
Involuntary employee termination -- 15 -- 15
Other exit costs -- 1,110 300 1,110
------- ------ ------ ------
Total merger costs and expenses -- 1,838 300 1,838
Other unusual items:
Gulf South operational tax charges -- 767 -- 1,534
ESOP cost of acquired company -- 1,839 -- 2,457
------- ------ ------ ------
Total unusual items -- 2,606 -- 3,991
Total charges included in continuing operations $ -- $4,444 $ 300 $5,829
======= ====== ====== ======
</TABLE>
7
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
During fiscal 1998, Gulf South recorded operational charges primarily related
to state and local, sales and use, and property taxes that are normally charged
directly to the customer at no cost to the Company. In addition, penalties and
interest are included in the charges because payments to tax authorities were
not remitted by Gulf South in a timely manner. Gulf South changed its tax
compliance procedures subsequent to fiscal 1998; therefore, management believes
these tax charges will be nonrecurring.
The ESOP cost of acquired company is a result of the merger with S&W X-Ray,
Inc. ("S&W") in the second quarter of fiscal 1998. S&W sponsored a leveraged
employee stock ownership plan (''S&W ESOP'') that covered all employees with one
year of service. The Company accounted for this ESOP in accordance with SOP 93-
6. Accordingly, the debt of the ESOP was recorded as debt of the Company, and
the shares pledged as collateral were reported as unearned ESOP shares in the
balance sheet. As shares were released from collateral, the Company reported
compensation expense equal to the then current market price of the shares, and
the shares became outstanding for the earnings-per-share (EPS) computation.
During fiscal 1998, the Company released the remaining shares to the S&W ESOP
participants. Accordingly, approximately $2.5 million of related expense was
recognized in fiscal 1998.
Summary of Accrued Merger Costs and Expenses
Accrued merger costs and expenses, classified as accrued expenses in the
accompanying consolidated balance sheets, were $9.7 million and $10.9 million,
at September 30, 1998 and April 3, 1998, respectively. A summary of the merger
activity is as follows (in thousands):
<TABLE>
<CAPTION>
DIRECT EMPLOYEE INVOLUNTARY
TRANSACTION RELOCATION EMPLOYEE OTHER EXIT
COSTS COSTS TERMINATION COSTS TOTAL
------------- ------------ ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Balance at April 3, 1998 $ 571 $525 $3,717 $ 6,124 $10,937
Additions 5,371 -- 417 1,586 7,374
Utilized (1,089) (3) (94) (1,506) (2,692)
------- ---- ------ ------- -------
Balance at June 30, 1998 4,853 522 4,040 6,204 15,619
Additions -- -- -- -- --
Utilized (4,060) (56) (31) (1,789) (5,936)
------- ---- ------ ------- -------
Balance at September 30, 1998 $ 793 $466 $4,009 $ 4,415 $ 9,683
======= ==== ====== ======= =======
</TABLE>
Upon consummation of a business combination, management develops formal plans
to exit certain activities, involuntarily terminate employees, and relocate
employees of the acquired companies. Management's plans to exit an activity
include identification of duplicate facilities for closure and identification of
facilities for consolidation into other facilities. Management anticipates
completion of these plans will occur within one year from the date in which the
plans were formalized.
Direct transaction costs primarily consist of investment banking, legal,
accounting, and filing fees related to mergers with the Company. Involuntary
employee termination costs are employee severance costs and termination
benefits. Other exit costs include facility closure, fixed asset write-offs, and
lease termination costs. In addition, other exit costs include employee
relocation costs that relate to employees of an acquired company in a
transaction accounted for under the purchase method of accounting. These
liabilities were recognized as of the consummation date of the acquisitions. As
of September 30, 1998, no adjustments have been made to these liabilities.
8
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
The significant additions to the accrued merger costs and expenses during the
three months ended June 30, 1998, are a result of i) additions of accrued merger
costs and expenses of $7.1 million recorded by Gulf South during the period
January 1 to April 3, 1998 directly related to the merger with PSS World
Medical, Inc. which closed on March 26, 1998 (refer to Note 1 - Basis of
Presentation for a discussion regarding the different year ends of Gulf South
and the Company) and ii) accrued merger costs and expenses of $0.3 million
related to an acquisition consummated by the Imaging Business.
Summary of Accrued Restructuring Costs and Expenses
Accrued restructuring costs and expenses, classified as accrued expenses in
the accompanying consolidated balance sheets, were $4.5 million and $3.8
million, at September 30, 1998 and April 3, 1998, respectively. No adjustments
have been made to these liabilities as of September 30, 1998. A summary of the
restructuring activity is as follows (in thousands):
<TABLE>
<CAPTION>
INVOLUNTARY
EMPLOYEE OTHER EXIT
TERMINATION COSTS TOTAL
----------- ---------- --------
<S> <C> <C> <C>
Balance at April 3, 1998 $1,117 $ 2,633 $ 3,750
Additions 2,462 3,322 5,784
Utilized (561) (2,164) (2,725)
------ ------- -------
Balance at June 30, 1998 3,018 3,791 6,809
Additions -- -- --
Utilized (508) (1,765) (2,273)
------ ------- -------
Balance at September 30, 1998 $2,501 2,026 $ 4,536
====== ======= =======
</TABLE>
In order to improve customer service, reduce costs, and improve
productivity and asset utilization, the Company decided to realign and
consolidate its operations. This restructuring plan, which resulted primarily
from the Gulf South merger and was formalized by the end of fiscal 1998,
involved merging 18 locations into existing locations, and eliminating
overlapping regional operations and management functions. The plan also
included the termination of approximately 290 employees from operations,
administration, and management. As of September 30, 1998, approximately 170
employees were terminated as a result of the plan. Management anticipates
terminating the remaining 120 employees by the end of fiscal 1999.
The Company recorded a total charge of approximately $9.5 million to
complete this restructuring. These charges include costs for severance and
benefits to terminate employees, facility closure costs, and other costs to
complete the consolidation of the operations. Approximately $3.7 million of the
total restructuring charge was recorded in the statement of operations for the
fiscal year ended April 3, 1998. The remaining $5.8 million of the
restructuring charge was recorded in the results of operations of Gulf South
during the period January 1 to April 3, 1998
The significant additions to the accrued restructuring costs and expenses
during the fiscal quarter ended June 30, 1998, are a result of the restructuring
costs and expenses of $5.8 million recorded by Gulf South during the period
January 1 to April 3, 1998. These charges directly relate to the merger with
PSS World Medical, Inc. which closed on March 26, 1998. Refer to Note 1 Basis
of Accounting for a discussion regarding the different year-ends of Gulf South
and the Company.
9
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
NOTE 4 - COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, which
defines comprehensive income as net income plus direct adjustments to
shareholders' equity. The cumulative translation adjustment of certain foreign
entities is the only such direct adjustment recorded by the Company during the
three and six months ended September 30, 1998 and 1997, and is immaterial for
all periods presented.
NOTE 5 - EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share, the calculation of basic earnings per common share and
diluted earnings per common share is presented below (share amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $13,851 $ 7,758 $25,145 $15,678
======= ======= ======= =======
Earnings per share:
Basic $ 0.20 $ 0.11 $ 0.36 $ 0.23
Diluted $ 0.20 $ 0.11 $ 0.35 $ 0.23
======= ======= ======= =======
Weighted average shares outstanding (in thousands):
Common shares 70,145 68,385 70,003 67,961
Assumed exercise of stock options 816 806 843 759
------- ------- ------- -------
Diluted shares outstanding 70,961 69,191 70,846 68,720
======= ======= ======= =======
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Gulf South and certain of its former officers and directors were named as
defendants in two purported class action lawsuits filed on July 21, 1997 related
to disclosures made in the prospectus issued by Gulf South in connection with
its public offering of common stock during 1996. The Company believes that the
allegations contained in the complaints are without merit and intends to defend
vigorously against the claims. However, there can be no assurance that this
litigation will ultimately be resolved on terms that are favorable to the
Company.
10
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(Unaudited)
In May 1998, the Company and certain of its present directors and officers
were named as defendants in a purported securities class action lawsuit related
to alleged damages suffered by purchasers of the Company's common stock during
the period from December 27, 1997 to May 8, 1998. The claimant seeks an
unspecified amount of damages, including costs and expenses. The Company
believes this lawsuit is without merit and intends to defend it vigorously.
However, this lawsuit is in its early stages and there can be no assurances that
this litigation will ultimately be resolved on terms that are favorable to the
Company.
The Company is named as a defendant in a purported patent infringement claim.
In this lawsuit, the claimant alleges that the urinalysis test strips sold by
the Company under the Penny Saver(TM) label infringe certain patents. The
Company is contesting the claim of infringement and has obtained a written
agreement from the manufacturer of the product indemnifying the Company for the
costs of defense of the suit and for the underlying liability. In addition, the
Company has indemnity rights against the U.S. distributor of the product
pursuant to its vendor agreement. No prediction can be made on the outcome of
this case.
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.
NOTE 7 - SUBSEQUENT EVENTS
Subsequent to September 30, 1998, the Company merged with a medical imaging
supply and equipment distributor in a stock merger accounted for under the
pooling-of-interests method.
1999
-------
Number of acquisitions.......................................... 1
Shares of common stock issued................................... 293,872
Subsequent to September 30, 1998, the Company acquired certain assets,
including accounts receivable, inventories, and equipment of a medical imaging
supply and equipment distributor accounted for under the purchase method of
accounting.
(dollars in thousands) 1999
-------
Number of acquisitions............................................ 1
Cash paid......................................................... $5,145
Goodwill recorded................................................. 900
Noncompete payments............................................... 30
11
<PAGE>
ITEM 2. PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
PSS World Medical, Inc. (the "Company" or "PSS") is a specialty marketer and
distributor of medical products to physicians, alternate-site imaging centers,
long-term care providers, and hospitals through 105 service centers to customers
in all 50 states and 5 European countries. Since its inception in 1983, the
Company has become a leader in all three market segments it serves with a
focused, market specific approach to customer services, a consultative sales
force, strategic acquisitions, strong arrangements with product manufacturers,
and a unique culture of performance.
The Company, through its Physician Sales & Service division, is the leading
distributor of medical supplies, and equipment to office-based physicians in the
United States based upon revenues, number and quality of sales representatives,
number of service centers, and exclusively distributed products. Physician
Sales & Service currently operates 56 medical supply distribution service
centers with over 700 sales representatives ("Physician Supply Business")
serving over 100,000 physician offices (representing approximately 50% of all
physician offices) in all 50 states. The Physician Supply Business' primary
market is the approximately 400,000 physicians who practice medicine in
approximately 200,000 office sites throughout the United States.
The Company, through its wholly owned subsidiary Diagnostic Imaging, Inc.
("DI"), is the leading distributor of medical diagnostic imaging supplies,
chemicals, equipment, and service to the acute care and alternate-care markets
in the United States based on revenues, number of service specialists, number of
distribution centers, and number of sales representatives. DI currently
operates 33 imaging distribution service centers with over 500 service
specialists and 100 sales representatives ("Imaging Business") serving over
13,000 customer sites in 32 states. The Imaging Business' primary market is the
approximately 5,000 hospitals and other alternate-site imaging companies
operating approximately 50,000 office sites throughout the United States.
Through its wholly owned subsidiary Gulf South Medical Supply, Inc. ("Gulf
South"), the Company has become a leading national distributor of medical
supplies and related products to the long-term care industry in the United
States based on revenues, number of sales representatives, and number of service
centers. Gulf South currently operates 13 distribution service centers with
over 100 sales representatives ("Long-Term Care Business") serving over 10,000
long-term care facilities in all 50 states. The Long-Term Care Business'
primary market is comprised of a large number of independent operators, small to
mid-sized local and regional chains, and several national chains representing
over 10,000 long-term care facilities.
In addition to its operations in the United States, the Company, through its
wholly owned subsidiary WorldMed International, Inc. ("WorldMed"), operates
three European service centers ("International Business") distributing medical
products to the physician office and hospital markets in Belgium, France,
Germany, Luxembourg, and the Netherlands.
12
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
INDUSTRY
According to industry estimates, the United States medical supply and
equipment segment of the health care industry represents a $34 billion market
comprised of distribution of medical products to hospitals, home health care
agencies, imaging centers, physician offices, dental offices, and long-term care
facilities. The Company's primary focus includes distribution to the physician
office, providers of imaging services, and long-term care facilities comprising
approximately $14 billion or approximately 40% of the overall market
Revenues of the medical products distribution industry are estimated to be
growing as a result of a growing and aging population, increased health care
awareness, proliferation of medical technology and testing, and expanding third-
party insurance coverage. In addition, the physician market is benefiting from
the shift of procedures and diagnostic testing from hospitals to alternate
sites, particularly physician offices despite a migration of significantly lower
hospital medical product pricing into the physician office market.
The health care industry is subject to extensive government regulation,
licensure, and operating procedures. National health care reform has been the
subject of a number of legislative initiatives by Congress. Such reform
proposals if adopted could impact the medical products distribution industry.
Additionally, the cost of a significant portion of medical care in the United
States is funded by government and private insurance programs. In recent years,
government-imposed limits on reimbursement of hospitals, long-term care
facilities, and other health care providers have impacted spending budgets in
certain markets within the medical products industry. Recently, Congress has
passed radical changes to reimbursements for nursing homes and home care
providers. These changes also effect some distributors who directly bill the
government for these providers.
Over the past few years, the health care industry has undergone significant
consolidation. Physician provider groups, long-term care facilities, and other
alternate-site providers along with the hospitals continue to consolidate. This
consolidation sometimes shifts the medical products purchasing decision to
individuals with whom medical products distributors had no prior selling
relationship. Additionally, the consolidation creates larger customers. The
majority of the market serviced by the Company consists of a large number of
small customers with no individual customer exceeding more than 10% of the
consolidated Company's revenues. However, the Long-Term Care Business depends
on a limited number of large customers for a significant portion of its net
sales and approximately 37% and 39% of the Long-Term Care Business revenues for
the twelve months ended April 3, 1998 and the six months ended September 30,
1998, respectively, represented sales to its top five customers. Growth in the
Long-Term Care Business as well as consolidation of the health care industry may
increase the Company's dependence on large customers.
13
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the results of
operations for the three and six months ended September 30, 1998 and 1997. Due
to the differing fiscal year ends of Gulf South Medical Supply, Inc. and PSS
World Medical, Inc. prior to April 4, 1998, the three and six months ended June
30, 1997 of Gulf South were consolidated with the three and six months ended
September 30, 1997 of the Company. With the change in Gulf South's fiscal year
end to conform with that of the Company on April 4, 1998, the three and six
months ended September 30, 1998 reflect the operating results of PSS World
Medical, Inc. and all subsidiaries, including Gulf South, for the same months.
The results of operations for Gulf South for the period January 1 to April 3,
1998, are not reflected in the condensed consolidated statements of operations
for any of the periods presented, but are reflected as an adjustment to retained
earnings of the consolidated Company as of April 4, 1998. During the period
January 1 to April 3, 1998, Gulf South recorded a net loss of $20.9 million,
which includes pre-tax unusual operating charges of $37.4 million. Refer to the
section titled Gulf South's Results of Operation for the Three Months Ended
April 3, 1998 and March 31, 1997 included in Management's Discussion and
Analysis of Results of Operations for further clarification.
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net Sales. Net sales for the three months ended September 30, 1998 totaled
$366.1 million, an increase of $46.0 million or 14.4% over net sales of $320.1
million for the three months ended September 30, 1997. Net sales for the six
months ended September 30, 1998 totaled $708.6 million, an increase of $100.3
million or 16.5% over net sales of $608.3 million for the six months ended
September 30, 1997. Approximately $31.5 million and $72.2 million of the
increase in revenues for the three and six months ended September 30, 1998,
respectively, resulted from revenues of companies acquired subsequent to
September 30, 1997 and revenues of companies acquired prior to September 30,
1997, but which did not contribute to revenues for the full three and six month
periods ended September 30, 1997. The remaining net sales increase during these
periods resulted from sales growth of existing service centers coupled with
incremental sales generated in connection with exclusive and semiexclusive
vendor relationships.
Gross Profit. Gross profit for the three months ended September 30, 1998
totaled $103.0 million, an increase of $16.4 million or 18.9% over the three
months ended September 30, 1997 total of $86.6 million. Gross profit for the
six months ended September 30, 1998 totaled $197.7 million, an increase of $34.3
million or 21.0% over the six months ended September 30, 1997 total of $163.4
million. Gross profit as a percentage of net sales was 28.1% and 27.1% for the
three months and 27.9% and 26.9% for the six months ended September 30, 1998 and
1997, respectively. The increase in gross margin as a percentage of sales is
attributable to an increase in the sales mix of higher margin diagnostic
equipment, an increase in sales of higher margin private label medical supplies
by the Physician Supply Business, the ability to negotiate lower product
purchasing costs which resulted from increased purchasing volume subsequent to
the Gulf South acquisition, and improved Imaging Business margins resulting from
a film vendor maintaining margin dollars rebated to the Company while reducing
film pricing to hospital customers. Although there has been considerable gross
margin pressure from competition and a consolidating customer base, the Company
has successfully maintained its overall gross margins.
14
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
General and Administrative Expenses. General and administrative expenses for
the three months ended September 30, 1998 totaled $50.0 million, a decrease of
$(0.6) million or (1.2)% over the three months ended September 30, 1997 total of
$50.6 million. General and administrative expenses for the six months ended
September 30, 1998 totaled $98.6 million, an increase of $5.6 million or 6.0%
over the six months ended September 30, 1997 total of $93.0 million. As a
percentage of net sales, general and administrative expenses were 13.7% and
15.8% for the three months and 13.9% and 15.3% for the six months ended
September 30, 1998 and 1997, respectively.
Included in general and administrative expenses for the three and six months
ended September 30, 1997 are unusual operating charges of approximately $4.4
million and $5.8 million, respectively. Excluding the unusual operating
charges, adjusted general and administrative expenses for the three months ended
September 30, 1998 totaled $49.9 million, an increase of $3.8 million or 8.2%
over the three months ended September 30, 1997 adjusted total of $46.1 million.
Adjusted general and administrative expenses for the six months ended September
30, 1998 totaled $98.3 million, an increase of $11.2 million or 12.9% over the
six months ended September 30, 1997 adjusted total of $87.1 million. As a
percentage of net sales, adjusted general and administrative expenses were 13.6%
and 14.4% for the three months and 13.9% and 14.3% for the six months ended
September 30, 1998 and 1997, respectively. Excluding the effect of the unusual
operating charges, the decrease in general and administrative expenses as a
percentage of net sales resulted from the continued leveraging of costs such as
rents, salaries, and other fixed overhead expenses that have not increased as
quickly as the growth in revenues. In addition, the Imaging Business, which
operates with lower general and administrative expenses than the Company as a
whole, has grown and contributes a greater portion of overall general and
administrative expenses.
General and administrative expenses include unusual operating charges related
to merger costs and expenses resulting from merger activity, restructuring costs
and expenses, and other unusual items. The following table summarizes the
components of the unusual operating charges included in general and
administrative expenses (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Merger costs and expenses:
Direct transaction costs $ -- $ 713 $ -- $ 713
Involuntary employee termination -- 15 -- 15
Other exit costs -- 1,110 300 1,110
------- ------ ------ ------
Total merger costs and expenses -- 1,838 300 1,838
Other unusual items:
Gulf South operational tax charge -- 767 -- 1,534
ESOP cost of acquired company -- 1,839 -- 2,457
------- ------ ------ ------
Total unusual items -- 2,606 -- 3,991
Total unusual charges included in continuing operations $ -- $4,444 $ 300 $5,829
======= ====== ====== ======
</TABLE>
15
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Merger Costs and Expenses
In connection with Company's merger activity, PSS incurs transaction costs
directly related to the merger. In addition, management develops formal plans
to exit certain activities, including the involuntary termination of certain
employees. Management's plans to exit an activity include identification of
duplicate facilities for closure and identification of facilities for
consolidation into other facilities. Management anticipates completion of these
plans will occur within one year from the date in which the plans were
formalized.
Direct transaction costs primarily consist of investment banking, legal,
accounting, and filing fees related to the Company's merger activity.
Involuntary employee termination costs are employee severance costs and
termination benefits. Other exit costs include facility closure, fixed asset
write-offs, and lease termination costs. These costs were recognized as of the
consummation date of the acquisitions.
Other Unusual Items
During fiscal 1998, Gulf South recorded operational charges primarily related
to state and local, sales and use, and property taxes that are normally charged
directly to the customer at no cost to the Company. In addition, penalties and
interest are included in the charges because payments to tax authorities were
not remitted by Gulf South in a timely manner. Gulf South changed its tax
compliance procedures subsequent to fiscal 1998; therefore, management believes
these tax charges will be nonrecurring.
The ESOP cost of acquired company is a result of the merger with S&W X-Ray,
Inc. ("S&W") in the second quarter of fiscal 1998. S&W sponsored a leveraged
employee stock ownership plan (''S&W ESOP'') that covered all employees with one
year of service. The Company accounted for this ESOP in accordance with SOP 93-
6. Accordingly, the debt of the ESOP was recorded as debt of the Company, and
the shares pledged as collateral were reported as unearned ESOP shares in the
balance sheet. As shares were released from collateral, the Company reported
compensation expense equal to the then current market price of the shares, and
the shares became outstanding for the earnings-per-share (EPS) computation.
During fiscal 1998, the Company released the remaining shares to the S&W ESOP
participants. Accordingly, approximately $2.5 million of related expense was
recognized in fiscal 1998.
Selling Expenses. Selling expenses for the three months ended September 30,
1998 totaled $29.6 million, an increase of $5.7 million or 23.8% over the three
months ended September 30, 1997 total of $23.9 million. Selling expenses for
the six months ended September 30, 1998 totaled $56.1 million, an increase of
$9.8 million or 21.2% over the six months ended September 30, 1997 total of
$46.3 million. As a percentage of sales, selling expenses were 8.1% and 7.5%
for the three months ended September 30, 1998 and 1997, respectively, and 7.9%
and 7.6% for the six months ended June 30, 1998 and 1997, respectively. Selling
expenses as a percentage of sales increased due to a change in the Gulf South
sales commission program from a primarily fixed salary plan to a variable
commission plan, and the company-wide addition of approximately 100 sales
trainees over the number of sales trainees in the comparable prior year period.
The Company utilizes a variable commission plan, which pays commissions based on
gross profit as a percentage of net sales.
Operating Income. Operating income for the three months ended September 30,
1998 totaled $23.4 million, an increase of $11.3 million or 93.4% over the three
months ended September 30, 1997 total of $12.1 million. Operating income for
the six months ended September 30, 1998 totaled $43.0 million, an increase of
$18.8 million or 77.7% over the six months ended September 30, 1997 total of
$24.2 million. As discussed in the analysis of general and administrative
expenses, operating results include unusual operating charges related to merger
costs and expenses resulting from merger activity, restructuring costs, and
expenses.
16
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The following table reconciles the effect of the unusual operating charges
included in continuing operations on operating income (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-----------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Operating Income $23,445 $12,124 $43,024 $24,174
Total unusual charges included in continuing operations -- 4,444 300 5,829
------- ------- ------- -------
Adjusted Operating Income $23,445 $16,568 $43,324 $30,003
======= ======= ======= =======
</TABLE>
Excluding the effect of unusual operating charges, adjusted operating income
for the three months ended September 30, 1998 totaled $23.4 million, an increase
of $6.8 million or 41.0% over the three months ended September 30, 1997 adjusted
total of $16.6 million. Adjusted operating income for the six months ended
September 30, 1998 totaled $43.3 million, an increase of $13.3 million or 44.3%
over the six months ended September 30, 1997 adjusted total of $30.0 million due
to the factors previously discussed.
Interest Expense. Interest expense for three months ended September 30, 1998
increased approximately $2.7 million compared to the three months ended
September 30, 1997. Interest expense for six months ended September 30, 1998
increased approximately $5.4 million compared to the six months ended September
30, 1997. Interest expense increased due to the $125.0 million 8.5% senior
subordinated debt outstanding during the three and six months ended September
30, 1998. Interest expense of $0.3 million and $0.6 million for the three and
six months ended September 30, 1997, respectively, primarily results from
interest on existing debt of a pooled Imaging Business company prior to
acquisition.
Interest and Investment Income. Interest and investment income for three and
six months ended September 30, 1998 increased approximately $0.8 million and
$1.7 million, respectively, compared to the three and six months ended September
30, 1997 due to the investment of the remaining net proceeds from the debt
offering which occurred in October 1997.
Other Income. Other income for the three months ended September 30, 1998
totaled $1.3 million, an increase of $0.6 million or 85.7% over the three months
ended September 30, 1997 total of $0.7 million. Other income for the six months
ended September 30, 1998 totaled $2.0 million, an increase of $0.9 million or
81.8% over the six months ended September 30, 1997 total of $1.1 million. Other
income consists of finance charges on customer accounts and financing
performance incentives. The increase in other income results from the growth in
the Company's operations.
Provision For Income Taxes. Provision for income taxes for the three months
ended September 30, 1998 totaled $9.3 million, an increase of $4.0 million or
75.5% over the three months ended September 30, 1997 total of $5.3 million.
Provision for income taxes for the six months ended September 30, 1998 totaled
$17.0 million, an increase of $6.6 million or 63.5% over the six months ended
September 30, 1997 total of $10.4 million. The income tax provision computation
is affected by the non-deductible nature of certain non-recurring merger costs
and expenses in the period in which they are incurred.
17
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Net Income. Net income for the three months ended September 30, 1998 totaled
$13.9 million, an increase of $6.1 million or 78.2% over the three months ended
September 30, 1997 total of $7.8 million. Net income for the six months ended
September 30, 1998 totaled $25.1 million, an increase of $9.4 million or 59.9%
over the six months ended September 30, 1997 total of $15.7 million. As a
percentage of net sales, net income was 3.8% and 2.4% for the three months and
six months 3.5% and 2.6% for the six months ended September 30, 1998 and 1997,
respectively.
Excluding the effect of unusual operating charges, adjusted net income for
the three months ended September 30, 1998 totaled $13.9 million, an increase of
$3.8 million or 37.6% over the three months ended September 30, 1997 total of
$10.1 million. Adjusted net income for the six months ended September 30, 1998
totaled $25.7 million, an increase of $6.8 million or 36.0% over the six months
ended September 30, 1997 total of $18.9 million.
The following table presents net income and earnings per share for the three
and six months ended September 30, 1998 and 1997, as reported, and adjusted net
income and earnings per share excluding unusual operating charges (in millions,
except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- ----------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net income $13.9 $ 7.8 $25.1 $15.7
Adjusted net income (a) $13.9 $10.1 $25.7 $18.9
Earnings per share:
Basic $0.20 $0.11 $0.36 $0.23
Diluted $0.20 $0.11 $0.35 $0.23
Adjusted earnings per share (a):
Basic $0.20 $0.15 $0.37 $0.28
Diluted $0.20 $0.15 $0.36 $0.28
</TABLE>
(a) Adjusted net income and adjusted earnings per share for the three and six
months ended September 30, 1998 and 1997 excludes the effect of unusual
operating charges, net of tax, included in general and administrative
expenses. See the discussion concerning the nature of the unusual operating
charges in the general and administrative section of Management's Discussion
and Analysis of the Results of Operations.
GULF SOUTH'S RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 3, 1998 AND
MARCH 31, 1997
The Company acquired Gulf South March 26, 1998 in a transaction accounted for
as a pooling-of-interests. The financial statements have been retroactively
restated as if Gulf South and the Company had operated as one entity since
inception. As discussed in Note 1 Basis of Presentation, due to a change in
Gulf South's fiscal year end to conform with that of the Company, the results of
operations of Gulf South for the period January 1, 1998 to April 3, 1998 are not
reflected in the condensed consolidated statements of operations for any periods
presented. Following is management's discussion and analysis of the financial
condition and results of operations of Gulf South for the three months ended
April 3, 1998 as compared to the three months ended March 28, 1997.
18
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED APRIL 3, 1998 VERSUS MARCH 28, 1997 (GULF SOUTH SUBSIDIARY
ONLY)
During the three months ended April 3, 1998, in connection with the merger
with the Company, Gulf South recorded merger costs and expenses of $7.1
million, restructuring costs and expenses of $5.8 million, and other unusual
items of $24.5 million. Management believes these charges are either direct
transaction costs, or of a nonrecurring or unusual nature and are not indicative
of the future results of Gulf South. Management's discussion and analysis
addresses the comparative quarters excluding the impact of these unusual
charges. The components of the $37.4 million unusual charges are specifically
addressed below under the caption Charges Included in Continuing Operations as
well as Note 3 - Charges in Continuing Operations in the Condensed Consolidated
Financial Statements herein.
The following table includes the unaudited results of Gulf South for the three
months ended April 3, 1998 as adjusted for the unusual charges discussed above
and the three months ended March 28, 1997 (in thousands):
<TABLE>
<CAPTION>
REMOVAL OF THREE MONTHS
THREE MONTHS THE EFFECT OF ENDED THREE MONTHS
ENDED UNUSUAL APRIL 3, 1998 ENDED
(UNAUDITED) APRIL 3, 1998 CHARGES AS ADJUSTED MARCH 28, 1997
------------------ -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 87,018 $ -- $87,018 $64,609
Cost of good sold 69,202 (3,573) 65,629 47,860
-------- -------- ------- -------
Gross profit 17,816 3,573 21,389 16,749
General and administrative 47,963 (33,870) 14,093 8,878
Selling expenses 2,939 -- 2,939 2,279
-------- -------- ------- -------
Income (loss) from operations (33,086) 37,443 4,357 5,592
Other income, net 321 -- 321 465
-------- -------- ------- -------
Income (loss) before provision for income taxes (32,765) 37,443 4,678 6,057
Provision (benefit) for income taxes (11,862) 13,597 1,735 2,246
-------- -------- ------- -------
Net income (loss) $(20,903) $ 23,846 $ 2,943 $ 3,811
======== ======= ======= =======
</TABLE>
Net Sales. Net sales for the three months ended April 3, 1998 totaled $87.0
million, an increase of $22.4 million or 34.7% over net sales of $64.6 million
for the three months ended March 31, 1997. The increase in net sales was
attributable to the addition of national chain customers and the acquisition of
a medical supply company during the three months ended December 31, 1997 which
contributed approximately $5.8 million during the three months ended April 3,
1998. The acquisition was accounted for utilizing the purchase method of
accounting and accordingly the results of the acquired company is included from
the date of acquisition.
Gross Profit. Gross profit, excluding the unusual charges discussed above,
for the three months ended April 3, 1998 totaled $21.4 million, an increase of
$4.7 million or 28.1% over the three months ended March 31, 1997 total of $16.7
million due to higher sales. Gross profit, as a percentage of net sales was
24.6% and 25.9% for the three months ended April 3, 1998 and March 31, 1997,
respectively. The decrease in gross profit as a percentage of net sales is
attributable to i) the increase in the portion of the customer base represented
by national chain customers which produce lower gross profit as a percentage of
sales but require lower distribution costs as a percentage of sales, and ii) the
lower gross profit percentage of the company acquired. Historically, management
has raised the gross profit percentage of acquired companies by reducing
purchase costs as a result of increased purchase volume.
19
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
General and Administrative Expenses. General and administrative expenses,
excluding the unusual charges discussed above, for the three months ended
April 3, 1998 totaled $14.1 million, an increase of $5.2 million or 58.4% over
the three months ended March 31, 1997 total of $8.9 million. As a percentage of
net sales, general and administrative expenses were 16.2% and 13.7% for the
three months ended April 3, 1998 and March 31, 1997, respectively. The increase
in general and administrative expenses as a percentage of net sales is primarily
attributable to increased operating costs, inefficiencies due to Gulf South's
merger with the Company, and loss of efficiencies resulting from the process of
integrating acquired distribution centers.
Charges Included in Continuing Operations. During the three months ended
April 3, 1998, Gulf South recorded $37.4 million in charges related to merger
and restructuring costs and expenses, asset impairment charges, and other
unusual operating charges. The following table summarizes the major categories
of these charges.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
APRIL 3, 1998
------------
<S> <C>
Merger costs and expenses:
Direct transaction costs $ 5,271
Involuntary employee termination 178
Other exit costs 1,625
-------
Total merger costs and expenses 7,074
Restructuring costs and expenses:
Involuntary employee termination 2,462
Other exit costs 3,322
-------
Total restructuring costs and expenses 5,784
Other unusual items:
Increase in allowance for doubtful accounts 5,114
Increase in allowance for obsolete inventory 3,573
Gulf South operational tax charges, litigation
expenses, and other unusual charges 13,853
Asset impairment charges 2,045
-------
Total unusual items 24,585
Total unusual charges included in continuing operations $37,443
=======
</TABLE>
Merger and Restructuring Costs and Expenses
A majority of the merger and restructuring costs and expenses component of
these charges are directly related to the merger with PSS World Medical, Inc.
which closed on March 26, 1998. Refer to Note 3 Charges Included in Continuing
Operations for a summary of the components and nature of items classified as
merger and restructuring costs and expenses.
20
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Other Unusual Items
The increase in the allowances for accounts receivable and inventory reflect
the differing plans, uses and collection efforts between current management of
the Company and former management of Gulf South, and are the result of applying
accounting methods at Gulf South consistent with those of the Company.
Subsequent to establishing these allowance accounts, Gulf South charged off a
significant portion against the allowances as the result of non-realization of
accounts receivable and inventories. The valuation allowance for inventory was
recorded as an adjustment to cost of sales and the valuation allowance for
accounts receivable was recorded as an adjustment to general and administrative
expenses for the three months ended April 3, 1998.
Gulf South operational tax charges, litigation expenses, and other unusual
charges primarily relate to the Gulf South operational tax issues discussed in
Note 3 Charges in Continuing Operations. In addition, these charges include
expenses related to a settled dispute between Gulf South and a competitor, and
accruals for anticipated expenses related to certain pending Gulf South related
litigation further discussed in Note 6 Commitments and Contingencies.
The asset impairment charges relate to the impairment of goodwill and
information systems. The goodwill impairment relates to a prior Gulf South
acquisition where a dispute with the acquired company's prior owners and
management resulted in the loss of key employees and all information related to
the acquired customer base which affected Gulf South's ability to conduct
business. The information systems impairment charge relates to a decision made
by management in the fourth quarter of fiscal 1998 to replace its current
information systems. Due to the merger with PSS World Medical, Inc., management
concluded that its existing information systems were not compatible with those
of PSS. As a result, management determined that the value of the related assets
had been impaired and an impairment charge was recorded. The amount of the
impairment charge was the excess of the carrying value over the fair value of
the assets.
Selling Expenses. Selling expenses for the three months ended April 3, 1998
totaled $2.9 million, an increase of $0.6 million or 26.1% over the three months
ended March 31, 1997 total of $2.3 million. As a percentage of sales, selling
expenses decreased to 3.4% for the three months ended April 3, 1998 from 3.5%
for the three months ended March 31, 1997. The decrease in selling expense as a
percentage of net sales is the result of the increase in the portion of the
customer base represented by national chain customers on which Gulf South does
not pay sales commissions.
Operating Income. Operating income, excluding the charges discussed above,
for the three months ended April 3, 1998 totaled $4.4 million, a decrease of
$1.2 million or 21.4% over the three months ended April 3, 1997 total of $5.6
million. Operating income decreased primarily due to i) the change in
accounting for operating costs of companies, ii) infrastructure investments made
in connection with the strategic objectives of the Company, and iii) the lower
gross profit percentage of companies acquired, each discussed above.
Provision For Income Taxes. Gulf South recorded a tax benefit for income
taxes for the three months ended April 3, 1998, of $11.9 million compared to a
tax provision of $2.2 million for the three months ended March 31, 1998. The
benefit primarily resulted from the $37.4 million in unusual charges related to
merger and restructuring costs, asset impairment charges, and other unusual
operating charges recorded during the three months ended April 3, 1998.
Net Income. Net income, excluding the charges discussed above, for the three
months ended April 3, 1998 totaled $2.9 million, a decrease of $1.1 million or
28.9% over the three months ended March 31, 1997 total of $3.8 million. The
decrease in net income is attributable to the factors discussed in Operating
Income above, and the decrease in investment income of $144,000 due to the use
of cash and investments for business acquisitions.
21
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business grows, its cash and working capital requirements
will also continue to increase as a result of the need to finance acquisitions
and anticipated growth of the Company's operations. This growth will be funded
through a combination of cash flow from operations, anticipated revolving credit
borrowings from a line of credit facility the Company is negotiating, use of
proceeds from the $125.0 million senior subordinate notes offering, and any
future public offerings.
Net cash used by operating activities was $15.3 million for the six months
ended September 30, 1998, compared to net cash provided by operating activities
of $18.6 million for the six months ended September 30, 1997, due to the timing
of accounts receivable collections, payments of merger and acquisition expenses,
and the timing of fiscal year end vendor payments and employee incentive based
compensation payments.
Net cash used in investing activities was $2.5 million for the six months
ended September 30, 1998. This primarily resulted from $53.3 million provided
by the sale and maturities of marketable securities offset by $44.4 million
related to purchase business acquisitions, $10.0 million related to capital
expenditures, of which approximately $5.0 million pertained to new information
system expenditures, and other corporate purposes. Net cash provided by
investing activities was $19.0 million for the six months ended September 30,
1997. This primarily resulted from $30.2 million provided by the sale and
maturities of marketable securities offset by $4.9 million relate to purchase
business acquisitions and capital expenditures of $4.9 million.
Net cash used in financing activities was $3.3 million for the six months
ended September 30, 1998. This primarily resulted from $4.7 million in payoffs
of debt assumed through business acquisitions offset by $1.6 million in proceeds
from the issuance of common stock. Net cash used in financing activities was
$53.9 million for the six months ended September 30, 1997. This primarily
resulted from $54.8 million in payoffs of debt assumed through business
acquisitions offset by $0.9 million in proceeds from the issuance of common
stock.
The Company had working capital of $347.3 million and $384.1 million as of
September 30, 1998 and April 3, 1998, respectively. Accounts receivable, net of
allowances, were $249.1 million and $210.0 million at September 30, 1998 and
April 3, 1998, respectively. The days sales in accounts receivable was
approximately 58.3 for the six months ended September 30, 1998 and 54.3 days for
the year ended April 3, 1998. Excluding the effects of an acquisition completed
during the last two weeks of September 1998, days sales in accounts receivable
was approximately 57.6 for the six months ended September 30, 1998.
Inventories were $126.3 million and $122.5 million as of September 30, 1998
and April 3, 1998, respectively. The Company had annualized inventory turnover
of 8.2x and 8.3x for the six months ended September 30, 1998 and the year ended
April 3, 1998, respectively. Excluding the effects of an acquisition completed
during the last two weeks of September 1998, the Company had annualized
inventory turnover of 8.5x for the six months ended September 30, 1998.
Inventory financing has historically been achieved through negotiating extended
payment terms from suppliers.
Earnings before interest expense, taxes, depreciation and amortization
("EBITDA") totaled approximately $55.2 million for the six months ended
September 30, 1998. EBITDA margin and coverage was approximately 7.5% and 9.2x,
respectively, for the same period. Excluding the effects of unusual charges
included in operating income, adjusted EBITDA totaled approximately $55.5
million for the six months ended September 30, 1998. EBITDA margin and coverage
was approximately 7.8% and 9.3x, respectively, for the same period.
22
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The following table presents EBITDA and other financial data for the three and
six months ended September 30, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income before provision for income taxes $23.1 $13.1 $ 42.1 $ 26.1
Plus: Interest Expense 3.0 0.3 6.0 0.6
EBIT (a) 26.1 13.4 48.1 26.7
Plus: Depreciation and amortization 3.5 2.7 7.1 5.4
EBITDA (b) 29.6 16.1 55.2 32.1
Unusual Charges Included in Continuing Operations -- 4.4 0.3 5.8
Adjusted EBITDA (c) 29.6 20.5 55.5 37.9
Adjusted interest expense (d) 3.0 3.0 6.0 5.9
EBITDA Coverage (e) 9.9x 5.4x 9.2x 5.4x
EBITDA Margin (f) 8.1% 5.0% 7.8% 5.3%
Adjusted EBITDA Coverage (g) 9.9x 6.8x 9.3x 6.4x
Adjusted EBITDA Margin (h) 8.1% 6.4% 7.8% 6.2%
Cash (used in) provided by operating activities $(15.3) $ 18.6
Cash (used in) provided by investing activities $ (2.5) $ 19.0
Cash used in financing activities $ (3.3) $(53.9)
</TABLE>
- - ----------------------
(a) EBIT represents income before income taxes and interest expense.
(b) EBITDA represents EBIT plus depreciation and amortization.
(c) Adjusted EBITDA represents EBITDA plus unusual charges included in
continuing operations.
(d) Adjusted interest expense equals historical interest expense plus an
estimate of interest expense on the $125.0 million 8.5% senior subordinated
notes for any period prior to the issuance of the notes in October 1997.
(e) EBITDA coverage represents the ratio of EBITDA to adjusted interest
expense.
(f) EBITDA margin represents the ratio of EBITDA to net sales.
(g) Adjusted EBITDA coverage represents the ratio of Adjusted EBITDA to
adjusted interest expense.
(h) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to net
sales.
EBITDA is not a measure of performance or financial condition under generally
accepted accounting principles ("GAAP"). EBITDA is not intended to represent
cash flow from operations and should not be considered as an alternative measure
to income from operations or net income computed in accordance with GAAP, as an
indicator of the Company's operating performance, as an alternative to cash flow
from operating activities, or as a measure of liquidity. In addition, EBITDA
does not provide information regarding cash flows from investing and financing
activities which are integral to assessing the effects on the Company's
financial position and liquidity as well as understanding the Company's
historical growth. The Company believes that EBITDA is a standard measure of
liquidity commonly reported and widely used by analysts, investors, and other
interested parties in the financial markets. However, not all companies
calculate EBITDA using the same method and the EBITDA numbers set forth above
may not be comparable to EBITDA reported by other companies. Adjusted EBITDA as
defined in the Company's $125.0 million 8.5% senior subordinated note indenture
is provided for the holders of those notes.
23
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company has historically maintained an asset-backed, revolving credit
facility. This credit facility expired during the first quarter of fiscal 1999.
The Company's wholly owned subsidiary, Gulf South, had a $15.0 million revolving
credit facility that matured on September 25, 1998. The Company is currently in
the process of negotiating a $125.0 million credit facility with a syndicate of
banks and expects to close the facility by the end of the third quarter of
fiscal 1999. As of September 30, 1998, management believes the Company's $82.7
million in cash and short-term investments and operating cash flows are adequate
to maintain working capital and capital expenditure requirements. The $125.0
million credit facility currently under negotiation will be available for future
acquisition purposes. As of September 30, 1998, the Company has not entered
into any material working capital commitments that require funding.
On October 7, 1997, the Company issued, in a private offering under Rule 144A
of the Securities Act of 1933, an aggregate principal amount of $125.0 million
of its 8.5% senior subordinated notes due in 2007 (the "Private Notes") with net
proceeds to the Company of $119.5 million after deduction for offering costs.
The Private Notes are unconditionally guaranteed on a senior subordinated basis
by all of the Company's domestic subsidiaries. On February 10, 1998, the
Company closed its offer to exchange the Private Notes for senior subordinated
notes (the "Notes") of the Company with substantially identical terms to the
Private Notes (except that the Notes do not contain terms with respect to
transfer restrictions). Interest on the Notes accrues from the date of original
issuance and is payable semiannually on April 1 and October 1 of each year,
commencing on April 1, 1998, at a rate of 8.5% per annum. The semiannual
payments of approximately $5.3 million will be funded by the operating cash flow
of the Company. No other principal payments on the Notes are required over the
next five years. The Notes contain certain restrictive covenants that, among
other things, limit the Company's ability to incur additional indebtedness.
Provided, however, that no event of default exist, additional indebtedness may
be incurred if the Company maintains a consolidated fixed charge coverage ratio,
after giving effect to such additional indebtedness, of greater than 2.0 to 1.0.
The Company believes it is in compliance with all debt covenants as of September
30, 1998 and April 3, 1998.
The Company believes that the expected cash flows from operations, bank
borrowings, the net proceeds of the debt offering, and capital markets should be
adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures and scheduled payments of interest on its debts
for the foreseeable future.
YEAR 2000
The Company is currently replacing a majority of its internal information
systems hardware and software with new systems ("New Systems") that are year
2000 compliant. These New Systems will be used in several key areas of the
Company's business, including inventory management, purchasing, order
processing, shipping, receiving, , accounts payable, accounts receivable, and
financial reporting. The Company expects to incur internal payroll costs,
consulting fees, and hardware and software costs for preparation and
implementation of these New Systems. The total expected cost of implementation
is estimated to be approximately $15.0 million through fiscal 2000, with $5.0
million incurred through September 30, 1998. The anticipated impact and costs
of the project is based on management's best estimates using information
currently available. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Based on
its current estimates and information currently available, the Company does not
anticipate that the costs associated with this project will have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows in future periods.
Concurrent with the New Systems implementation, the Company has developed a
contingency plan that consists of modifications and replacement to existing
information system software and hardware for year 2000 compliance. Management
has proceeded to implement this contingency plan in order to reduce year 2000
compliance risk and expects to complete this plan by the fourth quarter of
fiscal 1999.
24
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The potential risks associated with the year 2000 issues include, but are not
limited to, temporary disruption of the Company's operations in the areas of
inventory management, purchasing, order processing, shipping, receiving,
accounts payable, accounts receivable, and financial reporting. In addition
communications with customers, vendors, and other outside parties may be
disrupted. Implementation of the New System entails contacting suppliers to
ensure compatibility with the Company's information systems and to discuss year
2000 compliance issues. There can be no assurance that the systems of other
companies which the Company's systems rely upon will be timely converted, or
that such failure to convert by another company would not have a material
adverse effect on the Company's systems and results of operations.
Although the Company anticipates that minimal business disruption will occur
as a result of the year 2000 issues, based upon currently available information,
incomplete or untimely resolution of year 2000 issues by either the Company or
significant suppliers, customers and critical business partners could have a
material adverse impact on the Company's consolidated financial position,
results of operations and/or cash flows in future periods.
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigations
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business and
economic conditions ;successful implementation of the Company's year 2000
compliance plan, and other factors described from time to time in the Company's
reports filed with the Securities and Exchange Commission. The Company wishes
to caution readers not to place undue reliance on any such forward-looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
25
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its current officers and directors are named as
defendants in a purported securities class action lawsuit entitled Jack Hirsch
v. PSS World Medical, Inc., et al., Civil Action No. 98-502-cv-J-21A. The
action, which was filed on or about May 28, 1998, is pending in the United
States District Court for the Middle District of Florida. The plaintiff alleges,
for himself and for a purported class of similarly situated stockholders that
allegedly purchased the Company's stock between December 27, 1997 and May 8,
1998, that the defendants engaged in violations of certain provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5
promulgated thereunder. The allegations are based upon a decline in the PSS
stock price following an announcement by PSS in May 1998 regarding the Gulf
South Merger which resulted in earnings below analysts' expectations. The
plaintiff seeks damages, including costs and expenses. The Company believes that
the allegations contained in the complaint are without merit and intends to
defend vigorously against the claims. However, the lawsuit is in the earliest
stages, and there can be no assurance that this litigation will be ultimately
resolved on terms that are favorable to the Company.
Gulf South Medical Supply, Inc. ("Gulf South"), a wholly owned subsidiary of
the Company, and certain of its current and former officers and directors, among
others, are named as defendants in two purported securities class action
lawsuits entitled Ernest Klein v. Gulf South Medical Supply, Inc., et al., Civil
Action No. 3:97cv526WS, and Ann Krupnick v. Gulf South Medical Supply, Inc., et
al., Civil Action No. 3:97cv525BN. Both actions, which were filed on July 21,
1997, are pending in the United States District Court for the Southern District
of Mississippi, Jackson Division. The plaintiff in the Klein action alleges, for
himself and for a purported class of similarly situated stockholders that
allegedly purchased stock in Gulf South's June 1996 public offering of its
common stock (the "June 1996 Offering"), that the defendants engaged in
violations of certain provisions of the Securities Act of 1933, as amended, and
Mississippi state law. The plaintiff in the Krupnick action alleges for herself
and for a purported class of similarly situated stockholders who purchased Gulf
South Common Stock between May 2, 1996 and July 22, 1996, that the defendants
engaged in certain violations of the Exchange Act, Rule 10b-5 promulgated
thereunder and Mississippi state law. Plaintiffs allege that the defendants
artificially inflated the price of Gulf South stock by representing that Gulf
South was "well positioned" to grow by increasing its sales to existing
customers, including one of its largest customers Living Centers of America
("Living Centers"), after defendants had been informed by Living Centers that
its distribution arrangement with Gulf South was being terminated in favor of a
rival medical supply distributor. On August 21, 1998, the court filed an Order
dismissing all the allegations in the Krupnick action. The same Order also
dismissed the claims against Defendants Hixon, Piper, Tibbitts, Pritchard,
Boyer, and Gulf South under section 12(2) of the Securities Act and
corresponding claims against Defendants Hixon and Gulf South under section 15 of
the Securities Act and Miss. Code Ann. Sections 75-71-717(a)(2) and 75-71-719 in
the Klein action. Plaintiff's claims against Defendants Bogetz, Hecktman, and
McInnes under section 11 of the Securities Act and against the Underwriter
Defendants under sections 12(2) and 15 of the Securities Act, and the
corresponding state law claims, remain pending in the Klein case. Plaintiffs
seek damages, including costs and expenses. The Company believes that the
allegations contained in the remaining complaints are also without merit and
intends to defend vigorously against the claims. However, there can be no
assurance that this litigation will ultimately be resolved on terms that are
favorable to the Company.
The Company has been named in a purported patent infringement suit filed by
Bayer Corp. ("Bayer") in the United States District Court for the Middle
District of Florida (No. 89-235 Civ. J-21A). In this lawsuit, Bayer alleges that
certain of the urinalysis test strips sold under the Penny Saver (TM) name
infringe four Bayer patents. The products are made by YeongDong Pharmaceuticals
("YD"), which has agreed in writing to indemnify and defend the Company against
the infringement claims. YD denies the products infringe the patents. In
addition, the Company has indemnity rights against the U.S. distributor of the
product, BioSys Laboratories, pursuant to its vendor agreement. To date, YD has
fulfilled its defense obligations in the case. Chemical analysis testing of the
products conducted under the joint supervision of the parties, however,
indicates that some representations YD made to the Company about the technology
used by YD in one of the tests on the strip were incorrect. The Company
continues to vigorously contest
26
<PAGE>
Bayer's claims, but has agreed to remove those Penny Saver (TM) urinalysis test
strip products containing a test pad for leukocytes. There can be no assurance
that this litigation will ultimately be resolved on terms that are favorable to
the Company.
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 a
party to various legal and administrative legal proceedings and claims arising
in the normal course of business. While any litigation contains an element of
uncertainty, management believes that, other than as discussed above, the
outcome of any proceedings or claims which are pending or known to be threatened
will not have a material adverse effect on the Company's consolidated financial
position, liquidity, or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the Company's shareholders was held on September 3,
1998.
(a) The following persons were elected to serve as Class II directors for a
three-year term and received the number of votes as set opposite their names:
<TABLE>
<CAPTION>
Name For Withheld
- - ------------------------------- ---------------------------------- ----------------------------------
<S> <C> <C>
Melvin L. Hecktman 51,867,659 453,304
Delores P. Kesler 50,594,369 1,726,594
David A. Smith 51,795,163 525,800
</TABLE>
(b) The following are the results of the vote on the proposal to ratify the
adoption of the Company's Amended and Restated Director's Stock Plan:
<TABLE>
<CAPTION>
For Against Abstain
- - ------------------------------- ---------------------------------- ----------------------------------
<S> <C> <C>
32,257,300 19,567,412 496,251
</TABLE>
27
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation dated March 15, 1994, as amended.(13)
3.2 Amended and Restated Bylaws dated March 15, 1994.(1)
4.1 Form of Indenture, dated as of October 7, 1997, by and among the Company, the Subsidiary
Guarantors named therein, and SunTrust Bank, Central Florida, National Association, as Trustee.(2)
4.2 Registration Rights Agreement, dated as of October 7, 1997, by and among the Company, the
Subsidiary Guarantors named therein, BT Alex. Brown Incorporated, Salamon Brothers Inc. and
NationsBanc Montgomery Securities, Inc.(2)
4.3 Form of 81/2% Senior Subordinated Note due 2007, including Form of Guarantee (Private Notes).(2)
4.4 Form of 81/2% Senior Subordinated Note due 2007, including Form of Guarantee (Exchange
Notes).(2)
4.5 Shareholder Protection Rights Agreement, dated as of April 20, 1998, between PSS World Medical,
Inc. and Continental Stock Transfer & Trust Company, as Rights Agent.(12)
10.1 Registration Rights Agreement between the Company and Tullis-Dickerson Capital Focus, LP, dated
as of March 16, 1994.(3)
10.2 Employment Agreement for Patrick C. Kelly.(14)
10.3 Incentive Stock Option Plan dated May 14, 1986.(3)
10.4 Shareholders Agreement dated March 26, 1986, between the Company, the Charthouse Co., Underwood,
Santioni and Dunaway.(3)
10.5 Shareholders Agreement dated April 10, 1986, between the Company and Clyde Young.(3)
10.6 Shareholders Agreement between the Company and John D. Barrow.(3)
10.7 Amended and Restated Directors Stock Plan.(8)
10.8 Amended and Restated 1994 Long-Term Incentive Plan.(8)
10.9 Amended and Restated 1994 Long-Term Stock Plan.(8)
10.10 1994 Employee Stock Purchase Plan.(4)
10.11 1994 Amended Incentive Stock Option Plan.(3)
10.12 Amended and Restated Loan and Security Agreement between the Company and NationsBank of Georgia,
N.A. dated December 21, 1994.(5)
10.13 Distributorship Agreement between Abbott Laboratories and Physician Sales & Service, Inc.
(Portions omitted as confidential--Separately filed with Commission).(6)
</TABLE>
28
<PAGE>
<TABLE>
<C> <S>
10.14 Stock Purchase Agreement between Abbott Laboratories and Physician Sales & Service, Inc.(6)
10.15 Amendment to Employee Stock Ownership Plan.(8)
10.15a Amendment and Restatement of the Physician Sales and Service, Inc. Employee Stock Ownership and
Savings Plan.(8)
10.15b First Amendment to the Physician Sales and Service, Inc. Employee Stock Ownership and Savings
Plan.(8)
10.16 Third Amended and Restated Agreement and Plan of Merger By and Among Taylor Medical, Inc. and
Physician Sales & Service, Inc. (including exhibits thereto).(7)
10.17 Agreement and Plan of Merger by and Among Physician Sales & Service, Inc., PSS Merger Corp. and
Treadway Enterprises, Inc.(9)
10.18 Amended and Restated Agreement and Plan of Merger, dated as of August 22, 1997, among the
Company, Diagnostic Imaging, Inc., PSS Merger Corp. and S&W X-ray, Inc.(10)
10.19 Agreement and Plan of Merger dated December 14, 1997 by and among the Company, PSS Merger Corp.
and Gulf South Medical Supply, Inc.(11)
27 Financial Data Schedule (for SEC use only)
</TABLE>
(1) Incorporated by Reference to the Company's Registration Statement on
Form S-3, Registration No. 33-97524.
(2) Incorporated by Reference to the Company's Registration Statement on
Form S-4, Registration No. 333-39679.
(3) Incorporated by Reference from the Company's Registration Statement on
Form S-1, Registration No. 33-76580.
(4) Incorporated by Reference to the Company's Registration Statement on
Form S-8, Registration No. 33-80657.
(5) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 1994.
(6) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 30, 1995.
(7) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 29, 1996.
(8) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996.
(9) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed January 3, 1997.
(10) Incorporated by Reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-33453.
(11) Incorporated by Reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-44323.
(12) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 22, 1998.
(13) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 8, 1998.
(14) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended April 3, 1998.
(b) Reports on Form 8-K
None.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on November 16, 1998.
PSS World Medical, Inc.
/s/ DAVID A. SMITH
---------------------------------
David A. Smith
Executive Vice President and
Chief Financial Officer
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-02-1999
<PERIOD-START> APR-04-1998
<PERIOD-END> SEP-30-1998
<CASH> 61,059
<SECURITIES> 21,684
<RECEIVABLES> 249,064
<ALLOWANCES> 0
<INVENTORY> 126,341
<CURRENT-ASSETS> 519,807
<PP&E> 34,820
<DEPRECIATION> 0
<TOTAL-ASSETS> 698,761
<CURRENT-LIABILITIES> 172,524
<BONDS> 127,960
0
0
<COMMON> 702
<OTHER-SE> 395,862
<TOTAL-LIABILITY-AND-EQUITY> 698,761
<SALES> 708,608
<TOTAL-REVENUES> 708,608
<CGS> 510,944
<TOTAL-COSTS> 510,944
<OTHER-EXPENSES> 153,603
<LOSS-PROVISION> 1,037
<INTEREST-EXPENSE> 6,033
<INCOME-PRETAX> 42,140
<INCOME-TAX> 16,995
<INCOME-CONTINUING> 25,145
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,145
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.35
</TABLE>
