FORM 10-Q/A
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 59-2280364
(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 70,674,110 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, (Restated) 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended September 30, 1998 and 1997,(Restated) 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended September 30, 1998 and 1997, (Restated) 5
Notes to Condensed Consolidated Financial Statements -
September 30, 1998 and 1997, (Restated) 6
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations (Restated) 23
PART II: OTHER INFORMATION
Item 1--Legal Proceedings 39
Item 2--Changes in Securities and Use of Proceeds 40
Item 4--Submission of Matters to a Vote of Security Holders 40
Item 6--Exhibits and Reports on Form 8-K 41
SIGNATURES 43
</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)
ASSETS
<TABLE>
<CAPTION>
September 30, April 3,
1998 1998
------------- ----------
(Restated) (Restated)
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 60,580 $ 81,483
Marketable securities 21,684 81,550
Accounts receivable, net 251,410 213,869
Inventories 129,665 126,926
Employee advances 597 442
Prepaid expenses and other 58,093 45,409
------------- ----------
Total current assets 522,029 549,679
Property and equipment, net 39,196 31,473
Other Assets:
Intangibles, net 124,931 90,608
Other 19,681 19,494
------------- ----------
Total assets $ 705,837 $691,254
============= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $104,138 $109,790
Accrued expenses 56,010 48,081
Current maturities of long-term debt and capital lease obligations 8,988 3,570
Other 11,949 7,058
------------- ----------
Total current liabilities 181,085 168,499
Long-term debt and capital lease obligations, net of current portion 131,418 134,057
Other 1,704 4,121
------------- ----------
Total liabilities 314,207 306,677
------------- ----------
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, 70,544,213 and
70,171,909 shares issued and outstanding at September 30, 1998 and April 3, 705 702
1998, respectively
Additional paid-in capital 346,287 341,987
Retained earnings 48,646 46,021
Cumulative other comprehensive income (1,217) (1,296)
------------- ----------
394,421 387,414
Unearned ESOP shares (2,791) (2,837)
------------- ----------
Total shareholders' equity 391,630 384,577
------------- ----------
Total liabilities and shareholders' equity $705,837 $691,254
============= ==========
</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
(Restated) (Restated) (Restated) (Restated)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $387,366 $344,242 $754,928 $659,555
Cost of goods sold 282,465 253,721 552,829 487,894
------------- ------------- ------------- -------------
Gross profit 104,901 90,521 202,099 171,661
General and administrative expenses 52,310 54,277 106,833 100,368
Selling expenses 29,773 24,891 56,469 48,296
------------- ------------- ------------- -------------
Income from operations 22,818 11,353 38,797 22,997
------------- ------------- ------------- -------------
Other income (expense):
Interest expense (3,040) (584) (6,133) (1,135)
Interest and investment income 1,397 558 3,145 1,395
Other income 1,258 749 2,020 1,171
------------- ------------- ------------- -------------
(385) 723 (968) 1,431
------------- ------------- ------------- -------------
Income before provision for income taxes 22,433 12,076 37,829 24,428
Provision for income taxes 9,126 4,876 15,654 9,648
------------- ------------- ------------- -------------
Net income $ 13,307 $ 7,200 $ 22,175 $ 14,780
============= ============= ============= =============
Earnings per share:
Basic $0.19 $0.10 $0.31 $0.21
============= ============= ============= =============
Diluted $0.19 $0.10 $0.31 $0.21
============= ============= ============= =============
Weighted average shares outstanding (in thousands):
Basic 70,439 69,433 70,412 68,882
============= ============= ============= =============
Diluted 71,413 70,239 71,412 69,672
============= ============= ============= =============
</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
------------- -------------
(Restated) (Restated)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $22,175 $14,780
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 9,627 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) (424)
Accounts payable, accrued expenses and other liabilities (23,210) 7,545
------------- -------------
Net cash (used in) provided by operating activities (15,200) 19,388
------------- -------------
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 79 (619)
------------- -------------
Net decrease in cash and cash equivalents (20,903) (16,175)
Cash and cash equivalents, beginning of period 81,483 41,106
------------- -------------
Cash and cash equivalents, end of period $60,580 $24,931
============= =============
</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 (Restated)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
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 Medical
Imaging Systems, Inc. ("MIS") and TriStar Imaging Systems, Inc. ("TriStar")
acquired during fiscal 1999 and various acquired companies previously accounted
for as immaterial pooling-of-interests transactions (the "Pooled Entities").
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, MIS, TriStar, and the
Pooled Entities had operated as one entity since inception.
The Company's previously issued financial statements included in Form 10-Q for
the three and six months ended September 30, 1998 are being restated for: 1) the
information systems accelerated depreciation, (2) the reversal of Gulf South
Medical Supply, Inc. ("Gulf South") direct transaction costs, (3) the reversal
of the Gulf South restructuring charge, and (4) the immaterial Pooled Entities
(refer to Note 10--Restatements). In addition, the financial statements for the
three and six months ended September 30, 1997 are being restated for: (1) a
correction of an error in recording certain operating expenses at Gulf South,
and (2) the immaterial Pooled Entities (refer to Note 10--Restatements).
The Company's fiscal year ends on the Friday closest to March 31 of each year.
Prior to April 4, 1998, Gulf South's year-end was December 31. 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 year-end. As such, Gulf South's results of
operations for the period January 1, 1998 to April 3, 1998 are not included in
any of the periods presented in the accompanying condensed consolidated
statements of income. Accordingly, Gulf South's results of operations for the
three months ended April 3, 1998 are reflected as an adjustment to shareholders'
equity of the Company as of April 4, 1998. Refer to the section titled Gulf
South's Results of Operations 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 Company's three and six months ended
September 30, 1998 condensed consolidated financial statements include the
combined results of operations for the period from April 4, 1998 to September
30, 1998, of both PSS and Gulf South. The following table provides a rollforward
of retained earnings from April 3, 1998 to September 30, 1998:
<TABLE>
<CAPTION>
Rollforward
of
Retained
Earnings
-----------
(Restated)
<S> <C>
Retained earnings, April 3, 1998................................................................. $46,021
Gulf South results of operations, January 1, 1998 to April 3, 1998............................... (19,550)
-----------
Retained earnings, April 4, 1998................................................................. 26,471
Net income for the six months ended September 30, 1998........................................... 22,175
-----------
Retained earnings, September 30, 1998............................................................ $48,646
===========
</TABLE>
6
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
The accompanying condensed consolidated financial statements should be read in
conjunction with the financial statements and related notes in the Company's
1999 Annual Report on Form 10-K/A. 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 recorded in the other comprehensive income
component of shareholders' equity. 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.
NOTE 2--BUSINESS ACQUISITIONS
Purchase Acquisition
On September 21, 1998, the Company acquired certain assets and assumed certain
liabilities of an imaging supply and equipment distributor. A summary of the
details of the transaction follows:
September 30,
1998
-------------
Total consideration........................... $49,397
Cash paid, net of cash acquired............... 37,145
Goodwill recorded............................. 30,576
Value of noncompete agreements................ 700
The operations of the acquired company has been included in the Company's
results of operations subsequent to the date of acquisition. Supplemental pro
forma information, assuming this acquisition had been made at the beginning of
the year, is not provided, as the results would not be materially different from
the Company's reported results of operations.
This acquisition was accounted for under the purchase method of accounting, and
accordingly, the assets of the acquired company have been recorded at their
estimated fair values at the date of the acquisition. The excess of the purchase
price over the estimated fair value of the net assets acquired has been recorded
as goodwill and is amortized over 30 years.
7
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
The accompanying condensed consolidated financial statements reflect the
preliminary allocation of the purchase price. The allocation of the purchase
price, performed using values and estimates available as of the date of the
financial statements, has not been finalized due to certain pre-acquisition
contingencies identified by the Company and the nature of the estimates required
in the establishment of the Company's merger integration plans. Accordingly,
goodwill associated with this acquisition may increase or decrease in fiscal
1999.
The following table summarizes the adjustments recorded against goodwill during
the three months ended September 30, 1998:
Three Months
Ended
September 30,
1998
-------------
Reversal of excess accrued merger costs and expenses........... $ (1,125)
Integration plan accrual....................................... 747
-------------
$ (378)
=============
During the three months ended September 30, 1998, the Company reversed $1,125 of
accrued merger costs and expenses that management determined to be unnecessary
due to changes in estimates in an integration plan for General X-Ray, Inc.
("GXI"). Management evaluates integration plans at each period end and
determines if revisions to the accruals are appropriate. Such revisions to the
original estimates are made directly to goodwill. Refer to Note 4--Accrued
Merger and Restructuring Costs and Expenses, for further discussion of the
reversal.
Integration plan accrual
The Company recorded $747 of additional goodwill at the time an integration plan
was formalized. Refer to Note 4--Accrued Merger and Restructuring Costs and
Expenses, for further discussion regarding the integration plan.
NOTE 3--CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES
In addition to typical general and administrative expenses, this line includes
charges related to merger activity, restructuring activity, and other special
items. The following table summarizes charges included in general and
administrative expenses in the accompanying condensed consolidated statements of
operations:
8
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(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
------------- ------------- ------------- -------------
(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Merger costs and expenses......................... $ (343) $1,862 $ 486 $1,886
Restructuring costs and expenses.................. 516 -- 2,511 --
Information systems accelerated depreciation...... 1,010 -- 2,509 --
Gulf South operational tax charge ................ -- 767 -- 1,534
Other charges..................................... -- 1,839 -- 2,457
------------- ------------- ------------- -------------
Total charges..................................... $ 1,183 $4,468 $5,506 $5,877
============= ============= ============= =============
</TABLE>
Merger Costs and Expenses
The Company's policy is to accrue merger costs and expenses at the commitment
date of an integration plan if certain criteria under EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity ("EITF 94-3") or 95-14, Recognition of Liabilities in Anticipation of a
Business Combination ("EITF 95-14"), are met. Merger costs and expenses recorded
at the commitment date primarily include charges for involuntary employee
termination costs, branch shut-down costs, lease termination costs, and other
exit costs.
If the criteria described in EITF 94-3 or EITF 95-14 are not met, the Company
records merger costs and expenses as incurred. Merger costs expensed as incurred
include the following: (1) costs to pack and move inventory from one facility to
another or within a facility in a consolidation of facilities, (2) relocation
costs paid to employees in relation to an acquisition accounted for under the
pooling-of-interests method of accounting, (3) systems or training costs to
convert the acquired companies to the current existing information system, (4)
training costs related to conforming the acquired companies operational policies
to that of the Company's operational policies, and (5) direct transaction costs
primarily consisting of investment banking, legal, accounting, and filing fees
related to mergers with the Company. In addition, amounts incurred in excess of
the original amount accrued at the commitment date are expensed as incurred.
Merger costs and expenses for the three months ended September 30, 1998, include
$434 of charges for merger costs expensed as incurred, which related to direct
transaction costs from the merger with TriStar. In addition, the Company
reversed $777 of accrued merger costs and expenses into income, which related to
direct transaction costs in connection with the Gulf South merger. Due to
subsequent negotiations and an agreement between the Company and its service
provider, actual costs paid were less than costs originally estimated, billed
and recorded.
Merger costs and expenses for the three months ended September 30, 1997, include
$737 of charges for merger costs expensed as incurred, which related to direct
transaction costs. In addition, merger costs and expenses include amounts
incurred in excess of the original amounts accrued at commitment dates. Such
costs include involuntary employee termination costs, branch shut-down costs,
and lease termination costs of $15, $1,043, and $67, respectively.
Restructuring Costs and Expenses
Restructuring costs and expenses for the three months ended September 30, 1998
include $118 of charges for training costs related to conforming the acquired
companies operation policies to that of the Company's
9
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
operational policies. The remaining $398 of restructuring costs and expenses
recorded are charges for other exit costs. Other exit costs include costs
to pack and move inventory, costs to set up new facilities, employee
relocation costs, and other related facility closure costs.
Information Systems Accelerated Depreciation
In connection with the Gulf South merger during fiscal 1998, management
evaluated the adequacy of the combined companies' information systems. The
Company concluded that its existing information systems were not compatible with
those of Gulf South's and not adequate to support the future internal growth of
the combined companies and expected growth resulting from future acquisitions.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, the Company evaluated the recoverability of the information
system assets. Based on the Company's analysis, impairment did not exist at the
division level; therefore, management reviewed the depreciation estimates in
accordance with Accounting Principles Board ("APB") No. 20, Accounting Changes.
Effective April 4, 1998, the estimated useful lives of the PSS, DI, and GSMS
division information systems were revised to a range of 12 to 15 months, which
was the original estimate of when the new systems implementation would be
completed. For the three and six months ended September 30, 1998, the $1,010 and
$2,509 of charges, respectively, represent the incremental impact on
depreciation expense resulting from management's decision to replace its
information systems.
Gulf South Operational Tax Charge
The Company, in connection with the filing of its fiscal 1998 financial
statements, restated for certain operational tax compliance issues in the
financial statements of Gulf South for the year ended December 31, 1997. As
such, Gulf South recorded operational charges of $767 and $1,534 during the
three months and six months ended September 30, 1997, respectively, 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. Interest is included
in the above charges as Gulf South did not timely remit payments to tax
authorities. The Company reviewed all available information, including tax
exemption notices received, and recorded charges to expense, during the period
in which the tax noncompliance issues arose.
Other Charges
The other charges recorded in three months and six months ended September 30,
1997 relate to the ESOP cost of an acquired company. S&W X-Ray, Inc.("S&W"), a
company acquired by the Imaging Business during fiscal 1998, 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, Employers Accounting for Employee Stock Ownership Plans. 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 the six months
ended September 30, 1997, the Company released the remaining shares to the S&W
ESOP participants. Accordingly, approximately $1,839 and $2,457 of related
expenses were recognized in three and six months ended September 30, 1997,
respectively.
10
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
NOTE 4--ACCRUED MERGER AND RESTRUCTURING COSTS AND EXPENSES
Summary of Accrued Merger Costs and Expenses
In connection with the consummation of business combinations, management often
develops formal plans to exit certain activities, involuntarily terminate
employees, and relocate employees of the acquired companies. Management's plans
to exit an activity often include identification of duplicate facilities for
closure and identification of facilities for consolidation into other
facilities.
Generally, completion of the integration plans will occur within one year from
the date in which the plans were formalized and adopted by management. However,
intervening events occurring prior to completion of the plan, such as subsequent
acquisitions or system conversion issues, can significantly impact a plan that
had been previously established. Such intervening events may cause modifications
to the plans and are accounted for on a prospective basis. At the end of each
quarter, management reevaluates its integration plans and adjusts previous
estimates.
As part of the integration plans, certain costs are recognized at the date in
which the plan is formalized and adopted by management (commitment date). These
costs are generally related to employee terminations and relocation, lease
terminations, and branch shutdown. In addition, there are certain costs that do
not meet the criteria for accrual at the commitment date and are expensed as the
plan is implemented (refer to Note 3--Charges Included in General and
Administrative Expenses). Involuntary employee termination costs are employee
severance costs and termination benefits. Lease termination costs are lease
cancellation fees and forfeited deposits. Branch shutdown costs include costs
related to facility closure costs. Employee relocation costs are moving costs of
employees of an acquired company in transactions accounted for under the
purchase method of accounting.
Accrued merger costs and expenses, classified as accrued expenses in the
accompanying consolidated balance sheets, were $2,562 and $ 4,327, at September
30, 1998 and April 3, 1998, respectively. The discussion and rollforward of the
accrued merger costs and expenses below summarize the significant and
nonsignificant integration plans adopted by management for business combinations
accounted for under the purchase method of accounting and pooling-of-interests
method of accounting. Integration plans are considered to be significant if the
charge recorded to establish the accrual is in excess of 5% of consolidated
pretax income.
Significant Pooling-of-Interests Business Combination Plan
The Company formalized and adopted an integration plan in December 1997 to
integrate the operations of S&W with the Imaging Business. The following accrued
merger costs and expenses were recognized in the accompanying condensed
consolidated statements of operations at the commitment date.
11
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
A summary of the merger activity related to the S&W merger is as follows:
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
----------- ----------- -------- --------
<S> <C> <C> <C> <C>
Balance at April 3, 1998............................... $156 $540 $461 $1,157
Additions........................................... -- -- -- --
Utilized............................................ (2) -- (143) (145)
----------- ----------- -------- --------
Balance at June 30, 1998............................... 154 540 318 1,012
Adjustments -- -- -- --
Additions........................................... -- -- -- --
Utilized............................................ -- -- (138) (138)
----------- ----------- -------- --------
Balance at September 30, 1998.......................... $154 $540 $180 $ 874
=========== =========== ======== ========
</TABLE>
Involuntary employee termination costs are costs for seven employees, including
severance and benefits, who represent duplicative functions in the accounting,
purchasing, human resource, and computer support departments at locations where
facilities were combined into existing facilities. As of September 30, 1998, one
employee has been terminated and the remaining six employees are estimated to be
terminated by the end of second quarter of fiscal 2000. Management identified
seven distribution facilities to be closed or merged due to duplicative
functions. Three of the seven identified distribution facilities had been
shut down by September 30, 1998, with the remaining four locations estimated
to be shut down by the second quarter of fiscal 2000. Included in branch
shutdown costs are costs related to contractual obligations that existed prior
to the merger date but will provide no ongoing value to the Company.
Nonsignificant Poolings-of-Interests Business Combination Plans
The following accrued merger costs and expenses were recognized in the
accompanying condensed consolidated statements of operations at the date in
which the integration plan was formalized and adopted by management. A summary
of the merger activity related to seven nonsignificant pooling-of-interests
business combinations completed during fiscal 1997 through the six months ended
September 30, 1998, respectively, is as follows:
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
----------- ----------- -------- --------
<S> <C> <C> <C> <C>
Balance at April 3, 1998................................ $165 $253 $518 $936
Adjustments........................................ -- -- -- --
Additions.......................................... 74 -- 126 200
Utilized........................................... (17) (117) (280) (414)
----------- ----------- -------- --------
Balance at June 30, 1998................................ 222 136 364 722
Adjustments........................................ -- -- -- --
Additions.......................................... -- -- -- --
Utilized........................................... (2) (57) (313) (372)
----------- ----------- -------- --------
Balance at September 30, 1998........................... $220 $ 79 $ 51 $350
=========== =========== ======== ========
</TABLE>
12
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
The Imaging Business acquired MIS in June 1998, and management formalized and
adopted an integration plan in June 1998 to integrate the operations of the
acquired company. Approximately $103 of the $ 350 accrued merger costs and
expenses at September 30, 1998 relate to this integration plan. Involuntary
employee termination costs are costs for six employees, including severance and
benefits, who represent duplicative functions in the accounting, purchasing, and
computer support departments at the acquired company's corporate office. As of
September 30, 1998, one employee had been terminated. Management identified one
distribution facility to be closed in which all operations would be ceased due
to duplicative functions. The Company expects closure of this facility to occur
in the second quarter of fiscal 2000.
The remaining $247 of the $350 accrued merger costs and expenses at September
30, 1998 relate to several small integration plans for which the Company expects
completion by April 2, 1999.
Significant Purchase Business Combination Plan
The Company formalized and adopted an integration plan in September 1997 to
integrate the operations of General X-Ray, Inc. ("GXI") with the Imaging
Business. The following accrued merger costs and expenses were recognized and
additional goodwill was recorded at the commitment date. A summary of the GXI
merger accruals is as follows:
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch
Relocation Termination Termination Shutdown
Costs Costs Costs Costs Total
---------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at April 3, 1998.................. $162 $197 $1,090 $785 $2,234
Adjustments......................... -- -- -- -- --
Additions........................... -- -- -- -- --
Utilized............................ (2) -- (60) (90) (152)
---------- ----------- ----------- --------- ---------
Balance at June 30, 1998................. 160 197 1,030 695 2,082
Adjustments......................... (125) (85) (883) (32) (1,125)
Additions........................... -- -- -- -- --
Utilized............................ (35) (3) (81) (663) (782)
---------- ----------- ----------- --------- ---------
Balance at September 30, 1998............ $ -- $109 $ 66 $ -- $ 175
========== =========== =========== ========= =========
</TABLE>
The Company identified nine distribution facilities to be closed and all
operations would be ceased due to duplicative functions. As of September 30,
1998, all facilities have been closed and operations have ceased. Relocation
costs were recorded related to the transfer of approximately 15 GXI employees.
As of September 30, 1998, all employees were relocated. Involuntary employee
termination costs are costs for 19 employees, including severance and benefits,
who represent duplicative functions as service and operations leaders, customer
service representatives, and accounting personnel at locations where facilities
would be combined. As of September 30, 1998, five employee have been terminated,
and the Company expects the remaining 14 employees to be terminated by the end
of fiscal 1999.
Certain intervening events occurred that modified the execution of the GXI
integration plan. Due to growth from a subsequent acquisition and improvement in
the operating results for a distribution facility previously identified to
13
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
be closed, certain merger accruals were not utilized. Therefore, an adjustment
was recorded during the three months ended September 30, 1998 to reverse
$1,125 of excessive accruals against goodwill. Refer to Note 2 - Business
Acquisitions.
Nonsignificant Purchase Business Combination Plans
The following accrued merger costs and expenses were recognized and additional
goodwill was recorded at the date in which the integration plans were formalized
and adopted by management. A summary of the merger activity related to four
nonsignificant purchase business combinations during fiscal 1998 through the six
months ended September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch
Relocation Termination Termination Shutdown
Costs Costs Costs Costs Total
---------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at April 3, 1998...................... $ -- $ -- $ -- $ -- $ --
Additions from Gulf South subsidiary....... -- 102 100 250 452
---------- ----------- ----------- --------- ---------
Balance at April 4, 1998...................... -- 102 100 250 452
Adjustments................................ -- -- -- -- --
Additions.................................. -- -- -- -- --
Utilized................................... -- (11) (2) -- (13)
---------- ----------- ----------- --------- ---------
Balance at June 30, 1998...................... -- 91 98 250 439
Adjustments................................ -- -- -- --
Additions.................................. 100 -- 246 401 747
Utilized................................... -- -- (22) (1) (23)
---------- ----------- ----------- --------- ---------
Balance at September 30, 1998................. $100 $ 91 $322 $650 $1,163
========== =========== =========== ========= =========
</TABLE>
The additions from the Gulf South subsidiary represents the additions of the
accrued merger costs and expenses recorded by Gulf South during the period
January 1 to April 3, 1998. No amounts were utilized during this period. Gulf
South formalized and adopted an integration plan during the period January 1 to
April 3, 1998. Approximately $415 of the $1,163 accrued merger costs and
expenses at September 30, 1998 relate to this integration plan. Involuntary
employee termination costs are costs for 23 employees, including severance and
benefits, who represent duplicative functions in the accounting, purchasing,
human resource, warehouse and computer support departments at locations where
facilities were combined into existing facilities. As of September 30, 1998, 17
employees have been terminated. Management identified two distribution
facilities to be closed in which all operations would be ceased due to
duplicative functions, both of which had been shut down by September 30, 1998.
Included in branch shutdown costs are costs related to contractual obligations
that existed prior to the merger date but will provide no ongoing value to the
Company.
The Imaging Business acquired a company in September 1998 and management
formalized and adopted an integration plan in the three months ended September
30, 1998 to integrate the operations of the acquired company. The remaining $748
of the $1,163 accrued merger costs and expenses at September 30, 1998 relate to
this integration plan. Relocation costs are for four employees, and no one has
been relocated as of September 30, 1998. Management identified five distribution
facilities to be closed in which all operations would be ceased due to
duplicative functions, none of which had been shut down by September 30, 1998.
Included in branch shutdown costs are costs related to contractual obligations
that existed prior to the merger date but will provide no ongoing value to the
Company. Management anticipates this integration plan will be completed during
fiscal 2000; however, lease termination payments will extend through fiscal
2003.
14
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Summary of Accrued Restructuring Costs and Expenses
Primarily as a result of the impact of the Gulf South merger, in order to
improve customer service, reduce costs, and improve productivity and asset
utilization, the Company decided to realign and consolidate its operations.
Accordingly, the Company began implementing a restructuring plan during the
fourth quarter of fiscal 1998, which impacted all divisions ("Plan A").
Subsequently, the Company adopted a second restructuring plan during the three
months ended June 30, 1998 related to the Gulf South division ("Plan B") to
further consolidate its operations.
The Company recorded a total accrual of $7,972 related to Plan A. Approximately
$3,691 of the $7,972 total restructuring charge was related to the PSS and DI
divisions and was recorded in the accompanying condensed consolidated statement
of operations for the fiscal 1998. The additions from the Gulf South represent
restructuring costs and expenses of $4,281 recorded by Gulf South during the
unconsolidated period January 1 to April 3, 1998. No amounts were utilized
during this period. This charge is not included in the accompanying condensed
consolidated statements of operations; rather it is included in the retained
earnings adjustment recorded on April 4, 1998. Refer to Note 1--Basis of
Presentation, for a discussion regarding the different year-ends of Gulf South
and the Company.
Accrued restructuring costs and expenses, classified as accrued expenses in the
accompanying consolidated balance sheets, were $6,694 and $3,691, at September
30, 1998 and April 3, 1998, respectively. A summary of the restructuring plan
activity is as follows:
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch Other
Termination Termination Shutdown Exit
Costs Costs Costs Costs Total
----------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at April 3, 1998........................ $1,570 $1,389 $ 627 $105 $3,691
Additions from Gulf South subsidiary......... 1,880 406 1,455 540 4,281
----------- ----------- --------- -------- --------
Balance at April 4, 1998........................ 3,450 1,795 $2,082 645 $7,972
Adjustments.................................. -- -- -- -- --
Additions.................................... 652 570 281 -- 1,503
Utilized..................................... (842) (191) (857) (159) (2,049)
----------- ----------- --------- -------- --------
Balance at June 30, 1998........................ 3,260 $2,174 $1,506 $486 $7,426
Adjustments.................................. -- -- -- -- --
Additions.................................... -- -- -- -- --
Utilized..................................... (233) (237) -- (262) (732)
----------- ----------- --------- -------- --------
Balance at September 30, 1998................... $3,027 $1,937 $1,506 $ 224 $6,694
=========== =========== ========= ======== ========
</TABLE>
Plan A
Restructuring Plan A impacted all divisions, and involved merging 18 locations
into existing locations and eliminating overlapping regional operations and
management functions. As of September 30, 1998, 15 locations were merged into
existing locations. The plan also included the termination of approximately 270
employees from operations, administration, and management. As of September 30,
1998, 166 employees were terminated as a result of the plan. Furthermore, branch
shutdown costs include the costs to implement Best Practice Warehousing at the
Gulf South division in order to provide efficient, consistent, standard service
to Gulf South customers similar to the
15
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Company's established standards. Best Practice Warehousing involves removal of
all products, tearing down racking, rebuilding racking, and relocating bins and
products within the warehouse to achieve greater efficiencies in order filling.
The amount of costs was estimated based upon the size of the warehouse.
Plan B
During the three months ended June 30, 1998, the Company established an
additional accrual of $1,503 related to Plan B. Restructuring Plan B related
only to the Gulf South division, and involved merging six additional locations
into existing locations. As a result of the consolidation of the duplicate
facilities, lease termination costs will be incurred through fiscal 2000. At
September 30, 1998, three of the six locations had been shut down. The plan also
included the termination of three employees from operations and management. As
of September 30, 1998, no employees were terminated as a result of the plan.
NOTE 5--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 months and
six months ended September 30, 1998 and 1997, as detailed in the following
table:
<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........................................... $13,307 $7,200 $22,175 $14,780
============== ============= ============= =============
Other comprehensive income, net of tax:
Foreign currency translation adjustment........... 49 (241) 79 (619)
-------------- ------------- ------------- -------------
Comprehensive income................................. $13,356 $6,959 $22,254 $14,161
============== ============= ============= =============
</TABLE>
NOTE 6--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:
16
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(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 income.......................................... $13,307 $7,200 $22,175 $14,780
============= ============= ============= =============
Earnings per share:
Basic............................................ $0.19 $0.10 $0.31 $0.21
============= ============= ============= =============
Diluted.......................................... $0.19 $0.10 $0.31 $0.21
============= ============= ============= =============
Weighted average shares outstanding (in thousands):
Common shares.................................... 70,439 69,433 70,412 68,882
Assumed exercise of stock options................ 974 806 1,000 790
------------- ------------- ------------- -------------
Diluted shares outstanding....................... 71,413 70,239 71,412 69,672
============= ============= ============= =============
</TABLE>
NOTE 7--SEGMENT INFORMATION
The Company has adopted SFAS No. 131, Disclosure About Segments of an Enterprise
and Related Information, which establishes the way public companies report
information about segments. SFAS No. 131 requires segment reporting in interim
periods and disclosures regarding products and services, geographic areas, and
major customers.
The Company's reportable segments are strategic businesses that offer different
products and services to different segments of the health care industry, and are
based upon how management regularly evaluates the Company. These segments are
managed separately because of different customers and products. These segments
include Physician Sales & Service Division (the "Physician Supply Business"),
Diagnostic Imaging, Inc. (the "Imaging Business"), Gulf South Medical Supply,
Inc. ( the "Long-Term Care Business"), and WorldMed International, Inc.
("WorldMed Int'l") combined with the Holding Company.
The Physician Supply Business is a distributor of medical supplies, equipment
and pharmaceuticals to primary care and other office-based physicians in the
United States. The Imaging Business is a distributor of medical diagnostic
imaging supplies, chemicals, equipment, and service to the acute and alternate
care markets in the United States. The Long-Term Care Business is a distributor
of medical supplies and other products to the long-term care market. WorldMed
Int'l along with WorldMed, Inc. manages and develops PSS' European medical
equipment and supply distribution market.
The Company primarily evaluates the operating performance of its segments based
on net sales and income from operations.
17
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
1998 1998
------------- -------------
<S> <C> <C>
NET SALES:
Physician Supply Business........................ $172,480 $338,335
Imaging Business................................. 121,496 235,959
Long-Term Care Business.......................... 88,456 170,953
Other (a)........................................ 4,934 9,681
------------- -------------
Total net sales......................... $387,366 $754,928
============= =============
INCOME FROM OPERATIONS:
Physician Supply Business........................ $ 12,514 $ 22,978
Imaging Business................................. 5,537 8,962
Long-Term Care Business.......................... 7,396 12,028
Other (a)........................................ (2,629) (5,171)
------------- -------------
Total income from operations............ $ 22,818 $ 38,797
============= =============
DEPRECIATION:
Physician Supply Business........................ $ 1,640 $ 3,766
Imaging Business................................. 516 1,522
Long-Term Care Business.......................... 288 661
Other (a)........................................ 75 175
------------- -------------
Total depreciation...................... $ 2,519 $ 6,124
============= =============
AMORIZATION OF INTANGIBLE AND OTHER ASSETS:
Physician Supply Business........................ $ 923 $ 1,477
Imaging Business................................. 618 1,167
Long-Term Care Business.......................... 495 859
Other (a)........................................ -- --
------------- -------------
Total amortization of intangible assets $ 2,036 $ 3,503
============= =============
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business........................ $ 115 $ 314
Imaging Business................................. 59 141
Long-Term Care Business.......................... 307 307
Other (a)........................................ 239 275
------------- -------------
Total provision for doubtful accounts... $ 720 $ 1,037
============= =============
CAPITAL EXPENDITURES:
Physician Supply Business........................ $ 4,200 $ 5,750
Imaging Business................................. 2,242 3,313
Long-Term Care Business.......................... 559 815
Other (a)........................................ 75 103
------------- -------------
Total capital expenditures.............. $ 7,076 $ 9,981
============= =============
</TABLE>
(a) Other includes the holding company and international subsidiaries for
fiscal 1999.
18
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
September 30, April 3,
1998 1998
------------- -----------
ASSETS:
Physician Supply Business................... $272,732 $320,216
Imaging Business............................ 218,857 158,698
Long-Term Care Business..................... 200,768 196,306
Other (a)................................... 13,480 16,034
------------- -----------
Total assets....................... $705,837 $691,254
============= ===========
(a) Other includes the holding company and international subsidiaries for
fiscal 1999.
NOTE 8--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.
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.
19
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
NOTE 9--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.
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 an imaging supply and
equipment distributor. This transaction was accounted for under the purchase
method of accounting. A summary of the details of the transaction follows:
Number of acquisitions......................................... 1
Total consideration............................................ $9,695
Cash paid, net of cash acquired................................ 5,145
Goodwill recorded.............................................. 5,068
Value of noncompete agreements................................. 30
NOTE 10--RESTATEMENTS
The Company has restated its historical financial statements to include the
effect of certain items as discussed below. The effect of the restatements is as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
------------------------------------------------------------------
Information Gulf South
As Systems Direct
Previously Accelerated Transaction Immaterial As
Reported Depreciation Costs Poolings Restated
---------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................................ $366,071 $ -- $ -- $21,295 $387,366
Net income............................... 13,851 (617) 475 (402) 13,307
Earnings per share:
Basic................................. $ 0.20 $ (0.01) $ 0.01 $ (0.01) $ 0.19
Diluted............................... 0.20 (0.01) 0.01 (0.01) 0.19
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997
---------------------------------------------------
As Gulf South
Previously Operating Immaterial As
Reported Expenses Poolings Restated
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales.................................................. $ 320,123 $ -- $ 24,119 $ 344,242
Net income 7,758 (727) 169 7,200
Earnings per share:
Basic................................................... $ 0.11 $ (0.01) $ 0.00 $ 0.10
Diluted................................................. 0.11 (0.01) 0.00 0.10
</TABLE>
20
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Six Months Ended September 30, 1998
-----------------------------------------------------------------------------------
Information Gulf South
As Systems Gulf South Direct
Previously Accelerated Restructuring Transaction Immaterial As
Reported Depreciation Plan B Costs Poolings Restated
---------- ------------ ------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales.............. $708,609 $ -- $ -- $ -- $ 46,319 $ 754,928
Net income............. 25,146 (1,534) (918) 475 (994) 22,175
Earnings per share:
Basic............... $ 0.36 $ (0.02) $ (0.01) $ 0.01 $ (0.02) $ 0.31
Diluted............. 0.35 (0.02) (0.01) 0.01 (0.02) 0.31
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended September 30, 1997
-------------------------------------------------
As Gulf South
Previously Operating Immaterial As
Reported Expenses Poolings Restated
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................................................. $ 608,305 $ -- $ 51,250 $ 659,555
Net income 15,678 (1,264) 365 14,780
Earnings per share:
Basic.................................................. $ 0.23 $ (0.02) $ 0.00 $ 0.21
Diluted................................................ 0.23 (0.02) 0.00 0.21
</TABLE>
Information Systems Accelerated Depreciation
The $617 and the $1,534 represent the incremental impact on depreciation
expense, net of tax, for the three and six months ended September 30, 1998,
respectively, related to the replacement of the information systems. Refer to
Note 3-Charges Included in General and Administrative Expenses for a further
discussion regarding the accelerated depreciation.
Gulf South Direct Transaction Costs
Direct transaction costs primarily consist of professional fees, such as
investment banking, legal, and accounting, for services rendered through the
date of the merger. Due to subsequent negotiations and agreements between the
Company and its service provider, actual costs paid were less than costs
originally billed and recorded. As a result, approximately $475 of costs, net of
tax, were reversed against general and administrative expenses during the
quarter ended September 30, 1998.
Operating Expenses
During the three and six months ended September 30, 1997, Gulf South charged
certain operating expenses to an accrual for merger integration costs and
expenses that were established as a component of goodwill as of the date of the
acquisition. The Company determined that the operating expenses should have been
expensed as incurred and included in the accompanying condensed consolidated
statements of income. As a result, Gulf South restated its historical condensed
consolidated financial statements to include the effects of recording operating
expenses as incurred and properly stating goodwill and accrued merger costs and
expenses.
21
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Gulf South Restructuring Plan B
Gulf South previously recorded $918 million, net of tax, of restructuring costs
and expenses during the period January 1, 1998 to April 3, 1998 and, therefore,
the amount was included in the retained earnings adjustment recorded on April 4,
1998. However, the Company's condensed consolidated financial statements have
been restated to reverse the $918 million charge as certain recognition criteria
were not met. The charge was recognized when the criteria were met, which was
during the three months ended June 30, 1998.
Immaterial Poolings
The Company merged with certain imaging supply and equipment distributors in
stock mergers accounted for under the pooling-of-interests method of accounting.
Due to the immaterial effect of these acquisitions on prior periods, the
Company's previously issued financial statements included in Form 10Q for the
three months ended September 30, 1998 were not restated for the immaterial
Pooled Entities. During fiscal 1999, the Company made two additional
individually immaterial acquisitions accounted for as poolings of interests. As
such, the Company evaluated the aggregate impact of the individually immaterial
pooling of interest transactions on the Company's current and prior period
financial statements and concluded that the aggregate impact was material to the
Company's consolidated financial position taken as a whole. As a result, the
Company's condensed consolidated financial statements have been restated to
include the historical financial results of the individually immaterial
pooling-of-interest transactions for all periods.
22
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
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 50 states and five European countries. Since its inception in 1983, the
Company has become a leader in all three of the market segments it serves with a
focused, market specific approach to customer service, a consultative sales
force, strategic acquisitions, strong arrangements with product manufacturers,
innovative systems, and a unique culture of performance.
The Company, through its Physician Sales & Service division, is the leading
distributor of medical supplies, equipment, and pharmaceuticals to office-based
physicians in the United States based on revenues, number of physician-office
customers, 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 is 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.
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.
23
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
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.
RESULTS OF OPERATIONS
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 Medical
Imaging Systems, Inc. ("MIS") and TriStar Imaging Systems, Inc. ("TriStar")
acquired during fiscal 1999 and various acquired companies previously accounted
for as immaterial pooling-of-interests transactions (the "Pooled Entities").
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, MIS, TriStar, and the
Pooled Entities had operated as one entity since inception.
The Company's previously issued financial statements included in Form 10Q for
the three and six months ended September 30, 1998 are being estated for: (1) the
information systems accelerated depreciation, (2) the reversal of Gulf South
Medical Supply, Inc. ("Gulf South") direct transaction costs, (3) the reversal
24
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
of Gulf South restructuring charge, and (4) the immaterial Pooled Entities
(refer to Note 10--Restatements). In addition, the financial statements for the
three and six months ended September 30, 1997 included in the Form 10Q for the
three and six months ended September 30, 1998 are being restated for: (1)
a correction of an error in recording certain operating expenses at Gulf South,
and (2) the immaterial Pooled Entities (refer to Note 10--Restatements).
The Company's fiscal year ends on the Friday closest to March 31 of each year.
Prior to April 4, 1998, Gulf South's year-end was December 31. 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 year-end. As such, Gulf South's results of
operations for the period January 1, 1998 to April 3, 1998 are not included in
any of the periods presented in the accompanying condensed consolidated
statements of income. Accordingly, Gulf South's results of operations for the
three months ended April 3, 1998 are reflected as an adjustment to shareholders'
equity of the Company as of April 4, 1998. The Company's three and six months
ended September 30, 1998 condensed consolidated financial statements include the
combined results of operations for the period from April 4, 1998 to September
30, 1998, of both PSS and Gulf South. Refer to the section titled Gulf South's
Results of Operations for the Three Months Ended April 3, 1998 and March 31,
1997 included in Management's Discussion and Analysis 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
$387.4 million, an increase of $43.1 million or 12.5% over net sales of $344.2
million for the three months ended September 30, 1997. Net sales for the six
months ended September 30, 1998 totaled $754.9 million, an increase of $95.4
million or 14.5% over net sales of $659.6 million for the six months ended
September 30, 1997. Approximately $17.8 million and $48.3 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
$104.9 million, an increase of $14.4 million or 15.9% over the three months
ended September 30, 1997 total of $90.5 million. Gross profit for the six months
ended September 30, 1998 totaled $202.1 million, an increase of $30.4 million or
17.7% over the six months ended September 30, 1997 total of $171.7 million.
Gross profit as a percentage of net sales was 27.1% and 26.3% for the three
months and 26.8% and 26.0% 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.
General and Administrative Expenses. General and administrative expenses for the
threemonths ended September 30, 1998 totaled $52.3 million, a decrease of
$(2.0) million or (3.7)% over the three months
25
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
ended September 30, 1997 total of $54.3 million. General and administrative
expenses for the six months ended September 30, 1998 totaled $106.8 million, an
increase of $6.5 million or 6.4% over the six months ended September 30, 1997
total of $100.4 million. As a percentage of net sales, general and
administrative expenses were 13.5% and 15.8% for the three months and 14.2% and
15.2% for the six months ended September 30, 1998 and 1997, respectively.
In addition to typical general and administrative expenses, this income
statement caption includes charges related to merger activity, restructuring
activity, and other special items. The following table summarizes charges
included in general and administrative expenses in the accompanying consolidated
statements of income:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Merger costs and expenses......................... $ (343) $1,862 $ 486 $1,886
Restructuring costs and expenses.................. 516 -- 2,511 --
Information systems accelerated depreciation...... 1,010 -- 2,509 --
Gulf South operational tax charge ................ -- 767 -- 1,534
Other charges..................................... -- 1,839 -- 2,457
------------- ------------- ------------- -------------
Total charges..................................... $ 1,183 $4,468 $5,506 $5,877
============= ============= ============= =============
</TABLE>
Merger Costs and Expenses
The Company's policy is to accrue merger costs and expenses at the commitment
date of an integration plan if certain criteria under EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity ("EITF 94-3") or 95-14, Recognition of Liabilities in Anticipation of a
Business Combination ("EITF 95-14"), are met. Merger costs and expenses recorded
at the commitment date primarily include charges for involuntary employee
termination costs, branch shut-down costs, lease termination costs, and other
exit costs.
If the criteria described in EITF 94-3 or EITF 95-14 are not met, the Company
records merger costs and expenses as incurred. Merger costs expensed as incurred
include the following: (1) costs to pack and move inventory from one facility to
another or within a facility in a consolidation of facilities, (2) relocation
costs paid to employees in relation to an acquisition accounted for under the
pooling-of-interests method of accounting, (3) systems or training costs to
convert the acquired companies to the current existing information system, (4)
training costs related to conforming the acquired companies operational policies
to that of the Company's operational policies, and (5) direct transaction costs
primarily consisting of investment banking, legal, accounting, and filing fees
related to mergers with the Company. In addition, amounts incurred in excess of
the original amount accrued at the commitment date are expensed as incurred.
Merger costs and expenses for the three months ended September 30, 1998 include
$434 of charges for merger costs expensed as incurred, which related to direct
transaction costs from the merger with TriStar. In addition, the Company
reversed $777 of accrued merger costs and expenses into income, which related to
direct transaction costs in connection with the Gulf South merger. Due to
subsequent negotiations and in agreement between the Company and its service
provider, actual costs paid were less than costs originally estimated, billed,
and recorded resulting in the reversal.
26
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
Merger costs and expenses for the three months ended September 30, 1997 include
$737 of charges for merger costs expensed as incurred, which related to direct
transaction costs. In addition, merger costs and expenses include amounts
incurred in excess of the original amounts accrued at commitment dates. Such
costs include involuntary employee termination costs, branch shut-down costs,
and lease termination costs of $15, $1,043, and $67, respectively.
Restructuring Costs and Expenses
Restructuring costs and expenses for the three months ended September 30, 1998
include $118 of charges for training costs related to conforming the acquired
companies operation policies to that of the Company's operational policies. The
remaining $398 of restructuring costs and expenses recorded are charges for
other exit costs. Other exit costs include costs to pack and move inventory,
costs to set up new facilities, employee relocation costs, and other related
facility closure costs.
Information Systems Accelerated Depreciation
In connection with the Gulf South merger during fiscal 1998, management
evaluated the adequacy of the combined companies' information systems. The
Company concluded that its existing information systems were not compatible with
those of Gulf South's and not adequate to support the future internal growth of
the combined companies and expected growth resulting from future acquisitions.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, the Company evaluated the recoverability of the information
system assets. Based on the Company's analysis, impairment did not exist at the
division level; therefore, management reviewed the depreciation estimates in
accordance with Accounting Principles Board ("APB") No. 20, Accounting Changes.
Effective April 4, 1998, the estimated useful lives of the PSS, DI, and GSMS
division information systems were revised to a range of 12 to 15 months, which
was the original estimate of when the new systems implementation would be
completed. For the three months and six months ended September 30, 1998, the
$1,010 and $2,509 of charges, respectively, represent the incremental impact on
depreciation expense resulting from management's decision to replace its
information systems.
Gulf South Operational Tax Charge
The Company, in connection with the filing of its fiscal 1998 financial
statements, restated for certain operational tax compliance issues in the
financial statements of Gulf South for the year ended December 31, 1997. As
such, Gulf South recorded operational charges of $767 and $1,534 during the
three months and six months ended June 30, 1997, respectively, 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. Interest is included in the
above charges as Gulf South did not timely remit payments to tax authorities.
The Company reviewed all available information, including tax exemption notices
received, and recorded charges to expense, during the period in which the tax
noncompliance issues arose.
Other Charges
The other charges recorded in three months and six months ended September 30,
1997 relate to the ESOP cost of an acquired company. S&W, a company acquired by
the Imaging Business during fiscal 1998 sponsored
27
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
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, Employers Accounting for Employee Stock Ownership
Plans. 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 the six months ended September 30, 1997, the Company
released the remaining shares to the S&W ESOP participants. Accordingly,
approximately $1,839 and $2,457 of related expenses were recognized in three and
six months ended September 30, 1997, respectively.
Selling Expenses. Selling expenses for the three months ended September 30, 1998
totaled $29.8 million, an increase of $4.9 million or 19.6% over the three
months ended September 30, 1997 total of $24.9 million. Selling expenses for the
six months ended September 30, 1998 totaled $56.5 million, an increase of $8.2
million or 16.9% over the six months ended September 30, 1997 total of $48.3
million. As a percentage of sales, selling expenses were 7.7% and 7.2% for the
three months ended September 30, 1998 and 1997, respectively, and 7.5% and 7.3%
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 $22.8 million, an increase of $11.5 million or 101.0% over the three
months ended September 30, 1997 total of $11.4 million. Operating income for the
six months ended September 30, 1998 totaled $38.8 million, an increase of $15.8
million or 68.7% over the six months ended September 30, 1997 total of $23.0
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.
Interest Expense. Interest expense for three months ended September 30, 1998
increased approximately $2.5 million compared to the three months ended
September 30, 1997. Interest expense for six months ended September 30, 1998
increased approximately $5.0 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 $0.6 million and $1.1 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 $1.8
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 $0.5 million or 68.0% over the three months ended
September 30, 1997 total of $0.8 million. Other income for the six months ended
September 30, 1998 totaled $2.0 million, an increase of $0.9 million
28
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
or 72.5% over the six months ended September 30, 1997 total of $1.2 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 $9.1 million, an increase of $4.3 million or
87.2% over the three months ended September 30, 1997 total of $4.9 million.
Provision for income taxes for the six months ended September 30, 1998 totaled
$15.7 million, an increase of $6.0 million or 62.3% over the six months ended
September 30, 1997 total of $9.6 million. The income tax provision computation
is affected by the nondeductible nature of certain nonrecurring merger costs and
expenses in the period in which they are incurred.
Net Income. Net income for the three months ended September 30, 1998 totaled
$13.3 million, an increase of $6.1 million or 84.8% over the three months ended
September 30, 1997 total of $7.2 million. Net income for the six months ended
September 30, 1998 totaled $22.2 million, an increase of $7.4 million or 50.0%
over the six months ended September 30, 1997 total of $14.8 million. As a
percentage of net sales, net income was 3.4% and 2.1% for the three months and
six months 2.9% and 2.2% for the six months ended September 30, 1998 and 1997,
respectively.
GULF SOUTH'S RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 3, 1998
AND MARCH 31, 1997 (restated)
The Company acquired Gulf South on March 26, 1998 in a transaction accounted for
under the pooling-of-interests method of accounting. 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 the consolidation method of the Company and the differing year ends of
PSS and Gulf South, Gulf South's results of operations for the period January 1,
1998 to April 3, 1998 are not reflected in the condensed consolidated statements
of operations for any periods presented. Rather they have been recorded as an
adjustment to equity during the first quarter of fiscal 1999. 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 31, 1997.
29
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
The following table summarizes Gulf South's results of operations for the three
months ended April 3, 1998 and the three months ended March 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
April 3, 1998 March 31, 1997
------------- --------------
(Restated) (Unaudited)
<S> <C> <C>
Net sales.................................................................... $ 87,018 $64,609
Cost of goods sold........................................................... 69,202 47,860
------------- --------------
Gross profit........................................................ 17,816 16,749
General and administrative expenses.......................................... 43,020 10,524
Selling expenses............................................................. 2,939 2,279
------------- --------------
(Loss) income from operations....................................... (28,143) 3,946
Other income, net............................................................ 321 465
------------- --------------
(Loss) income before for income taxes........................................ (27,822) 4,411
(Benefit) provision for income taxes......................................... (8,272) 1,597
------------- --------------
Net (loss) income............................................................ $(19,550) $ 2,814
============= ==============
</TABLE>
In connection with the merger with the Company, Gulf South recorded an allowance
for inventory of $3.6 million, merger costs and expenses of $5.7 million,
restructuring costs and expenses of $4.3 million, and other unusual items of
$18.9 million during the three months ended April 3, 1998. 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 and
nature of these unusual charges. The components of the $32.5 million of unusual
charges are specifically addressed below under the captions Gross Profit and
General and Administrative Expenses as well as Note 3--Gulf South's Results of
Operations for the Three Months Ended April 3, 1998, and Note 4--Charges
Included in General and Administrative Expenses, in the Notes to the
Consolidated Financial Statements included herein.
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 using the purchase method of accounting
and, accordingly, the results of the acquired company is included from the date
of acquisition.
Gross Profit. Gross profit for the three months ended April 3, 1998 totaled
$17.8 million, an increase of $1.1 million or 6.4% over the three months ended
March 31, 1997 total of $16.7 million. Gross profit, as a percentage of net
sales was 20.5% 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) an allowance for inventory charge, as discussed below, (ii)
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 (iii) 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.
30
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
During the three months ended April 3, 1998, a $3.6 million allowance for
inventory charge was recorded. This charge is directly related to a change of
plans, uses, and disposition efforts which new Gulf South management had as
compared to prior management. As a result, gross profit did not increase
proportionately compared to the increase in net sales.
Gulf South previously disclosed in its fiscal 1996 Form 10-K that they had
generally been able to return any unsold or obsolete inventory to the
manufacturer, resulting in negligible inventory write-offs. Gulf South's prior
management had a policy of keeping old or overstocked inventory on the warehouse
shelf until the inventory could ultimately be sold. As such, this policy kept
the inventory on the books with what was deemed to be an appropriate
obsolescence reserve.
New management, on the other hand, determined that it was not cost effective,
from an operational standpoint, to continue warehousing and financing such old
or overstocked inventory. Also, the Company does not normally allow product with
less than desirable box or labeling conditions to be shipped to its customers.
As such, consistent with the operational policies at the Company's other
divisions, management decided to dispose of, certain inventories that did not
meet the Company's dating, box condition, or labeling requirements, or in which
excessive quantities existed.
This decision to significantly alter Gulf South's inventory retention and buying
policies, and, therefore, to dispose of the related inventories resulted in a
change in the ultimate valuation of the impacted inventories. This charge was
recognized in the period in which management made the decision to dispose of the
affected inventory, which was Gulf South's quarter ended April 3, 1998.
Selling Expenses. Selling expenses for the three months ended April 3, 1998
totaled $2.9 million, an increase of $0.7 million or 29.0% 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.
General and Administrative Expenses. General and administrative expenses for the
three months ended April 3, 1998 totaled $43.0 million, an increase of $32.5
million or 308.8% over the three months ended March 31, 1997 total of $10.5
million. As a percentage of net sales, general and administrative expenses were
49.4% and 16.3% 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 (i) merger costs and
expenses, (ii) restructuring costs and expenses, (iii) other unusual items, (iv)
increased operating costs, (v) inefficiencies due to Gulf South's merger with
the Company, and (vi) loss of efficiencies resulting from the process of
integrating acquired distribution centers.
31
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
The following table summarizes the components of the charges included in general
and administrative expenses as outlined in (i), (ii), and (iii) above (in
thousands).
<TABLE>
<CAPTION>
Three Months
Ended
April 3, 1998
-------------
<S> <C>
Reconciling items............................................................................. $ 5,863
Direct transaction costs related to the merger................................................ 5,656
Increase allowance for doubtful accounts...................................................... 5,114
Restructuring costs and expenses.............................................................. 4,281
Legal fees and settlements.................................................................... 3,577
Operational tax charge........................................................................ 2,772
Goodwill impairment charge.................................................................... 1,664
-------------
Total charges included in general & administrative expenses....................... $28,927
=============
</TABLE>
Reconciling Items. This amount represents the charge needed to reconcile
Gulf South's financial statements to its underlying books and records.
Direct Transaction Costs Related to the Merger. Direct transaction costs
primarily consist of professional fees, such as investment banking, legal, and
accounting, for services rendered through the date of the merger. As of April 2,
1999, all direct transaction costs were paid. Due to subsequent negotiations and
agreements between the Company and its service provider, actual costs paid were
less than costs originally billed and recorded. As a result, approximately $777
of costs were reversed against general and administrative expenses during the
quarter ended September 30, 1998.
Increase Allowance for Doubtful Accounts. This charge relates directly to a
change of plans and collection efforts which new management had as compared to
prior Gulf South management.
Gulf South previously disclosed in its fiscal 1996 Form 10-K that credit losses
had consistently been within management's expectations and that the Company had
not experienced any failure to collect accounts receivable from its largest
customers. Gulf South's prior management had a policy of continuing collection
efforts on aged and small receivables and keeping those receivables on the
books, with what was deemed to be an appropriate reserve.
Under new management, the collection efforts for receivables changed in order to
be consistent with the operational policies at the Company's other divisions.
Effective with the closing of the transaction, new management determined that it
was not cost effective, from an operational standpoint, to continue old
management's collection efforts on what it considered excessively old or small
customer receivables. As such, consistent with the operational policies at the
Company's other divisions, management decided to write-off the related aged
receivables.
This change in operational policies resulted in a change in the ultimate
collectability of the related receivables and this charge was recognized in the
period in which the operational decision to change collection efforts was made,
which was Gulf South's quarter ended April 3, 1998.
32
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
Restructuring Costs and Expenses. In order to improve customer service, reduce
costs, and improve productivity and asset utilization, the Company decided to
realign and consolidate its operations with Gulf South. The restructuring costs
and expenses, which directly relate to the merger with PSS World Medical, Inc.,
were recorded during the three months ended April 3, 1998. During this time
period, management approved and committed to a plan to integrate and restructure
the business of Gulf South.
The Company recorded restructuring costs and expenses for lease terminations
costs, severance and benefits to terminate employees, facility closure, and
other costs to complete the consolidation of the operations. The following table
summarizes the components of the restructuring charge.
Lease termination costs......................................... $ 977
Involuntary employee termination costs.......................... 1,879
Branch shutdown costs........................................... 885
Other exit costs................................................ 540
-------
$4,281
=======
Legal Fees and Settlements. Gulf South recorded a $2,000 accrual for legal fees
specifically related to class action lawsuits, which Gulf South, the Company,
and certain present and former directors and officers were named as defendants.
These lawsuits are further discussed in Note 19, Commitments and Contingencies.
In addition, Gulf South recorded $1,577 in charges to settle certain disputes
related to vendor and customer agreements.
Operational Tax Charge. Gulf South recorded an operational tax charge of $9,492,
of which $2,772 was recorded in the quarter ended April 3, 1998, for state and
local, sales and use, and property taxes that are normally charged directly to
the customer at no cost to the Company. Penalties and interest are included in
the above charge as Gulf South did not timely remit payments to tax authorities.
The Company reviewed all available information, including tax exemption notices
received, and recorded charges to expense, during the period in which the tax
noncompliance issues arose. See Note 4, Charges Included in General and
Administrative Expenses, and Note 22, Restatements, for more discussion related
to this issue.
Goodwill Impairment Charges. The $1,664 goodwill impairment charge relates
primarily to a prior Gulf South acquisition. During the quarter ended April 3,
1998, a dispute with the acquired company's prior owners and management resulted
in the loss of key employees and all operational information related to the
acquired customer base. This ultimately affected Gulf South's ability to conduct
business related to this acquisition, and impacted Gulf South's ability to
recover the value assigned to the goodwill asset.
(Loss) Income from Operations. Loss from operations for the three months ended
April 3, 1998 totaled $28.1 million, a decrease of $32.1 million or 813.2% over
the three months ended March 31, 1997 income from operations of $4.0 million.
Operating income decreased primarily due to (i) significant 1998 charges to cost
of sales and general and administrative expenses, (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 $8.3 million compared to a tax
provision of $1.6 million for the three months ended
33
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
March 31, 1997. The 1998 benefit primarily resulted from the $32.5 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. The effective rate of Gulf South's tax benefit during 1998
was lower than the statutory rate, primarily due to the nondeductible nature of
certain of Gulf South's direct transaction costs.
Net (Loss) Income. Net loss for the three months ended April 3, 1998 totaled
$19.6 million, a decrease of $22.4 million or 794.7% over the three months ended
March 31, 1997 net income of $2.8 million. The decrease in net income is
attributable to the factors discussed in Gross Profit and Charges Included in
General and Administrative Expenses above, and the decrease in investment income
of $144,000 due to the use of cash and investments for business acquisitions.
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 in operating activities was $15.2 million for the six months ended
September 30, 1998, compared to net cash provided by operating activities of
$19.4 million for the six months ended September 30, 1997. The decrease is 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 $1.4 million for noncompete payments. 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, capital expenditures of $4.9 million, and $1.4 million
for noncompete payments.
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 $340.9 million and $381.2 million as of
September 30, 1998 and April 3, 1998, respectively. Accounts receivable, net of
allowances, were $251.4 million and $213.9 million at September 30, 1998 and
April 3, 1998, respectively. The average number of days sales in accounts
receivable outstanding was approximately 55.5 for the six months ended September
30, 1998 (annualized) and 52.0 days for the year ended April 3, 1998.
34
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
Inventories were $129.7 million and $126.9 million as of September 30, 1998 and
April 3, 1998, respectively. The Company had inventory turnover of 8.6x and 8.7x
for the six months ended September 30, 1998 (annualized) and the year ended
April 3, 1998, respectively.
The following table presents EBITDA and other financial data for the three and
six months ended September 30, 1998 and 1997 (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>
Income before provision for income taxes $22,433 $12,076 $37,829 $24,428
Plus: Interest Expense 3,040 584 6,133 1,135
------------- ------------- ------------- -------------
EBIT (a) 25,473 12,660 43,962 25,563
Plus: Depreciation and amortization 4,555 2,744 9,627 5,354
------------- ------------- ------------- -------------
EBITDA (b) 30,028 15,404 53,589 30,917
Unusual Charges Included in Continuing Operations (h) 173 4,468 2,997 5,877
Cash Paid For Charges Included in Continuing Operations (8,604) (861) (12,998) (1,915)
------------- ------------- ------------- -------------
Adjusted EBITDA (c) 21,597 19,011 43,588 34,879
EBITDA Coverage (d) 9.9x 26.4x 8.7x 27.2x
EBITDA Margin (e) 7.8% 4.5% 7.1% 4.7%
Adjusted EBITDA Coverage (f) 7.1x 32.6x 7.1x 30.7x
Adjusted EBITDA Margin (g) 5.6% 5.5% 5.8% 5.3%
Cash (used in) provided by operating activities $(15.2) $ 19.4
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 plus interest expense.
(b) EBITDA represents EBIT plus depreciation and amortization. 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.
(c) Adjusted EBITDA represents EBITDA plus unusual charges included in
continuing operations less cash paid for unusual charges included in
continuing operations.
(d) EBITDA coverage represents the ratio of EBITDA to interest expense.
35
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
(e) EBITDA margin represents the ratio of EBITDA to net sales.
(f) Adjusted EBITDA coverage represents the ratio of Adjusted EBITDA to
interest expense.
(g) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to net
sales.
(h) Three and six months ended September 30, 1998 excludes $1,010 and
$2,510 of information systems accelerated depreciation, respectively.
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. As of
September 30, 1998, the Company is in compliance with the covenants.
As of September 30, 1998, the Company has not entered into any material working
capital commitments that require funding. The Company believes that the expected
cash flows from operations, available borrowing under the credit facility, and
capital markets are sufficient to meet the Company's anticipated future
requirements for working capital, capital expenditures, and acquisitions for the
foreseeable future.
Quantitative and qualitative disclosures about market risk
As of September 30, 1998, the Company did not hold any derivative financial or
commodity instruments. The Company is subject to interest rate risk and certain
foreign currency risk relating to its operations in Europe; however, the Company
does not consider its exposure in such areas to be material. The Company's
interest rate risk is related to its Senior Subordinated Notes, which bear
interest at a fixed rate of 8.5%.
36
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
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.
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
37
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
Management Discussion and Analysis of Financial Condition
and Results of Operations (RESTATED) - (Continued)
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.
38
<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 announcement by PSS in May 1998 regarding the Gulf South
Merger which resulted in earnings below analyst's 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. Plaintiffs' 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 SaverTM 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
39
<PAGE>
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 Bayer's claims, but has
agreed to remove those Penny SaverTM 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:
Name For Withheld
-------------------- ---------- -----------
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
(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:
For Against Abstain
----------- ----------- ---------
32,257,300 19,567,412 496,251
40
<PAGE>
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
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, Salomon 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)
</TABLE>
41
<PAGE>
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
10.13 Distributorship Agreement between Abbott Laboratories and Physician Sales & Service, Inc.
(Portions omitted as confidential--Separately filed with Commission).(6)
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.
42
<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 12, 1999.
PSS WORLD MEDICAL, INC.
/s/ DAVID A. SMITH
----------------------------
Executive Vice President and
Chief Financial Officer
43
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q/A
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFRENCE TO SUCH FINACIAL STATEMENTS
</LEGEND>
<CIK> 0000920527
<NAME> PSS WORLD MEDICAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-02-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 60,580
<SECURITIES> 21,684
<RECEIVABLES> 251,410
<ALLOWANCES> 0
<INVENTORY> 129,665
<CURRENT-ASSETS> 522,029
<PP&E> 39,196
<DEPRECIATION> 0
<TOTAL-ASSETS> 705,837
<CURRENT-LIABILITIES> 181,085
<BONDS> 125,000
0
0
<COMMON> 705
<OTHER-SE> 390,925
<TOTAL-LIABILITY-AND-EQUITY> 705,837
<SALES> 387,366
<TOTAL-REVENUES> 387,366
<CGS> 282,465
<TOTAL-COSTS> 282,465
<OTHER-EXPENSES> 81,363
<LOSS-PROVISION> 720
<INTEREST-EXPENSE> 3,040
<INCOME-PRETAX> 22,433
<INCOME-TAX> 9,126
<INCOME-CONTINUING> 13,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,307
<EPS-BASIC> 0.19
<EPS-DILUTED> 0.19
</TABLE>
