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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended April 2, 1999 Commission File Number 0-2383
PSS WORLD MEDICAL, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-2280364
(State of incorporation) (I.R.S. Employer
Identification No.)
4345 Southpoint Boulevard
Jacksonville, Florida 32216
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 332-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of common stock, par value $0.01 per share (the
"Common Stock") held by nonaffiliates, based upon the closing sales price, was
approximately $625,074,653 as of July 12, 1999. In the determination of this
amount, affiliates include all of the Company's officers, directors and
persons known to the Company to be beneficial owners of more than five percent
of the Company's Common Stock. This amount should not be deemed conclusive
for any other purpose. As of July 12, 1999, a total of 70,858,533 shares of
the Company's Common Stock were outstanding.
Document Incorporated by Reference
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of the
Registrant which will be filed with the Securities and Exchange Commission not
later than 120 days after April 2, 1999.
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PART I
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially.
Among the factors that could cause results to differ materially are the
following: the availability of sufficient capital to finance the Company's
business plans on terms satisfactory to the Company; competitive factors; the
ability of the Company to adequately defend or reach a settlement of
outstanding litigations and investigations involving the Company or its
management; changes in labor, equipment and capital costs; changes in
regulations affecting the Company's business; future acquisitions or strategic
partnerships; general business and economic conditions; 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.
Item 1. Business
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, home care providers, and hospitals through 111
service centers to customers in all 50 states and three European countries.
Since its inception in 1983, the Company has become a leader in 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
approximately 730 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 37 imaging distribution service centers with approximately 750
service specialists and 190 sales representatives ("Imaging Business") serving
over 15,000 customer sites in 41 states. The Imaging Business' primary market
is the approximately 10,000 hospitals and other alternate-site imaging
companies operating approximately 40,000 office sites throughout the United
States.
Through its wholly owned subsidiary Gulf South Medical Supply, Inc. ("GSMS"),
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. GSMS
currently operates 15 distribution service centers with approximately 160
sales representatives ("Long-Term Care Business") serving over 14,000 long-
term care facilities in all 50 states. The Long-Term Care Business'
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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 17,000 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.
COMPANY STRATEGY
The Company's objectives are to be the leading distributor and marketer of
medical products to office-based physicians, providers of imaging services,
and long-term care providers in the United States, and to enhance operating
performance. The key components of the Company's strategy to achieve these
objectives are to continue to:
Expand Operating Margins. The Company is pursuing several initiatives to
enhance its operating margins. With respect to sales, the Company is focusing
its efforts on higher-margin accounts and on sales of diagnostic equipment,
often on an exclusive or semi-exclusive basis, that involves ongoing sales of
higher-margin reagents and/or higher margin service contracts. With respect
to its product line, the Company seeks to generate high sales volumes of
selected products and to obtain such products on a discounted basis from
manufacturers. With respect to its operations locations, the Company has
rationalized its service center locations with the closure of thirteen Long-
Term Care Business centers, five Physician Supply Business centers, and six
Imaging Business centers during fiscal 1999 to increase efficiency and
eliminate centers with below average performance. Finally, with respect to its
service center expansion program, the Company intends to emphasize
acquisitions over new-center development, thus avoiding the substantial start-
up losses associated with new-center development.
Pursue Strategic Acquisitions. The Company has made 49, 33, 4, and 4
acquisitions since fiscal year 1989 in its Physician Supply, Imaging, Long-
Term Care, and International Businesses, respectively (excludes acquisitions
made by the Company's subsidiaries and divisions prior to PSS World Medical,
Inc. ownership). After consummating a merger or acquisition, the Company
begins an intensive process of converting the acquired company to its business
model through information systems conversion, personnel development and
training, and service and product expansion. The Company intends to continue
to acquire local, regional, and other distributors in new and existing markets
where it can leverage its distribution infrastructure, expand its geographic
coverage, add service and sales competence, and gain market share.
Utilize Sophisticated Information Systems. In 1994, the Company implemented
its Instant Customer Order Network ("ICONSM"), an ordering and customer data
system, with all its Physician Supply Business sales representatives. ICONSM
has increased time available to sales representatives for selling, decreased
operating expenses, and increased the Company's ability to provide same-day
delivery. During fiscal year 1997, the Physician Supply Business developed
and test marketed CustomerLink, an Internet-based system for inventory
management and purchasing. Since then, the Company has been very active in
developing ancillary systems that improve efficiencies throughout its
operations (see Information Systems discussion). The Company has also
developed internet-based solutions for each of its businesses. The Company
believes its physician customers will be very late adopters of both e-commerce
and the internet. However, $80,000 of internet sales are currently being
processed by the Long-Term Care Business with approximately 40% of all of its
business sales processing through e-commerce. The Imaging Business is
currently implementing internet access for its customers. The Company will
continue to pursue the development of sophisticated systems that improve
operational efficiency, reduces fixed and variable costs of its
infrastructure, improves access to the Company by its customers, and reduces
costs in the supply channel.
Provide Differentiated, High Quality Service. The Company believes its
success to date has been based largely on its ability to provide superior
customer service, including same-day, next-day, and scheduled delivery,
guaranteed service specialist response, and "no-hassle" returns. Unlike its
competitors, which generally ship products via common carrier, the Company
operates a fleet of over 1,500 delivery and service vehicles enabling it to
provide same-day or next day delivery and service to virtually all of its
customers. Historically, the Company has differentiated itself from the
competition servicing the office-based physician market by providing
consistent, same-day delivery on a national basis. The Company again is
distinguishing itself from the competition by providing a metropolitan two-
hour and a four-hour rural technical service specialist deployment guarantee
through its Imaging Business. In addition, the Company's Long-Term Care
Business has increased next day or scheduled self-delivery on Company leased
vehicles from 8% to 50% of orders during fiscal 1999.
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Offer a Broad Product Line Emphasizing Exclusive Products. The Company seeks
to meet all of the medical products needs of office-based physicians,
providers of imaging services and providers of long-term care. The Company
currently stocks over 56,000 medical products in its Physician Supply
Business, over 8,000 imaging products in its Imaging Business, and over 20,000
medical products in its Long-Term Care Business. The Company also seeks to
establish exclusive distribution and marketing arrangements for selected
products. In the United States, PSS currently has exclusive or semi-exclusive
marketing arrangements for certain products with Abbott, Biosound, Candela,
Critikon, Hologic, Inc., Leisegang Medical, Inc., Philips Medical Systems
Roche/Boehringer Mannheim Corporation, Siemens AG, Sonosight, Trex Medical
Corporation, and other leading manufacturers. The Company believes that its
sophisticated selling efforts, highly trained sales force, and large customer
base provide manufacturers with a unique sales channel through which to
distribute new and existing products and technology that require consultative
selling.
Enhance Selling Capabilities. The Company believes its sales force and
managers are its most valuable corporate assets and focuses not only on the
recruitment of sales personnel with superior sales aptitude, but also on the
initial and continued development of its sales force and management through
training at The University, its in-house educational center. The Company
believes investment in personnel and training enable it to provide high-
quality service to its customers, offer sophisticated product lines, and
attract manufacturers that desire a means of rapidly bringing new products and
technology to market.
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
that comprise $14 billion or approximately 40% of the overall market.
Revenues of the medical products distribution industry are estimated to be
growing as a result of a growing and aging population, increased health care
awareness, proliferation of medical technology and testing, and expanding
third-party insurance coverage. In addition, the physician market is
benefiting from the shift of procedures and diagnostic testing from hospitals
to alternate sites, particularly physician offices, despite a migration of
significantly lower hospital medical product pricing into the physician office
market.
The health care industry is subject to extensive government regulation,
licensure, and operating procedures. National health care reform has been the
subject of a number of legislative initiatives by Congress. 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. The
industry has struggled with these changes and the ability of providers,
distributors, and manufacturers to adopt to the changes is not yet determined.
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. The consolidation creates new and larger customers. However,
the majority of the market serviced by the Company remains a large number of
small customers with no single customer exceeding 10% of the consolidated
Company's revenues. However, the Long-Term Care Business depends on a limited
number of
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large customers for a significant portion of its net sales and approximately
38% of the Long-Term Care Business revenues for the 12 months ended April 2,
1999 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.
ACQUISITIONS
A significant portion of the medical supply and equipment distribution
business in the United States includes locally owned and operated
distributors. The Company believes that in the United States, there are
approximately 200 locally owned companies serving the nonimaging physician-
supply market, approximately 300 locally owned companies serving the imaging-
supply market, and approximately 100 locally owned companies serving the long-
term care market. The physician-supply market has experienced rapid
consolidation in recent years. PSS believes that the imaging-supply and long-
term care markets are in the early stages of consolidation. The Company
believes that consolidation is occurring due to local and regional
distributors experiencing: (i) a lack of purchasing and administrative
economies of scale; (ii) reduced access to medical equipment lines as
manufacturers seek to reduce marketing costs by minimizing the number of
distributors they use; (iii) consolidation among providers, who are
increasingly seeking to reduce the number of suppliers from which they
purchase medical products; (iv) a lack of resources for continued development
and training of personnel for maintenance, expansion or replacement of
existing business; and (v) a lack of resources to develop new distribution
system technologies and services.
The Company's Physician Supply Business has grown from one service center
located in Jacksonville, Florida, in 1983 to 56 service centers currently.
Historically, the Company's growth has been accomplished through both the
start-up of service centers and the acquisition of local and regional medical
supply and equipment distributors. The Company believes there are very few
attractive full line physician supply distributors in the United States to
acquire. In the future, the Company will focus its efforts on those few
companies and new groups of specialty distributors of products like
orthopedics, podiatry, opthalmics, and various diagnostic equipment lines.
With the November 1996 acquisition of a medical diagnostic imaging supply and
equipment distributor, the Company began the operations of its Imaging
Business through its wholly owned subsidiary Diagnostic Imaging, Inc.
Subsequent acquisitions have resulted in 37 Imaging Business service centers
(after consolidation of certain centers) currently serving customers in 41
states. The Company will focus on acquisitions that (i) improve its core
competency in the service and sales of high-end imaging equipment, (ii)
improve the leverage of its existing infrastructure, (iii) strengthen its
geographic reach and market share penetration in film handling and chemistry
products, and (iv) improve the quality of its product offering and management
expertise.
With the March 1998 acquisition of Gulf South Medical Supply, Inc., the
Company became a leading national distributor of medical supplies and related
products to the long-term care industry. Gulf South provides products and
services to over 14,000 long-term care facilities in all 50 states. Now that
the Company has rationalized the number of Long-Term Care Business
distribution centers to 15 and has completed the implementation of its best
practices distribution overhaul, the Company will begin to seek acquisitions
that leverage its infrastructure and increase its market share.
The Company believes acquisitions will remain a core strategy for its existing
businesses as well as a means for leveraging its core competencies in new
areas of medical distribution.
SALES, SERVICE, AND DISTRIBUTION
The Company focuses on complete customer satisfaction, which it characterizes
to its customers as "no hassle" service. Consistent with this approach, the
Company offers its customers same-day, next-day, or scheduled delivery service
on a regular basis, highly trained, consultative sales professionals, a broad
product line
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including medical supplies, sophisticated diagnostic equipment and reagents,
and pharmaceuticals, no minimum order size, and permits returns of unused,
saleable products for instant credit, guaranteed response and dispatch of
service specialists, as well as repair and service of imaging equipment.
The Company has increased its emphasis on national customer accounts,
including large physician group practices, physician practice management
companies, physician-hospital organizations, physician management service
organizations, large long-term care chains, and group purchasing
organizations. In selling to these national accounts, the Company emphasizes
its core strengths of rapid delivery and service, stockless inventory,
competitive pricing, consultative selling, broad product lines, exclusive
products which increase practice revenue and enhance the quality of care,
customer usage reporting, and high service levels.
PHYSICIAN SUPPLY BUSINESS
The Physician Supply Business currently maintains a highly decentralized
distribution network of 56 service centers operating approximately 500
delivery vans servicing customers throughout the 50 United States. This
distribution network along with the Company's Instant Customer Order Network
("ICONSM") has enabled the Physician Supply Business to provide same-day
delivery service on a consistent basis. Customer orders received by 10:30
a.m. at the local service center are delivered the same day within a 100-mile
radius. Within a 30-mile radius, orders received by noon are delivered the
same day.
Through over 731 sales representatives, the Physician Supply Business
distributes medical supplies and equipment to physicians in over 100,000
office sites nationally. Generally, each sales representative is responsible
for calling on approximately 150 to 200 physician offices, with a minimum goal
of visiting each office once every one to two weeks.
IMAGING BUSINESS
The Company's Imaging Business operates in a similar decentralized format as
the Physician Supply Business and distributes over 8,000 types of medical
diagnostic imaging supplies, chemicals, and equipment and provides technical
service to hospitals, other alternate-site providers, and physician offices.
This Imaging Business began operations in November 1996 with the acquisition
of eight service centers, 24 sales representatives and 75 service specialists.
Currently, the Imaging Business provides service to over 10,000 customers
including approximately 5,000 hospitals and approximately 6,000 alternate-site
providers, through 37 service centers, with over 194 sales representatives.
In addition to providing delivery of over 8,000 imaging products, the Imaging
Business currently provides imaging equipment service through approximately
750 service specialists who provide technical assistance and maintenance on
imaging equipment. Customer service requests for service specialists are
guaranteed to receive a two-hour response in metropolitan areas and a four-
hour response in rural areas. The Company believes this service guarantee,
coupled with the significant number of highly qualified service specialists,
positions it as the service leader in the industry.
LONG-TERM CARE BUSINESS
The Company entered the Long-Term Care Business with the acquisition of Gulf
South Medical Supply, Inc. in March 1998. The Long-Term Care Business
currently operates 15 full-service regional distribution centers. Coupled
with a team of approximately 170 sales representatives, the Long-Term Care
Business is able to provide consistent and reliable service to customers
ranging from independent nursing homes to large national chains, as well as
providers of home health care and subacute, rehabilitation, and transitional
care that operate in different geographic areas. Currently, the Long-Term
Care Business provides service to approximately 14,000 long-term care
facilities nationally and offers a product line consisting of over 20,000
products.
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In addition to distribution of medical and related products, the Company's
Long-Term Care Business provides it customers support services developed to
meet the customer's needs. These services include: (i) usage reports
designed to help customers manage supply requirements, prepare forecasts and
track multifacility purchases; (ii) inventory control processes which enable
the customer to order products on a just-in-time basis and monitor patient's
utilization of products for Medicaid and Medicare reimbursement; and (iii)
customized services including customized invoices, bar code labels, and
customized order guides.
INTERNATIONAL BUSINESS
The Company's International Business distributes medical products to office-
based physicians and hospitals in Belgium, France, Germany, Luxembourg and the
Netherlands and began operations in April 1996 with the acquisition of its
service center in Leuven, Belgium. The International Business currently
operates three European service centers located in Belgium, Germany, and the
Netherlands, employing approximately 20 sales representatives and
approximately 90 total employees.
The Company's Physician Supply, Imaging, Long-Term Care, and International
Business service centers operate as profit centers led by a management team
that typically includes a sales leader and an operations leader, and a service
leader in the Imaging Business service centers. Each service center employs
sales representatives and staff, including purchasing agents, customer service
representatives, and warehouse and delivery personnel. Employees are
compensated based upon both individual and service center performance. Both
leadership and employee bonuses are based largely upon asset management,
attainment of goals, and operating profit performance.
PRODUCTS
The Company is required to carry a significant investment in inventory to meet
the rapid delivery requirements of its customers. During the 12 months ended
April 2, 1999, no vendor accounted for more than 10%, except for Eastman Kodak
which accounted for less than 15%, of the Company's inventory purchases. The
Company's ability to maintain good relations with its vendors will affect the
profitability of the business.
PHYSICIAN SUPPLY BUSINESS
Through its Physician Supply Business, the Company distributes medical
products consisting of medical supplies, diagnostic equipment, and
pharmaceuticals. The following is a discussion of the over 56,000 types of
medical products offered by the Physician Supply Business.
Medical Supplies. The Physician Supply Business sells a broad range of
medical supplies, including various types and sizes of paper goods, needles
and syringes, gauze and wound dressings, surgical instruments, sutures, latex
gloves, orthopedic soft goods and casting products, wood tongue blades and
applicators, sterilization and intravenous solutions, specimen containers,
diagnostic equipment reagents, and diagnostic rapid test kits for pregnancy,
strep, mononucleosis, chlamydia, H-Pylori, and bladder cancer.
Medical Equipment. The Physician Supply Business equipment lines include
blood chemistry analyzers, automated cell and differential counters,
immunoassay analyzers, bone densitometers, exam tables and furniture,
electrocardiograph monitors and defibrillators, cardiac stress systems,
cardiac and OB/GYN ultrasound, holter monitors, flexible sigmoidoscopy scopes,
hyfracators, laser and endoscopy surgical units, autoclaves, spirometers,
pulse oximeters, tympanometers, and microscopes. Demand for diagnostic
equipment has been increasing recently, reflecting in part, technological
advances that enable increasingly sophisticated diagnostic tests to be
performed in the physician's office. Sales of diagnostic equipment, while
generally lower in gross margin than supplies, normally entail the ongoing
reordering of disposable diagnostic reagents that generally yield higher
margins.
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Pharmaceuticals. The Company's pharmaceutical sales include vaccines,
injectables, and ointments. As a result of the changing dynamics in the
pharmaceutical industry, particularly the reduction of sales personnel focused
on the physicians' offices, pharmaceutical manufacturers are increasingly
seeking alternative means of distribution. The Company believes that its
consultative sales approach and its emphasis on training have allowed PSS to
be highly effective in selling pharmaceuticals to the physician-office market.
IMAGING BUSINESS
The Imaging Business distributes a broad range of approximately 8,000 products
consisting of imaging supplies, equipment, parts, and service.
Imaging Supplies. The Company's product portfolio includes x-ray film,
processing chemicals, contrast agents, barium, filing and mailing products,
film viewing devices, darkroom products, protective materials, and other
miscellaneous imaging accessories.
Imaging Equipment. The Imaging Business equipment lines include processors,
wet and dry laser cameras, automated film handling equipment, radiographic
equipment, radiographic and fluoroscopic equipment ("R&F"), digital R&F,
electrophysiology equipment, mammography systems, bone densitometry, C-Arms,
computed tomography scanners ("CT"), vascular labs, and magnetic resonance
imaging ("MRI") equipment.
Imaging Service Specialist. Through approximately 750 service specialists,
the Imaging Business currently provides on-site preventive maintenance,
emergency service, and parts for all of the above-mentioned imaging equipment
sold.
LONG-TERM CARE BUSINESS
The Long-Term Care Business offers over 20,000 medical and related products
consisting largely of name brand items including medical supplies, incontinent
supplies, personal care items, enteral feeding supplies, medical instruments,
and respiratory and ostomy supplies.
Medical Supplies. Medical supplies consist of wound care supplies, needles
and syringes, gauze, sutures, various types of exam gloves, urological
supplies, and blood and urine testing supplies and test kits.
Incontinent Supplies and Personal Care Items. These items include adult
diapers and underpads, as well as soaps and shampoos, personal hygiene items,
various paper products and bedside utensils.
Enteral Feeding Supplies. Enteral feeding supplies include nutritional
supplements, pump sets, and intravenous tubing and solutions.
Other. Other items offered by the Company include medical instruments, oxygen
supplies, trach and suction supplies, and over-the-counter pharmaceuticals.
INTERNATIONAL BUSINESS
The International Business distributes medical supplies, equipment and
pharmaceuticals similar to those provided by the Physician Supply Business to
five European countries. The International Business offers products to the
European physician office and hospital markets.
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RECRUITMENT AND DEVELOPMENT
The Company believes its leaders and sales force are its most valuable assets.
Accordingly, the Company invests significant resources in recruiting, training
and developing these employees. The Company spent approximately $5.5 million
and $3.0 million for training and development in fiscal years 1999 and 1998,
respectively. Over the past ten years, the Company has refined its
recruitment practices and development procedures for its Physician Supply
Business, and the Company developed similar training programs for the sales
representatives and service specialists of its Imaging and Long-Term Care
businesses. The Company's comprehensive program includes the following:
Recruitment. The Company has developed a recruitment program to help provide
it with a source of mobile and committed sales representatives. The Company
believes that it is a leader in its industry in recruiting sales
representatives on college and university campuses. The Company's recruiters
use state-of-the-art marketing materials to attract candidates who demonstrate
superior sales aptitude. The Company also recruits college graduates with up
to five years experience in business, government or the military as
operational leadership trainees.
Initial Development. Each sales trainee is initially recruited to work for
PSS World Medical, Inc. and is first brought to The University for education
about the business and each division, introduction to officers, and
orientation on the culture. This is followed with placement in one of several
training branches at one of the three divisions. Each trainee is then
assigned to a service center for longer-term training. Under the supervision
of local leaders, training consists of a combination of self-study, individual
instruction and interaction with customers and vendors. Such training
includes 16 one-week courses providing instruction on products, procedures,
and selling skills. During this development program, the trainee attends The
University for additional training. Individual progress is measured weekly
through formal testing and role playing, resulting in continued advancement to
graduation, usually within 16 weeks. PSS designs the program to be strenuous
of the trainees that enter, only 70% successfully complete the program.
Upon graduation, the newly appointed sales representative assumes
responsibility for the first available sales territory, within a preferred
region regardless of location. The Company typically has approximately 50
sales candidates at various stages of the training process. The Company
believes that the level of its expenditures in developing new sales
representatives and its ability to place new sales representatives quickly in
a new region is unique within the industry. The new sales graduate is placed
on a salary-to-commission conversion program.
Operations Management. The Company's development program for its operations
leadership trainees consists of approximately 12 months of intensive training
and development. After recruitment, the operations management trainee is
transferred to at least three service centers and is given various and
gradually increasing levels of responsibility. The trainee is assigned to an
operations management position when it becomes available at a service center,
regardless of location. The Company has available approximately five
operations management trainees to support its growth at any given time.
Technical Service Specialists. The Imaging Business has implemented an
intensive service training schedule in which the vast majority of it's over
750 service specialists will be participating in some manner in the upcoming
fiscal year. The Company has recently successfully completed its first Basic
X-ray class, and it was very successful. Presently, the Company is in the
process of designing and constructing its own state-of-the-art 5,000 square
foot Diagnostic Imaging training center where it will provide classes on all
aspects of the imaging business including film handling equipment, Basic X-
ray, Basic Imaging, Laser Imager and mammography equipment. During fiscal
2000, the Company will train over 250 service specialists in The University's
classes on customer skills and communications. In addition, a large number of
service specialists will attend classes provided by various equipment
manufacturers.
Continued Development. The Company provides several programs to continue
development of its sales and leadership organization. The programs provided
by The University include a leadership program for senior sales
representatives, a general leaders program for first-year leaders that
emphasizes creativity and innovation, and a senior leadership development
program. In addition, the Company encourages its sales representatives to
participate in industry-accredited self-study programs. Every sales
representative routinely attends local sales
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meetings, annual sales and marketing meetings, key vendor product conferences
and continuing education programs at The University. Additionally, the Company
is developing training programs on customer service, purchasing and other
field operations.
On April 2, 1999, the Company had approximately 1,118 sales representatives,
727 imaging service specialists, and 4,900 total employees. The Company
considers its employee relations to be excellent.
INFORMATION SYSTEMS
PSS World Medical is in the process of implementing JD Edwards OneWorld ERP.
The Company successfully deployed the JD Edwards OneWorld general ledger and
accounts payable system to its PSS and Gulf South divisions during fiscal
1999. Distribution modules will be piloted during the September 30, 1999
quarter with a rollout to begin in the December 31, 1999 quarter. The system
utilizes state-of-the-art client server technology to deliver an easy to use
end user interface that will long-term reduce training costs and boost
productivity among PSS and Gulf South knowledge workers. The system runs on an
Oracle 8i database with HP9000 Unix hardware providing the engine for success.
Physician Supply Business
The Physician Supply Business maintains a decentralized information system
with data acquisition at the local service centers and a centralized database
that is accessible from all of the service centers. ICONSM is a sales force
automation tool that allows the Physician Supply Business sales
representatives to access critical customer information and place orders from
any location using a pen-based, hand-held computer system. ICONSM provides
the sales representatives with customer pricing, contracts, backorders,
inventory levels, account status and instant ordering. ICONSM has increased
time available for selling, decreased operating expenses in the service
centers, and enhanced the Company's ability to provide same-day delivery to
customers.
During fiscal years 1999 and 2000 the Physician Supply Business developed and
test-marketed the ICONWeb system. The Company believes this system is the
first Internet based health care information system designed and used
specifically for inventory management and purchasing for the medical practice.
Company customers can access ICONWeb through the Internet at
http://www.iconweb.com after receiving their personal password from the
----------------------
Company. All Company customers, regardless of size, with access to the
Internet, will be given access to services and on-line information, including:
(i) on-line order placement and confirmation; (ii) customer specific pricing,
product availability, back orders and utilization reports; (iii) working
capital management reports; and (iv) practice compliance assistance for OSHA
and CLIA, including a database of medical safety sheets. The system will be
completely deployed by November 1999.
QuickTrack is a delivery automation system that was completed in August 1998.
The system provides electronic signature recognition and web based proof of
delivery and has dramatically increased PSS customer service responsiveness to
customer order inquiries. QuickTrack has also helped PSS to maintain stable
accounts receivable levels due to this online access to proof of delivery
information.
To enable the Company to maintain high customer order fill rates on a
consistent basis, the Company utilizes its BEAR system. Each service center
reports its inventory quantities on a daily basis. The separate service
center reports are combined into one company-wide inventory report containing
product number, quantity on hand and historical usage. This system reduces
back orders to customers and reduces the Company's total inventory through
increased inventory efficiencies. BEAR also displays the on-hand usage
quantities of neighboring service centers that are within one commercial
shipping day of the service center.
Imaging Business
The Imaging Business is currently completing the system rollout that was
started in October 1997. The Imaging Business maintains this centralized
system with rollover capability to an offsite facility in the event the
current system is unavailable. Certain recent acquisitions are not on the new
system, but the Company expects
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to convert its remaining acquisition locations by the end of September 1999.
The current system runs on the AS/400 model 740 using several software
packages. JD Edwards supports the core business functions such as accounts
payable, accounts receivable, general ledger, and distribution. MDSI supports
the service component of the business, and there are several add-in components
such as RF-Smart (warehouse - management), Premenos (EDI), and Quardrant
(faxing from the AS400). The current general ledger and accounts payable
system is connected to that of PSS World Medical, but will be replaced by the
Company's consolidated general ledger and accounts payable system in fiscal
2000.
During fiscal 1999, the Imaging System developed a STARS (Service Technician
Automated Response System) that provides this division the ability to better
service our customers and improve efficiency. This system will be implemented
during fiscal 2000.
Long-Term Care Business
Gulf South maintains a centralized computing environment that allows for real
time data updates and access by our remote branch locations via a wide area
network. The Gulf South distribution system was designed and developed in
house, specifically for the medical supply distribution industry. This
distribution system is connected to the PSS World Medical general ledger and
accounts payable system. Once the new PSS distribution system is implemented,
the existing Gulf South distribution system will be replaced by the OneWorld
JD Edwards Company system.
In the past year, Gulf South has developed an internet based sales force
automation application (RepNet) and a customer on-line ordering application
(GSOnline). Repnet provides the Gulf South sales force with immediate access
to customer account data and historical purchasing activity, product and
inventory data, and remote sales quotes and sales order entry capabilities.
This system has greatly improved the amount of information available to our
mobile sales force and increased the level of service provided to our
customer. GSOnline is an internet based order entry and historical reporting
application developed specifically for the Gulf South customer. Through
GSOnline a customer can access their specific account pricing and product
formularies, inquire on product availability, place orders and view order
status, and perform history reporting.
In addition, Gulf South offers its customers Accuscan, a barcode based
inventory control and ancillary billing software package designed specifically
for the long term care and home health industries. Accuscan allows a customer
to maintain a real time inventory count and order products on a just-in-time
basis, as well as to monitor patients' utilization of products.
The effectiveness of internet access to improve efficiencies of distribution
in the health care industry is being tested and developed by current and new
participants of the health care industry. The Company believes its physician
customers will be very late adopters of both e-commerce and the internet.
However, $80,000 a day of long-term care sales are currently being processed
by the Long-Term Care Business with approximately 40% of all of its sales
processed through e-commerce. The Imaging Business is currently implementing
its internet access for its customers.
PURCHASING AND VENDOR RELATIONSHIPS
The Company aggressively seeks to purchase the medical supplies and equipment
it distributes at the lowest possible price through volume discounts, rebates
and product line consolidation. The Company's materials management group
negotiates all of its contract terms with vendors. Individual orders are
placed by the Company's purchasing agents located at the Company's service
centers, who are responsible for purchasing and maintaining the inventory.
Supplies and equipment are delivered directly from vendors to the service
centers.
The Company aggressively pursues the opportunity to market and sell medical
equipment and supplies on an exclusive basis. Manufacturers of medical
diagnostic equipment and supplies typically offer distribution rights only to
a selected group of distributors and are increasingly seeking to reduce the
number of distributors selling
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their products to end users in an effort to reduce the cost associated with
marketing and field support. The Company has been successful in assisting
manufacturers in their development and marketing plans and in obtaining the
exclusive right to sell certain products. The Company believes that its
ability to capture such distribution rights represents a significant barrier
to the entry of competitors.
In addition, the Company continually seeks vendor relationships on an
exclusive or semi-exclusive basis providing the Company with a competitive
advantage and providing the manufacturer with one distribution channel
comprised of 1,118 highly-trained, consultative sales representatives.
Following is a list of manufacturers that the Company currently maintains such
relationships and the type of product offered:
<TABLE>
<CAPTION>
Manufacturer Product
- --------------------------------------------------- --------------------------------------------------
<S> <C>
Abbott Laboratories, Inc........................... Blood chemistry analyzers, hematology products,
immunoassay analyzers, rapid tests, and reagents
Biosound........................................... Ultrasound equipment
Candela............................................ Laser equipment
Critikon (a Johnson & Johnson Company)............. Vital signs monitors
Hologic, Inc....................................... Bone densitometry analyzers
Leisegang Medical, Inc............................. OB/GYN diagnostic instruments, ultrasonic tissue
aspirator (liposuction)
Philips Medical Systems............................ Computed tomography
Roche/Boehringer Mannheim Corporation.............. Hematology, chemistry analyzers, and reagents
Siemens............................................ Ultrasound equipment
Sonosight.......................................... Hand-held ultrasound equipment
Trex Medical Corporation........................... Imaging systems
</TABLE>
Vendor relationships are an integral part of the Company's businesses.
Marketing and sales support, performance incentives, product literature,
samples, demonstration units, training, marketing intelligence, distributor
discounts and rebates, and new products are strategic to the Company's future
success.
In the Imaging Business, prices of consumable imaging products, primarily
films and film related products, are influenced significantly by three
manufacturers through distributor discounts and rebates. These
distributor/manufacturer relationships affect the profitability of the
Company's Imaging Business. Additionally, the development of new technology
may change the manner in which diagnostic imaging services are provided. In
the event of such technological changes, the Company's ability to obtain
distribution agreements or develop vendor relationships to distribute such new
technology will impact the Company's operations.
COMPETITION
The Company operates in a highly competitive environment. The Company's
principal competitors are the few multimarket medical distributors that are
full-line, full-service medical supply companies, most of which are national
in scope. These national companies have sales representatives competing
directly with PSS, are substantially larger in size, and have substantially
greater financial resources than the Company. There are also numerous local
dealers and mail order firms that distribute medical supplies and equipment
within the same market as the Company. Most local dealers are privately owned
and operate with limited product lines. There are several mail order firms
that distribute medical supplies on a national or regional basis. The Company
also competes with manufacturers that sell their products both to distributors
and/or directly to users, including office-based physicians and hospitals.
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RISK FACTORS
Our Continued Rapid Growth Through Acquisitions Could Adversely Affect Our
Financial Condition, Results of Operation, and Liquidity
We anticipate that we will continue to grow through the acquisition of
medical-products distributors. These acquisitions may expose us to the
following risks, among others:
o diversion of management's attention from the business of running PSS;
o the inability to integrate acquired companies' information systems
into our operations;
o the assumption of liabilities;
o amortization of goodwill and other intangible assets;
o entry into markets in which we have little or no direct prior
experience;
o the potential loss of key employees of the acquired company;
o an inability to manage changing business conditions;
o an inability to implement and improve our central and reporting
system;
o an adverse affect on our liquidity;
o dilution to our earnings per share before giving effect to certain
expected potential cost savings and synergies; and
o charges to earnings.
In addition, our systems, procedures, controls and existing space may not be
adequate to support continuing extensions of our operations. Our operating
results substantially depend on our ability to improve technical,
administrative, financial control, and reporting systems of acquired
businesses.
If We Cannot Integrate Acquired Companies with Our Business, Our Profitability
May Be Adversely Affected
Even though we may acquire additional companies in the future, we may be
unable to successfully integrate the acquired business and realize anticipated
economic, operational and other benefits in a timely manner. Integration of
an acquired business is especially difficult when we acquire a business in a
market in which we have limited or no expertise, or with a corporate culture
different from ours. If we are unable to successfully integrate acquired
businesses:
o we may incur substantial costs and delays;
o we may experience other operational, technical or financial problems;
o our management's attention and other resources may be diverted; and
o our relationships with our key clients and employees may be damaged.
Our Rate of Revenue Growth Will Be Adversely Affected If We Are Unable to Make
Future Acquisitions
If we are unable to make acquisitions, we may not meet our revenue growth
expectations and our business, financial condition, and results of operations
could be materially and adversely affected. While we are not currently a
party to any agreements or understandings for any material acquisitions, we
expect to continue to acquire both domestic and foreign companies as part of
our growth strategy. However, we may be unable to continue to identify
suitable acquisition candidates. We compete with other companies to acquire
businesses that distribute medical equipment and supplies to physicians, other
alternate-site providers, long-term care providers, home care providers, and
hospitals as well as other lines of business. We expect this competition to
continue to increase, making it more difficult to acquire suitable companies
on favorable terms.
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<PAGE>
Acquisitions May Decrease Our Shareholders' Percentage Ownership in PSS and
Require Us To Incur Additional Debt
We may issue equity securities in future acquisitions that could be dilutive
to our shareholders. We also may incur additional debt and amortization
expense related to goodwill and other intangible assets in future
acquisitions. This additional debt and amortization expense may reduce
significantly our profitability and materially and adversely affect our
business, financial condition, and results of operations.
Our Indebtedness May Limit Our Ability to Obtain Additional Financing in the
Future and May Limit Our Flexibility to React to Industry or Economic
Conditions
In October 1997, we issued $125.0 million of 8.5% Senior Subordinated Notes
due 2007. The Notes are governed by an indenture between PSS, all of our
domestic subsidiaries and SunTrust Bank, Central Florida, as trustee. At April
2, 1999, our consolidated long-term indebtedness was $125.0 million under
these Notes. For fiscal 2000, we are scheduled to pay approximately $11.7
million in principal and interest for our Notes and capitalized leases. In
addition, we have a credit facility with a syndicate of lenders for an
additional $140.0 million, of which $24.0 million was outstanding as of April
2, 1999. If we default under any of our indebtedness, then we are deemed to be
in default under the terms of the indenture and the credit agreement.
As a result of this increased leverage, our principal and interest obligations
have increased significantly. The level of its indebtedness could:
o limit our ability to obtain additional financing in the future for
working capital;
o limit our ability to make capital expenditures;
o limit our acquisition activity;
o limit our flexibility in reacting to changes in the industry and
economic conditions in general; and
o adversely affect our liquidity because a substantial portion of cash
flow must be dedicated to debt service and will not be available for
other purposes.
We believe that our cash flow, together with available borrowings, is
sufficient to allow us to meet operating expenses and service our debt
requirements in the future. Our belief assumes, among other things, that we
will successfully implement our business strategy and that there will be no
material adverse developments in our business, liquidity, or capital
requirements. However, if we are unable to generate sufficient cash flow from
operations to service our indebtedness, we will be forced to adopt an
alternative strategy that may include the following options:
o reducing or delaying acquisitions and capital expenditures;
o selling assets;
o restructuring or refinancing our indebtedness; and
o seeking additional equity capital.
Our Indenture and Credit Facility May Limit Our Ability to Make Acquisitions
The financial covenants in our indenture and credit facility may restrict us
from making certain acquisitions for the following reasons, among others:
o we must maintain a consolidated fixed coverage ratio of 2.0 to 1.0 or
greater;
o we must maintain a consolidated leverage ratio of 3.5 to 1.0 or less;
and
o we may only engage in businesses that we have previously engaged in
or certain other reasonably related businesses.
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<PAGE>
We Face Pricing and Customer Credit Quality Pressures Due to Reduced Spending
Budgets by Health Care Providers
The cost of a significant portion of medical care in the United States is
funded by government and private insurance programs, such as Medicare,
Medicaid, and corporate health insurance plans. In recent years, government-
imposed limits on reimbursement of hospitals and other health care providers
have significantly impacted spending budgets in certain markets within the
medical-products industry. In particular, recent changes in the Medicare
program have limited payments to providers in the long-term care industry, the
principal customers of our Gulf South subsidiary. For cost-reporting periods
beginning on or after July 1, 1998, Medicare's prospective payment system was
applied to the long-term care industry. This prospective payment system will
limit government payments to long-term care providers to federally established
cost levels. Prior to this time, the long-term care facilities were
reimbursed by the Medicare program pursuant to a cost-based reimbursement
system. This shift was designed to encourage greater provider efficiency and
to help stem the growth in reimbursement relating to the care of long-term
care patients. Under the prospective payment system, the customers of our
Gulf South subsidiary are now receiving revenues that are substantially less
than they received under cost-based reimbursement. In addition, private
third-party reimbursement plans are also developing increasingly sophisticated
methods of controlling health care costs. Therefore, particularly with
respect to our Gulf South customers, we cannot assure you that the purchase of
our medical products will not be limited or reduced or that we will be able to
collect our receivables in a timely manner, if at all. This may adversely
affect our future sales and income.
Our Strategy for Growth May Not Result in Additional Revenue or Operating
Income and May Have An Adverse Effect on Working Capital and Earnings
A key component of our growth strategy is to increase sales to both existing
and new customers, including large chains, independent operators and provider
groups. We intend to accomplish this by:
o adding one or more new strategic distribution centers;
o expanding some existing distribution centers;
o hiring additional direct sales or other personnel; and
o increasing our national sales efforts.
We cannot assure you that these efforts will result in additional revenues or
operating income.
We also anticipate continuing to grow through the opening of start-up imaging
and long-term care service centers. We anticipate these start-ups to
generally incur operating losses for approximately 18 months. This expansion,
therefore, entails risks, including:
o an adverse effect on working capital and earnings during the
expansion period;
o the incurrence of significant indebtedness; and
o significant losses from unsuccessful start-ups.
As We Continue to Increase Our Sales to Large Chains and Consolidating
Provider Groups, We May Face Competitive Pricing Pressures
We are expanding our business with large chains and consolidating provider
groups, especially in the long-term care market. This may result in
competitive pricing pressures. Our gross margins on these large group chains
are 300 to 600 basis points lower than average due to:
o additional negotiating leverage of large chains;
o vendor agreements containing volume discounts;
o customer volume specifications; and
o service specifications.
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<PAGE>
We Depend Heavily on Our Exclusive Distributorship Agreements
We distribute over 45,000 medical products manufactured by approximately 5,000
vendors. We rely on these vendors for the manufacture and supply of products.
During the 12-month period ended April 2, 1999, however, no vendor
relationship accounted for more than 10%, except for Eastman Kodak that
accounted for less than 15%, of PSS' inventory purchases.
One of our significant vendor contracts is with Abbott Laboratories. Abbott
may terminate the contract if we do not meet certain sales levels. We have,
in the past, renegotiated such sales levels. Our other exclusive and semi-
exclusive distribution agreements include agreements for certain products
manufactured by:
o Abbott Laboratories, Inc. o Philips Medical Systems
o Biosound o Roche/Boehringer Mannheim
o Candela Corporation
o Critikon o Siemens
o Hologic, Inc. o Sonosight
o Leisegang Medical, Inc. o Trex Medical Corporation
Our ability to maintain good relations with these vendors affects our
profitability. Currently, PSS relies on vendors to provide:
o field sales representatives' technical and selling support;
o agreeable purchasing and delivery terms;
o sales performance incentives;
o financial support of sales and marketing programs; and
o promotional materials.
There can be no assurance that we will maintain good relations with our
vendors.
Our Gulf South Subsidiary Depends on a Limited Number of Large Customers
Consolidation among long-term care providers, including several national
hospital and drug wholesale distributors and health care manufacturers, may
result in a loss of large customers. Gulf South's business depends on a
limited number of large customers for a significant portion of its net sales.
As is customary in its industry, Gulf South does not have long-term contracts
with its customers and sells on a purchase order basis only. The loss of, or
significant declines in, the level of purchases by one or more of these large
customers would have a material adverse effect on our business and results of
operations. Failure to collect accounts receivable from its largest customers
due to an adverse change in the financial condition of any of these customers
could have a material adverse effect upon our results of operations or
financial condition.
Litigation and Liability Exposure
A series of related, putative class actions were filed against PSS and two
officers in the United States District Court for the Middle District of
Florida, Jacksonville Division, beginning on or about March 22, 1999 seeking
to recover indeterminate damages, interest, costs and attorneys' fees for a
class of stock purchasers between June 16, 1998 and March 10, 1999. The
claims are based on alleged violations of Section 10(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), Rule 10b-5 and "control
person" liability arising out of PSS' announcement that the SEC is reviewing
its financial reports for certain prior periods and that PSS would likely be
required to retroactively restate its financial statements to reflect the pre-
acquisition operating results of certain merger transactions that were
accounted for under the pooling of interest accounting method. The actions
are presently being consolidated and a motion to dismiss will ultimately be
filed. The lawsuits are in the earliest stages, and there can be no assurance
that this litigation will be ultimately resolved on terms that are favorable
to us.
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<PAGE>
PSS and certain of our 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, Jacksonville Division. An
amended complaint was filed December 11, 1998. The plaintiff alleges, for
himself and for a purported class of similarly situated stockholders who
allegedly purchased PSS' stock between December 23, 1997 and May 8, 1998, that
the defendants engaged in violations of certain provisions of the Exchange
Act, and Rule 10b-5 promulgated thereunder. The allegations are based upon a
decline in the PSS stock price following announcements by PSS in May 1998
regarding the Gulf South merger which resulted in earnings below analyst's
expectations. The plaintiff seeks indeterminate damages, including costs and
expenses. We believe that the allegations contained in the complaint are
without merit and intend to defend vigorously against the claims. The
defendants filed their motions to dismiss on January 25, 1999 which are
pending. 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 us.
Although we do not manufacture products, the distribution of medical supplies
and equipment entails inherent risks of product liability. We are a party to
various legal and administrative legal proceedings and claims arising in the
normal course of business. However, to date we have not experienced any
significant product liability claims and maintain product liability insurance
coverage.
We Need to Retain the Services of Senior Management
Our success depends largely on the efforts and abilities of our senior
management, particularly our Chief Executive Officer and Chief Financial
Officer. The loss of the services of one or more of such individuals may
adversely affect our business. Because of our decentralized operating
structure, we are also dependent upon the operations and sales managers for
each of our service centers.
We Need to Hire and Retain Qualified Sales Representatives and Service
Specialists to Continue Our Sales Growth
In our experience, our ability to retain existing customers and attract new
customers is dependent upon:
o hiring and developing new sales representatives;
o adding, through acquisitions, established sales representatives whose
existing customers become customers of PSS;
o retaining those sales representatives; and
o hiring and retaining skilled service specialists in a tight market to
maintain radiology and imaging equipment for our Imaging Business.
An inability to adequately hire or retain sales representatives or service
specialists could limit our ability to expand our business and grow sales.
Due to relationships developed between PSS' sales representatives and their
customers, upon the departure of a sales representative, we face the risk of
losing the representative's customers. This is particularly a risk where the
representative goes to work as a sales representative for a competitor. We
generally require our sales representatives and service specialists to execute
a noncompetition agreement as a condition of employment. We have not,
however, obtained these agreements from some of these employees. In addition,
courts do not always uphold the terms of noncompetition agreements.
We May Not Be Able to Continue to Compete Successfully With Other Medical
Supply Companies
The medical supply distribution market is very competitive. Our principal
competitors are the few full-line and full-service multi-market medical
distributors, most of which are national in scope. Many of these national
companies:
o have sales representatives competing directly with us;
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<PAGE>
o are substantially larger in size; and
o have substantially greater financial resources than we do.
We also compete with:
o local dealers;
o mail order firms; and
o certain manufacturers that sell their products both to distributors
and directly to users such as office-based physicians.
Most local dealers are privately owned and operate within limited product
lines. Several of our mail order competitors distribute medical supplies on a
national or regional basis.
Continued Consolidation Within the Health Care Industry May Lead to Increased
Competition
Consolidation within the health care industry has resulted in increased
competition by large national distributors and drug wholesalers. In response
to competitive pressures, we have lowered and may continue to lower selling
prices in order to maintain or increase our market share. These lower selling
prices have resulted and may continue to result in lower gross margins.
We could face additional competition because:
o many of our products can be readily obtained by competitors from
various suppliers;
o competitors could obtain exclusive rights to market a product to our
exclusion;
o national hospital, drug wholesale distributors and health care
manufacturers could begin focusing their efforts more directly on the
long-term care market;
o hospitals forming alliances with long-term care facilities to create
integrated health care networks may look to hospital distributors and
manufacturers to supply their long-term care affiliates;
o as provider networks are created through consolidation among
physician provider groups, long-term care facilities and other
alternate site providers, purchasing decisions may shift to people
with whom we have no selling relationship; and
o we are increasingly focusing on national accounts where the
purchasing decision may not be made by our traditional customers.
Therefore, we cannot assure you:
o that we will be able to maintain our customer relationships in such
circumstances;
o that such provider consolidation will not result in reduced operating
margins; or
o that we will not face increased competition and significant pricing
pressure in the future.
Risks of Managing and Expanding Operations in Foreign Countries
Through our WorldMed International, Inc. subsidiary, we have acquired medical
supply distributors serving physicians in Belgium, France, Germany, Luxembourg
and the Netherlands and plan to increase our presence in European markets. As
of April 2, 1999, we have directly invested approximately $13 million in our
European operations and have guaranteed approximately $5 million in bank debt.
The expansion efforts in Europe have slowed due to:
o internal competition for investment resources from our new imaging
and long-term care divisions;
o language barriers to effective communication of business prospects
and goals; and
o development of key personnel necessary for expansion.
As we expand internationally, we will need to hire, train and retain qualified
personnel in countries where language, cultural or regulatory impediments may
exist. We cannot assure you that vendors, physicians or other
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<PAGE>
involved parties in foreign markets will accept our services and business
practices. The cost of medical care in many European countries is funded by
the government, which may significantly impact spending budgets in certain
markets. International revenues are subject to inherent risks, including:
o political and economic instability;
o difficulties in staffing and managing foreign operations;
o difficulties in accounts receivable collection;
o fluctuating currency exchange rates;
o costs associated with localizing service offerings in foreign
countries;
o unexpected changes in regulatory requirements;
o difficulties in the repatriation of earnings; and
o burdens of complying with a wide variety of foreign laws and labor
practices.
Continued Development and Proliferation of Digital Radiology Equipment May
Adversely Affect Profits From Our Imaging Business
Recently, certain manufacturers have developed digital radiology equipment
that does not rely on film and film products. Film and film products
constitute a substantial percentage of the products distributed by our Imaging
Business. We cannot assure you that the introduction and proliferation of
digital radiology or other technological changes will not result in a material
adverse change in the Imaging Business. While we anticipate that we will
distribute new imaging technology, we cannot assure you that we will obtain
distribution agreements or develop vendor relationships to distribute such new
technology. In addition, we cannot assure that we would be able to distribute
any such new technology profitably.
We Maintain a Significant Investment in Product Inventory Which Exposes Us to
Risks of Product Obsolescence or Price Changes
In order to provide prompt and complete service to our customers, we maintain
a significant investment in product inventory at our 111 warehouse locations.
Although we closely monitor our inventory exposure through inventory control
procedures and policies, we cannot assure you that:
o such procedures and policies will continue to be effective; or
o unforeseen product development or price changes will not occur.
In addition, we may assume inventory of distributors we acquire. This
inventory may include product lines or operating assets not normally carried
or used by us. These product lines or assets may:
o be difficult to sell; and
o result in our writing off any such unsold inventory or unused assets
in the future.
We cannot assure you that such risks will not adversely affect our business or
results of operations.
Expansion of the Two-Tiered Pricing Structure May Place Us at a Competitive
Disadvantage
As a result of the Non-Profit Act of 1944, the medical-products industry is
subject to a two-tier pricing structure. Under this structure, certain
institutions, originally limited to nonprofit hospitals, can obtain more
favorable prices for medical products than PSS. The two-tiered pricing
structure continues to expand as many large integrated health care providers
and others with significant purchasing power demand more favorable pricing
terms. Although we are seeking to obtain similar terms from our
manufacturers, we cannot assure you that we can obtain such terms. Such a
pricing structure, should it persist, may place us at a competitive
disadvantage.
Our Net Sales and Operating Results May Fluctuate Quarterly
Our net sales and operating results may fluctuate quarterly as a result of the
following factors:
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<PAGE>
o fluctuating demand for our products and services;
o the introduction of new products and services by the Company and our
competitors;
o acquisitions or investments;
o changes in manufacturers' prices or pricing policies;
o changes in the level of operating expenses;
o changes in estimates used by management;
o product supply shortages;
o inventory adjustments;
o changes in product mix; and
o general competitive and economic conditions.
In addition, a substantial portion of our net sales in each quarter that may
be impacted by the above factors result from orders recorded in such quarter.
Accordingly, we believe that period-to-period comparisons of our operating
results should not be relied upon as an indication of future performance. It
is possible that in certain future periods our operating results may be below
analysts' and investors' expectations. This could materially and adversely
affect the trading price of our common stock.
Our Business is Dependent Upon Sophisticated Data Processing Systems
The success of our business relies on our ability to:
o obtain, process, analyze and manage data and
o maintain and upgrade our data processing capabilities.
We rely on this capability because:
o we typically receive rebates from manufacturers when we sell certain
products for our Imaging Business and need sophisticated systems to
track and apply for such rebates;
o we must convert data and information systems after acquisitions;
o we must receive and process customer orders quickly; and
o we must ship orders on a timely basis.
Our business, financial conditions and results of operations may be materially
adversely affected if, among other things:
o our data processing capabilities are interrupted or fail for any
extended length of time;
o we fail to upgrade our data services;
o our data processing system is unable to support our expanded
business; or
o we lose or are unable to store data.
We May Lose Revenue or Incur Additional Costs Because of Failure to Adequately
Address the Year 200 Issue
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000.
We have developed and are implementing a Year 2000 program to address
information technology systems as well as telecommunications and warehouse
systems. We currently estimate that the total of such costs for addressing
our internal Year 2000 readiness, on a worldwide basis, will approximate $1.7
million in the aggregate on a pretax basis. A large part of the Year 2000
effort has been accomplished through the redeployment of existing resources.
The cost of such redeployment or of internal management time, however, has not
been specifically quantified. In addition, recent acquisitions of Imaging
Business companies have added to our remediation efforts. We do not fully
know the state of Year 2000 readiness of the acquired companies.
-19-
<PAGE>
Moreover, we could be adversely affected if critical suppliers, customers,
banks, payers, utilities, transportation companies, or other business partners
fail to properly remediate their systems to achieve Year 2000 compliance. We
are subject to risk should Government or private payers (including insurers)
fail to become Year 2000 ready and, therefore, be unable to make full or
timely reimbursement to our customers. Such a situation could have a material
adverse affect on our cash flows, financial position, or results of operations
by reducing the ability of customers to pay for products purchased from us.
Risks to achieve Year 2000 compliance include:
o the availability of resources;
o our ability to discover and correct potential Year 2000 problems
which could have a serious impact on specific systems, equipment or
facilities; and
o the ability of our significant vendors, payers and customers to make
their systems Year 2000 compliant.
Even with the contingency plans in place, there can be no assurance that we
will avoid experiencing problems relating to Year 2000 problems.
Our Articles of Incorporation, Bylaws, Rights Agreement and Florida Law May
Inhibit a Takeover of PSS
Our Articles of Incorporation and Bylaws and Florida law contain provisions
that may delay, deter or inhibit a future acquisition. This could occur even
if our shareholders are offered an attractive value for their shares or if a
substantial number or even a majority of our shareholders believe the takeover
is in their best interest. These provisions are intended to encourage any
person interested in acquiring us to negotiate with and obtain the approval of
our Board of Directors in connection with the transaction. Provisions that
could delay, deter or inhibit a future acquisition include the following:
o a staggered Board of Directors;
o the Affiliated Transaction Statute; and
o the Control-Share Acquisition Statute.
In addition, the rights of holders of our common stock will be subject to, and
may be adversely affected by, the rights of the holders of our preferred stock
that may be issued in the future and that may be senior to the rights of
holders of our common stock. On April 20, 1998, our Board of Directors
approved a Shareholder Protection Rights Agreement which provides for one
preferred stock purchase right in respect of each share of our common stock.
These rights become exercisable upon a person or group of affiliated persons
acquiring 15% or more of our then-outstanding common stock by all persons
other than an existing 15% shareholder. This Rights Agreement also could
discourage bids for your shares of common stock at a premium and could have a
material adverse effect on the market price of your shares.
-20-
<PAGE>
REGULATORY MATTERS
General
Federal, state, and local governments extensively regulate the provision of
medical devices and over-the-counter pharmaceutical products, as well as the
distribution of prescription pharmaceutical products. Applicable federal and
state statutes and regulations require the Company to meet various standards
relating, among other things, to licensure, personnel, maintenance of proper
records, equipment and quality assurance programs.
The Company believes it substantially complies with applicable federal and
state laws. However, if a state or the federal government finds that the
Company has not complied with these laws, then the Company could be required
to change its way of operating, and this could have a negative impact on the
Company. The Company believes that the health care services industry will
continue to be subject to extensive regulation at the federal, state, and
local levels. The Company cannot predict the scope and effect of future
regulation on its business and cannot predict whether health care reform will
require the Company to change its operations or whether such reform will have
a negative impact on the Company.
The Food, Drug and Cosmetic Act, Prescription Drug Marketing Act and
Controlled Substances Act
The Company's business is subject to regulation under the federal Food, Drug,
and Cosmetic Act, the Prescription Drug Marketing Act of 1987, the Controlled
Substances Act, and state laws applicable to the distribution and manufacture
of medical devices and over-the-counter pharmaceutical products, as well as
the distribution of prescription pharmaceutical products. In addition, the
Company is subject to regulations issued by the Food and Drug Administration,
the Drug Enforcement Administration and comparable state agencies relating to
these areas.
The Federal Food, Drug, and Cosmetic Act generally regulates the manufacture
of drug and medical devices shipped in interstate commerce, including such
matters as labeling, packaging, storage and handling of such products. The
Prescription Drug Marketing Act of 1987, which amended the federal Food, Drug
and Cosmetic Act, establishes certain requirements applicable to the wholesale
distribution of prescription drugs, including the requirement that wholesale
drug distributors be registered with the Secretary of Health and Human
Services or be licensed in each state in which they conduct business in
accordance with federally established guidelines on storage, handling, and
records maintenance. Under the Controlled Substances Act, the Company, as a
distributor of controlled substances, is required to obtain annually a
registration from the United States Attorney General in accordance with
specified rules and regulations and is subject to inspection by the Drug
Enforcement Administration acting on behalf of the United States Attorney
General. The Company is required to maintain licenses and permits for the
distribution of pharmaceutical products and medical devices under the laws of
the states in which it operates.
The Anti-Kickback Statute
Under Medicare, Medicaid, and other government-funded health care programs
such as the CHAMPUS program, federal and state governments enforce a federal
law called the Anti-Kickback Statute. The Anti-Kickback Statute prohibits any
person from offering or paying any type of benefit to another person in
exchange for the referral of items or services covered by Medicare, Medicaid
or other federally-subsidized
-21-
<PAGE>
program. Remuneration prohibited by the Anti-Kickback Statute includes the
payment or transfer of anything of value. Many states also have similar anti-
kickback statutes.
The Anti-Kickback Statute is a broad law, and courts have not been consistent
in their interpretations of it. Courts have stated that, under certain
circumstances, the Anti-Kickback Statute is violated when just one purpose, as
opposed to the primary purpose, of a payment is to induce referrals. To
clarify what acts or arrangements will not be subject to prosecution by the
Department of Justice, the Department of Health and Human Services ("DHHS")
adopted a set of safe harbor regulations and has proposed additional safe
harbor regulations. DHHS continues to publish clarifications to these safe
harbors. If an arrangement does not meet all of the requirements of a safe
harbor, it does not mean that the arrangement is necessarily illegal or will
be prosecuted under the Anti-Kickback Statute.
An arrangement must meet a number of specific requirements in order to enjoy
the benefits of the applicable safe harbor. Meeting the requirements of a
safe harbor will protect an arrangement from enforcement action by the
government. The Company seeks to satisfy as many safe harbor requirements as
possible when it is structuring its business arrangements. The types of
arrangements covered by safe harbors that are not subject to enforcement
actions by the government include, but are not limited to, certain investments
in companies whose stock is traded on a national exchange, certain small
company investments in which physician ownership is limited, rental of space,
rental of equipment, personal services contracts, management contracts, sales
of physician practices, physician referral services, warranties, discounts,
payments to employees, and group purchasing organizations. Despite the
Company's efforts to meet safe harbor requirements whenever possible and
otherwise comply with the Anti-Kickback Statute, a government agency might
take a position contrary to the interpretations made by the Company or may
require the Company to change its practices. If an agency were to take such a
position, it could adversely affect the Company.
The Health Insurance Portability and Accountability Act of 1996
In an effort to combat health care fraud, Congress included several anti-fraud
measures in the Health Insurance Portability and Accountability Act of 1996,
also called HIPAA. Among other things, HIPAA broadened the scope of certain
fraud and abuse laws, extended criminal penalties for Medicare and Medicaid
fraud to other federal health care programs, and expanded the authority of the
Office of Inspector General to exclude persons and entities from participating
in the Medicare and Medicaid programs. HIPAA also extended the Medicare and
Medicaid civil monetary penalty provisions to other federal health care
programs, increased the amounts of civil monetary penalties, and established a
criminal health care fraud statute.
Federal health care offenses under HIPAA include health care fraud and making
false statements relating to health care matters. Under HIPAA, among other
things, any person or entity that knowingly and willfully defrauds or attempts
to defraud a health care benefit program is subject to a fine, imprisonment,
or both. Also under HIPAA, any person or entity which knowingly and willfully
falsifies or conceals or covers up a material fact or makes any materially
false or fraudulent statements in connection with the delivery of or payment
for health care services by a health care benefit plan is subject to a fine,
imprisonment, or both.
The Company seeks to satisfy HIPAA when it is structuring its business
arrangements. However, a government agency might take a position contrary to
the interpretations made by the Company or may require the Company to change
its practices. If an agency were to take such a position, it could adversely
affect the Company.
Other Laws
The Company is also subject to regulation in the European countries where its
International Business markets its products. Many of the laws and regulations
applicable in such countries are similar to those described above. The
national health or social security organizations of certain countries require
the products distributed by the Company to be qualified before they can be
marketed in those countries.
-22-
<PAGE>
Health Care Legislation
Federal, state and foreign laws and regulations regarding the sale and
distribution of medical supplies, equipment and devices by the Company are
subject to change. The Company cannot predict what impact, if any, such
changes might have on its business. Any new legislation or regulations, or
new interpretations of existing statutes and regulations, governing the manner
in which the Company provides services could have a material impact on the
Company and could adversely affect its profitability. In addition, the
Company's physician and other health care customers are subject to significant
federal and state regulation. There can be no assurance that regulations that
impact their practices will not have a material adverse impact on the
Company's business.
-23-
<PAGE>
Item 2. Properties
At April 2, 1999, the Company maintained 110 service centers providing service
to 50 states throughout the United States, as well as Belgium, France,
Germany, Luxembourg, and the Netherlands. All locations are leased by the
Company with the exception of the Imaging Business service center located in
Syracuse, New York, the International Business service center located in
Leuven, Belgium, and the Long-Term Care Business service center located in
Ridgeland, MS, and Long-Term Care Business administrative offices in Madison,
Mississippi. The following table identifies the locations of the Company's
service centers and the areas that they service.
PHYSICIAN SUPPLY BUSINESS
<TABLE>
<CAPTION>
Service Center Location States Serviced Service Center Location States Serviced
- ----------------------- ------------------------- -------------------------- ----------------------------
<S> <C> <C> <C>
Albany, NY CT, NY, VT Louisville, KY IN, KY
Albuquerque, NM CO, NM, TX Lubbock, TX TX
Atlanta, GA AL, GA Memphis, TN AR, MS, TN
Baltimore, MD MD, PA, VA, WV Milwaukee, WI WI
Birmingham, AL AL, MS Minneapolis, MN IA, MN, MT, ND, SD, WI
Charlotte, NC NC, SC, TN, VA New Orleans, LA AL, FL, LA, MS, TX
Chattanooga, TN AL, GA, TN Norfolk, VA NC, VA, WV
Chicago, IL IL, IN, WI Omaha, NE CO, IA, NE, WY
Cincinnati, OH IN, KY, OH, WV Orlando, FL FL
Cleveland, OH OH Philadelphia, PA DE, NJ, NY, PA
Columbia, SC GA, SC Phoenix, AZ AZ
Dallas, TX OK, TX Pittsburgh, PA MD, NY, OH, PA, WV
Deerfield Beach, FL FL Portland, OR CA, OR, WA
Denver, CO CO, NM, WY Raleigh, NC NC, VA
Detroit, MI MI Richmond, VA VA
Honolulu, HI HI Roanoke, VA TN, VA
Houston, TX OK, TX Rochester, NY NY
Indianapolis, IN IL, IN Salt Lake City, UT CO, ID, MT, NV, UT
Jackson, MS LA, MS San Antonio, TX TX
Jacksonville, FL FL, GA, SC San Diego, CA CA
Kansas City, KS IA, IL, KS, MO San Francisco, CA CA
Knoxville, TN KY, NC, TN Seattle, WA AK, WA
Lafayette, LA LA St. Louis, MO IL, MO
Las Vegas, NV AZ, NV, UT St. Petersburg, FL FL
Little Rock, AR AR, TX Tallahassee, FL AL, FL, GA
Long Island, NY MA, NJ, NY Tulsa, OK AK, MO, OK
Los Angeles, CA (North) CA Union, NJ NJ, NY
Los Angeles, CA (South) CA Wareham, MA CT, MA, ME, NH, RI
</TABLE>
-24-
<PAGE>
IMAGING BUSINESS
<TABLE>
<CAPTION>
Service Center Location States Serviced Service Center Location States Serviced
- ------------------------- ------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Albany, NY CT, MA, NJ, NY, VT, Laguna-Hills, CA AZ, CA, NM, NV, UT
Albuquerque, NM AZ, CO, NM, TX Las Vegas, NV NV, UT
Atlanta, GA GA, SC Leon Valley, TX TX
Austin, TX (1) TX Little Rock, AR AK, LA, MS, OK, TN
Birmingham, AL AL, FL, MS Lubbock, TX TX
Charlotte, NC NC, SC Lynnwood, WA AK, ID, MT, OR, WA
Chicago, IL IL, IN, WI Memphis, TN AR, MS, TN
Columbia, SC SC, NC Nashville, TN KY, TN
Dallas, TX AR, LA, OK, TX Phoenix, AZ (2) AZ
Danville, PA (1) NJ, PA Pompano Beach, FL FL
Del City, OK KS, OK Raleigh, NC NC
Delran, NJ MD, NJ, NY, PA, VA, Redlands, CA CA
Denver, CO CO, KS, NE, UT, WY Roanoke, VA NC, TN, VA, WV
Ft. Myers, FL (2) FL Rochester, NY OH, NY, PA
Hicksville, NY NY, PA Salt Lake City, UT ID, NV, UT, WY
Houston, TX TX South Beloit, IL IA, IL, IN, WI
Indianapolis, IN IN, KY St. Louis, MO IL, KY, MO
Jacksonville, FL FL, GA Syracuse, NY NY, PA
Kansas City, KS KS, MO Tampa, FL FL
Knoxville, TN GA, KY, TN
</TABLE>
LONG-TERM CARE BUSINESS
<TABLE>
<CAPTION>
Service Center Location States Serviced Service Center Location States Serviced
- ------------------------- ------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Atlanta, GA AL, GA, SC, TN Madison, WI IA, MD, MN, NE, WI
Birmingham, AL AL, FL, MS, TN Manchester, NH ME, NH, RI
Columbus, OH IN, OH, PA, WV Orlando, FL FL, GA
Dallas, TX KS, LA, NM, OK, TX Phoenix, AZ AZ, NM
Harrisburg, PA NJ, NY, OH, PA, VA, WV Raleigh, NC NC, SC, VA, WV
Jackson, MS AL, LA, MS, TN Sacramento, CA CA, OR, WA
Los Angeles, CA CA, NV San Antonio, TX LA, NM, TX
</TABLE>
INTERNATIONAL BUSINESS
<TABLE>
<CAPTION>
Service Center Location Country Serviced Service Center Location Country Serviced
- ------------------------- -------------------- ------------------------ ---------------------
<S> <C> <C> <C>
Leuven, Belgium Belgium, France, Dusseldorf, Germany Germany
Germany, Luxembourg Utrecht, Netherlands Netherlands
</TABLE>
(1) Merged into existing service centers subsequent to April 2, 1999
(2) Acquired subsequent to April 2, 1999
In the aggregate, the Company's service centers consist of approximately 2.4
million square feet, of which all is leased, with the exception of the
locations in Syracuse, New York, Leuven, Belgium, Ridgeland, Mississippi, and
Madison, Mississippi, under lease agreements with expiration dates ranging
from July 31, 1999 to January 31, 2013. The Company's service centers range
in size from approximately 3,500 square feet to 90,000 square feet.
The corporate offices of PSS consist of approximately 65,000 square feet of
leased office space located at 4345 Southpoint Boulevard, Jacksonville,
Florida 32216. The lease for this space expires in April 2002.
-25-
<PAGE>
At April 2, 1999, the Company's facilities provided adequate space for the
Company's operations. Throughout the Company's history of growth, the Company
has been able to secure the required facilities.
Item 3. Legal Proceedings
A series of related, putative class actions were filed against PSS and two
officers in the United States District Court for the Middle District of
Florida, Jacksonville Division, beginning on or about March 22, 1999 seeking
to recover indeterminate damages, interest, costs and attorneys' fees for a
class of stock purchasers between June 16, 1998 and March 10, 1999. The
claims are based on alleged violations of Section 10(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), Rule 10b-5 and "control
person" liability arising out of PSS' announcement that the SEC is reviewing
its financial reports for certain prior periods and that PSS would likely be
required to retroactively restate its financial statements to reflect the pre-
acquisition operating results of certain merger transactions that were
accounted for under the pooling of interest accounting method. The actions
are presently being consolidated and a motion to dismiss will ultimately be
filed. The lawsuits are in the earliest stages, and there can be no assurance
that this litigation will be ultimately resolved on terms that are favorable
to PSS.
PSS 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, Jacksonville Division. An
amended complaint was filed on December 11, 1998. The plaintiff alleges, for
himself and for a purported class of similarly situated stockholders who
allegedly purchased the Company's stock between December 23, 1997 and May 8,
1998, that the defendants engaged in violations of certain provisions of 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 indeterminate damages, including
costs and expenses. PSS believes that the allegations contained in the
complaint are without merit and intends to defend vigorously against the
claims. The defendants filed their motions to dismiss on January 25, 1999
which are pending. 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 PSS.
Gulf South and certain of its current and former officers and directors, among
others, were 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. On May 14, 1999, the United
States Court of Appeals for the 5th Circuit dismissed the Krupnik case with
prejudice. On May 24, 1999 the United States District Court for the Southern
District of Mississippi, Jackson Division, dismissed the Klein case with
prejudice.
PSS was named in a purported patent infringement suit filed by Bayer Corp. in
the United States District Court for the Middle District of Florida (No. 89-
235 Civ. J-21A). In this lawsuit, Bayer alleged that certain of the
urinalysis test strips sold under the Penny SaverTM name infringe four Bayer
patents. On May 18, 1999, Bayer and PSS settled this lawsuit with the entry
of a consent decree. Under the consent decree, (a) Bayer waived any claim for
money damages; (b) Bayer dismissed its claim for infringement of one of the
patents without prejudice; (c) PSS agreed the remaining three patents were
infringed, but did not concede their validity; (d) PSS agreed to an injunction
against the sale of the products which infringed the three remaining patents;
and (e) PSS' claim that the patents were invalid was dismissed without
prejudice.
Although PSS does not manufacture products, the distribution of medical
supplies and equipment entails inherent risks of product liability. PSS is a
party to various legal and administrative legal proceedings and claims arising
in the normal course of business. However, PSS has not experienced any
significant product liability claims and maintains product liability insurance
coverage. 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.
-26-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Shares and Related Shareholder
Matters
Shares of PSS World Medical, Inc.'s Common Stock are quoted on the NASDAQ
National Market under the ticker symbol "PSSI." The following table reflects
the range of the NASDAQ reported high and low closing sale prices of the
Company's Common Stock during the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------------------------------------------------------------------------------------ ---------- ---------
<S> <C> <C>
June 30, 1997............................................................................. $19.00 $12.00
September 30, 1997........................................................................ 19.50 16.75
December 31, 1997......................................................................... 24.00 18.06
April 3, 1998............................................................................. 26.00 18.31
June 30, 1998............................................................................. 24.13 12.06
September 30,1998......................................................................... 20.50 14.13
December 31, 1998......................................................................... 23.25 15.63
April 2, 1999............................................................................. 23.00 8.81
</TABLE>
As of April 2, 1999, there were 1,600 holders of record and approximately
17,000 beneficial holders of the Company's Common Stock.
Since inception, the Company has neither declared nor paid cash dividends on
the Common Stock. The Company expects that earnings will be retained for the
growth and development of the Company's business. Accordingly, the Company
does not anticipate that any dividends will be declared on the Common Stock
for the foreseeable future. Certain acquired companies paid distributions to
their S corporation shareholders during the periods prior to acquisition by
the Company.
-27-
<PAGE>
Item 6. Selected Financial Data
The following selected financial data of the Company for fiscal years 1995
through 1999 have been derived from the Company's consolidated financial
statements which give retroactive effect to the mergers accounted for as
pooling of interests. The fiscal 1998 and 1997 consolidated financial
statements combine the December 31, 1997 and December 31, 1996 financial
statements of Gulf South with the April 3, 1998 and March 28, 1997 financial
statements of PSS, respectively. 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
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 fiscal 1999 consolidated financial statements include the combined
results of operations for the period from April 4, 1998 to April 2, 1999, of
both PSS and Gulf South.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ---------- ---------- ----------- -----------
(Restated) (Restated) (Restated) (Restated)
(Dollars in Thousands, Except Per Share Data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales $564,136 $719,214 $1,166,286 $1,381,786 $1,564,505
Gross profit 156,344 194,711 287,473 366,436 421,908
Selling and G&A expenses 135,320 159,578 266,721 330,668 348,055
Net income 7,465 10,706 15,523 17,552 43,741
----------- ---------- ---------- ----------- -----------
Earnings per share:
Basic N/A $ 0.17 $ 0.23 $ 0.25 $ 0.62
Diluted $0.12 $ 0.16 $ 0.23 $ 0.25 $ 0.61
----------- ---------- ---------- ----------- -----------
Weighted average shares outstanding (h)
Basic N/A 55,813 66,207 69,697 70,548
Diluted 47,979 57,360 66,957 70,545 71,398
----------- ---------- ---------- ----------- -----------
Balance Sheet Data:
Working capital $ 88,011 $211,835 $ 270,018 $ 381,180 $ 356,578
Total assets 189,866 351,553 512,640 691,254 743,381
Long-term liabilities 39,927 10,622 8,459 138,178 155,553
Total equity 79,114 242,091 352,661 384,577 416,560
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------
1997 1998 1999
------------ ------------- ------------
(Restated) (Restated)
<S> <C> <C> <C>
(Dollars in Thousands, Except Per Share Data)
Other Financial Data:
Income before provision for income taxes $23,588 $36,349 $ 73,681
Plus: Interest Expense 3,471 7,517 11,522
------------ ------------- ------------
EBIT (a) 27,059 43,866 85,203
Plus: Depreciation and amortization 6,473 10,861 20,384
------------ ------------- ------------
EBITDA (b) 33,532 54,727 105,587
Unusual Charges Included in Continuing
Operations (i) 17,950 31,927 9,232
Cash Paid For Unusual Charges Included
in Continuing Operations (13,175) (14,956) (29,134)
------------ ------------- ------------
Adjusted EBITDA (c) 38,307 71,698 85,685
EBITDA Coverage (d) 9.7x 7.3x 9.2x
EBITDA Margin (e) 2.9% 4.0% 6.8%
Adjusted EBITDA Coverage (f) 11.0x 9.5x 7.4x
Adjusted EBITDA Margin (g) 3.3% 5.2% 5.5%
Cash (used in) provided by operating $(10,802) $27,936 $(18,704)
activities
Cash used in investing activities (74,843) (47,969) (28,914)
Cash provided by financing activities 56,427 65,209 7,471
</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.
(d) EBITDA coverage represents the ratio of EBITDA to interest expense.
(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) Adjusted to give effect to a three-for-one stock split in fiscal year 1996.
(i) Fiscal 1999 excludes $5,379 of information systems accelerated
depreciation.
-29-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Restated)
The following discussion and analysis of the consolidated financial condition
and consolidated results of operations of PSS should be read in conjunction
with the more detailed information contained in the Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-K.
The historical consolidated financial statements of the Company have been
restated to include the following: i) the financial position and results of
operations of various businesses acquired and accounted for under the pooling-
of-interests method accounting as if the companies had operated as one entity
since inception, ii) the effects of recording certain operating expenses as
incurred and properly stating goodwill and accrued merger costs and expenses,
iii) the effects of capitalizing the information system assets previously
considered impaired, and iv) an accrual of professional fees to resolve the
Gulf South operational tax issues. Refer to the notes to the consolidated
financial statements (Note 22, Restatements) for a further discussion
regarding the restatements.
All dollar amounts presented below are in thousands, except per share data.
COMPANY OVERVIEW
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, home care providers, and hospitals through 111
service centers to customers in all 50 states and three European countries.
Since its inception in 1983, the Company has become a leader in 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 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 approximately 730 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 37 imaging distribution service centers with approximately 750
service specialists and 190 sales representatives ("Imaging Business") serving
over 10,000 customer sites in 41 states. The Imaging Business' primary market
is the approximately 10,000 hospitals and other alternate-site imaging
companies operating approximately 40,000 office sites throughout the United
States.
Through its wholly owned subsidiary Gulf South Medical Supply, Inc. ("GSMS"),
the Company has become a leading national distributor of medical supplies and
related products to the long-term care industry in the United States based on
revenues, number of sales representatives, and number of service centers.
GSMS currently operates 15 distribution service centers with approximately 160
sales representatives ("Long-Term Care Business") serving over 14,000 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
17,000 long-term care companies.
-30-
<PAGE>
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.
COMPANY STRATEGY
The Company's objectives are to be the leading distributor and marketer of
medical products to office-based physicians, providers of imaging services,
and long-term care providers in the United States, and to enhance operating
performance. The key components of the Company's strategy to achieve these
objectives are to continue to:
Expand Operating Margins. The Company is pursuing several initiatives to
enhance its operating margins. With respect to sales, the Company is focusing
its efforts on higher-margin accounts and on sales of diagnostic equipment,
often on an exclusive or semi-exclusive basis, that involves ongoing sales of
higher-margin reagents and/or higher margin service contracts. With respect
to its product line, the Company seeks to generate high sales volumes of
selected products and to obtain such products on a discounted basis from
manufacturers. The Company has rationalized its service center locations with
the closure of nine Long-Term Care Business centers, three Physician Supply
Business centers, and seven Imaging Business centers during fiscal 1999 to
increase efficiency and eliminate centers with below average performance.
Finally, with respect to its service center expansion program, the Company
intends to emphasize acquisitions over new-center development, thus avoiding
the substantial start-up losses associated with new-center development.
Pursue Strategic Acquisitions. The Company has made 49, 33, 4, and 4
acquisitions since fiscal year 1989 in its Physician Supply, Imaging, Long-
Term Care, and International Businesses, respectively (excludes acquisitions
made by the Company's subsidiaries and divisions prior to PSS World Medical,
Inc. ownership). After consummating a merger or acquisition, the Company
begins an intensive process of converting the acquired company to its business
model through information systems conversion, personnel development and
training, and service and product expansion. The Company intends to continue
to acquire local, regional, and other distributors in new and existing markets
where it can leverage its distribution infrastructure, expand its geographic
coverage, add service and sales competence, and gain market share.
Utilize Sophisticated Information Systems. In 1994, the Company implemented
its Instant Customer Order Network ("ICONSM"), an ordering and customer data
system, with all its Physician Supply Business sales representatives. ICONSM
has increased time available to sales representatives for selling, decreased
operating expenses, and increased the Company's ability to provide same-day
delivery. During fiscal year 1997, the Physician Supply Business developed
and test marketed CustomerLink, an Internet-based system for inventory
management and purchasing. Since then, the Company has been very active in
developing ancillary systems that improve efficiencies throughout its
operations (see Information Systems discussion). The Company has also
developed internet-based solutions for each of its businesses. The Company
believes its physician customers will be very late adopters of both e-commerce
and the internet. However, $80,000 a day of internet sales are currently being
processed by the Long Term Care Business with approximately 40% of all that
business sales processing through e-commerce. The Imaging Business is
currently implementing internet access for its customers.
Provide Differentiated, High Quality Service. The Company believes its
success to date has been based largely on its ability to provide superior
customer service, including same-day, next-day, and scheduled delivery,
guaranteed service specialist response, and "no-hassle" returns. Unlike its
competitors, which generally ship products via common carrier, the Company
operates a fleet of over 1,500 delivery and service vehicles enabling it to
provide same-day or next day delivery and service to virtually all of its
customers. The Company will continue to pursue the development of
sophisticated systems that improve operational efficiency, reduces fixed and
variable costs of its infrastructure, improves access to the Company by its
customers, and reduces costs in the supply channel.
Historically, the Company has differentiated itself from the competition
servicing the office-based physician market by providing consistent, same-day
delivery on a national basis. The Company again is distinguishing itself from
the competition by providing a metropolitan two-hour and a four-hour rural
technical service specialist deployment guarantee through its Imaging
Business. In addition, the Company's Long-Term Care
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<PAGE>
Business has increased next day or scheduled self-delivery on Company leased
vehicles from 8% to 50% of orders during fiscal 1999.
Offer a Broad Product Line Emphasizing Exclusive Products. The Company seeks
to meet all of the medical products needs of office-based physicians,
providers of imaging services and providers of long-term care. The Company
currently stocks over 56,000 medical products in its Physician Supply
Business, over 8,000 imaging products in its Imaging Business, and over 20,000
medical products in its Long-Term Care Business. The Company also seeks to
establish exclusive distribution and marketing arrangements for selected
products. In the United States, PSS currently has exclusive or semi-exclusive
marketing arrangements for certain products with Abbott, Candela, Critikon,
Hologic, Inc, Leisegang, Philips Medical Systems, Siemens AG, Sonosight, Trex
Medical Corporation, and other leading manufacturers. The Company believes
that its sophisticated selling efforts, highly trained sales force, and large
customer base provide manufacturers with a unique sales channel through which
to distribute new and existing products and technology that require
consultative selling.
Enhance Selling Capabilities. The Company believes its sales force and
managers are its most valuable corporate assets and focuses not only on the
recruitment of sales personnel with superior sales aptitude, but also on the
initial and continued development of its sales force and management through
training at The University, its in-house educational center. The Company
believes investment in personnel and training enable it to provide high-
quality service to its customers, offer sophisticated product lines, and
attract manufacturers that desire a means of rapidly bringing new products and
technology to market.
COMPANY GROWTH
The Company has grown rapidly in recent years through mergers and
acquisitions, same-center growth and new-center development. The number of
company service centers has grown from two at the end of fiscal year 1984 to
110 as of April 2, 1999, including 56 Physician Supply Business service
centers, 37 Imaging Business service centers, 14 Long-Term Care Business
Service centers and three International Business service centers. In order of
priority, the Company's growth has been accomplished through: (i) acquiring
local and regional Imaging Business medical products distributors; (ii)
acquiring local and regional Physician Supply Business medical-products
distributors; (iii) acquiring Gulf South Medical Supply, Inc. thereby forming
the basis of the Company's Long-Term Care Business; (iv) increasing sales from
existing service centers; and (v) opening start-up service centers.
The following table depicts the number of service centers, sales and service
representatives and states served by the Company for the fiscal years
indicated. See "Item 2.--Properties" for a list of the Company's service
centers.
<TABLE>
<CAPTION>
Fiscal Year Ended (4)
-----------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total Company:
Sales representatives............................................ 523 813 924 957 1,118
Service Specialists.............................................. 104 112 223 390 727
Service centers (1).............................................. 70 90 103 111 110
States served.................................................... 50 50 50 50 50
Physician Supply Business:
Sales representatives............................................ 455 692 720 703 731
Service centers (1).............................................. 54 64 61 61 56
States served.................................................... 48 50 50 50 50
Imaging Business (2):
Sales representatives............................................ 26 30 73 116 194
Service specialists.............................................. 104 112 223 390 727
Service centers.................................................. 7 8 21 25 37
States served.................................................... 9 9 16 27 41
Long-Term Care Business:
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended (4)
-----------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Sales representatives............................................ 42 91 107 110 170
Service centers (3).............................................. 9 18 19 22 14
States served.................................................... 50 50 50 50 50
International Business:
Sales representatives............................................ -- -- 24 28 23
Service centers.................................................. -- -- 2 3 3
Countries served................................................. -- -- 5 5 5
</TABLE>
(1) Excludes Taylor service centers prior to their acquisition.
(2) All Imaging Business data for periods prior to November 1996 reflect pre-
merger financial data of companies acquired through pooling-of-interests
transactions.
(3) All Long-Term Care Business data prior to fiscal 1999 is presented based on
a calendar year end.
(4) Excludes pre-acquisition data of companies acquired by PSS World Medical,
Inc. unless otherwise noted.
ACQUISITION PROGRAM
The Company views the acquisition of medical products distributors as an
integral part of its growth strategy. The Physician Supply Business has grown
from one service center located in Jacksonville, Florida, in 1983 to 56 at the
end of fiscal 1999. The Imaging Business and International Business began
with acquisitions in fiscal year 1997 and have grown primarily through
acquisitions to 37 and three service centers, respectively, to date. The
Long-Term Care Business was developed through the acquisition of Gulf South
Medical Supply, Inc. in March 1998 and has acquired four long-term care
companies in fiscal year 1999. Since fiscal year 1995 the Company has
accelerated its acquisition of medical products distributors both in number
and in size of the operations acquired.
The following table sets forth the number of acquisitions of the Company and
the prior revenues of the companies acquired for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended (1)
--------------------------------------------------------
1995 1996 1997 1998 1999
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Number of acquisitions............................ 9 11 10 15 26
Prior year revenues for acquired companies (2).... $37,600 $167,600 $241,700 $498,942 $294,428
</TABLE>
(1) Excludes pre-acquisition data of companies acquired by PSS World Medical,
Inc.
(2) Reflects 12-month trailing revenues for companies prior to their acquisition
by PSS World Medical, Inc. and is not necessarily reflective of actual
revenues under continued operations following an acquisition.
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<PAGE>
OPERATING HIGHLIGHTS
The following table sets forth information regarding the Company's net sales
by business for the periods indicated (in millions):
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
1997 1998 1999
-------------- -------------- -------------
(Restated) (Restated)
Net Sales
<S> <C> <C> <C>
Physician Supply Business ........................................ $ 610.4 $ 662.5 $ 677.4
Imaging Business ................................................. 362.5 409.7 524.8
Long-Term Care Business............................................ 177.7 287.6 342.4
International Business ........................................... 15.7 22.0 19.9
Total company ............................................... $1,166.3 $1,381.8 $1,564.5
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
1997 1998 1999
-------------- -------------- -------------
(Restated) (Restated)
Percentage of Net Sales
<S> <C> <C> <C>
Physician Supply Business.......................................... 52.3% 48.0% 43.3%
Imaging Business................................................... 31.1 29.7 33.5
Long-Term Care Business............................................ 15.2 20.8 21.9
International Business............................................. 1.4 1.5 1.3
Total company................................................. 100.0% 100.0% 100.0%
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
1997 1998 1999
-------------- -------------- -------------
(Restated) (Restated)
<S> <C> <C> <C>
Gross Margin Trends
Total Company...................................................... 24.6% 26.5% 27.0%
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
1997 1998 1999
-------------- -------------- -------------
(Restated) (Restated)
Income From Operations
<S> <C> <C> <C>
Physician Supply Business ........................................ $ 3.4 $16.9 $ 46.8
Imaging Business ................................................. 4.0 6.5 19.4
Long-Term Care Business............................................ 12.8 17.7 19.3
International Business ........................................... 0.5 (5.3) (11.7)
Total company ............................................... $20.7 $35.8 $ 73.8
</TABLE>
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<PAGE>
The following table sets forth certain operating trends of the Company for the
periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------
1998 1999
---------- ----------
(Restated)
<S> <C> <C>
Operating Trends:
Average Days Sales Outstanding.................................................... 54.3 56.0
Average Inventory Turnover........................................................ 8.7x 8.1x
</TABLE>
Accounts receivable, net of allowances, were $273.0 million and $213.9 million
at April 2, 1999 and April 3, 1998, respectively. Inventories were $153.6
million and $127.0 million and as of April 2, 1999 and April 3, 1998,
respectively.
The following table sets forth certain liquidity trends of the Company for the
periods presented (in millions):
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------
1998 1999
---------- ----------
(Restated)
<S> <C> <C>
Liquidity Trends:
Cash and Investments.............................................................. $163.0 $ 41.1
Working Capital................................................................... 381.2 356.6
</TABLE>
RESULTS OF OPERATIONS
The table below sets forth for each of the fiscal years 1997 through 1999
certain financial information as a percentage of net sales. The following
financial information includes the pre-acquisition financial information of
companies acquired as poolings of interests. The fiscal 1998 and 1997
consolidated financial statements combine the December 31, 1997 and December
31, 1996 financial statements of Gulf South with the April 3, 1998 and March
28, 1997 financial statements of PSS, respectively. 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 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 fiscal 1999 consolidated financial statements include the
combined results of operations for the period from April 4, 1998 to April 2,
1999, of both PSS and Gulf South. Refer to Note 3, Gulf South's Results of
Operations for the Three Months Ended April 3, 1998, in the accompanying
consolidated financial statements for the results of Gulf South for the three
months ended April 3, 1998.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------
1997 1998 1999
---------- ----------- ----------
(Restated) (Restated)
Income Statement Data
<S> <C> <C> <C>
Net sales.................................................................. 100.0% 100.0% 100.0%
Gross profit............................................................... 24.7 26.5 27.0
General and administrative expenses........................................ 16.3 16.5 14.4
Selling expenses........................................................... 6.6 7.4 7.9
Operating income........................................................... 1.8 2.6 4.7
Net income................................................................. 1.3 1.3 2.8
</TABLE>
FISCAL YEAR ENDED APRIL 2, 1999 VERSUS FISCAL YEAR ENDED APRIL 3, 1998
(RESTATED)
Net Sales. Net sales for fiscal year 1999 totaled $1.56 billion, an increase
of $182.7 million, or 13.2%, over the fiscal year 1998 total of $1.38 billion.
The increase in sales can be attributed to (i) net sales from the
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<PAGE>
acquisition of companies during fiscal year 1998 and 1999 accounted for as
purchases; (ii) internal sales growth of centers operating at least two years;
(iii) the Company's focus on diagnostic equipment sales; and (iv) incremental
sales generated in connection with exclusive and semi-exclusive vendor
relationships.
Net sales contributed from acquisitions completed in fiscal 1999 totaled
approximately $5.6 million, $74.4 million, and $8.4 million for the Physician
Supply, Imaging, and Long-Term Care Businesses, respectively. In addition,
Physician Supply Business and Imaging Business acquisitions completed during
fiscal 1998 provided approximately $7.0 million and $27.9 million,
respectively, in additional incremental sales to fiscal 1999.
The Company experienced a sequential decline in fourth quarter net sales in
its Long-Term Care Business due to the implementation of the Prospective Pay
System ("PPS") for reimbursement of Medicare patients in long-term care
facilities. The Company does not expect this trend to continue unless long-
term care facility customers are financially impaired or reorganized due to
the impact of the new PPS reimbursement requirements.
Gross Profit. Gross profit for fiscal year 1999 totaled $421.9 million, an
increase of $55.5 million, or 15.1%, over the fiscal year 1998 total of $366.4
million. The increase in gross profit dollars is primarily attributable to
the sales growth described above. Gross profit as a percentage of net sales
was 27.0% and 26.5% for fiscal years 1999 and 1998, respectively. Although
there has been considerable gross margin pressure from competition and a
consolidating customer base, as well as internal pressure from an increase of
Imaging Business revenues at a lower margin, the Company has successfully
maintained its overall gross margins. The increase in gross margin as a
percentage of sales is attributable to (i) an increase in the sales mix of
higher margin diagnostic equipment and service, (ii) an increase in sales of
higher margin private label medical supplies by the Physician Supply Business,
and (iii) the ability to negotiate lower product purchasing costs which
resulted from increased purchasing volume subsequent to the Gulf South
acquisition. This is offset by the expansion of imaging revenues with lower
gross profit margins.
During fiscal 1999, the Company experienced margin pressures in the Long-Term
Care Business as a result of its large chain customers renegotiating prices
due to the implementation of PPS. The Company expects this trend to continue
in the Long-Term Care Business. The Company added a net addition of
approximately 50 sales representatives in fiscal 1999 to develop sales to
independent and regional customers to offset the impact of decreased margins
in its chain customer sales.
General and Administrative Expenses. General and administrative expenses for
fiscal year 1999 totaled $224.7 million, a decrease of $3.6 million, or 1.6%,
from the fiscal year 1998 total of $228.3 million. General and administrative
expenses as a percentage of net sales, decreased to 14.4% for fiscal year 1999
from 16.5% for fiscal year 1998. The decrease in general and administrative
expenses as a percentage of net sales was a result of (i) a decrease in merger
activity, restructuring costs and expenses, and other special items as
discussed below, (ii) the continued leveraging of fixed costs of mature
service center operations, (iii) the elimination of below average performance
centers during fiscal 1999, and (iv) the increased contribution by the Imaging
division which operates at lower general and administrative expenses as a
percentage of sales.
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 consolidated statements of income:
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<PAGE>
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Merger costs and expenses............................................................ $ 3,300 $13,986
Restructuring costs and expenses..................................................... 4,922 3,691
Information systems accelerated depreciation......................................... 5,379 --
Goodwill impairment charges.......................................................... -- 5,807
Gulf South operational tax charge and professional fee accrual....................... -- 5,986
Other charges........................................................................ 1,010 2,457
----------- -----------
Total charges........................................................................ $14,611 $31,927
=========== ===========
</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 direct transaction costs, 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, and (4) training
costs related to conforming the acquired companies operational policies to
that of the Company's operational policies. In addition, amounts incurred
in excess of the original amount accrued at the commitment date, are
expensed as incurred.
Merger costs and expenses for fiscal 1999 include $2,818 of charges
recorded at the commitment date of an integration plan adopted by
management and $1,410 of charges for merger costs expensed as incurred. In
addition, during fiscal 1999, the Company reversed approximately $928 of
merger costs and expenses into income, of which approximately $777 related
to direct transaction costs (refer to Note 3, Gulf South's Results of
Operations for the Three Months Ended April 3, 1998).
Merger costs and expenses for fiscal 1998 include $4,055 of charges
recorded at the commitment date of an integration plan adopted by
management and $9,931 of charges for merger costs expensed as incurred.
The merger costs expensed as incurred primarily relate to direct
transaction costs related to the merger with Gulf South.
Restructuring Costs and Expenses
During fiscal 1998, due to the impact of the Gulf South merger, the Company
recorded restructuring costs and expenses of $3,691 related to the PSS and
DI divisions. See Note 3, Gulf South's Results of Operations for the Three
Months Ended April 3, 1998, which discusses the charges recorded by the
Gulf South division.
Refer to Note 5, Accrued Merger and Restructuring Costs and Expenses, for a
further discussion regarding the restructuring plan.
During the quarter ended June 30, 1998, management approved and adopted an
additional Gulf South component to its formal plan to restructure the
Company. This restructuring plan identified two additional distribution
centers and two corporate offices to be merged with existing facilities and
identified three executives to be involuntarily terminated. Accordingly,
the Company recorded restructuring costs and expenses of $1,503 at the
commitment date of the restructuring plan adopted by management. Such
costs
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<PAGE>
include branch shutdown costs, lease termination costs, involuntary
employee termination costs of $281, $570, and $652, respectively.
The remaining $3,419 of restructuring costs recorded during fiscal 1999
represent charges expensed as incurred. Such costs include charges for
training costs related to conforming the acquired companies operational
policies to that of the Company's operational policies, direct transaction
costs, involuntary employee termination costs, and other exit costs of
$1,138, $227, $300, and $1,754, respectively. 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 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 12 to 15 months, which
was the original estimate of when the new systems implementation would be
completed. The $5,379 charge represents the incremental fiscal 1999 impact
on depreciation expense resulting from management's decision to replace its
information systems.
Goodwill Impairment Charges
During fiscal 1998, the Company determined that goodwill related to three
foreign (World Med) acquired companies and one domestic (PSS division)
acquired company, was not recoverable. As such, the goodwill of $5,807
related to the four entities was written-off during fiscal 1998.
Gulf South Operational Tax Charge and Professional Fee Accrual
The Company, in connection with the filing of its Fiscal 1998 financial
statements, restated for certain operational tax issues in the
Financial Statements of Gulf South for the years ended December 31, 1997,
1996, and 1995. As such, Gulf South recorded operational charges of
$5,986, $1,998, and $1,656 during fiscal 1998, 1997, and 1996,
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. In addition, as explained in Note 3, Gulf South's
Results of Operations for Three Months Ended April 3, 1998, $2,772 of such
charges were recorded by Gulf South during the quarter ended April 3, 1998.
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 issues arose.
In addition, professional fees estimated to be incurred to resolve the tax
issues of $2,919 for fiscal 1998 were recorded in the accompanying
consolidated statements of income for the year ended April 3, 1998. These
professional fees were previously recorded by Gulf South in the period from
January 1, 1998 to April 3, 1998 and, therefore, reflected as an adjustment
to shareholders' equity on April 4, 1998 (refer to Note 1, Background and
Summary of Significant Accounting Policies). However, the Company's fiscal
1998 historical consolidated financial statements have been restated to
recognize the professional fees at the Holding Company in fiscal 1998,
rather than at the Gulf South divisional level (refer to Note 22,
Restatements).
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<PAGE>
Other Charges
During fiscal 1999, the Company incurred approximately $1,010 of costs
related to acquisitions not consummated.
The other charges recorded in 1998 and 1997 relate to the ESOP cost of an
acquired company. S&W sponsored a leveraged employee stock ownership plan
("S&W ESOP") that covered all employees with one year of service. The
Company accounted for this ESOP in accordance with SOP 93-6, 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 fiscal 1998, the Company released the remaining shares to the S&W
ESOP participants. Accordingly, approximately $2,457 of related expenses
were recognized in fiscal 1998. The Company did not incur any related
costs during fiscal 1999.
Selling Expenses. Selling expenses for fiscal year 1999 totaled $123.3
million, an increase of $21.0 million, or 20.5%, over the fiscal year 1998
total of $102.4 million. Selling expense as a percentage of net sales was
approximately 7.9% and 7.4% for fiscal years 1999 and 1998, respectively. The
Company utilizes a variable commission plan, which pays commissions based on
gross profit as a percentage of net sales. In fiscal 1999, sales commissions
as a percent of net sales increased due (i) to the addition of new sales
representatives to increase or replace existing low performance sales
representatives, (ii) acquisition of sales representatives at the Imaging
Business that are in transition to the Company's commission plan, and (iii)
the short-term impact of the Long-Term Care Business changing of its
compensation plan for its sales representatives.
Operating Income. Operating income for fiscal year 1999 totaled $73.9
million, an increase of $38.1 million, or 106.5%, over the fiscal year 1998
total of $35.8 million. As a percentage of net sales, operating income for
fiscal year 1999 increased to 4.7% from 2.6% for fiscal year 1998. As
discussed in the analysis of general and administrative expenses, 1998
operating results include higher levels of operating charges related to merger
activity, restructuring costs and expenses, and other unusual items than 1999.
Interest Expense. Interest expense for fiscal year 1999 totaled $11.5
million, an increase of $4.0 million, or 53.3%, over the fiscal year 1998
total of $7.5 million. The increase in interest expense in fiscal 1999 over
the comparable prior year period primarily reflects interest on the $125.0
million 8.5% senior subordinated debt that was outstanding for a full twelve
months during fiscal 1999 versus five months outstanding during fiscal 1998.
Interest and Investment Income. Interest and investment income for fiscal
1999 totaled $4.7 million, a decrease of $0.5 million, or 9.9%, over the
fiscal year 1998 total of $5.2 million.
Other Income. Other income for fiscal 1999 totaled $6.6 million, an increase
of $3.8 million, or 132.3%, over the fiscal year 1998 total of $2.8 million.
Other income consists of finance charges on customer accounts and financing
performance incentives. Other income for fiscal 1999 includes a gain of $0.4
million from the sale of property and equipment.
Provision for Income Taxes. Provision for income taxes for fiscal year 1999
totaled $29.9 million, an increase of $11.1 million, or 59.3%, over the fiscal
year 1998 total of $18.8 million. This increase primarily resulted from the
increase in taxable income due to the factors discussed above. The effective
income tax rate was 40.6% in fiscal year 1999 versus 51.7% in fiscal 1998.
The effective tax rate is generally higher than the Company's statutory rate
due to the to the nondeductible nature of certain merger related costs and the
impact of the Company's foreign subsidiary, both of which were higher in 1998
than 1999.
Net Income. Net income for fiscal year 1999 totaled $43.7 million, an
increase of $26.2 million, or 149.2%, over the fiscal year 1998 total of $17.6
million. As a percentage of net sales, net income increased to 2.8% for
fiscal year 1999 from 1.3% for fiscal year 1998 due primarily to the factors
described above.
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<PAGE>
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, Background and Summary
of Significant Accounting Policies, 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 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.
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
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<PAGE>
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.
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.
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<PAGE>
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.
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.
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<PAGE>
<TABLE>
<S> <C>
Lease termination costs...................................................................... $ 977
Involuntary employee termination costs......................................................... 1,879
Branch shutdown costs.......................................................................... 885
Other exit costs............................................................................... 540
----------
$4,281
==========
</TABLE>
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 $2,771was 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 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.
FISCAL YEAR ENDED APRIL 3, 1998 VERSUS FISCAL YEAR ENDED MARCH 28, 1997
(RESTATED)
Net Sales. Net sales for fiscal year 1998 totaled $1.38 billion, an increase
of $215.5 million, or 18.5%, over the fiscal year 1997 total of $1.17 billion.
The increase in net sales was attributable to: (i) net sales from the
acquisitions of the companies during fiscal year 1998 and 1997, accounted for
as purchases, (ii) internal sales growth of centers operating at least two
years; (iii) the Company's focus on diagnostic equipment sales; (iv)
incremental sales generated in connection with the Abbott Agreement.
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<PAGE>
Net sales contributed from acquisitions completed in fiscal 1998 totaled
approximately $4.7 million and $56.6 million for the Physician Supply and
Imaging Businesses, respectively.
Gross Profit. Gross profit for fiscal year 1998 totaled $366.4 million, an
increase of $79.0 million, or 27.5%, over the fiscal year 1997 total of $287.5
million. The increase in gross profit dollars is primarily attributable to
the sales growth described above. Gross profit as a percentage of net sales
was 26.5% and 24.7% for fiscal years 1998 and 1997, respectively.
General and Administrative Expenses. General and administrative expenses for
fiscal year 1998 totaled $228.3 million, an increase of $38.1 million, or
20.0%, over the fiscal year 1997 total of $190.2 million. General and
administrative expenses as a percentage of net sales was 16.5% and 16.3% for
fiscal years 1998 and 1997, respectively.
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 consolidated statements of income:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Merger costs and expenses............................................................ $13,986 $14,506
Restructuring costs and expenses..................................................... 3,691 --
Goodwill impairment charges.......................................................... 5,807 --
Gulf South operational tax charge and professional fee accrual....................... 5,986 1,998
Other charges........................................................................ 2,457 1,446
--------- ---------
Total charges........................................................................ $31,927 $17,950
========= =========
</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 direct transaction costs, 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, and (4) training
costs related to conforming the acquired companies operational policies to
that of the Company's operational policies. In addition, amounts incurred
in excess of the original amount accrued at the commitment date are
expensed as incurred.
Merger costs and expenses for fiscal 1998 include $4,055 of charges
recorded at the commitment date of an integration plan adopted by
management and $9,931 of charges for merger costs expensed as incurred.
The merger costs expensed as incurred primarily relate to direct
transaction costs related to the merger with Gulf South.
Merger costs and expenses for fiscal 1997 include $6,287 of charges
recorded at the commitment date of an integration plan adopted by
management and $8,219 for merger costs expensed as incurred. Refer to Note
5, Accrued Merger and Restructuring Costs and Expenses.
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<PAGE>
Restructuring Costs and Expenses
During fiscal 1998, due to the impact of the Gulf South merger, the Company
recorded restructuring costs and expenses of $3,691 related to the PSS and
DI divisions. See Note 3, Gulf South's Results of Operations for the Three
Months Ended April 3, 1998, which discusses the charges recorded by the
Gulf South division. Refer to Note 5, Accrued Merger and Restructuring
Costs and Expenses, for a further discussion regarding the restructuring
plan.
Goodwill Impairment Charges
During fiscal 1998, the Company determined that goodwill related to three
foreign (World Med) acquired companies and one domestic (PSS division)
acquired company, was not recoverable. As such the, goodwill of $5,807
related to the four entities was written-off during fiscal 1998.
Gulf South Operational Tax Charge and Professional Fee Accrual
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 years ended December 31, 1997,
1996, and 1995. As such, Gulf South recorded operational charges of
$5,986, $1,998, and $1,656 during fiscal 1998, 1997, and 1996,
respectively, primarily related to state and local, sales and
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<PAGE>
use, and property taxes that are normally charged directly to the customer
at no cost to the Company. In addition, as explained in Note 3, Gulf
South's Results of Operations for Three Months Ended April 3, 1998, $2,772
of such charges were recorded by Gulf South during the quarter ended April
3, 1998. 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.
In addition, professional fees estimated to be incurred to resolve the tax
issues of $2,919 for fiscal 1998 were recorded in the accompanying
consolidated statements of income for the year ended April 3, 1998. These
professional fees were previously recorded by Gulf South in the period from
January 1, 1998 to April 3, 1998 and, therefore, reflected as an adjustment
to shareholders' equity on April 4, 1998 (refer to Note 1, Background and
Summary of Significant Accounting Policies). However, the Company's fiscal
1998 historical consolidated financial statements have been restated to
recognize the professional fees at the Holding Company in fiscal 1998,
rather than at the Gulf South divisional level (refer to Note 22,
Restatements).
Other Charges
The other charges recorded in 1998 and 1997 relate to the ESOP cost of an
acquired company. S&W sponsored a leveraged employee stock ownership plan
("S&W ESOP") that covered all employees with one year of service. The
Company accounted for this ESOP in accordance with SOP 93-6, 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 fiscal 1998, the Company released the remaining shares to the S&W
ESOP participants. Accordingly, approximately $2,457 and $1,446 of related
expenses were recognized in fiscal 1998 and 1997, respectively.
Selling Expenses. Selling expenses for fiscal year 1998 totaled $102.4
million, an increase of $25.9 million, or 33.8%, over the fiscal year 1997
total of $76.5 million. Selling expense as a percentage of net sales was
approximately 7.4% and 6.6% for fiscal years 1998 and 1997, respectively. 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 fiscal year 1998 totaled $35.8
million, an increase of $15.0 million, or 72.4%, over the fiscal year 1997
total of $20.8 million. As a percentage of net sales, operating income for
fiscal year 1998 increased to 2.6% from 1.8% for fiscal year 1997.
Interest Expense. Interest expense for fiscal year 1998 totaled $7.5 million,
an increase of $4.0 million, or 116.6%, over the fiscal year 1997 total of
$3.5 million. The increase in interest expense reflects interest on the
$125.0 million 8.5% Senior Subordinated debt that was outstanding the last
five months of fiscal 1998.
Interest and Investment Income. Interest and investment income for fiscal
year 1998 totaled $5.2 million, an increase of $1.0 million, or 23.7%, over
the fiscal year 1997 total of $4.2 million.
Other Income. Other income for fiscal year 1998 totaled $2.8 million, an
increase of $0.8 million, or 38.2%, over the fiscal 1997 total of $2.1
million.
Provision for Income Taxes. Provision for income taxes for fiscal year 1998
totaled $18.8 million, an increase of $10.7 million, or 133.1%, over the
fiscal year 1997 total of $8.1 million. This increase primarily resulted from
the impact of factors discussed above. The effective income tax rate was 51.7%
in fiscal year 1998 versus 34.2% in fiscal 1997. The effective tax rate was
higher in 1998 and is generally higher than the Company's statutory rate
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<PAGE>
due to the nondeductible nature of certain merger related costs and the effect
of the Company's foreign subsidiary, both of which increased in 1998.
Net Income. Net income for fiscal year 1998 totaled $17.6 million, an
increase of $2.0 million, or 13.1%, over the fiscal year 1997 total of $15.5
million. As a percentage of net sales, net income remained constant at 1.3%
for fiscal year 1998 and 1997.
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, revolving credit
borrowings and proceeds from any future public offerings.
Net cash (used in) provided by operating activities was $(10.8) million, $27.9
million, and $(18.7) million, in fiscal years 1997, 1998, and 1999,
respectively. The decrease in fiscal 1999 operating cash flow over prior years
was primarily attributable to: (i) $29.1 million of cash paid for merger and
restructuring accruals established in the current and prior years, (ii)
accounts receivable and inventory growth in the Imaging division, (iii)
approximately $10 million in accounts payable funding in excess of normal
operations, and (iv) working capital requirements of the best practices and
distribution upgrades at Gulf South. These amounts were offset by continued
leveraging of fixed operating costs.
Net cash used in investing activities was $74.8 million, $48.0 million, and
$28.9 million, in fiscal years 1997, 1998, and 1999, respectively. These
funds were primarily utilized to finance the acquisition of new service
centers and capital expenditures including the use of the net proceeds from
sales and maturities of marketable securities. The increase in capital
expenditures in fiscal 1999 is primarily attributable to new computer systems
being implemented across all the Company's divisions.
Net cash provided by financing activities was $56.4 million, $65.2 million,
and $7.5 million for fiscal years 1997, 1998, and 1999, respectively. Fiscal
1997 cash provided by Gulf South Medical Supply's net proceeds from a public
offering of approximately $91.5 million of its common stock was partially
offset by the use of cash to pay off debt assumed through fiscal 1997
acquisitions. Fiscal 1998 cash provided by the issuance of the $125.0 million
senior subordinated notes was partially offset by cash used to retire debt of
acquired companies.
The Company had working capital of $356.6 million and $381.2 million as of
April 2, 1999 and April 3, 1998, respectively. Accounts receivable, net of
allowances, were $273.0 million and $213.9 million at April 2, 1999 and April
3, 1998, respectively. The average number of days sales in accounts
receivable outstanding was approximately 56.0 and 52.0 days for the years
ended April 2, 1999 and April 3, 1998, respectively. For the year ended April
2, 1999, the Company's Physician Supply, Imaging, and Long-Term Care
Businesses had days sales in accounts receivable of approximately 55.0, 47.4,
and 67.5 days, respectively.
Inventories were $153.6 million and $126.9 million as of April 2, 1999 and
April 3, 1998, respectively. The Company had annualized inventory turnover of
8.1x and 8.7x times for the years ended April 2, 1999 and April 3, 1998. For
the year ended April 2, 1999, the Company's Physician Supply, Imaging, and
Long-Term Care Businesses had annualized inventory turnover of 8.3x, 8.8x,
and 7.5x, respectively. Inventory financing historically has been achieved
through negotiating extended payment terms from suppliers.
The Company has historically been able to finance its liquidity needs for
expansion through lines of credit provided by banks and proceeds from the
public and private offering of stock and debt. In May 1994, the Company
completed an initial public offering of Common Stock resulting in proceeds of
approximately $15.8 million. In November 1995, the Company completed a
secondary offering of Common Stock. The Company used approximately $58.2
million and $26.9 million of the total secondary offering net proceeds of
$142.9 million to repay Company debt and debt assumed through acquisitions in
fiscal years 1996 and 1997, respectively. Management used the remaining
proceeds in connection with acquisitions for the Imaging,
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<PAGE>
Physician Supply, and International Businesses, and general corporate
purposes, including capital expenditures during fiscal years 1997 and 1998.
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.
On February 11, 1999, the Company entered into a $140.0 million senior
revolving credit facility with a syndicate of financial institutions with
NationsBank, N.A. as principal agent. Borrowings under the credit facility
are available for working capital, capital expenditures, and acquisitions, and
are secured by the common stock and assets of the Company and its
subsidiaries. The credit facility expires February 10, 2004 and borrowings
bear interest at certain floating rates selected by the Company at the time of
borrowing. The credit facility contains certain affirmative and negative
covenants, the most restrictive of which require maintenance of a maximum
leverage ratio of 3.5 to 1.0, maintenance of consolidated net worth of $337.0
million, and maintenance of a minimum fixed charge coverage ratio of 2.0 to
1.0. In addition, the covenants limit additional indebtedness and asset
dispositions, require majority lender approval on acquisitions with a total
purchase price greater than $75.0 million, and restrict payments of dividends.
The Company was not in compliance with its covenants at April 2, 1999, due to
failure to meet certain timely filing requirements and exceeding capital
expenditures limitations by $2.2 million in the quarter ended April 2, 1999.
However, a limited waiver was obtained by the Company from the lending group.
As of April 2, 1999, 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 December 31, 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%, and borrowings under its Credit
Facility, which bear interest at variable rates, at the Company's option, at
either the lender's base rate (7.75% at April 2, 1999) or the LIBOR rate plus
1.125% (6.19% at April 2, 1999).
YEAR 2000 READINESS DISCLOSURE
The following disclosure is a "Year 2000 Readiness Disclosure" within the
context of the Year 2000 Information and Readiness Disclosure Act to the
extent allowed by that Act.
Year 2000 Problem
Many computer programs and hardware with embedded technology use only two
digits to identify a year in a date field within a program (e.g., "98" or
"02"). These programs or hardware may fail to distinguish dates in the
"2000s" from dates in the "1900s" due to the two digit date fields. If
uncorrected, such programs and hardware with date sensitive operations may
malfunction or fail to operate after 1999 (and possibly before the year 2000
in some instances).
Company's Year 2000 Program and Systems
The Company has developed, and is implementing, a Year 2000 program to address
both information technology ("IT") and non-IT systems. The Company's business
applications reside on a group of mini computers, servers and personal
computers. The Company also uses laptop computers that serve as sales force
-48-
<PAGE>
and service technician automation tools. The Company's IT systems include
computer and data network hardware, internally developed software, and
software purchased or licensed from external vendors. The Company's non-IT
systems include equipment which uses date-sensitive embedded technology.
Principal non-IT systems include telecommunications and warehouse equipment.
The Company initiated a Year 2000 compliance program during May 1998, and the
progress of this program has been communicated regularly to the Audit
Committee of the Company's Board of Directors. The Company's approach to
address the Year 2000 compliance program includes the following phases:
inventory, assessment, planning, remediation, testing, and implementation,
third party risk management, and business continuity planning.
Company's State of Year 2000 Readiness
The Company believes that its existing systems are substantially Year 2000
compliant, except that the Company lacks sufficient information to determine
the Year 2000 status of recently acquired companies. The recently acquired
companies are scheduled to be converted to Company's substantially compliant
systems before the end of September 1999. The Company substantially completed
inventory, assessment, and plans for remediation of its critical IT systems
during the quarter ended December 1998. Remediation and testing of these
critical systems included upgrading, replacing, or modifying non-compliant
components, and was substantially completed during the quarter ended March
1999. Implementation of these remediation efforts is now substantially
complete, and has been substantially complete since the quarter ended June
1999. As a precaution against possible errors or omissions to our remediation
efforts, ongoing testing of all systems, critical and non-critical is targeted
to continue through the end of September 1999. Additional remediation will
occur as licensors offer remedies to Year 2000 issues or in the event
undetected system non-compliance issues are uncovered.
As stated above, recent acquisitions of companies by the Imaging Business have
added to our remediation efforts. The Company does not fully know the state
of Year 2000 readiness of the acquired companies. As a result, seven acquired
service centers are targeted to be integrated into the imaging division's
distribution IT system as branches prior to the end of September 1999.
Currently, the Imaging Business has 30 of 37 service centers, and its
corporate location systems converted to its new Year 2000 compliant system.
The progress of these integrations will be closely monitored, the Year 2000
readiness of these branches will be assessed, and contingency plans will be
modified accordingly.
The Company is also in the process of completing an inventory and assessment
of its non-critical IT and all non-IT systems. Remediation efforts of non-
critical systems include the development and implementation of ICONWEB, a new
enhanced version of the Physician Supply Business's sales force automation
software, and the remediation of the Accuscan software that Gulf South
provides its customers to monitor and order inventory. The new ICONWEB
software, which includes enhanced functionality, is currently being piloted
and is targeted for complete implementation prior to the end of November 1999.
Remediated software has been implemented at approximately 90% of the customers
currently using Accuscan. The remaining customers are targeted for
implementation prior to the end of September 1999. The Company estimates that
it will complete inventories, assessments, planning, remediation, and testing
of all other non-critical IT and all non-IT systems by the end of September
1999.
Costs for Company's Year 2000 Program
The total costs of addressing the Company's Year 2000 readiness issues are not
expected to be material to the Company's financial condition or results of
operations. Since initiation of its program in calendar year 1998, the Company
has expensed approximately $0.5 million on a worldwide basis in costs on a
pretax basis to address its Year 2000 readiness issues. These expenditures
include information system replacement and embedded technology upgrade costs
of $0.3 million, supplier and customer compliance costs of $0.1 million and
all other costs of $0.1 million. The Company currently estimates that the
total of such costs for addressing its internal Year 2000 readiness, on a
worldwide basis, will approximate $1.7 million in the aggregate on a pretax
basis. These costs are being expensed as they are incurred, except for
purchases of computer hardware and other equipment, which are capitalized as
property and equipment and depreciated over the equipment's estimated useful
lives in accordance with the Company's normal accounting policies. All costs
are being funded through operating cash flows. No projects material to the
financial condition, or results of operations of the Company
-49-
<PAGE>
have been deferred or delayed as a result of the Year 2000 program. A large
part of the Year 2000 effort has been accomplished through the redeployment of
existing resources. The cost of such redeployment or of internal management
time has not been specifically quantified. As reported previously, concurrent
with the Year 2000 modifications and upgrades to existing systems, 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.
The aforementioned amounts specifically exclude the costs associated with the
implementations, but not the testing of these "New Systems" which are being
installed primarily to integrate operations and achieve additional information
technology functionality.
Both internal and external resources are being used to identify, correct and
test the Company's systems for Year 2000 compliance. A Year 2000 program
manager has been assigned to coordinate the Company's Year 2000 compliance
program at all of the Company's divisions. To assist the Company in meeting
its Year 2000 responsibilities, the Company has contracted with external
consultants specializing in Year 2000 readiness assessments. The goal of
these consultants was to assist the Company in evaluating the Year 2000
programs, processes and progress of its U.S. divisions, and to help identify
any remaining areas of effort advisable. The Company's original cost
estimates for testing, third party Year 2000 risks, and contingency planning
were revised as a result of the consultant's independent assessment of the
scope of the Company's program. These consultants will be engaged through the
end of calendar year 1999. The Company's Year 2000 efforts will be assessed
and reported to executive management as part of this ongoing engagement. In
addition, the Company has engaged its attorneys and other outside consultants
to assist or examine selected critical areas. The Company has consulted
insurance professionals and is exploring possible mitigation of Year 2000
risks through purchasing insurance. Budgeted costs for these ongoing
engagements are estimated at $0.8 million and are included in the total costs
estimates above. With respect to non-IT system issues, the Company is unable
to estimate its remediation costs since it does not have available information
upon which to measure the cost of Year 2000 compliance in this area. While
the total costs to become Year 2000 compliant in the non-IT system area are
not known at this time, management does not believe that such costs will have
a material adverse effect on the business, financial position, or results of
operations of the Company.
Third Party Year 2000 Risks
The Company could be adversely affected if critical manufacturers, suppliers,
customers, banks, payers, utilities, transportation companies, or other
business partners fail to properly remediate their systems to achieve Year
2000 compliance. As planned, the Company has initiated communications, which
include soliciting written responses to questionnaires, inquiries and follow-
up meetings, with critical manufacturers, suppliers, customers and other
business partners to determine the extent to which any Year 2000 issues
affecting such third parties would affect the Company. Such communications
are ongoing and are expected to continue through the end of calendar year
1999, with action plans developed and implemented as necessary. The Company
has established a plan for ongoing monitoring of critical manufacturers,
suppliers, customers, and other business partners during calendar year 1999.
However, many critical manufacturers, suppliers, customers and other business
partners have as yet, either declined to provide the requested assurances or
have limited the scope of assurances to which they are willing to commit.
Naturally, most third parties are unwilling to guarantee that they will
achieve Year 2000 compliance.
The Company is subject to risk should Government or private payers (including
insurers) fail to become Year 2000 compliant and, therefore, be unable to make
full or timely reimbursement to the Company's customers. For example, if the
federal government were unable to make payments under the Medicaid or Medicare
programs due to Year 2000 failures, the Company's customers that derive a
significant portion of their revenues from these government programs could be
adversely affected. Such a situation could have a material adverse affect on
the Company's cash flows, financial position, or results of operations by
reducing the ability of customers to pay for products purchased from the
Company. Since the Company's Year 2000 plan is dependent in part upon these
suppliers, customers and other key third parties being Year 2000 compliant,
there can be no assurance that the Company's efforts to assess third parties'
Year 2000 readiness will be able to prevent a material adverse effect on the
Company's business, financial position, or results of operations in future
periods should a significant number of third parties experience business
disruptions as a result of their lack of Year 2000 compliance. Additionally,
third party failures to adequately address the Year 2000 issue could
significantly disrupt the Company's operations and possibly lead to litigation
against the Company. The costs
-50-
<PAGE>
and expenses associated with any such failure or litigation, or with any
disruptions in the economy in general as a result of the Year 2000, are not
presently estimable, but could have a material adverse effect on the Company's
business and results of operations.
Other Year 2000 Risks and Contingency Planing
Management of the Company believes that its Year 2000 compliance program will
be effective in avoiding significant adverse consequences due to Year 2000
problems with its systems. The Company has, however, begun mitigating
identified risks, and is developing contingency plans to address situations
that may arise where the Company's systems or third party systems experience
Year 2000 problems. As part of this effort, the Company has been assessing
the viability of its entire supply chain and is developing contingency plans
to provide alternatives in the event Year 2000 related issues arise. Current
contingency alternatives center on human resource issues, substitute sources
of utilities, inventory management, and the development of a rapid response
capability and a monitoring process for critical communications during the
transition into the Year 2000. The Company is developing and executing
employee awareness plans to assist with the implementation of the Company's
Year 2000 efforts. The Company is alerting customers of their need to address
Year 2000 problems, specifically their need to address risks associated with
non-compliant IT and non-IT equipment that they may have been or are relying
on. If the Company were to experience significant Year 2000 problems due to a
failure in its systems or a third party's systems, the Company would revert to
interim manual methods of conducting business. In developing contingency
plans, the Company will be prioritizing its systems and affected operations,
and developing emergency measures to address potential systems failures that
could significantly affect the Company's business operations. Likewise, the
Company's contingency plans will address Year 2000 risks associated with Year
2000 potential failures experienced by third parties. Additionally, the
Company is in the process of updating its information technology disaster
recovery plan to include Year 2000 contingencies that may arise.
Risks to achieving Year 2000 compliance include the availability of resources,
the Company's ability to discover and correct potential Year 2000 problems
which could have a serious impact on specific systems, equipment or
facilities, and the ability of the Company's significant vendors, payers and
customers to make their systems Year 2000 compliant. Even with contingency
plans in place, there can be no assurance that Company will avoid experiencing
problems relating to Year 2000 problems.
Forward-Looking Statements
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially.
Among the factors that could cause results to differ materially are the
following: the availability of sufficient capital to finance the Company's
business plans on terms satisfactory to the Company; competitive factors; the
ability of the Company to adequately defend or reach a settlement of
outstanding litigations and investigations involving the Company or its
management; changes in labor, equipment and capital costs; changes in
regulations affecting the Company's business; future acquisitions or strategic
partnerships; general business and economic conditions; successful
implementation of the Company's Year 2000 compliance plan; and other factors
described herein 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.
-51-
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO the CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements:
Report of Independent Certified Public Accountants--PSS World Medical, Inc............................ F-2
Report of Independent Auditors--Gulf South Medical Supply, Inc........................................ F-3
Consolidated Balance Sheets--April 2, 1999 and April 3, 1998 (Restated)............................... F-4
Consolidated Statements of Income for the Years Ended April 2, 1999, April 3, 1998, and
March 28, 1997 (Restated)........................................................................... F-5
Consolidated Statements of Shareholders' Equity for the Years Ended April 2, 1999, April 3, 1998, and
March 28, 1997 (Restated).......................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended April 2, 1999, April 3, 1998, and March 28,
1997 (Restated).................................................................................... F-7
Notes to Consolidated Financial Statements (Restated)................................................ F-8
Schedule II--Valuation and Qualifying Accounts for the Years Ended March 28, 1997, April 3, 1998, and
April 2, 1999 (Restated)........................................................................... F-46
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
PSS World Medical, Inc.:
We have audited the accompanying consolidated balance sheets (restated) of PSS
World Medical, Inc. (a Florida corporation) and subsidiaries as of April 2, 1999
and April 3, 1998, and the related consolidated statements of income (restated),
shareholders' equity (restated), and cash flows (restated) for each of the three
years in the period ended April 2, 1999. These financial statements and the
schedule (restated) referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the consolidated
financial statements of Gulf South Medical Supply, Inc., for the years ended
December 31, 1997 and 1996, a company acquired during fiscal year 1998 in a
transaction accounted for as a pooling of interests, as discussed in Note 2.
Such statements are included in the consolidated financial statements of PSS
World Medical, Inc. and subsidiaries and reflect, after restatement for certain
adjustments as explained in Note 22, total assets of 28% as of April 3, 1998 and
total revenues of 21% and 15% for each of the two years in the period ended
April 3, 1998 of the related consolidated totals. These statements were audited
by other auditors, whose reissued report has been furnished to us and our
opinion, insofar as it relates to amounts included for Gulf South Medical
Supply, Inc., is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reissued report of the other auditors provide
a reasonable basis for our opinion.
In our opinion, based on our audits and the reissued report of the other
auditors, the financial statements referred to above present fairly, in all
material respects, the financial position of PSS World Medical, Inc. and
subsidiaries as of April 2, 1999 and April 3, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
April 2, 1999 in conformity with generally accepted accounting principles.
As explained in Notes 18 and 22 to the financial statements, the Company has
restated certain of its previous financial statements and has given retroactive
effect to the change in accounting for the information systems impairment charge
and the restructuring charge previously recorded in fiscal 1998. In addition,
the Company has restated its fiscal 1998 and 1997 consolidated financial
statements to include the financial position, results of operations and cash
flows of various businesses acquired in fiscal 1999, 1998, and 1997, which had
been treated as immaterial pooling-of-interests transactions for which prior
periods were not previously restated.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
consolidated financial statements, is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, based on our audits and the report of the other auditors, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
July 15, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder of
Gulf South Medical Supply, Inc.:
We have audited the consolidated balance sheets (restated) of Gulf South Medical
Supply, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of income (restated), stockholders' equity (restated),
and cash flows (restated) for each of the two years in the period ended December
31, 1997 (not presented separately herein). Our audits also included the
financial statement schedule, Valuation and Qualifying Accounts (not presented
separately herein). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gulf South Medical
Supply, Inc. and subsidiaries as of December 31, 1997 and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presented fairly in all material respects the information set forth
therein.
As more fully described in Note 22 to the consolidated financial statements,
Gulf South Medical Supply, Inc. has restated its financial statements for 1997
and 1996 to correct an error in the recording of certain operating expenses.
ERNST & YOUNG LLP
Jackson, Mississippi
June 30, 1998, except for
Note 22, as to which the
date is July 9, 1999
F-3
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 2, 1999 and April 3, 1998
(Dollars in Thousands, Except Share Data)
ASSETS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Restated)
Current Assets:
<S> <C> <C>
Cash and cash equivalents....................................................................... $ 41,106 $ 81,483
Marketable securities........................................................................... 3 81,550
Accounts receivable, net........................................................................ 272,996 213,869
Inventories, net................................................................................ 153,626 126,926
Employee advances............................................................................... 702 442
Prepaid expenses and other...................................................................... 59,413 45,409
---------- ----------
Total current assets....................................................................... 527,846 549,679
Property and equipment, net...................................................................... 48,167 31,473
Other Assets:
Intangibles, net................................................................................ 146,082 90,608
Other........................................................................................... 21,286 19,494
---------- ----------
Total assets............................................................................... $743,381 $691,254
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................................ $112,966 $109,790
Accrued expenses................................................................................ 48,704 48,081
Current maturities of long-term debt and capital lease obligations.............................. 1,062 3,570
Other........................................................................................... 8,536 7,058
---------- ----------
Total current liabilities.................................................................. 171,268 168,499
Long-term debt and capital lease obligations, net of current portion............................. 152,442 134,057
Other............................................................................................ 3,111 4,121
---------- ----------
Total liabilities.......................................................................... 326,821 306,677
---------- ----------
Commitments and contingencies (Notes 1, 2, 8, 9, 16, 19, and 21)
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, 70,796,024 and 70,171,909 shares
issued and outstanding at April 2, 1999 and April 3, 1998, respectively....................... 708 702
Additional paid-in capital...................................................................... 349,460 341,987
Retained earnings............................................................................... 70,211 46,021
Cumulative other comprehensive income........................................................... (1,177) (1,296)
---------- ----------
419,202 387,414
Unearned ESOP shares............................................................................ (2,642) (2,837)
---------- ----------
Total shareholders' equity................................................................. 416,560 384,577
---------- ----------
Total liabilities and shareholders' equity................................................. $743,381 $691,254
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended April 2, 1999, April 3, 1998, and March 28, 1997
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(Restated) (Restated)
<S> <C> <C> <C>
Net sales.......................................................... $1,564,505 $1,381,786 $1,166,286
Cost of goods sold................................................. 1,142,597 1,015,350 878,813
----------- ----------- -----------
Gross profit................................................. 421,908 366,436 287,473
General and administrative expenses................................ 224,733 228,315 190,228
Selling expenses................................................... 123,322 102,353 76,493
----------- ----------- -----------
Income from operations....................................... 73,853 35,768 20,752
Other income (expense):
Interest expense.................................................. (11,522) (7,517) (3,471)
Interest and investment income.................................... 4,732 5,249 4,245
Other income...................................................... 6,618 2,849 2,062
----------- ----------- -----------
(172) 581 2,836
----------- ----------- -----------
Income before provision for income taxes........................... 73,681 36,349 23,588
Provision for income taxes......................................... 29,940 18,797 8,065
----------- ----------- -----------
Net income......................................................... $ 43,741 $ 17,552 $ 15,523
=========== =========== ===========
Earnings per share:
Basic............................................................. $0.62 $0.25 $0.23
=========== =========== ===========
Diluted........................................................... $0.61 $0.25 $0.23
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (RESTATED)
For the Years Ended April 2, 1999, April 3, 1998, and March 28, 1997
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
Cumulative
Common Stock Additional Other Unearned
-------------------- Paid-In Retained Comprehensive ESOP
Shares Amount Capital Earnings Income Shares Totals
----------- -------- ---------- ---------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 29, 1996........................... 64,051,168 $641 $222,068 $ 14,046 $ -- $(2,378) $234,377
Net income......................................... -- -- -- 15,523 -- -- 15,523
Issuance of common stock........................... 4,580,934 46 98,359 -- -- (4,034) 94,371
Employee benefits and other........................ -- -- 3,482 (1,100) -- 1,413 3,795
Cumulative foreign currency
translation adjustment........................... -- -- -- -- (93) -- (93)
----------- -------- ---------- ---------- ------------- ---------- --------
Balance at March 28, 1997........................... 68,632,102 687 323,909 28,469 (93) (4,999) 347,973
Net income......................................... -- -- -- 17,552 -- -- 17,552
Issuance of common stock........................... 1,539,807 15 15,946 -- -- -- 15,961
Employee benefits and other........................ -- -- 2,132 -- -- 2,162 4,294
Cumulative foreign currency
translation adjustment........................... -- -- -- -- (1,203) -- (1,203)
----------- -------- ---------- ---------- ------------- ---------- --------
Balance at April 3, 1998............................ 70,171,909 702 341,987 46,021 (1,296) (2,837) 384,577
Gulf South results of operations and issuance of
common stock, January 1, 1998 to April 3, 1998
(Note 1 and 3).................................... 202,685 2 2,594 (19,551) -- -- (16,955)
----------- -------- ---------- ---------- ------------- ---------- --------
Balance at April 4, 1998............................ 70,374,594 704 344,581 26,470 (1,296) (2,837) 367,622
Net income......................................... -- -- -- 43,741 -- -- 43,741
Issuance of common stock........................... 421,430 4 4,267 -- -- -- 4,271
Employee benefits and other........................ -- -- 612 -- -- 195 807
Cumulative foreign currency
translation adjustment........................... -- -- -- -- 119 -- 119
----------- -------- ---------- ---------- ------------- ---------- --------
Balance at April 2, 1999............................ 70,796,024 $708 $349,460 $ 70,211 $(1,177) $(2,642) $416,560
=========== ======== ========== ========== ============= ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended April 2, 1999, April 3, 1998, and March 28, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
(Restated) (Restated)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income...................................................................................... $ 43,741 $ 17,552 $ 15,523
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization................................................................. 20,384 10,861 6,473
Provision for doubtful accounts............................................................... 5,181 3,289 3,965
Provision (benefit) for deferred income taxes................................................. 10,901 (2,647) (5,891)
Merger and other nonrecurring costs and expenses.............................................. 4,873 22,340 4,879
(Gain) on sale of fixed assets................................................................ (836) -- --
Deferred compensation expense................................................................. 365 630 --
Unrealized loss (gain) on marketable securities............................................... 288 3 (457)
Changes in operating assets and liabilities, net of effects from business acquisitions:
Accounts receivable, net.................................................................... (43,848) (17,140) (14,818)
Inventories, net............................................................................ (1,275) (2,273) (3,004)
Prepaid expenses and other assets........................................................... (4,916) (10,675) (7,247)
Other assets................................................................................ (2,265) (2,562) (4,784)
Accounts payable, accrued expenses, and other liabilities................................... (53,847) 8,558 (5,441)
---------- ---------- ---------
Net cash (used in) provided by operating activities........................................ (18,704) 27,936 (10,802)
---------- ---------- ---------
Cash Flows From Investing Activities:
Purchases of marketable securities.............................................................. (50,813) (318,166) (256,824)
Proceeds from sales and maturities of marketable securities..................................... 125,098 309,628 205,117
Proceeds from sale of property and equipment.................................................... 1,586 -- --
Capital expenditures............................................................................ (24,774) (10,519) (7,171)
Purchases of businesses, net of cash acquired................................................... (75,453) (22,481) (11,985)
Payments on noncompete agreements............................................................... (4,558) (6,431) (3,980)
---------- ---------- ---------
Net cash used in investing activities...................................................... (28,914) (47,969) (74,843)
---------- ---------- ---------
Cash Flows From Financing Activities:
Proceeds from public debt offering, net of debt issuance costs.................................. -- 119,459 --
Proceeds from borrowings........................................................................ 24,000 4,349 6,131
Repayments of borrowings........................................................................ (20,337) (56,014) (42,180)
Repayments on revolving line of credit.......................................................... -- (5,000) --
Principal payments under capital lease obligations.............................................. (366) (306) (795)
Proceeds from issuance of common stock.......................................................... 4,174 2,721 94,371
Distributions to former S corporation shareholders.............................................. -- -- (1,100)
---------- ---------- ---------
Net cash provided by financing activities.................................................. 7,471 65,209 56,427
---------- ---------- ---------
Foreign currency translation adjustment.......................................................... 119 (1,203) (93)
---------- ---------- ---------
Gulf South decrease in cash and cash equivalents for the three months ended April 3, 1998........ (349) -- --
---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents............................................. (40,377) 43,973 (29,311)
Cash and cash equivalents, beginning of year..................................................... 81,483 37,510 66,821
---------- ---------- ---------
Cash and cash equivalents, end of year........................................................... $ 41,106 $ 81,483 $ 37,510
========== ========== =========
Supplemental Disclosures:
Cash paid for:
Interest...................................................................................... $ 17,877 $ 5,195 $ 1,237
========== ========== =========
Income taxes.................................................................................. $ 36,497 $ 21,170 $ 10,000
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
April 2, 1999, APRIL 3, 1998, and MARCH 28, 1997
(Dollars in Thousands, Except Share Data, Unless Otherwise Noted)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and Nature of Business
Physician Sales & Service, Inc. was incorporated in 1983 in Jacksonville,
Florida. On March 26, 1998, the corporate name of Physician Sales & Service,
Inc. was changed to PSS World Medical, Inc. (the "Company" or "PSS").
The Company, through its Physician Sales & Service, Inc. division ("Physician
Supply Business") is a distributor of medical supplies, equipment and
pharmaceuticals to primary care and other office-based physicians in the
United States. As of April 2, 1999, the Company operated 56 service centers
distributing to over 100,000 physician office sites in all 50 states.
In November 1996, PSS established a new subsidiary, Diagnostic Imaging, Inc.
("DI" or "Imaging Business"). DI is a distributor of medical diagnostic
imaging supplies, chemicals, equipment, and service to the acute and alternate
care markets in the United States. As of April 2, 1999, DI operated 37
imaging division service centers distributing to approximately 15,000 medical
imaging sites in 41 states.
In March 1996, PSS established two new subsidiaries, WorldMed International,
Inc. ("WorldMed Int'l") and WorldMed, Inc. These subsidiaries were
established to manage and develop PSS' European medical equipment and supply
distribution market. As of April 2, 1999, the European operation included
three service centers distributing to acute and alternate care sites in
Belgium, Germany, France, Holland, and Luxembourg.
In March 1998, the Company entered the long-term care market for the
distribution of medical supplies and other products with its acquisition of
Gulf South Medical Supply, Inc. ("Gulf South" or "Long-Term Care Business").
As of April 2, 1999, Gulf South, a wholly owned subsidiary of PSS, operated 14
long-term care distribution service centers serving over 14,000 long-term care
facilities in all 50 states.
Basis of Presentation
The accompanying consolidated financial statements give retroactive effect to
the mergers (the "Mergers") with X-Ray of Georgia ("X-Ray Georgia"), S&W
X-Ray, Inc. ("S&W"), and Gulf South. In addition, the accompanying
consolidated financial statements have been restated to include the financial
position and results of operations of various businesses acquired during
fiscal 1999, 1998, and 1997 and previously accounted for as immaterial
pooling-of-interests transactions (the "Pooled Entities"). The Company's
previously issued financial statements included in the Company's 1998 Annual
Report on Form 10-K were not restated for the immaterial Pooled Entities
(refer to Note 22, Restatements). These transactions were accounted for under
the pooling-of-interests method of accounting, and accordingly, the
accompanying consolidated financial statements have been retroactively
restated as if PSS, X-Ray Georgia, S&W, Gulf South, and the Pooled Entities
had operated as one entity since inception.
F-8
<PAGE>
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries using the year-ends discussed below. All
intercompany accounts and transactions have been eliminated. Results of
operations of companies acquired in purchase business transactions are
included in the accompanying consolidated financial statements from the dates
of acquisition.
Fiscal Year
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 fiscal
1998 and 1997 consolidated financial statements combine the December 31, 1997
and December 31, 1996 financial statements of Gulf South with the April 3,
1998 and March 28, 1997 financial statements of PSS, respectively. 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 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 fiscal 1999 consolidated financial statements
include the combined results of operations for the period from April 4, 1998
to April 2, 1999, of both PSS and Gulf South.
Fiscal years 1999, 1998, and 1997, consist of 52, 53, and 52 weeks,
respectively.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, marketable securities, short-term trade receivables, and
accounts payable approximate their fair values due to the short-term nature of
these assets and liabilities. The fair value of the senior subordinated debt
is estimated using quoted market prices. The carrying value of the Company's
senior subordinated debt at April 2, 1999 and April 3, 1998 was $125,000 and
the market value was $120,925 and $128,413, respectively. The carrying value
of the Company's other long-term debt was $27,442 and $9,057, at April 2, 1999
and April 3, 1998, respectively, which approximates fair value.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash held at banks, short-term
government obligations, commercial paper, and money market instruments. The
Company invests its excess cash in high-grade investments and, therefore,
bears minimal risk. These instruments have original maturity dates not
exceeding three months.
Marketable Securities
The Company classifies its marketable securities either as trading securities
or held-to-maturity and carries such securities at fair market value or
amortized cost, respectively. Marketable securities include obligations of
states and political subdivisions, preferred stock, corporate debt securities,
and other equity securities, generally with an original maturity greater than
three months. Changes in net unrealized gains and losses on trading
securities are included in interest and investment income in the accompanying
consolidated statements of income. Gains and losses are based on the specific
identification method of determining cost.
F-9
<PAGE>
Concentration of Credit Risk
The Company's trade accounts receivables are exposed to credit risk. Although
the majority of the market served by the Company is comprised of numerous
individual accounts, none of which is individually significant, the Company's
subsidiary Gulf South depends on a limited number of large customers.
Approximately 38% and 37% of Gulf South's revenues for the years ended
April 2, 1999 and December 1997, respectively, represented sales to its top
five customers. The Company monitors the creditworthiness of its customers on
an ongoing basis and provides reserves for estimated bad debt losses and sales
returns. The Company had allowances for doubtful accounts of approximately
$7,833 and $6,004 as of April 2, 1999 and April 3, 1998, respectively.
Provisions for doubtful accounts were approximately $5,181, $3,289, and
$3,965, for fiscal years ended 1999, 1998, and 1997, respectively.
Inventories
Inventories are comprised principally of medical and related products and are
stated at the lower of cost (first-in, first-out) or market. Market is
defined as net realizable value.
A companywide physical inventory observation is performed semiannually. Any
inventory that is impaired for any reason is disposed of or written down to
fair market value at this time. Management reviews all branch inventory
valuations and makes further adjustment if necessary.
Slow moving inventory is tracked using a report that details items that have
not moved in the last 60, 90, or 120 days and an appropriate reserve is
established. Once slow moving inventory has been identified, the branches
transfer inventory to other branches with a market for that inventory. If
management determines the inventory is not saleable, the inventory is written
off against the inventory obsolescence reserve.
The Company allows the customers to return products under its "no hassle
customer guarantee," and customers are issued credit memos. The Company
records an allowance for estimated sales returns and allowances at the end of
each period. Sales returns and allowances are estimated based on past
history.
Property and Equipment
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to thirty years. Leasehold
improvements are amortized over the lease terms or the estimated useful lives,
whichever is shorter. Gain or loss upon retirement or disposal of property
and equipment is recorded in other income in the accompanying consolidated
statements of income.
The Company evaluates the recoverability of long-lived assets not held for
sale by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows. At the time such evaluations indicate that
the future undiscounted cash flows of certain long-lived assets are not
sufficient to recover the carrying value of such assets, the assets are
adjusted to their fair values.
Intangibles
Noncompete agreements are amortized on a straight-line basis over the lives of
the agreements, which range from 3 to 15 years. The Company has classified as
goodwill the cost in excess of the fair value of net identifiable assets
purchased in business acquisitions that are accounted for as purchase
transactions. Goodwill is being amortized over 15 to 30 years using the
straight-line method, including any contingent consideration paid.
The Company periodically evaluates intangible assets to determine if there is
impairment. Based on these evaluations, there was an adjustment to the
carrying value of certain intangible assets in fiscal year 1998 (refer to Note
4, Charges Included in General and Administrative Expenses).
F-10
<PAGE>
Self-Insurance Coverage
The Company maintains a minimum premium program for employee health and dental
costs. This plan includes coverage for stop loss based on maximum individual
costs of $125 per claimant and approximately $3 per year, per participant for
all plan participants, in the aggregate. Claims that have been incurred but
not reported are recorded based on estimates of claims provided by the third
party administrator and are included in the accrued expenses in the
accompanying consolidated balance sheets.
Contingent Loss Accruals
In determining the accrual necessary for probable loss contingencies as
defined by Statement of Financial Accounting Standards ("SFAS") No. 5,
Accounting for Contingencies, the Company includes estimates for professional
fees, such as engineering, legal, accounting, and consulting, and other
related costs to be incurred, unless such fees and related costs are not
probable of being incurred or are not reasonably estimable.
Income Taxes
The Company uses the asset and liability method in accounting for income
taxes. Deferred income taxes result primarily from the net tax effect of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Shareholders' Equity
Gulf South completed a public offering in June 1996 pursuant to which Gulf
South received net proceeds of approximately $91,500 from the sale of
3,890,733 shares of its common stock. A portion of the net proceeds from the
offering were used to repay the outstanding balance under Gulf South's
revolving credit facility, with the remaining balance used for general
corporate purposes, including the subsequent acquisitions.
The Company realizes an income tax benefit from the exercise or early
disposition of certain stock options. This benefit results in a decrease in
current income taxes payable and a direct increase in additional paid-in
capital (refer to Note 10, Income Taxes).
During fiscal year 1998, the Company committed to release the remaining shares
to the S&W ESOP participants. Approximately $2.5 million of related expense
was recognized during fiscal year 1998 (refer to Note 15, Employee Benefit
Plans).
Other Comprehensive Income
During 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, Reporting Comprehensive Income, which requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. The Company adopted this
statement in fiscal 1999 (refer to Note 11, Other Comprehensive Income).
Other comprehensive income has been separately disclosed in the accompanying
consolidated statements of shareholders' equity.
Revenue Recognition
Substantially all revenues are recorded when products are shipped or services
are provided to customers. Revenues from service contracts are recognized in
earnings over the respective term of the contract.
Foreign Currency Translation
Financial statements for the Company's subsidiaries outside the United States
are translated into U.S. dollars at year-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded in the other comprehensive
income component of shareholders' equity.
F-11
<PAGE>
Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the
intrinsic value method. The Company adopted the disclosure only provisions of
SFAS No. 123, Accounting for Stock-Based Compensation. In accordance with
SFAS No. 123, for footnote disclosure purposes only, the Company computes its
earnings and earnings per share on a pro forma basis as if the fair value
method had been applied.
Earnings Per Common Share
Basic and diluted earnings per common share are presented in accordance with
SFAS No. 128, Earnings Per Share. Basic earnings per common share is computed
by dividing net income by the weighted average number of shares outstanding.
Diluted earnings per common share includes the dilutive effect of stock
options (refer to Note 12, Earnings Per Share).
Statements of Cash Flows
The Company's noncash investing and financing activities were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
Business acquisitions:
<S> <C> <C> <C>
Fair value of assets acquired.......................................... $56,815 $49,725 $37,648
Liabilities assumed.................................................... 39,930 32,684 39,258
Notes payable issued................................................... -- -- 25,321
Noncompetes issued..................................................... 3,950 7,574 4,300
Tax benefits related to stock option plans............................. 759 1,505 3,449
Capital lease obligations incurred..................................... -- 325 --
</TABLE>
Reclassification
Certain amounts for prior years have been reclassified to conform to the
current year presentation.
Recent Accounting Pronouncements
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information during fiscal 1999. This statement establishes
standards for the reporting of information about operating segments in annual
and interim financial statements and requires restatement of prior year
information. Operating segments are defined as components of an enterprise
for which separate financial information is available that is evaluated
regularly by the chief operating decision maker(s) in deciding how to allocate
resources and in assessing performance. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information, as presented in
Note 17, Segment Information.
The Company will adopt AICPA Statement of Position ("SOP") 98-5, Reporting on
the Costs of Start-Up Activities, during Fiscal 2000. This SOP requires that
costs of start-up and organization activities previously capitalized be
expensed and reported as a cumulative effect of a change in accounting
principle and requires that such costs subsequent to adoption be expensed as
incurred. Management does not anticipate that the new SOP will have a
material impact on future results of operations.
During fiscal 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. This statement revises employers'
disclosures about pension and other postretirement benefit plans. The Company
adopted this statement in fiscal 1999. There was no change in the measurement
or recognition of the Company's benefit plans.
F-12
<PAGE>
During 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement is effective for the Company's fiscal year 2002. The Company is in
the process of evaluating the disclosure requirements under this standard.
2. BUSINESS ACQUISITIONS
On March 26, 1998, the Company completed its merger with Gulf South. The
Company issued 28,810,747 shares of its common stock for all of the
outstanding common stock of Gulf South, which was valued at $662.6 million at
the time of merger. Each share of Gulf South common stock was exchanged for
1.75 shares of PSS common stock. In addition, outstanding Gulf South stock
options were converted at the same exchange factor into stock options to
purchase 2,206,461 shares of PSS common stock. This merger constituted a tax-
free reorganization and has been accounted for as a pooling of interests;
therefore, the historical financial statements of the Company have been
restated as discussed in Note 1, Background and Summary of Significant
Accounting Policy.
On September 23, 1997, the Company acquired S&W in a merger pursuant to which
the Company issued 1,737,458 shares of common stock to the former shareholders
of S&W in exchange for all of the outstanding shares of capital stock of S&W
valued at $26.0 million at the time of the merger. The merger constituted a
tax-free reorganization and has been accounted for as a pooling of interests,
and accordingly, the Company's consolidated financial statements have been
restated to include the accounts and operations of S&W for all periods prior
to the merger.
On December 20, 1996, the Company acquired X-Ray Georgia in a merger pursuant
to which the Company issued 593,672 shares of common stock to the former
shareholders of X-Ray Georgia in exchange for all of the outstanding shares of
capital stock of X-Ray Georgia valued at $11.0 million at the time of the
merger. The merger constituted a tax-free reorganization and has been
accounted for as a pooling of interests, and accordingly, the Company's
consolidated financial statements have been restated to include the accounts
and operations of X-Ray Georgia for all periods prior to the merger.
Other Pooled Entities
The Company merged with certain other medical supply and equipment
distributors and imaging supply and equipment distributors in stock mergers
accounted for under the pooling-of-interests method of accounting. Due to the
aggregate impact of these individually immaterial pooling-of-interest
transactions on the Company's prior period financial statements, the
consolidated financial statements have been retroactively restated to include
the pooling-of-interest transactions as if the companies had operated as one
entity since inception, as shown below. The number of companies acquired and
the number of shares of common stock issued are as follows.
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------
1999 1998 1997
-------- --------- ----------
<S> <C> <C> <C>
Number of acquisitions................................................ 2 4 4
Number of shares of common stock issued............................... 608,000 490,000 1,737,000
</TABLE>
F-13
<PAGE>
The results of operations for the acquired companies through their respective
acquisition dates and the combined amounts presented in the consolidated
financial statements follow:
<TABLE>
<CAPTION>
Fiscal Year Ended April 2, 1999
------------------------------------
Other
Pooled
Entities PSS Combined
---------- ---------- ------------
<S> <C> <C> <C>
Net sales............................................................ $51,643 $1,512,862 $1,564,505
Gross profit......................................................... 4,914 416,994 421,908
Net income........................................................... (1,098) 44,839 43,741
Other changes in shareholders' equity................................ 70 (11,828) (11,758)
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended April 3, 1998
-------------------------------------------------------
Other
Pooled
Gulf South S&W Entities PSS Combined
----------- -------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net sales.......................................................... $287,582 $38,003 $92,722 $963,479 $1,381,786
Gross profit....................................................... 74,353 8,756 14,598 268,729 366,436
Net income......................................................... 12,114 (2,095) 581 6,952 17,552
Other changes in shareholders' equity..............................
753 2,790 (243) 15,753 19,053
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 28, 1997
------------------------------------------------------------------------------------------
Gulf South
As Other
Originally Impact of Gulf South X-Ray of Pooled
Published Restatement Restated Georgia S&W Entities PSS Combined
(See Note
4 and 22)
----------- ----------- --------- ------- ----- --------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $177,710 $ -- $177,710 $33,182 $72,034 $225,522 $657,838 $1,166,286
Gross profit................... 48,052 -- 48,052 5,784 16,782 34,531 182,324 287,473
Net income..................... 10,694 (1,622) 9,072 938 54 2,024 3,435 15,523
Other changes in shareholders'
equity........................ 93,651 -- 93,651 (1,100) 1,321 1,426 2,776 98,074
</TABLE>
Purchase Acquisitions
During fiscal 1999, the Company acquired certain assets and assumed certain
liabilities of 3 medical supply and equipment distributors, 15 imaging supply
and equipment distributors, and 4 long-term health care distributors. In
addition, the Company acquired the common stock of 2 imaging supply and
equipment distributors. A summary of the details of the transactions follow:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Number of acquisitions................................................. 24 13 9
Issuance of shares of common stock..................................... -- 933,000 3,000
Total consideration.................................................... $115,183 $ 35,739 $36,613
Cash paid, net of cash acquired........................................ 75,293 22,909 11,252
Issuance of note payable............................................... -- -- 25,321
Goodwill recorded...................................................... 58,368 32,944 40,125
Noncompete payments.................................................... 3,950 2,982 220
</TABLE>
The operations of the acquired companies have been included in the Company's
results of operations subsequent to the dates of acquisition. Supplemental
pro forma information, assuming these acquisitions had been made at
F-14
<PAGE>
the beginning of the year, is not provided, as the results would not be
materially different from the Company's reported results of operations.
These acquisitions were accounted for under the purchase method of accounting,
and accordingly, the assets of the acquired companies have been recorded at
their estimated fair values at the dates of the acquisitions. The value of
the common stock issued in connection with these purchases is generally
determined based on an average market price of the shares over a ten-day
period before a definitive agreement is signed and the proposed transaction is
announced. 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 15
to 30 years.
The accompanying 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 these acquisitions may increase or
decrease in fiscal 2000.
In addition, the terms of certain of the Company's recent acquisition
agreements provide for additional consideration to be paid if the acquired
entity's results of operations exceed certain targeted levels. Targeted
levels are generally set above the historical experience of the acquired
entity at the time of acquisition. Such additional consideration is to be
paid in cash or with shares of the Company's common stock and is recorded when
earned as additional purchase price. The maximum amount of remaining
contingent consideration is approximately $5.9 million (payable through fiscal
2001). The first potential earn-out payment is effective in fiscal 2000.
The following table summarizes the adjustments recorded against goodwill
during fiscal 1999 and 1998.
<TABLE>
<CAPTION>
April 2, 1999 April 3, 1998
--------------- ----------------
<S> <C> <C>
Merger costs and expenses..................................................... $ 1,038 $ --
Reversal of excess accrued merger costs and expenses.......................... (1,343) --
Deferred tax assets of acquired companies..................................... (2,644) --
Restatement of operating expenses............................................. -- (942)
--------------- ----------------
$(2,949) $(942)
=============== ================
</TABLE>
Merger costs and expenses
During fiscal 1999, the Company recorded approximately $545 of merger
integration costs and expenses directly to goodwill as incurred, as these
costs were contemplated at the time of acquisition. In addition, the Company
recorded approximately $493 of merger costs and expenses related to other
acqusitions directly to goodwill for costs that were in excess of the original
integration plan accrual estimated by management. Such merger costs and
expenses are recorded directly to goodwill only if it is within one year from
the date of the acquisition and such expenses were contemplated at the time of
the acquisition. If merger costs and expenses are incurred subsequent to one
year from the date of the acquisition, or were not contemplated at the time of
the acquisition, such expenses are recorded in general and administrative
expenses.
Reversal of excess accrued merger costs and expenses
During fiscal 1999, the Company reversed approximately $1,343 of certain
accrued merger costs and expenses that management determined to be unnecessary
due to changes in integration plans or estimates. 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.
F-15
<PAGE>
Deferred tax assets of acquired companies
This adjustment represents a true-up of the deferred tax assets and
liabilities per the financial statements and the tax return, as a result of
additional information received on the deductibility of certain pre-
acquisition expenditures.
Restatement of operating expenses
Refer to Note 22, Restatements, for a further discussion of the restatement of
operating expenses and the impact on goodwill.
3. GULF SOUTH'S RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 3, 1998
As discussed in Note 1, Background and Summary of Significant Accounting
Policies, due to the Company's consolidation method and the differing year-
ends of PSS and Gulf South, Gulf South's results of operations for the three
months ended April 3, 1998 are not reflected in the accompanying consolidated
statements of income for any periods presented. Rather, the results of
operations have been recorded as an adjustment to shareholders' equity during
the first quarter of fiscal 1999. Therefore, the results of Gulf South's
operations for the period January 1, 1998 to April 3, 1998 are summarized
below for additional disclosure. Certain adjustments have been made to the
results of Gulf South's operations as compared to the unaudited results
disclosed during the prior year. These adjustments are included in the
discussion below, and in Note 22, Restatements.
<TABLE>
<CAPTION>
Three Months
Ended
April 3, 1998
---------------
<S> <C>
Net sales...................................................... $ 87,018
Cost of goods sold............................................. 69,202
---------------
Gross profit............................................... 17,816
General and administrative expenses............................ 43,020
Selling Expenses............................................... 2,939
---------------
Loss from operations....................................... (28,143)
Other income, net.............................................. 321
---------------
Loss before benefit for income taxes........................... (27,822)
Benefit for income taxes....................................... 8,272
---------------
Net loss....................................................... $(19,550)
===============
</TABLE>
During the three months ended April 3, 1998, Gulf South recorded $32,500 in
charges related to merger and restructuring costs and expenses, goodwill
impairment charge, and other operating charges. These charges are included in
cost of goods sold and general and administrative expenses above. The
following table summarizes the components of the $32,500 charges.
F-16
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended
April 3, 1998
---------------
Cost of Sales:
<S> <C>
Increase allowance for inventory............................................................ $ 3,573
---------------
Total charges included in costs of goods sold.......................................... 3,573
---------------
General & Administrative Expenses:
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
---------------
Total charges.......................................................................... $32,500
===============
</TABLE>
Increase Allowance for Inventory
The charge relates directly to a change of plans, uses, and disposition
efforts which new Gulf South management had as compared to prior management.
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.
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 that
new management had as compared to prior Gulf South management. 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.
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.
F-17
<PAGE>
The Company recorded restructuring costs and expenses for costs for lease
terminations, 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.
Involuntary employee termination costs....................... $1,879
Lease termination costs...................................... 977
Branch shutdown costs........................................ 885
Other exit costs............................................. 540
-----------
$4,281
===========
Refer to Note 5, Accrued Merger and Restructuring Costs and Expenses, and Note
18, Quarterly Results of Operations, for a more detailed discussion regarding
accrued restructuring costs and expenses.
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
issues arose. See Note 4, Charges Included in General and Administrative
Expenses, and Note 22, Restatements, for more detailed discussion related to
this issue.
Goodwill Impairment Charge
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.
Benefit for Income Taxes
Due to the accounting changes discussed above, and changes in the deductible
treatment of certain other items, the benefit for income taxes has been
adjusted as compared to the unaudited amounts previously published.
4. 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 consolidated statements of income:
F-18
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Merger costs and expenses............................................... $ 3,300 $13,986 $14,506
Restructuring costs and expenses........................................ 4,922 3,691 --
Information systems accelerated depreciation............................ 5,379 -- --
Goodwill impairment charges............................................. -- 5,807 --
Gulf South operational tax charge and professional fee accrual.......... -- 5,986 1,998
Other charges........................................................... 1,010 2,457 1,446
-------- -------- --------
Total charges........................................................... $14,611 $31,927 $17,950
======== ======== ========
</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 direct
transaction costs, 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, and (4) training costs related to conforming the acquired companies
operational policies to that of the Company's operational policies. In
addition, amounts incurred in excess of the original amount accrued at the
commitment date are expensed as incurred.
Merger costs and expenses for fiscal 1999 include $2,818 of charges recorded
at the commitment date of an integration plan adopted by management and $1,410
of charges for merger costs expensed as incurred. In addition, during fiscal
1999, the Company reversed approximately $928 of merger costs and expenses
into income, of which approximately $777 related to direct transaction costs
(refer to Note 3, Gulf South's Results of Operations for the Three Months
Ended April 3, 1998).
Merger costs and expenses for fiscal 1998 include $4,055 of charges recorded
at the commitment date of an integration plan adopted by management and $9,931
of charges for merger costs expensed as incurred. The merger costs expensed
as incurred primarily relate to direct transaction costs related to the merger
with Gulf South.
Merger costs and expenses for fiscal 1997 include $6,287 of charges recorded
at the commitment date of an integration plan adopted by management and $8,219
for merger costs expensed as incurred. Refer to Note 5, Accrued Merger and
Restructuring Costs and Expenses.
Restructuring Costs and Expenses
During fiscal 1998, due to the impact of the Gulf South merger, the Company
recorded restructuring costs and expenses of $3,691 related to the PSS and DI
divisions. See Note 3, Gulf South's Results of Operations for the Three
Months Ended April 3, 1998, which discusses the charges recorded by the Gulf
South division.
Refer to Note 5, Accrued Merger and Restructuring Costs and Expenses, for a
further discussion regarding the restructuring plan.
During the quarter ended June 30, 1998, management approved and adopted an
additional Gulf South component to its formal plan to restructure the Company.
This restructuring plan identified two additional distribution centers and two
corporate offices to be merged with existing facilities and identified three
F-19
<PAGE>
executives to be involuntarily terminated. Accordingly, the Company recorded
restructuring costs and expenses of $1,503 at the commitment date of the
restructuring plan adopted by management. Such costs include branch shutdown
costs, lease termination costs, involuntary employee termination costs of
$281, $570, and $652, respectively.
The remaining $3,419 of restructuring costs recorded during fiscal 1999
represent charges expensed as incurred. Such costs include charges for
training costs related to conforming the acquired companies operational
policies to that of the Company's operational policies, direct transaction
costs, involuntary employee termination costs, and other exit costs of $1,138,
$227, $300, and $1,754, respectively. 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 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 12 to 15 months, which was the
original estimate of when the new systems implementation would be completed.
The $5,379 charge represents the incremental fiscal 1999 impact on
depreciation expense resulting from management's decision to replace its
information systems.
Goodwill Impairment Charges
During fiscal 1998, the Company determined that goodwill related to three
foreign (World Med International) acquired companies and one domestic (PSS
division) acquired company, was not recoverable. As such, the goodwill of
$5,807 related to the four entities was written-off during fiscal 1998.
Gulf South Operational Tax Charge and Professional Fee Accrual
The Company, in connection with the filing of its fiscal 1998 financial
statements, restated for certain operational tax issues in the financial
statements of Gulf South for the years ended December 31, 1997, 1996, and
1995. As such, Gulf South recorded operational charges of $3,067, $1,998, and
$1,656 during fiscal 1998, 1997, and 1996, 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. In addition, as explained
in Note 3, Gulf South's Results of Operations for Three Months Ended April 3,
1998, $2,772 of such charges were recorded by Gulf South during the quarter
ended April 3, 1998. 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 issues arose.
In addition, professional fees estimated to be incurred to resolve the tax
issues of $2,919 for fiscal 1998 were recorded in the accompanying
consolidated statements of income for the year ended April 3, 1998. These
professional fees were previously recorded by Gulf South in the period from
January 1, 1998 to April 3, 1998 and, therefore, reflected as an adjustment to
shareholders' equity on April 4, 1998 (refer to Note 1, Background and Summary
of Significant Accounting Policies). However, the Company's fiscal 1998
historical consolidated financial statements have been restated to recognize
the professional fees at the Holding Company in fiscal 1998, rather than at
the Gulf South divisional level (refer to Note 22, Restatements).
Other Charges
During fiscal 1999, the Company incurred approximately $1,010 of costs related
to acquisitions not consummated.
The other charges recorded in 1998 and 1997 relate to the ESOP cost of an
acquired company. S&W sponsored a leveraged employee stock ownership plan
("S&W ESOP") that covered all employees with one year of service. The
Company accounted for this ESOP in accordance with SOP 93-6, 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 fiscal 1998, the Company
released the remaining shares to the S&W ESOP participants. Accordingly,
approximately $2,457 and $1,446 of related expenses were recognized in fiscal
1998 and 1997, respectively.
F-20
<PAGE>
5. 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 4, 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 $4,084 and $4,779, at April 2,
1999 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.
F-21
<PAGE>
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
consolidated statements of operations at the commitment date. 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 March 28, 1997.............................. $ -- $ -- $ -- $ --
Additions............................................. 160 540 873 1,573
Utilized.............................................. (4) -- (412) (416)
Balance at April 3, 1998............................... 156 540 461 1,157
Adjustments........................................... -- -- -- --
Additions............................................. -- -- -- --
Utilized.............................................. (2) -- (350) (352)
Balance at April 2, 1999............................... $154 $540 $ 111 $ 805
</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
April 2, 1999, 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
in which all operations would be ceased due to duplicative functions, six of
which had been shut down by April 2, 1999, with the final location estimated
to be shut down in 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.
During fiscal 1999, information system programming delays occurred that were
not anticipated at the time the integration plan was finalized and adopted by
management. As a result, the information system conversion dates for all
locations were delayed. The accruals for involuntary employee termination and
branch shutdown costs have not been paid in full as of April 2, 1999 because
the information system conversion must be completed prior to consolidating
distribution facilities. The lease termination costs will be paid through
fiscal 2002.
Nonsignificant Poolings-of-Interests Business Combination Plans
The following accrued merger costs and expenses were recognized in the
accompanying 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 eight nonsignificant pooling-of-interests business
combinations completed during fiscal 1997 through 1999, respectively, is as
follows:
F-22
<PAGE>
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Balance at March 28, 1997.............................. $ 2 $ 436 $ 1,544 $ 1,982
Additions............................................ 164 150 1,247 1,561
Utilized............................................. (1) (333) (2,273) (2,607)
------------- ------------ ------------ ---------
Balance at April 3, 1998............................... 165 253 518 936
Adjustments.......................................... (144) 11 311 178
Additions............................................ 74 1,868 376 2,318
Utilized............................................. (21) (248) (969) (1,238)
------------- ------------ ------------ ---------
Balance at April 2, 1999............................... $ 74 $1,884 $ 236 $ 2,194
============= ============ ============ =========
</TABLE>
Actual involuntary employee termination costs were less than management's
estimate and lease termination and branch shutdown costs were greater than
management's estimate recorded to establish the accrued merger costs and
expenses. Therefore, adjustments were made to the accruals to reflect the
changes in estimated costs and expenses in the accompanying statement of
operations for the year ended April 2, 1999. Refer to Note 4, Charges
Included in General and Administrative Expenses.
The Imaging Business acquired Tristar Imaging Systems, Inc. in October 1998,
and management formalized and adopted an integration plan in April 1999 to
integrate the operations of the acquired company. Approximately $2,064 of the
$2,194 accrued merger costs and expenses at April 2, 1999 relate to this
integration plan. Management anticipates this integration plan will be
completed during fiscal 2000; however, lease termination payments will extend
through fiscal 2007.
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 (in thousands):
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch
Relocation Termination Termination Shutdown
Costs Costs Costs Costs Total
------------ ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance at March 28, 1997................ $ -- $ -- $ -- $ -- $ --
Additions.............................. 225 205 1,150 920 2,500
Utilized............................... (63) (8) (60) (135) (266)
Balance at April 3, 1998................. 162 197 1,090 785 2,234
Adjustments............................ (125) (85) (883) (32) (1,125)
Additions.............................. -- -- -- -- --
Utilized............................... (37) (112) (207) (753) (1,109)
Balance at April 2, 1999................. $ -- $ -- $ -- $ -- $ --
</TABLE>
The Company identified nine distribution facilities to be closed and all
operations would be ceased due to duplicative functions. Relocation costs
were recorded related to the transfer of approximately 15 GXI employees.
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 April 2, 1999, all
employees have been terminated and relocated, and the plan has been completed.
F-23
<PAGE>
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
be closed, certain merger accruals were not utilized. Therefore, an
adjustment was recorded during the second quarter of fiscal 1999 to reverse
$1,125 of excessive accruals against goodwill.
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 six nonsignificant purchase business combinations during fiscal
1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Involuntary
Employee Employee Lease Branch
Relocation Termination Termination Shutdown
Costs Costs Costs Costs Total
----------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at March 28, 1997............................. $ -- $ -- $ -- $ -- $ --
Additions............................................ -- -- -- -- --
Utilized............................................. -- -- -- -- --
----------- ----------- ----------- --------- --------
Balance at April 3, 1998.............................. -- -- -- -- --
Additions from Gulf South subsidiary................. -- 102 100 250 452
----------- ----------- ----------- --------- --------
Balance at April 3, 1998.............................. -- 102 100 250 452
Adjustments.......................................... -- (102) (55) (135) (292)
Additions............................................ 155 556 423 496 1,630
Utilized............................................. (38) (11) (58) (598) (705)
----------- ----------- ----------- --------- --------
Balance at April 2, 1999.............................. $117 $ 545 $410 $ 13 $1,085
=========== =========== =========== ========= ========
</TABLE>
The additions from the Gulf South subsidiary represents the additions of the
accrued merger costs and expenses recorded by Gulf South during the
unconsolidated period January 1 to April 3, 1998. No amounts were utilized
during this period. Refer to Note 1, Background and Summary of Significant
Accounting Policies, for a discussion regarding the different year-ends of
Gulf South and the Company.
During the fourth quarter of fiscal 1999, management determined that actual
merger costs to be incurred were less than management's estimate recorded to
establish the accrued merger costs and expenses. Therefore, an adjustment to
reduce goodwill of $292 was recorded to eliminate the excessive accruals.
The Imaging Business acquired Gilbert X-Ray, Inc. in September 1998 and
management formalized and adopted two separate integration plans in fiscal
1999 to integrate the operations of the acquired company. Approximately $964
of the $1,085 accrued merger costs and expenses at April 2, 1999 relate to
these integration plans. Management anticipates these integration plans will
be completed during fiscal 2000; however, lease termination payments will
extend through fiscal 2003.
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 first
quarter of fiscal 1999 related to the Gulf South division ("Plan B") to
further consolidate its operations.
The Company recorded a total accrual of $7,971 related to Plan A.
Approximately $3,691 of the $7,971 total restructuring charge was related to
the PSS and DI divisions and was recorded in the accompanying 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
F-24
<PAGE>
consolidated statements of operations; rather it is included in the retained
earnings adjustment recorded on April 4, 1998. Refer to Note 1, Background and
Summary of Accounting Policies, for a discussion regarding the different year-
ends of Gulf South and the Company.
During the first quarter of fiscal 1999, the Company established an additional
accrual of $1,503 related to Plan B.
Accrued restructuring costs and expenses, classified as accrued expenses in the
accompanying consolidated balance sheets, were $3,817 million and $3,691
million, at April 2, 1999 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 March 28, 1997 $ -- $ -- $ -- $ -- $ --
Additions 1,570 1,389 627 105 3,691
Utilized -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at April 3, 1998 1,570 1,389 627 105 3,691
Additions from Gulf South subsidiary 1,879 406 1,455 540 4,280
------------ ------------ ------------ ------------ ------------
Balance at April 4, 1998 3,449 1,795 2,082 645 7,971
Additions 652 570 281 -- 1,503
Utilized (2,500) (1,045) (1,467) (645) (5,657)
------------ ------------ ------------ ------------ ------------
Balance at April 2, 1999 $ 1,601 $ 1,320 $ 896 $ -- $ 3,817
============ ============ ============ ============ ============
</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. The plan also included the termination of approximately
270 employees from operations, administration, and management. As of April 2,
1999, 231 employees were terminated as a result of the plan. Management
anticipates terminating the remaining 39 employees by the end of the fourth
quarter of fiscal 2000. 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 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
Restructuring Plan B related only to the Gulf South division, and involved
merging six additional locations into existing locations. At April 2, 1999, two
of the six locations had been shut down and the remaining four locations are
scheduled to be shut down in fiscal 2000. As a result of the consolidation of
the duplicate facilities, lease termination costs will be incurred through
fiscal 2000. The plan also included the termination of three employees from
operations and management. As of April 2, 1999, all employees were terminated
as a result of the plan, with the related severance payments to be made in
fiscal 2000.
F-25
<PAGE>
6. MARKETABLE SECURITIES
At April 3, 1998, the Company held investments in marketable securities that
were classified as either trading or held-to-maturity, depending on the security
and management's intent.
Securities classified as trading at April 3, 1998 consisted of obligations of
states and political subdivisions, preferred stock, and other equity securities.
The investments are carried at their fair values based upon the quoted market
prices, with changes in unrealized gains or losses included in interest and
investment income. At April 3, 1998, securities classified as trading consisted
of the following:
Changes in
Fair Unrealized
Value Gain (Loss)
-------- -----------
April 2, 1999:
Other equity securities........................... $ 3 $(573)
======== ===========
April 3, 1998:
Obligations of states and political subdivisions.. $11,000 $ --
Preferred stock................................... 25,000 (3)
Other equity securities........................... 576 --
-------- -----------
$36,576 $ (3)
======== ===========
Securities classified as held-to-maturity consist of corporate debt securities
for which the Company has the positive intent and ability to hold to maturity.
Held-to-maturity securities are stated at cost with corresponding premiums or
discounts amortized over the life of the investment to interest income. All
commercial paper is due within one year and are classified as current in the
accompanying consolidated balance sheets. The fair value of commercial paper
was $44,974, which is based on quoted market prices and approximates amortized
cost at April 3, 1998.
7. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
1999 1998
-------- --------
Land.............................................. $ 1,996 $ 838
Building.......................................... 4,186 3,268
Equipment......................................... 62,430 40,627
Furniture, fixtures, and leasehold improvements... 12,233 8,487
-------- --------
80,845 53,220
Accumulated depreciation.......................... (32,678) (21,747)
-------- --------
$ 48,167 $ 31,473
======== ========
Equipment includes equipment acquired under capital leases with a cost of $488
and $434 and related accumulated depreciation of $233 and $171 at April 2, 1999
and April 3, 1998, respectively. Depreciation expense, included in general and
administrative expenses in the accompanying consolidated statements of income,
aggregated approximately $12,209, $5,629, and $3,856 for fiscal 1999, 1998, and
1997, respectively.
F-26
<PAGE>
8. INTANGIBLES
Intangibles, stated at cost, consist of the following:
1999 1998
-------- --------
Goodwill..................................... $132,895 $77,355
Noncompete agreements and other.............. 27,257 22,295
-------- --------
160,152 99,650
Accumulated amortization..................... (14,070) (9,042)
-------- --------
$146,082 $90,608
-------- --------
Future minimum payments required under noncompete agreements at April 2, 1999
are as follows:
Fiscal Year:
2000.................................................. $2,421
2001.................................................. 1,074
2002.................................................. 713
2003.................................................. 292
2004.................................................. 74
Thereafter............................................ 340
--------
$4,914
========
Amortization expense, included in general and administrative expenses in the
accompanying consolidated statements of income, aggregated approximately $7,289,
$5,062, and $2,617 for fiscal 1999, 1998, and 1997, respectively.
9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
April 2, 1999 April 3, 1998
--------------- ---------------
Senior subordinated notes............ $125,000 $125,000
Senior revolving credit.............. 24,000 --
Capital lease obligations............ 496 532
Long-term debt of acquired companies. 96 7,675
Other notes.......................... 3,912 4,420
--------------- ---------------
153,504 137,627
Less current maturities.............. (1,062) (3,570)
--------------- ---------------
$152,442 $134,057
=============== ===============
Senior Subordinated Notes
During October 1997, the Company issued 8.5% unsecured senior subordinated notes
due in 2007 (the ''Notes'') in the amount of $125,000. Interest on the Notes
accrues from their date of original issuance and is payable semi-annually on
April 1 and October 1 of each year, commencing on April 1, 1998, at a rate of
8.5% per annum. The Notes are subject to certain covenants, including
restrictions on indebtedness, investments, payments of dividends, purchases of
treasury stock, and sales of assets and maintaining a fixed charge coverage
ratio of 2.0 to 1.0.
F-27
<PAGE>
Senior Revolving Credit
The Company entered into a $140,000 senior revolving credit facility with a
syndicate of financial institutions with NationsBank, N.A. as principal agent in
February 1999. Borrowings under the credit facility are available for working
capital, capital expenditures, and acquisitions and are secured by the common
stock of the subsidiaries and assets of the Company and its subsidiaries. The
credit facility expires February 10, 2004 and borrowings bear interest at
variable rates, at the Company's option, at either the lender's base rate or the
LIBOR rate plus 1.125%. The interest rates at April 2, 1999 were 7.75% and
6.19%, respectively. The amount outstanding under the credit facility at April
2, 1999 was $24,000.
The credit facility contains certain affirmative and negative covenants, the
most restrictive of which require maintenance of a maximum leverage ratio of 3.5
to 1, maintenance of consolidated net worth of $337.0 million, and maintenance
of a minimum fixed charge coverage ratio of 2.0 to 1. In addition, the
covenants limit additional indebtedness and asset dispositions, require majority
lender approval on acquisitions with a total purchase price greater than
$75,000, and restrict payments of dividends. The Company was not in compliance
with its covenants at April 2, 1999, due to failure to meet certain timely
filing requirements. However, a limited waiver was obtained by the Company from
the lending group.
Capital Lease Obligations
As of April 2, 1999, future minimum payments, by fiscal year and in the
aggregate, required under capital leases are approximately as follows:
Fiscal Year:
2000.......................................................... $ 361
2001.......................................................... 98
2002.......................................................... 64
2003.......................................................... 38
-------
Net minimum lease payments....................................... 561
Less amount representing interest................................ (65)
-------
Present value of net minimum lease payments under capital leases. 496
Less amounts due in one year..................................... (321)
-------
Amounts due after one year............................ $ 175
=======
Long-Term Debt of Acquired Companies
Approximately $5,150 of long-term debt of acquired companies outstanding at
April 3, 1998 relates to the Other Pooled Entities. Refer to Note 1, Background
and Summary of Significant Accounting Policies, for a further discussion
regarding the Other Pooled Entities. All debt has been repaid subsequent to the
date of merger.
Other Notes
At April 2, 1999, other notes consist of various debt maintained by WorldMed
Int'l, including a working capital line of credit, a mortgage on facilities in
Leuven, Belgium, and debt to acquire certain international business service
centers. Interest rates on the related notes range from 4.9% to 6.15%,
respectively.
F-28
<PAGE>
As of April 2, 1999, future minimum payments of long-term debt, excluding
capital lease obligations, are approximately as follows:
Fiscal Year:
2000..................................................... $ 741
2001..................................................... 645
2002..................................................... 645
2003..................................................... 645
2004..................................................... 24,645
Thereafter............................................... 125,687
--------
Total............................................ $153,008
========
10. INCOME TAXES
The provisions for income taxes are detailed below:
1999 1998 1997
---------- ---------- ----------
Current tax provision:
Federal............................... $16,253 $17,928 $11,441
State................................. 2,786 3,516 2,515
---------- ---------- ----------
Total current................. 19,039 21,444 13,956
---------- ---------- ----------
Deferred tax provision (benefit):
Federal............................... 9,306 (2,257) (4,776)
State................................. 1,595 (390) (1,115)
---------- ---------- ----------
Total deferred................ 10,901 (2,647) (5,891)
---------- ---------- ----------
Total income tax provision.... $29,940 $18,797 $ 8,065
========== ========== ==========
The difference between income tax computed at the federal statutory rate and the
actual tax provision is shown below:
1999 1998 1997
--------- -------- --------
Income before provision for taxes.................. $73,681 $36,349 $23,588
--------- -------- --------
Tax provision at the 35% statutory rate............ $25,788 $12,722 $ 8,256
--------- -------- --------
Increase (decrease) in taxes:
State income tax, net of federal benefit......... 2,847 2,031 910
Effect of foreign subsidiary..................... 310 2,179 (174)
Merger costs and expenses........................ (250) 1,958 721
Goodwill amortization............................ 969 512 15
Meals and entertainment.......................... 454 207 180
Nontaxable interest income....................... (374) (688) (1,102)
Change in valuation allowance for deferred taxes. -- -- (900)
Income of S corporations......................... 68 (287) (750)
Other, net....................................... 128 163 909
--------- -------- --------
Total increase (decrease) in taxes........ 4,152 6,075 (191)
--------- -------- --------
Total income tax provision................ $29,940 $18,797 $ 8,065
========= ======== ========
Effective tax rate................................. 40.6% 51.7% 34.2%
========= ======== ========
F-29
<PAGE>
Deferred income taxes for fiscal 1999 and 1998 reflect the impact of temporary
differences between the financial statement and tax bases of assets and
liabilities. The tax effect of temporary differences which create deferred tax
assets and liabilities at April 2, 1999 and April 3, 1998 are detailed below:
<TABLE>
<CAPTION>
1999 1998
-------- --------
Deferred tax assets:
<S> <C> <C>
Allowance for doubtful accounts and sales returns..................... $ 5,398 $ 3,514
Merger, restructuring and other nonrecurring costs and expenses....... 4,406 5,886
Accrued expenses...................................................... 4,017 2,233
Net operating loss carryforwards...................................... 3,380 1,228
Operational tax reserve............................................... 2,980 2,614
Inventory uniform cost capitalization................................. 1,536 1,640
Reserve for inventory obsolescence.................................... 1,272 866
Accrued professional fees............................................. 1,014 1,135
Goodwill impairment charges........................................... 551 627
Excess book depreciation and amortization over tax depreciation and
amortization......................................................... -- 214
Other................................................................. 1,075 479
-------- --------
Gross deferred tax assets................................... 25,629 20,436
-------- --------
Deferred tax liabilities:
Excess of tax depreciation and amortization over book depreciation and
amortization......................................................... (288) --
Other................................................................. (107) (223)
-------- --------
Gross deferred tax liabilities.............................. (395) (223)
-------- --------
Net deferred tax assets.................................................. $25,234 $20,213
======== ========
</TABLE>
The income tax benefit related to the exercise or early disposition of certain
stock options reduces taxes currently payable and is credited directly to
additional paid-in capital. Such amounts were $759, $1,505, and $3,449 for
fiscal 1999, 1998, and 1997, respectively.
At April 2, 1999, the Company had net operating loss carryforwards for income
tax purposes arising from mergers of approximately $8,688 which expire from 2000
to 2019. The utilization of the net operating loss carryforwards is subject to
limitation in certain years.
All deferred tax assets as of April 2, 1999 and April 3, 1998 are considered to
be realizable due to the projected future taxable income. Therefore, no
valuation allowance has been recorded as of April 2, 1999 and April 3, 1998.
11. OTHER 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 fiscal 1999,
1998, and 1997, as detailed in the following table (amounts in thousands):
<TABLE>
April 2, 1999 April 3, 1998 March 28, 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
Net income................................ $43,741 $17,552 $15,523
--------------- --------------- ----------------
Other comprehensive income, net of tax:
Foreign currency translation adjustment... 119 (1,203) (93)
--------------- --------------- ----------------
Other comprehensive income................ 119 (1,203) (93)
--------------- --------------- ----------------
Comprehensive income...................... $43,860 $16,349 $15,430
=============== =============== ================
</TABLE>
F-30
<PAGE>
12. EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, the calculation of basic
net earnings per common share and diluted earnings per common share is presented
below (share amounts in thousands, except per share data):
1999 1998 1997
-------- -------- -------
Net income (loss)...................... $43,741 $17,552 $15,523
======== ======== =======
Earnings per share:
Basic.................................. $ 0.62 $ 0.25 $ 0.23
======== ======== =======
Diluted................................ $ 0.61 $ 0.25 $ 0.23
======== ======== =======
Weighted average shares outstanding:
Common shares.......................... 70,548 69,575 66,207
Assumed exercise of stock options...... 850 970 750
-------- -------- -------
Diluted shares outstanding............. 71,398 70,545 66,957
======== ======== =======
13. RELATED-PARTY TRANSACTION
During fiscal 1998, the Company loaned its Chairman of the Board and Chief
Executive Officer $3,000 to consolidate debt incurred in relation to certain
real estate activities, as well as to provide the cash needed to pay-off
personal debt. During fiscal 1999, the principal amount of the loan increased
approximately $585. The loan is unsecured, bears interest at the applicable
federal rate for long-term obligations (5.74% and 6.55% at April 2, 1999 and
April 3, 1998, respectively), and is due September 2007. The outstanding
principal, included in other assets in the accompanying consolidated balance
sheets, at April 2, 1999 and April 3, 1998 was approximately $2,736 and $2,715,
respectively. Accrued interest was approximately $146 and $45 at April 2, 1999
and April 3, 1998, respectively. Interest income, included in interest and
investment income in the accompanying consolidated statements of income for
fiscal 1999 and 1998 was approximately $165 and $103, respectively. Principal
payments for fiscal 1999 and 1998, were approximately $564 and $285,
respectively. Interest payments for fiscal 1999 and 1998, were approximately $65
and $58, respectively.
14. STOCK-BASED COMPENSATION PLANS
1999 Broad-Based Employee Stock Plan
Under the Company's 1999 Broad-Based Employee Stock Plan, 500,000 shares of the
Company's common stock are reserved for sale to nonofficer employees. Grants
under this plan are in the form of nonqualified stock options or restricted
stock. Options may be granted at prices not less than the fair market value of
the common stock on the date such option is granted and are exercisable five
years from the date of grant. Any option may be exercisable no later than ten
years from the date of grant. According to Rule 144, unregistered stock options
must be held for a minimum of two years subsequent to the date of exercise prior
to selling the common stock.
F-31
<PAGE>
Information regarding this plan is summarized below (share amounts in
thousands):
Weighted
Average
Shares Price
-------- --------
Balance, April 3, 1998...................... -- $ --
Granted................................... 453 9.73
Exercised................................. -- --
Forfeited................................. -- --
-------- --------
Balance, April 2, 1999...................... 453 $9.73
======== ========
As of April 2, 1999, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $8.97 to $10.66 and 6.25
years, respectively, and approximately 47,160 shares of common stock are
available for issuance under the plan. The weighted-average per share fair
value of options granted was $4.36 in fiscal 1999.
Incentive Stock Option Plan
Under the Company's qualified 1986 Incentive Stock Option Plan, 6,570,000 shares
of the Company's common stock are reserved for sale to officers and key
employees. Options may be granted at prices not less than fair market value at
the date of grant and are exercisable during periods of up to five years from
that date. The exercisability of the options is not subject to future
performance.
Information regarding this plan is summarized below (share amounts in
thousands):
Weighted
Average
Shares Price
-------- --------
Balance, March 29, 1996................... 722 $2.94
Granted................................. -- --
Exercised............................... (346) 2.83
Forfeited............................... (12) 3.28
-------- --------
Balance, March 28, 1997................... 364 3.05
Granted................................. -- --
Exercised............................... (248) 2.77
Forfeited............................... (3) 2.10
-------- --------
Balance, April 3, 1998.................... 113 3.67
Granted................................. -- --
Exercised............................... (110) 3.67
Forfeited............................... (3) 3.67
-------- --------
Balance, April 2, 1999.................... -- $ --
======== ========
All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. As of April 2, 1999, there
were no remaining outstanding options. This plan has expired and will require
shareholder vote to renew this plan and issue any of the approximate 1,180,502
shares of common stock that remains in the plan.
Long-Term Stock Plan
In March 1994, the Company adopted the 1994 Long-Term Stock Plan under which the
Compensation Committee of the Board of Directors has discretion to grant
nonqualified stock options and restricted stock to
F-32
<PAGE>
any employee of the Company. A total of 2,190,000 shares of the Company's common
stock have been reserved for issuance under this plan. The exercise price of
options granted under this plan may not be less than the fair market value of
the Company's common stock on the date of grant.
Information regarding the stock option component of this plan is summarized
below (share amounts in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Shares Price
-------- ----------
<S> <C> <C>
Balance, March 29, 1996................................. 615 $14.17
Granted............................................... 217 23.90
Exercised............................................. (27) 13.35
Forfeited............................................. (3) 5.79
-------- ----------
Balance, March 28, 1997................................. 802 16.52
Granted............................................... 898 14.53
Exercised............................................. (112) 13.20
Forfeited............................................. (43) 14.89
-------- ----------
Balance, April 3, 1998.................................. 1,545 16.19
Granted............................................... 476 13.27
Exercised............................................. (66) 13.76
Forfeited............................................. (5) 16.78
-------- ----------
Balance, April 2, 1999.................................. 1,950 $14.80
-------- ----------
</TABLE>
All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. The weighted-average per
share fair value of options granted was $6.84, $5.60, and $11.08 in fiscal 1999,
1998, and 1997, respectively. As of April 2, 1999, the range of exercise prices
and the weighted-average remaining contractual life of outstanding options were
$5.29 to $28.86 and 6.37 years, respectively. As of April 2, 1999, there were
no remaining shares available for grant under this plan, and the Company does
not intend to issue any more options under this plan.
Long-Term Incentive Plan
In March 1994, the Company adopted the 1994 Long-Term Incentive Plan which
provides officers with performance awards, consisting of cash or registered
shares of common stock, or a combination thereof, based primarily upon the
Company's total shareholder return as ranked against the companies comprising
the NASDAQ Composite Index over a three-year period. The maximum payable under
this plan to an eligible employee, whether in the form of cash or common stock,
may not exceed $1 million per fiscal year.
The plan also provides for nonqualified stock options or restricted stock to be
granted at the full discretion of the Compensation Committee. The exercise
price of options granted under this plan may not be less than the fair market
value of the Company's common stock on the date of grant, and accordingly, no
compensation expense is recorded on the date the stock options are granted. The
aggregate number of shares of common stock, including shares reserved for
issuance pursuant to the exercise of options, which may be granted or issued may
not exceed 730,000 shares.
No cash or restricted stock was issued during fiscal 1999. During fiscal 1998,
the Company has accrued approximately $407 related to awards granted under this
plan and approximately $832 of cash payments were made.
F-33
<PAGE>
Information regarding the stock option component of the plan is summarized below
(share amounts in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Shares Price
------------- ---------------
<S> <C> <C>
Balance, March 29, 1996 ..................... 319 $ 14.88
Granted .................................. 68 23.94
Exercised ................................ (61) 14.88
Forfeited ................................ (5) 23.94
------------- ---------------
Balance, March 28, 1997 ..................... 321 16.78
Granted .................................. 97 16.92
Exercised ................................ -- --
Forfeited ................................ -- --
------------- ---------------
Balance, April 3, 1998 ...................... 418 15.90
Granted .................................. -- --
Exercised ................................ -- --
Forfeited ................................ -- --
------------- ---------------
Balance, April 2, 1999 ...................... 418 $ 14.83
============= ===============
</TABLE>
All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. The weighted-average per
share fair value of options granted was $5.72 and $11.08 in fiscal 1998 and
1997, respectively. As of April 2, 1999, the range of exercise prices and the
weighted-average remaining contractual life of outstanding options were $14.75
to $14.88, and 6.86 years, respectively. As of April 2, 1999, there were
approximately 6,800 shares available for grant under this plan.
Directors' Stock Plan
In March 1994, the Company adopted the Directors' Stock Plan under which
nonemployee directors receive an annual grant of an option to purchase shares of
the Company's common stock. During fiscal 1999, the Plan was amended to
increase the number of option grants from 1,500 to 3,000 and to increase the
number of shares available for grant. A total of 400,000 shares of the
Company's common stock have been reserved for issuance under this plan. The
exercise price of options granted under this plan may not be less than the fair
market value of the Company's common stock on the date of grant.
F-34
<PAGE>
Information regarding the stock option component of this plan is summarized
below (share amounts in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Shares Price
------ --------
<S> <C> <C>
Balance, March 29, 1996 ....................... 45 $ 10.12
Granted ....................................... 32 23.94
Exercised ..................................... (3) 5.48
Forfeited ..................................... -- --
----- ---------
Balance, March 28, 1997 ....................... 74 13.44
Granted ....................................... 50 14.75
Exercised ..................................... -- --
Forfeited ..................................... -- --
----- ---------
Balance, April 3, 1998 ........................ 124 15.70
Granted ....................................... 135 13.71
Exercised ..................................... (6) 5.48
Forfeited ..................................... (1) 5.48
----- ---------
Balance, April 2, 1999 ........................ 252 $ 13.69
===== =========
</TABLE>
All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. The weighted-average per
share fair value of options granted was $7.37, $5.72, and $13.22 in fiscal years
1999, 1998, and 1997, respectively. As of April 2, 1999, the range of exercise
prices and the weighted-average remaining contractual life of outstanding
options were $5.48 to $15.81 and 8.35 years, respectively. At April 2, 1999,
approximately 135,000 shares were available for grant under this plan.
Gulf South's Stock Option Plans
Under Gulf South's Stock Option Plans of 1997 and 1992, 850,000 and 1,300,000
shares, respectively, of common stock have been reserved for grant to key
management personnel and to members of the former Board of Directors. The
options granted have ten-year terms with vesting periods of either three or five
years from either the date of grant or the first employment anniversary date.
At April 2, 1999, approximately 301,000 and 791,000 shares were available for
grant under the 1997 and 1992 plans, respectively. However, shareholder
approval must be received for any of the remaining shares to be issued under
this plan.
A summary of the Gulf South's stock option activity and related information is
as follows (share amounts in thousands):
<PAGE>
Weighted
Average
Shares Price
--------- ---------
Balance, January 1, 1996........ 976 $ 4.57
Granted....................... 355 16.53
Exercised..................... (216) 2.68
Forfeited..................... (20) 9.57
--------- ---------
Balance, December 31, 1996...... 1,095 8.57
Granted....................... 833 11.89
Exercised..................... (144) 2.90
Forfeited..................... (149) 13.38
--------- ---------
Balance, December 31, 1997...... 1,635 10.39
Granted....................... 788 19.89
Exercised..................... (203) 13.02
Forfeited..................... (13) 12.07
--------- ---------
Balance, April 3, 1998.......... 2,207 13.55
Granted....................... -- --
Exercised..................... (239) 11.46
Forfeited..................... (24) 17.07
--------- ---------
Balance, April 2, 1999.......... 1,944 $13.77
========= =========
All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. The weighted-average fair
values of options granted during calendar year 1997 and 1996 were $5.83 and
$5.94, respectively. As of April 2, 1999, the range of exercise prices and the
weighted-average remaining contractual life of outstanding options for the 1997
plan were $4.71 to $21.69 and 8.54 years, respectively. As of April 2, 1999,
the range of exercise prices and the weighted-average remaining contractual life
of outstanding options for the 1992 plan were $0.012 to $28.00 and 6.3 years,
respectively.
The Company granted warrants for 787,500 shares of its common stock on January
2, 1997 at an exercise price of $14.80 in connection with the purchase of
Gateway. All of the warrants were exercisable upon the date of grant and expire
January 2, 2002.
Unregistered Stock Options
During fiscal 1999, the Company issued 255,747 unregistered stock options to
nonofficer employees. The exercise price of options granted was $13.00, which
was equal to the fair market value of the Company's common stock on the date of
grant.
F-36
<PAGE>
Fair Value of Stock Options
Under SFAS No. 123, pro forma information regarding net income and earnings per
share has been determined as if the Company had accounted for its employee stock
options under the fair value method. The fair value of stock options granted
has been estimated using a Black-Scholes option pricing model.
The fair value of PSS' stock options (1999 Broad-Based Employee Stock Plan,
Incentive Stock Option Plan, Long-Term Stock Plan, Long-Term Incentive Plan, and
Directors' Stock Plan) granted during fiscal 1999, 1998, and 1997 have been
estimated based on the following weighted average assumptions: risk-free
interest rates ranging from 5.1% to 6.8%, expected option life ranging from 2.5
to 7 years; expected volatility of 56.0%, 55.0%, and 55.0%, respectively; and no
expected dividend yield. Using these assumptions, the estimated fair values of
options granted for fiscal 1999, 1998, and 1997 were approximately $9,091,
$4,814, and $2,897, respectively, and such amounts would be included in
compensation expense.
The fair value of Gulf South's stock options granted during fiscal 1998 and
1997, have been estimated based on the following weighted average assumptions:
risk-free interest rates of 6.0%, and 6.5%, respectively; expected option life
of three years; expected volatility of 65.2%, and 41.8%, respectively; and no
expected dividend yield. Using these assumptions, the estimated fair values of
options granted for fiscal 1998 and 1997 were approximately $1,568, and $633,
respectively, and such amounts would be included in compensation expense.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Pro forma net income and net income per share for the fiscal years ended 1999,
1998, and 1997, assuming the Company had accounted for the plans under the fair
value approach, are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income:
As reported.................................. $43,741 $17,552 $15,523
Pro forma.................................... 38,287 13,723 13,405
Earnings per share:
As reported:
Basic..................................... $ 0.62 $ 0.25 $ 0.23
Diluted................................... 0.61 0.25 0.23
Pro forma:
Basic..................................... 0.54 0.20 0.20
Diluted................................... 0.54 0.19 0.20
</TABLE>
Because the fair value method of accounting has not been applied to options
granted prior to March 31, 1996, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
15. EMPLOYEE BENEFIT PLANS
The Company has an employee stock ownership plan (''ESOP'') available to all
employees with at least one year of service. Effective January 1, 1996, the
Company amended the plan to allow participants to direct the investment of a
portion of their plan balances. Prior to this change, the trustees directed the
investment of the participants' balances. As of plan years ended March 31, 1999
and April 3, 1998, the ESOP owns approximately 2,123,000 and 1,999,000 shares of
the Company's common stock, respectively. Company
F-37
<PAGE>
contributions to the plan were approximately $108, $134, and $160 for fiscal
1999, 1998, and 1997, respectively, and are made at the discretion of the
Company.
The Company also has an employee stock purchase plan available to employees with
at least one year of service. The plan allows eligible employees to purchase
company stock over-the-counter through payroll deductions.
A company acquired in fiscal 1999 sponsored a leveraged employee stock ownership
plan (''Tristar ESOP''). The Company accounted for this ESOP in accordance with
SOP 93-6. Accordingly, the debt of the ESOP was recorded as debt of the
Company, and the shares pledged as collateral were reported as unearned ESOP
shares in the balance sheet. As shares were released from collateral, the
Company reported compensation expense equal to the then current market price of
the shares, and the shares became outstanding for the earnings-per-share (EPS)
computation.
The Tristar ESOP shares were as follows:
<TABLE>
<CAPTION>
April 2, 1999 April 3, 1998 March 28, 1997
------------- ------------- --------------
<S> <C> <C> <C>
Allocated shares.................. 76,972 25,934 --
Shares released for allocation.... 12,524 51,038 25,934
Unreleased shares................. 169,840 182,364 233,402
------------- ------------- --------------
Total ESOP shares......... 259,336 259,336 259,336
------------- ------------- --------------
Fair value of unreleased shares... $ 1,523 $ 5,835 $ 3,371
------------- ------------- --------------
</TABLE>
Approximately $221, $824, and $469, of related expense was recognized in fiscal
1999, 1998, and 1997, respectively.
S&W sponsored a leveraged employee stock ownership plan (''S&W ESOP'') that
covered all employees with one year of service. The Company accounted for this
ESOP in accordance with SOP 93-6. Accordingly, the debt of the ESOP was
recorded as debt of the Company, and the shares pledged as collateral were
reported as unearned ESOP shares in the balance sheet. As shares were released
from collateral, the Company reported compensation expense equal to the then
current market price of the shares, and the shares became outstanding for the
earnings-per-share (EPS) computation.
The S&W ESOP shares were as follows:
<TABLE>
<CAPTION>
April 3, 1998 March 28, 1997
------------- --------------
<S> <C> <C>
Allocated shares.................. 398,727 278,490
Shares released for allocation.... 162,769 120,237
Unreleased shares................. -- 162,769
------------- --------------
Total ESOP shares......... 561,496 561,496
------------- --------------
Fair value of unreleased shares... $ -- $1,512,495
------------- --------------
</TABLE>
During fiscal 1998, the Company released the remaining shares to the S&W ESOP
participants, and it is management's intention to terminate this plan.
Accordingly, approximately $2.5 million of related expense was recognized in
fiscal 1998.
PSS EDP Program
Effective July 1, 1997, the Company adopted the PSS EDP Program ("EDP"), which
is available to executives, management, and salespeople. This plan has two
components: a deferred compensation plan and a stock option program. EDP is an
unfunded plan. The Company has purchased life insurance as a means to finance
the benefits that become payable under the plan.
F-38
<PAGE>
Under the deferred compensation plan, participants can elect to defer up to 10%
of their total compensation. The Company will match up to a range of 125.0% to
10%, 5% of the first 10% of income deferred by executives, management, and
salespeople. The Company match for fiscal 1999 was $638. Participants are
guaranteed to earn interest on the amount deferred and the Company match at a
rate declared annually by the Board of Directors (5.13% for the plan years ended
March 31, 1999 and 1998, respectively). The interest rate shall never be less
than the 90-day U.S. Treasury Bill rate.
Under the stock option plan, participants are granted stock options to purchase
common stock of the Company. The number of stock options granted is function of
participant's annual deferral amount plus the Company match. The grant price of
the option is determined annually to reflect an exercise price which allows the
annual deferral amount to be supplemented by the growth of the PSS stock in
excess of the declared interest rate projected to compound for four years.
Thus, the option price is not less than the fair market value of the common
stock on the date such option is granted.
Participant contributions are always 100% vested. The Company match and the
stock options vest as follows:
# of Years Vesting %
-------------------- -------------
Less than 4 years 0%
4 years 20%
5 years 40%
6 years 60%
7 years 80%
8 years 100%
Death or disability 100%
After the options are 100% vested, participants can exercise up to 25% of vested
options in any calendar year.
At age 60, or age 55 with 10 years of participation in EDP, the retirement
benefit is distributed to participants in five equal installments. The
retirement benefit is distributed in a lump sum upon death and over 5 years upon
disability.
During fiscal 1999, the Company matched approximately $638 of employee
deferrals. At April 2, 1999 and April 3, 1998, approximately $2,497 and $526,
respectively, is recorded in other long-term assets in the accompanying
consolidated balance sheets. In addition, $2,490 and $611, respectively of
deferred compensation is included in other long-term liabilities in the
accompanying consolidated balance sheets.
16. OPERATING LEASE COMMITMENTS
The Company leases various facilities and equipment under operating leases which
expire at various dates through 2005. Certain lease commitments provide that
the Company pay taxes, insurance, and maintenance expenses related to the leased
assets.
Rent expense approximated $19,905, $19,019, and $8,083 for fiscal 1999, 1998,
and 1997, respectively. As of April 2, 1999, future minimum payments, by fiscal
year and in the aggregate, required under noncancelable operating leases are as
follows:
F-39
<PAGE>
<TABLE>
<S> <C>
Fiscal Year:
2000........................................................ $19,998
2001........................................................ 15,966
2002........................................................ 12,849
2003........................................................ 7,908
2004........................................................ 5,014
Thereafter.................................................. 2,935
-----------
Total....................................................... $64,670
-----------
</TABLE>
17. 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. See Note 1,
Background and Summary of Significant Accounting Policies, for descriptive
information about the Company's business segments. International business and
other includes the accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
primarily evaluates the operating performance of its segments based on net sales
and income from operations.
The following table presents financial information about the Company's business
segments (in thousands):
F-40
<PAGE>
The following table presents financial information about the Company's business
segments (in thousands):
<TABLE>
<CAPTION>
April 2, April 3, March 28,
1999 1998 1997
----------- ----------- -----------
NET SALES:
<S> <C> <C> <C>
Physician Supply Business $ 677,353 $ 662,543 $ 610,358
Imaging Business 524,823 409,660 362,511
Long-Term Health Care Business 342,405 287,582 177,710
Other (a) 19,924 22,001 15,707
----------- ----------- -----------
Total net sales $1,564,505 $1,381,786 $1,166,286
=========== =========== ===========
INCOME FROM OPERATIONS:
Physician Supply Business $ 46,842 $ 16,871 $ 3,358
Imaging Business 19,400 6,486 4,048
Long-Term Health Care Business 19,275 17,721 12,848
Other (a) (11,664) (5,310) 498
----------- ----------- -----------
Total income from operations $ 73,853 $ 35,768 $ 20,752
=========== =========== ===========
DEPRECIATION:
Physician Supply Business $ 6,844 $ 3,287 $ 3,309
Imaging Business 3,614 1,010 172
Long-Term Health Care Business 1,429 934 375
Other (a) 322 398 --
----------- ----------- -----------
Total depreciation $ 12,209 $ 5,629 $ 3,856
=========== =========== ===========
AMORTIZATION OF INTANGIBLE AND OTHER ASSETS:
Physician Supply Business $ 2,953 $ 2,444 $ 2,380
Imaging Business 3,460 1,545 121
Long-Term Health Care Business 1,762 1,243 116
----------- ----------- -----------
Total amortization of intangible assets $ 8,175 $ 5,232 $ 2,617
=========== =========== ===========
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business $ 1,627 $ 605 $ 2,463
Imaging Business 846 539 578
Long-Term Health Care Business 2,485 2,004 924
Other (a) 223 141 --
----------- ----------- -----------
Total provision for doubtful accounts $ 5,181 $ 3,289 $ 3,965
=========== =========== ===========
CAPITAL EXPENDITURES:
Physician Supply Business $ 15,149 $ 4,468 $ 5,635
Imaging Business 6,735 4,565 419
Long-Term Health Care Business 3,550 1,659 1,117
Other (a) -- (173) --
----------- ----------- -----------
Total capital expenditures $ 25,434 $ 10,519 $ 7,171
=========== =========== ===========
ASSETS:
Physician Supply Business $ 309,719 $ 418,811
Imaging Business 277,250 158,698
Long-Term Health Care Business 174,868 196,306
Other (a) 164,934 16,034
----------- -----------
926,771 789,849
Eliminating entries (183,390) (98,595)
----------- -----------
Total assets $ 743,381 $ 691,254
=========== ===========
</TABLE>
(a) Other includes the holding company and the international subsidiaries.
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents summarized unaudited quarterly results of
operations for the Company for fiscal years 1998 and 1999. The Company believes
all necessary adjustments have been included in the amounts stated below to
present fairly the following selected information when read in conjunction with
the consolidated financial statements of the Company. Future quarterly
operating results may fluctuate depending on a number of factors, including the
timing of acquisitions of service centers, the timing of the opening of start-up
service
F-41
<PAGE>
centers, and changes in customer's buying patterns of supplies, diagnostic
equipment and pharmaceuticals. Results of operations for any particular quarter
are not necessarily indicative of results of operations for a full year or any
other quarter.
<TABLE>
<CAPTION>
Fiscal Year 1998 Fiscal Year 1999
As Restated ------------------------------------------- --------------------------------------------
(In Thousands, Except Per Share Data) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------- --------- -------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ......................... $ 315,313 $ 344,242 $ 353,642 $ 368,589 $ 367,562 $ 387,366 $ 399,547 $ 410,029
Gross profit ...................... 81,140 90,521 94,277 100,498 97,198 104,901 109,684 110,124
General and administrative expenses 46,091 54,277 53,376 74,571 54,523 52,310 53,913 63,986
Net income (loss) ................. 7,580 7,200 8,730 (5,958) 8,868 13,307 13,822 7,743
Basic earnings (loss) per share ... $ 0.11 $ 0.10 $ 0.13 $ (0.09) $ 0.13 $ 0.19 $ 0.20 $ 0.11
Diluted earnings (loss) per share $ 0.11 $ 0.10 $ 0.12 $ (0.08) $ 0.13 $ 0.19 $ 0.19 $ 0.11
<CAPTION>
Fiscal Year 1998 Fiscal Year 1999
Adjustments --------------------------------------------- ---------------------------------------------
(In Thousands, Except Per Share Data) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------- --------- -------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ......................... $ 27,131 $ 24,119 $ 23,027 $ 18,444 $ 25,024 $ 21,295 $ 5,324 $--
Gross profit ...................... 4,356 3,905 3,581 2,758 2,514 1,920 480 --
General and administrative expenses 3,776 3,691 3,392 (3,356) 5,919 2,350 2,343 --
Net income (loss) ................. (341) (558) (595) 3,076 (2,427) (544) (1,210) --
Basic earnings (loss) per share ... $ (0.01) $ (0.01) $ (0.01) $ 0.04 ($ 0.03) ($ 0.01) ($ 0.01) $--
Diluted earnings (loss) per share $ (0.01) $ (0.01) $ (0.01) $ 0.05 ($ 0.03) ($ 0.01) ($ 0.02) $--
<CAPTION>
As Previously Reported Fiscal Year 1998 Fiscal Year 1999
--------------------------------------------- -------------------------------------------
(In Thousands, Except Per Share Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Data) --------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ......................... $288,182 $320,123 $330,615 $350,145 $342,538 $366,071 $394,223 $410,029
Gross profit ...................... 76,784 86,616 90,696 97,740 94,684 102,981 109,204 110,124
General and administrative ........ 42,315 50,586 49,984 77,927 48,604 49,960 51,570 63,986
expenses
Net income (loss) ................. 7,921 7,758 9,325 (9,034) 11,295 13,851 15,032 7,743
Basic earnings (loss) per ......... $ 0.12 $ 0.11 $ 0.14 ($ 0.13) $ 0.16 $ 0.20 $ 0.21 $ 0.11
share
Diluted earnings (loss) per ...... $ 0.12 $ 0.11 $ 0.13 ($ 0.13) $ 0.16 $ 0.20 $ 0.21 $ 0.11
share
</TABLE>
The following adjustments have been made to the quarterly financial statements.
Refer to Note 22, Restatements, for a further discussion of the adjustments
described below.
Other Pooled Entities
These adjustments affect all line items presented above and affect all quarters
presented above except for the fourth quarter of fiscal 1999.
Information Systems Impairment Charge
The adjustment to reverse the previously recorded impairment charge affects
general and administrative expenses and net income for the fourth quarter of
fiscal 1998. The adjustment to record the accelerated depreciation related to
the information systems affects general and administrative expenses and net
income for the first three quarters of fiscal 1999.
Restructuring Costs and Expenses
Gulf South previously recorded $1,503 of restructuring costs and expenses during
the unconsolidated 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 consolidated financial statements have been restated to
reverse the $1,503 charge as certain recognition criteria were not met. The
charge was recognized when the criteria were met, which was during the first
quarter of fiscal 1999. This adjustment affects general administrative expenses
and net income for the first quarter of fiscal 1999. There was no affect to the
Company's reported results for the fourth quarter of fiscal 1998 due to the
differing year-ends of Gulf South and the Company's method of consolidation.
Refer to Note 1, Background and Summary of Significant Accounting Policies.
F-42
<PAGE>
Accrual for Loss Contingencies
The adjustment to record the professional fees related to the Gulf South
operation tax compliance issues affects general and administrative
expenses and net income for the fourth quarter of fiscal 1998.
Operating Expenses
The adjustment to correct an error to record certain operating expenses
affects general and administrative expenses and net income for all fiscal
1998 quarters.
19. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain executive officers
which provide that in the event of their termination or resignation,
under certain conditions, the Company may be required to continue salary
payments and provide insurance for a period ranging from 12 to 36 months
for the Chief Executive Officer and from 3 to 12 months for other
executives and to repurchase a portion or all of the shares of common
stock held by the executives upon their demand at the fair market value
at the time of repurchase. The period of salary and insurance
continuation and the level of stock repurchases are based on the
conditions of the termination or resignation.
A series of related, putative class actions were filed against PSS and
two officers beginning on or about March 22, 1999. The allegations are
based on PSS' announcement that the SEC is reviewing its financial
reports for certain prior periods and that PSS would likely be required
to retroactively restate its financial statements to reflect the pre-
acquisition operating results of certain merger transactions that were
accounted for under the pooling of interest accounting method. The
actions are presently being consolidated, and a motion to dismiss will
ultimately be filed. However, the lawsuits are 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.
PSS and certain of its current officers and directors were named as
defendants in a purported securities class action lawsuit filed on or
about May 28, 1998. The allegations are based upon a decline in the PSS
stock price following announcements by PSS in May 1998 regarding the Gulf
South merger which resulted in earnings below analyst's expectations. The
Company believes that the allegations contained in the complaints are
without merit and intends to defend vigorously against the claims.
However, the lawsuit is in the early stages, and there can be no
assurances 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 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.
20. ABBOTT LABORATORIES DISTRIBUTION AGREEMENT
On March 27, 1995, the Company signed a Distribution Agreement with
Abbott Laboratories providing for the exclusive distribution of certain
Abbott diagnostic products. The Abbott Agreement, effective April 1,
1995, has a five-year term, although it may be terminated earlier if the
Company fails to meet certain performance objectives. Simultaneous with
the closing of the Abbott Agreement, Abbott purchased 825,000
unregistered, restricted shares of PSS common stock. A three-year
irrevocable proxy to the PSS Board of Directors and a perpetual stand
still agreement were provided by Abbott in the Stock Purchase Agreement.
F-43
<PAGE>
21. SUBSEQUENT EVENTS
Subsequent to year-end, the Company acquired certain assets, including
accounts receivable, inventories, and equipment of the following medical
supplies and equipment distributors accounted for under the purchase method
of accounting.
2000
----------
Number of acquisitions....................................... 8
Total consideration.......................................... $16,585
Cash paid.................................................... 13,439
Goodwill recorded............................................ 11,346
Noncompete payments.......................................... 145
Contingent consideration of approximately $644 is included in total
consideration above.
22. RESTATEMENTS
The Company has restated its historical consolidated financial statements to
include the effect of certain items as discussed below. The effect of the
restatements is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended April 3, 1998
------------------------------------------------------------------------
Information
As Systems Accrual for
Previously Impairment Loss Operating Immaterial
Reported Charge Contingencies Expenses Poolings As Restated
---------- ---------- ------------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,289,065 $ -- $ -- $ -- $92,721 $1,381,786
Net income 15,970 3,727 (1,783) (942) 580 17,552
Earnings per share:
Basic $0.23 $0.05 $(0.03) $(0.01) $0.01 $0.25
Diluted $0.23 $0.05 $(0.03) $(0.01) $0.01 $0.25
<CAPTION>
Fiscal Year Ended March 28, 1997
------------------------------------------------------
As
Previously Operating Immaterial
Reported Expenses Poolings As Restated
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $940,764 $ -- $225,522 $1,166,286
Net income 13,922 (423) 2,024 15,523
Earnings per share:
Basic $0.22 $(0.01) $0.03 $0.24
Diluted $0.21 $ -- $0.03 $0.24
</TABLE>
Information Systems Impairment Charge
The historical financial statements for the year ended April 3, 1998 and Gulf
South's results of operations for the quarter ended April 3, 1998, included an
impairment charge of $6,100 related to the Physician Business' and the Imaging
Business' information systems and $520 related to Gulf South's information
systems. Subsequently, the Company determined that the impairment charge was not
recognizable in accordance with SFAS No. 121 and that accelerated depreciation
should be recorded in accordance with APB No. 20 during fiscal 1999 and 2000. As
a result, the Company restated its consolidated financial statements for fiscal
1998 to include the effects of capitalizing the information system assets
previously considered impaired. Refer to Note 4, Charges Included in General and
Administrative Expenses, for further
F-44
<PAGE>
discussion regarding the information systems accelerated depreciation effect on
the fiscal 1999 financial statements.
Accrual for Loss Contingencies
The Gulf South division, as part of an accrual for a loss contingency,
previously recorded an accrual approximately $2,919 of professional fees during
the three months ended April 3, 1998, to conform Gulf South's accounting
policies related to contingent loss accruals to those of the Company. Refer to
Note 1, Background and Summary of Significant Accounting Policies, for the
Company's current policy regarding the inclusion of professional fees in the
Company's estimation of loss contingencies.
During fiscal 1999, the Company determined that the fees should have been
recorded at the Holding Company as opposed to the Gulf South division. Refer to
Note 4, Charges Included in General and Administrative Expenses, for a further
discussion regarding the Gulf South operational tax charges that gave rise to
the professional fee accrual. As a result, the Company restated its consolidated
financial statements to include the effects of these transactions in fiscal
1998, as shown above.
Operating Expenses
During the years ended December 31, 1997 and 1996, 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 consolidated statements of income. As
a result, Gulf South restated its historical consolidated financial statements
to include the effects of recording operating expenses as incurred and stating
goodwill and accrued merger costs and expenses.
Immaterial Poolings
The Company merged with certain medical supply and equipment distributors and
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 historical consolidated financial
statements had previously not been restated in the Company's 1998 Annual Report
on Form 10-K. 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
consolidated financial statements have been restated to include the historical
financial results of the individually immaterial pooling-of-interest
transactions for all periods prior to the date of the mergers, as shown above.
F-45
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Restated)
FOR THE YEARS ENDED MARCH 28, 1997, APRIL 3, 1998, AND April 2, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additions
--------------------------
Balance Provision
at Charged Transfers Balance
Valuation Allowance for Beginning to From at End of
Accounts Receivable of Period Expense Acquisitions Write-offs Period
- -------------------------------------- --------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended March 28, 1997 $4,035 $3,965 $883 $2,996 $5,887
Year ended April 3, 1998 5,887 3,289 447 3,619 6,004
Gulf South January 1, 1998 to April 3, 1998
activity 6,004 5,564(a) -- 1,578 9,990
Year ended April 2, 1999 9,990 5,181 332 7,670 7,833
</TABLE>
<TABLE>
<CAPTION>
Additions
-------------------------
Balance Provision
at Charged Transfers Balance
Valuation Allowance for Beginning to From at End of
Inventory Obsolescence of Period Expense Acquisitions Write-offs Period
- -------------------------------------- --------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended March 28, 1997 $ 775 $1,204 $1,938 $ 731 $3,186
Year ended April 3, 1998 3,186 1,238 1,203 2,531 3,096
Gulf South January 1, 1998 to April 3,
1998 activity 3,096 3,291(a) -- 160 6,227
Year ended April 2, 1999 6,227 801 1,019 4,604 3,443
</TABLE>
<TABLE>
<CAPTION>
Charged
To
Balance General
at & Balance
Gulf South Operational Beginning Admin. at End of
Tax Charge Reserve of Period Expense Utilizations Period
- -------------------------------------- --------- ------- ------------ ---------
<S> <C> <C> <C> <C>
Year ended March 28, 1997 $1,656 $1,998 $ -- $3,654
Year ended April 3, 1998 3,654 3,067 -- 6,721
Gulf South January 1, 1998 to April 3,
1998 activity 6,721 2,771(a) -- 9,492
Year ended April 2, 1999 9,492 -- 1,646 7,846
</TABLE>
(a) Amount represents activity recorded by Gulf South during the quarter ended
April 3, 1998, and therefore is not reflected in any of the consolidated
statements of operations presented. See Notes 1 and 3 for further
discussion of the impact of the change in Gulf South's year-end.
F-46
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on accounting
and financial disclosures during the two years ended April 2, 1999.
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by August 2, 1999 for its fiscal year 1999 Annual Meeting of
Shareholders under the caption "Directors and Executive Officers of the
Registrant."
Item 11. Executive Compensation
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by August 2, 1999 for its fiscal year 1999 Annual Meeting of
Shareholders under the caption "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by August 2, 1999 for its fiscal year 1999 Annual Meeting of
Shareholders under the caption "Beneficial Ownership of Certain
Stockholders" and "Stock Ownership of Directors and Officers."
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the Company's Definitive Proxy Statement to
be filed by August 2, 1999 for its fiscal year 1999 Annual Meeting of
Shareholders under the caption "Certain Relationships and Related
Transactions."
52
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Registration
Statement:
1. Consolidated Financial Statements
Refer to Item 8 "Financial Statements and Supplementary Data" for a listing
of the Consolidated Financial Statements included therein.
2. Supplementary Data
Refer to Item 8 "Financial Statements and Supplementary Data" for a listing
of the Supplementary Data included therein.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation dated March 15, 1994, as
amended.(12)
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 8 1/2% Senior Subordinated Note due 2007, including Form of Guarantee
(Private Notes).(2)
4.4 Form of 8 1/2% 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.(11)
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.(7)
10.8 Amended and Restated 1994 Long-Term Incentive Plan.(7)
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.9 Amended and Restated 1994 Long-Term Stock Plan.(7)
10.10 1994 Employee Stock Purchase Plan.(4)
10.11 1994 Amended Incentive Stock Option Plan.(3)
10.13 Distributorship Agreement between Abbott Laboratories and Physician Sales &
Service, Inc. (Portions omitted as confidential--Separately filed with Commission).(5)
10.14 Stock Purchase Agreement between Abbott Laboratories and Physician Sales &
Service, Inc.(5)
10.15 Amendment to Employee Stock Ownership Plan.(7)
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.(7)
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).(6)
10.17 Agreement and Plan of Merger by and Among Physician Sales & Service, Inc., PSS
Merger Corp. and Treadway Enterprises, Inc.(8)
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.(9)
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.(10)
10.20 Credit Agreement dated as of February 11, 1999 among the Company, the several
lenders from time to time hereto and NationsBank, N.A., as Agent and Issuing
Lender.(14)
23.1 Consent of Independent Certified Public Accountants
23.2 Consent of Independent Auditors
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 Annual Report on Form 10-K for
the fiscal year ended March 30, 1995.
(6) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 29, 1996.
(7) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996.
(8) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed January 3, 1997.
(9) Incorporated by Reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-33453.
(10) Incorporated by Reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-44323.
(11) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 22, 1998.
(12) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 8, 1998.
(13) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended April 3, 1998.
(14) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed February 23, 1999.
54
<PAGE>
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended April 2,
1999:
The Company reported on February 23, 1999 that it entered into a Credit
Agreement dated as of February 11, 1999 among the Company, the several lenders
from time to time thereto and NationsBank, N.A., as Agent and Issuing Lender.
The total principal amount was $140 million.
55
<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, in the City of Jacksonville, State of
Florida, on July 16, 1999.
PSS WORLD MEDICAL, INC.
By: /s/ Patrick C. Kelly
-------------------------------------
Patrick C. Kelly,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Patrick C. Kelly Chairman of the Board of Directors, Chief Executive Officer,
- ------------------------- and Director (Principal Executive Officer) July 16, 1999
Patrick C. Kelly
/s/ David A. Smith Executive Vice President, Chief Financial Officer, and Director
- ------------------------- (Principal Financial and Accounting Officer) July 16, 1999
David A. Smith
/s/ Thomas G. Hixon
- -------------------------
Thomas G. Hixon Director July 16, 1999
/s/Hugh M. Brown
- -------------------------
Hugh M. Brown Director July 16, 1999
/s/ T. O'Neal Douglas
- -------------------------
T. O'Neal Douglas Director July 16, 1999
/s/ Melvin L. Heckman
- -------------------------
Melvin L. Heckman Director July 16, 1999
/s/Delores Kesler
- -------------------------
Delores Kesler Director July 16, 1999
/s/Charles R. Scott
- -------------------------
Charles R. Scott Director July 16, 1999
/s/ James L.L. Tullis
- -------------------------
James L.L. Tullis Director July 16, 1999
/s/Donna Williamson
- -------------------------
Donna Williamson Director July 16, 1999
</TABLE>
56
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation by reference of our report dated July 15, 1999 included in this
Form 10-K into the Company's previously filed Registration Statement File Nos.
33-80657, 33-90464, 333-15043, 333-15107, 333-64185, 33-85004, 33-97756,
33-99046, 33-97754, 333-30427, and 333-64187.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
July 16, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-80657, 33-90464, 333-15043, 333-15107, 333-64185, 33-85004,
33-997756, 33-99046, 33-97754, 333-30427, and 333-64187) of PSS World Medical,
Inc., of our report dated June 30, 1998, except for Note 22, as to which the
date is July 9, 1999, included in PSS World Medical, Inc.'s Annual Report on
Form 10-K for the year ended April 2, 1999, with respect to the consolidated
financial statements of Gulf South Medical Supply, Inc. as of December 31, 1997
and for each of the two years then ended (not presented separately therein).
ERNST & YOUNG LLP
Jackson, Mississippi
July 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Comany's
Form 10-K for the period ended April 2, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> APR-02-1999 APR-03-1998
<PERIOD-START> APR-04-1998 MAR-29-1997
<PERIOD-END> APR-02-1999 APR-03-1998
<CASH> 41,106 81,483
<SECURITIES> 3 81,550
<RECEIVABLES> 280,829 219,873
<ALLOWANCES> (7,883) (6,004)
<INVENTORY> 153,626 126,926
<CURRENT-ASSETS> 527,846 549,679
<PP&E> 80,845 53,220
<DEPRECIATION> (32,678) (21,747)
<TOTAL-ASSETS> 743,381 691,254
<CURRENT-LIABILITIES> 171,268 168,499
<BONDS> 152,442 134,057
0 0
0 0
<COMMON> 708 702
<OTHER-SE> 418,852 383,875
<TOTAL-LIABILITY-AND-EQUITY> 743,381 691,254
<SALES> 1,564,505 1,381,786
<TOTAL-REVENUES> 1,564,505 1,381,786
<CGS> 1,142,597 1,015,350
<TOTAL-COSTS> 1,142,597 1,015,350
<OTHER-EXPENSES> 348,055 330,668
<LOSS-PROVISION> 5,181 3,289
<INTEREST-EXPENSE> 11,522 7,517
<INCOME-PRETAX> 73,681 36,349
<INCOME-TAX> 29,940 18,797
<INCOME-CONTINUING> 43,741 17,552
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 43,741 17,552
<EPS-BASIC> 0.62 0.25
<EPS-DILUTED> 0.61 0.25
</TABLE>
