39
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-23832
PSS WORLD MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2280364
(State or other jurisdiction (IRS employer
of incorporation) identification number)
4345 Southpoint Blvd.
Jacksonville, Florida 32216
(Address of principal executive offices) (Zip code)
Registrant's telephone number (904) 332-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of February 8, 1999 a total of 71,056,941 shares of common stock,
par value $.01 per share, of the registrant were outstanding.
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
----------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1--Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and April 3, 1998, (Restated) 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended December 31, 1998 and 1997, (Restated) 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1998 and 1997, (Restated) 5
Notes to Condensed Consolidated Financial Statements -
December 31, 1998 and 1997, (Restated) 6
Item 2--Management's Discussion and Analysis of
Financial Condition and Results of Operations (Restated) 23
PART II: OTHER INFORMATION
Item 1--Legal Proceedings 35
Item 2--Changes in Securities and Use of Proceeds 36
Item 6--Exhibits and Reports on Form 8-K 37
SIGNATURES 39
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1.--FINANCIAL STATEMENTS
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
ASSETS
December 31, April 3,
1998 1998
(Restated) (Restated)
------------ ----------
(Unaudited) *
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 58,734 $ 81,483
Marketable securities 476 81,550
Accounts receivable, net 263,473 213,869
Inventories, net 135,502 126,926
Employee advances 519 442
Prepaid expenses and other 55,762 45,409
------------ ----------
Total current assets 514,466 549,679
Property and equipment, net 43,019 31,473
Other Assets:
Intangibles, net 134,429 90,608
Other 19,464 19,494
------------ ----------
Total assets $ 711,378 $ 691,254
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 107,176 $ 109,790
Accrued expenses 45,631 48,081
Current maturities of long-term debt and capital lease obligations 1,749 3,570
Other 18,681 7,058
------------ ----------
Total current liabilities 173,237 168,499
Long-term debt and capital lease obligations, net of current portion 129,311 134,057
Other 1,206 4,121
------------ ----------
Total liabilities 303,754 306,677
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued -- --
and outstanding
Common stock, $.01 par value; 150,000,000 shares authorized, 70,707,166 and
70,171,909 shares issued and outstanding at December 31, 1998 and April 3,
1998, respectively 707 702
Additional paid-in capital 348,437 341,987
Retained earnings 62,468 46,021
Cumulative other comprehensive income (1,197) (1,296)
------------ ----------
410,415 387,414
Unearned ESOP Shares (2,791) (2,837)
------------ ----------
Total shareholders' equity 407,624 384,577
------------ ----------
Total liabilities and shareholders' equity $ 711,378 $ 691,254
============ ==========
</TABLE>
*Condensed from audited financial statements.
The accompanying notes are an integral part of these
condensed consolidated statements.
3
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 399,547 $ 353,642 $ 1,154,475 $ 1,013,197
Cost of goods sold 289,862 259,365 842,691 747,259
------------ ------------ ------------ ------------
Gross profit 109,685 94,277 311,784 265,938
General and administrative expenses 53,913 53,376 160,746 153,744
Selling expenses 32,484 26,330 88,953 74,626
------------ ------------ ------------ ------------
Income from operations 23,288 14,571 62,085 37,568
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (2,701) (2,837) (8,834) (3,972)
Interest and investment income 506 2,029 3,651 3,424
Other income 1,819 957 3,839 2,128
------------ ------------ ------------ ------------
(376) 149 (1,344) 1,580
------------ ------------ ------------ ------------
Income before provision for income taxes 22,912 14,720 60,741 39,148
Provision for income taxes 9,090 5,990 24,744 15,638
------------ ------------ ------------ ------------
Net income $ 13,822 $ 8,730 $ 35,997 $ 23,510
============ ============ ============ ============
Earnings per share:
Basic $0.20 $0.12 $0.51 $0.34
============ ============ ============ ============
Diluted $0.19 $0.12 $0.50 $0.34
============ ============ ============ ============
Weighted average shares outstanding (in thousands):
Basic 70,615 69,949 70,481 69,238
============ ============ ============ ============
Diluted 72,118 71,108 71,731 70,151
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
4
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 35,997 $ 23,510
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 15,426 8,230
Provision for doubtful accounts 2,213 1,104
Merger and other non-recurring costs and expenses 1,181 6,997
Deferred compensation 222 --
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Accounts receivable, net (41,518) (21,765)
Inventories 9,549 (10,078)
Prepaid expenses and other current assets (1,129) (1,946)
Other assets (2,627) (3,781)
Accounts payable, accrued expenses and other liabilities (29,889) 2,284
------------ ------------
Net cash (used in) provided by operating activities (10,575) 4,555
------------ ------------
Cash Flows From Investing Activities:
Purchases, maturities, and sales of marketable securities, net 74,574 (44,750)
Capital expenditures (16,632) (7,577)
Purchases of businesses, net of cash acquired (55,678) (7,691)
Payments on noncompete agreements (2,032) (2,959)
------------ ------------
Net cash provided by (used in) investing activities 232 (62,977)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from public debt offering, net of debt issue cost -- 119,459
Repayments of borrowings (16,044) (55,112)
Principal payments under capital lease obligations (299) --
Proceeds from issuance of common stock 3,838 2,482
------------ ------------
Net cash (used in) provided by financing activities (12,505) 66,829
------------ ------------
Foreign currency translation adjustment 99 167
------------ ------------
Net (decrease) increase in cash and cash equivalents (22,749) 8,574
Cash and cash equivalents, beginning of period 81,483 41,106
------------ ------------
Cash and cash equivalents, end of period $ 58,734 $ 49,680
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
5
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
NOTE 1--BASIS OF PRESENTATION
The condensed consolidated financial statements of PSS World Medical, Inc.
("PSS" or the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position and results of operations for
the periods indicated and give retroactive effect to the mergers with Medical
Imaging Systems, Inc. ("MIS") and TriStar Imaging Systems, Inc. ("TriStar")
acquired during fiscal 1999 and various acquired companies previously accounted
for as immaterial pooling-of-interests transactions (the "Pooled Entities").
These transactions were accounted for under the pooling-of-interests method of
accounting, and accordingly, the accompanying condensed consolidated financial
statements have been retroactively restated as if PSS, MIS, TriStar, and the
Pooled Entities had operated as one entity since inception.
The Company's previously issued financial statements included in Form 10Q for
the three and nine months ended December 31, 1998 were not restated for: (1) the
information systems accelerated depreciation, (2) the reversal of Gulf South
Medical Supply, Inc. ("Gulf South") restructuring charge, (3) the reversal of
Gulf South direct transaction costs and (4) the immaterial Pooled Entities
(refer to Note 10--Restatements). In addition, the financial statements for the
three and nine months ended December 31, 1997 were not restated for: (1) a
correction of an error in recording certain operating expenses at Gulf South,
and (2) the immaterial Pooled Entities (refer to Note 10--Restatements).
The Company's fiscal year ends on the Friday closest to March 31 of each year.
Prior to April 4, 1998, Gulf South's year-end was December 31. The three and
nine months ended September 30, 1997 of Gulf South were consolidated with the
three and nine months ended December 31, 1997 of the Company. In addition, Gulf
South's balance sheet as of December 31, 1997 was consolidated with PSS' balance
sheet as of April 3, 1998. Effective April 4, 1998, Gulf South's fiscal year-end
was changed to conform to the Company's year-end. As such, Gulf South's results
of operations for the period January 1, 1998 to April 3, 1998 are not included
in any of the periods presented in the accompanying condensed consolidated
statements of income. Accordingly, Gulf South's results of operations for the
three months ended April 3, 1998 are reflected as an adjustment to shareholders'
equity of the Company as of April 4, 1998. Refer to the section titled Gulf
South's Results of Operations for the Three Months Ended April 3, 1998 and March
31, 1997 included in Management's Discussion and Analysis of Results of
Operations for further clarification. The Company's three and nine months ended
December 31, 1998 condensed consolidated financial statements include the
combined results of operations for the period from April 4, 1998 to December 31,
1998, of both PSS and Gulf South. The following table provides a rollforward of
retained earnings from April 3, 1998 to December 31, 1998:
Rollforward
of
Retained
Earnings
-----------
(Restated)
Retained earnings, 4/3/98............................... $46,021
Gulf South results of operations, 1/1/98 to 4/3/98...... (19,550)
-----------
Retained earnings, 4/4/98............................... 26,471
Net income for the nine months ended 12/31/98........... 35,997
-----------
Retained earnings, 12/31/98............................. $62,468
===========
6
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
The accompanying condensed consolidated financial statements should be read in
conjunction with the financial statements and related notes in the Company's
1999 Annual Report on Form 10-K/A. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to the Securities and
Exchange Commission rules and regulations.
Financial statements for the Company's subsidiary outside the United States are
translated into U.S. dollars at quarter-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded in the other comprehensive income
component of shareholders' equity.
The results of operations for the interim periods covered by this report may not
necessarily be indicative of operating results for the full fiscal year. Certain
items have been reclassified to conform to the current year presentation.
NOTE 2--BUSINESS ACQUISITIONS
Pooling-of-Interests Transaction
During the three months ended December 31, 1998, the Company merged with TriStar
Imaging Systems, Inc. ("TriStar"), an imaging supply and equipment distributor
with aggregate annual revenues of approximately $40.0 million, in a merger
accounted for under the pooling-of-interests method. The Company issued
approximately 294,000 shares of PSS common stock in connection with this
pooling. The accompanying condensed consolidated financial statements have been
retroactively restated as if PSS and TriStar had operated as one entity since
inception.
Purchase Acquisitions
During the three months ended December 31, 1998, the Company acquired certain
assets and assumed certain liabilities of two imaging supply and equipment
distributors and the common stock of two additional imaging supply and equipment
distributors. A summary of the details of the transactions follows:
December 31,
1998
------------
Number of acquisitions..................................... 4
Total consideration........................................ $17,397
Cash paid, net of cash acquired............................ 11,150
Goodwill recorded.......................................... 9,855
Value of Noncompete Agreements............................. 45
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 the beginning of
the year, is not provided, as the results would not be materially different from
the Company's reported results of operations.
7
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
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 30 years.
The accompanying condensed consolidated financial statements reflect the
preliminary allocation of the purchase price. The allocation of the purchase
price, performed using values and estimates available as of the date of the
financial statements, has not been finalized due to certain pre-acquisition
contingencies identified by the Company and the nature of the estimates required
in the establishment of the Company's merger integration plans. Accordingly,
goodwill associated with these acquisitions may increase or decrease in fiscal
1999.
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.
During the three months ended December 31, 1998 and 1997, no adjustments were
made to goodwill.
NOTE 3--CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES
In addition to typical general and administrative expenses, this line includes
charges related to merger activity, restructuring activity, and other special
items. The following table summarizes charges included in general and
administrative expenses in the accompanying consolidated statements of income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(restated) (restated) (restated) (restated)
<S> <C> <C> <C> <C>
Merger costs and expenses........................... $ (16) $3,810 $ 470 $ 5,696
Restructuring costs and expenses.................... 498 -- 3,009 --
Information systems accelerated depreciation........ 1,814 -- 4,323 --
Gulf South operational tax charge................... -- 767 -- 2,301
Other charges....................................... 1,005 -- 1,005 2,457
------------ ------------ ------------ ------------
Total charges included in continuing operations..... $ 3,301 $4,577 $ 8,807 $ 10,454
============ ============ ============ ============
</TABLE>
Merger Costs and Expenses
The Company's policy is to accrue merger costs and expenses at the commitment
date of an integration plan if certain criteria under EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity ("EITF 94-3") or 95-14, Recognition of Liabilities in Anticipation of a
Business Combination ("EITF 95-14"), are met. Merger costs and expenses recorded
at the commitment date primarily include charges for involuntary employee
termination costs, branch shut-down costs, lease termination costs, and other
exit costs.
8
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
If the criteria described in EITF 94-3 or EITF 95-14 are not met, the Company
records merger costs and expenses as incurred. Merger costs expensed as incurred
include the following: (1) costs to pack and move inventory from one facility to
another or within a facility in a consolidation of facilities, (2) relocation
costs paid to employees in relation to an acquisition accounted for under the
pooling-of-interests method of accounting, (3) systems or training costs to
convert the acquired companies to the current existing information system, (4)
training costs related to conforming the acquired companies operational policies
to that of the Company's operational policies, and (5) direct transaction costs
primarily consisting of investment banking, legal, accounting, and filing fees
related to mergers with the Company. In addition, amounts incurred in excess of
the original amount accrued at the commitment date are expensed as incurred.
Merger costs and expenses for the three months ended December 31, 1998 include
$136 of charges for merger costs expensed as incurred, which primarily related
to direct transaction costs from the merger with TriStar. In addition, the
Company reversed $152 of merger costs and expenses into income, which related to
deferred compensation forfeited by terminated employees in relation to mergers.
During the three months ended December 31, 1997, the Company recorded $1,677 of
merger costs related to integration plans adopted by management and $434 of
direct transaction costs expensed as incurred. In addition, merger costs and
expenses include amounts incurred in excess of the original amounts accrued at
commitment dates. Such costs include involuntary employee termination costs and
branch shut-down costs of $1,201 and $498, respectively.
Restructuring Costs and Expenses
Restructuring costs and expenses for the three months ended December 31, 1998
include $103 of charges for training costs related to conforming the acquired
companies operation policies to that of the Company's operational policies. The
remaining $395 of restructuring costs and expenses recorded are charges for
other exit costs expensed as incurred. Other exit costs include costs to pack
and move inventory, costs to set up new facilities, employee relocation costs,
and other related facility closure costs.
Information Systems Accelerated Depreciation
In connection with the Gulf South merger during fiscal 1998, management
evaluated the adequacy of the combined companies' information systems. The
Company concluded that its existing information systems were not compatible with
those of Gulf South's and not adequate to support the future internal growth of
the combined companies and expected growth resulting from future acquisitions.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, the Company evaluated the recoverability of the information
system assets. Based on the Company's analysis, impairment did not exist at the
division level; therefore, management reviewed the depreciation estimates in
accordance with Accounting Principles Board ("APB") No. 20, Accounting Changes.
Effective April 4, 1998, the estimated useful lives of the PSS, DI, and GSMS
division information systems were revised to a range of 12 to 15 months, which
was the original estimate of when the new systems implementation would be
completed. For the three and nine months ended December 31, 1998, the $1,814 and
$4,323 of charges, respectively, represent the incremental impact on
depreciation expense resulting from management's decision to replace its
information systems.
9
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
Gulf South Operational Tax Charge
The Company, in connection with the filing of its fiscal 1998 financial
statements, restated for certain operational tax compliance issues in the
financial statements of Gulf South for the year ended December 31, 1997. As
such, Gulf South recorded operational charges of $767 and $2,310 during the
three months and nine months ended December 31, 1997, respectively, primarily
related to state and local, sales and use, and property taxes that are normally
charged directly to the customer at no cost to the Company. Interest is included
in the above charges as Gulf South did not timely remit payments to tax
authorities. The Company reviewed all available information, including tax
exemption notices received, and recorded charges to expense, during the period
in which the tax noncompliance issues arose.
Other Charges
During the three and nine months ended December 31, 1998, the Company incurred
approximately $1,005 of costs related to acquisitions not consummated.
NOTE 4--ACCRUED MERGER AND RESTRUCTURING COSTS AND EXPENSES
Summary of Accrued Merger Costs and Expenses
In connection with the consummation of business combinations, management often
develops formal plans to exit certain activities, involuntarily terminate
employees, and relocate employees of the acquired companies. Management's plans
to exit an activity often include identification of duplicate facilities for
closure and identification of facilities for consolidation into other
facilities.
Generally, completion of the integration plans will occur within one year from
the date in which the plans were formalized and adopted by management. However,
intervening events occurring prior to completion of the plan, such as subsequent
acquisitions or system conversion issues, can significantly impact a plan that
had been previously established. Such intervening events may cause modifications
to the plans and are accounted for on a prospective basis. At the end of each
quarter, management reevaluates its integration plans and adjusts previous
estimates.
As part of the integration plans, certain costs are recognized at the date in
which the plan is formalized and adopted by management (commitment date). These
costs are generally related to employee terminations and relocation, lease
terminations, and branch shutdown. In addition, there are certain costs that do
not meet the criteria for accrual at the commitment date and are expensed as the
plan is implemented (refer to Note 3--Charges Included in General and
Administrative Expenses). Involuntary employee termination costs are employee
severance costs and termination benefits. Lease termination costs are lease
cancellation fees and forfeited deposits. Branch shutdown costs include costs
related to facility closure costs. Employee relocation costs are moving costs of
employees of an acquired company in transactions accounted for under the
purchase method of accounting.
Accrued merger costs and expenses, classified as accrued expenses in the
accompanying consolidated balance sheets, were $1,312 and $4,327, at December
31, 1998 and April 3, 1998, respectively. The discussion and rollforward of the
accrued merger costs and expenses below summarize the significant and
nonsignificant integration plans adopted by management for business combinations
accounted for under the purchase method of accounting and pooling-of-interests
method of accounting. Integration plans are considered to be significant if the
charge recorded to establish the accrual is in excess of 5% of consolidated
pretax income.
10
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
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 April 3, 1998................................. $ 156 $ 540 $ 461 $ 1,157
Additions............................................. -- -- -- --
Utilized.............................................. (2) -- (143) (145)
----------- ----------- ----------- ----------
Balance at June 30, 1998................................. 154 540 318 1,012
Adjustments -- -- -- --
Additions............................................. -- -- -- --
Utilized.............................................. -- -- (138) (138)
----------- ----------- ----------- ----------
Balance at September 30, 1998............................ 154 540 180 874
Adjustments........................................... -- -- -- --
Additions............................................. -- -- -- --
Utilized.............................................. -- -- (69) (69)
----------- ----------- ----------- ----------
Balance at December 31, 1998............................. $ 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 December 31, 1998, one
employee has been terminated and the remaining four employees are estimated to
be terminated by the end of the third quarter of fiscal 2000. Management
identified seven distribution facilities to be closed and all operations would
be ceased due to duplicative functions. Three of the seven identified
distribution facilities had been shut down by December 31, 1998, with the
remaining four locations estimated to be shut down by the second quarter of
fiscal 2000. Included in branch shutdown costs are costs related to contractual
obligations that existed prior to the merger date but will provide no ongoing
value to the Company.
11
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
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 seven nonsignificant pooling-of-interests business
combinations completed during fiscal 1997 through the nine months ended December
31, 1998, respectively, is as follows:
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at April 3, 1998................................. $ 165 $ 253 $ 518 $ 936
Adjustments.......................................... -- -- -- --
Additions............................................ 74 -- 126 200
Utilized............................................. (17) (117) (280) (414)
----------- ----------- ----------- ----------
Balance at June 30, 1998................................. 222 136 364 722
Adjustments.......................................... -- -- -- --
Additions............................................ -- -- -- --
Utilized............................................. (2) (57) (313) (372)
----------- ----------- ----------- ----------
Balance at September 30, 1998............................ 220 79 51 350
Adjustments.......................................... -- -- -- --
Additions............................................ -- -- -- --
Utilized............................................. (2) (63) (51) (116)
----------- ----------- ----------- ----------
Balance at December 31, 1998............................. $ 218 $ 16 $ -- $ 234
=========== =========== =========== ==========
</TABLE>
The Imaging Business acquired MIS in June 1998, and management formalized and
adopted an integration plan in June 1998 to integrate the operations of the
acquired company. Approximately $68 of accrued merger costs and expenses at
December 31, 1998 relate to this integration plan. Involuntary employee
termination costs are costs for six employees, including severance and benefits,
who represent duplicative functions in the accounting, purchasing, and computer
support departments at the acquired company's corporate office. As of December
31, 1998, one employee had been terminated. Management identified one
distribution facility to be closed in which all operations would be ceased due
to duplicative functions. The Company expects closure of this facility to occur
in the second quarter of fiscal 2000.
12
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
Significant Purchase Business Combination Plan
The Company formalized and adopted an integration plan in September 1997 to
integrate the operations of General X-Ray, Inc. ("GXI") with the Imaging
Business. The following accrued merger costs and expenses were recognized and
additional goodwill was recorded at the commitment date. A summary of the GXI
merger accruals is as follows:
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch
Relocation Termination Termination Shutdown
Costs Costs Costs Costs Total
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at April 3, 1998.................. $ 162 $ 197 $ 1,090 $ 785 $ 2,234
Adjustments -- -- -- -- --
Additions............................. -- -- -- -- --
Utilized.............................. (2) -- (60) (90) (152)
---------- ----------- ----------- ---------- ----------
Balance at June 30, 1998................. 160 197 1,030 695 2,082
Adjustments (125) (85) (883) (32) (1,125)
Additions............................. -- -- -- -- --
Utilized.............................. (35) (3) (81) (663) (782)
---------- ----------- ----------- ---------- ----------
Balance at September 30, 1998............ -- 109 66 -- 175
Adjustments -- -- -- -- --
Additions............................. -- -- -- -- --
Utilized.............................. -- (109) (66) -- (175)
---------- ----------- ----------- ---------- ----------
Balance at December 31, 1998............. $ -- $ -- $ -- $ -- $ --
========== =========== =========== ========== ==========
</TABLE>
The Company identified nine distribution facilities to be closed and all
operations would be ceased due to duplicative functions. As of December 31, 1998
all facilities have been closed and operations have ceased. Relocation costs
were recorded related to the transfer of approximately 15 GXI employees. As of
December 31, 1998, all employees were relocated. Involuntary employee
termination costs are costs for 19 employees, including severance and benefits,
who represent duplicative functions as service and operations leaders, customer
service representatives, and accounting personnel at locations where facilities
would be combined. As of December 31, 1998, six employees have been terminated
and the remaining 13 employees are estimated to be terminated by the end of
fiscal 1999, with additional costs and expenses expensed as incurred.
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.
13
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
Nonsignificant Purchase Business Combination Plans
The following accrued merger costs and expenses were recognized and additional
goodwill was recorded at the date in which the integration plans were formalized
and adopted by management. A summary of the merger activity related to four
nonsignificant purchase business combinations during fiscal 1997 through the
nine months ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch
Relocation Termination Termination Shutdown
Costs Costs Costs Costs Total
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at April 3, 1998................... $ -- $ -- $ -- $ -- $ --
Additions from Gulf South subsidiary.... -- 102 100 250 452
---------- ----------- ----------- ---------- ----------
Balance at April 4, 1998................... -- 102 100 250 452
Adjustments............................. -- -- -- -- --
Additions............................... -- -- -- -- --
Utilized................................ -- (11) (2) -- (13)
---------- ----------- ----------- ---------- ----------
Balance at June30, 1998.................... -- 91 98 250 439
Adjustments............................. 100 -- 246 401 747
Additions............................... -- -- -- -- --
Utilized................................ -- -- (22) (1) (23)
---------- ----------- ----------- ---------- ----------
Balance at September 30, 1998.............. 100 91 322 650 1,163
Adjustments............................. -- -- -- -- --
Additions............................... -- -- -- -- --
Utilized................................ (24) -- (8) (635) (667)
---------- ----------- ----------- ---------- ----------
Balance at December 31, 1998............... $ 76 $ 91 $ 314 $ 15 $ 496
========== =========== =========== ========== ==========
</TABLE>
The additions from the Gulf South subsidiary represent the additions of the
accrued merger costs and expenses recorded by Gulf South during the period
January 1 to April 3, 1998. No amounts were utilized during this period. Gulf
South formalized and adopted an integration plan during the period January 1 to
April 3, 1998. Approximately $413 of the $496 accrued merger costs and expenses
at December 31, 1998 relate to this integration plan. Involuntary employee
termination costs are costs for 23 employees, including severance and benefits,
who represent duplicative functions in the accounting, purchasing, human
resource, warehouse and computer support departments at locations where
facilities were combined into existing facilities. As of December 31, 1998, 17
employees have been terminated. Management identified two distribution
facilities to be closed in which all operations would be ceased due to
duplicative functions, both of which had been shut down by December 31, 1998.
Included in branch shutdown costs are costs related to contractual obligations
that existed prior to the merger date but will provide no ongoing value to the
Company.
The Imaging Business acquired a company in September 1998 and management
formalized and adopted an integration plan during the three months ended
September 30, 1998 to integrate the operations of the acquired company.
Approximately $83 of the $496 accrued merger costs and expenses at December 31,
1998 relate to this integration plan. Relocation costs are for four employees
all of whom have been relocated as of December 31, 1998. Management identified
five distribution facilities to be closed in which all operations would be
ceased due to duplicative functions, none of which had been shut down by
December 31, 1998. Included in branch shutdown costs are costs related to
contractual obligations that existed prior to the merger date but will provide
no ongoing value to the Company. Management anticipates this integration plan
will be completed during fiscal 2000; however, lease termination payments will
extend through fiscal 2003.
14
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
Summary of Accrued Restructuring Costs and Expenses
Primarily as a result of the impact of the Gulf South merger, in order to
improve customer service, reduce costs, and improve productivity and asset
utilization, the Company decided to realign and consolidate its operations.
Accordingly, the Company began implementing a restructuring plan during the
fourth quarter of fiscal 1998 which impacted all divisions ("Plan A").
Subsequently, the Company adopted a second restructuring plan during the three
months ended June 30, 1998 related to the Gulf South division ("Plan B") to
further consolidate its operations.
The Company recorded a total accrual of $7,972 related to Plan A. Approximately
$3,691 of the $7,972 total restructuring charge was related to the PSS and DI
divisions and was recorded in the accompanying 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 consolidated
statements of operations; rather it is included in the retained earnings
adjustment recorded on April 4, 1998. Refer to Note 1, Basis of Presentation,
for a discussion regarding the different year-ends of Gulf South and the
Company.
Accrued restructuring costs and expenses, classified as accrued expenses in the
accompanying consolidated balance sheets, were $5,039 and $3,691, at December
31, 1998 and April 3, 1998, respectively. A summary of the restructuring plan
activity is as follows:
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch Other
Termination Termination Shutdown Exit
Costs Costs Costs Costs Total
------------ ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at April 3, 1998....................... $ 1,570 $ 1,389 $ 627 $ 105 $ 3,691
Additions from Gulf South subsidiary........ 1,880 406 1,455 540 4,281
------------ ----------- ----------- --------- --------
Balance at April 4, 1998....................... 3,450 1,795 2,082 645 7,972
Adjustments................................. -- -- -- -- --
Additions................................... 652 570 281 -- 1,503
Utilized.................................... (842) (191) (857) (159) (2,049)
------------ ----------- ----------- --------- --------
Balance at June 30, 1998....................... 3,260 2,174 1,506 486 7,426
Adjustments................................. -- -- -- -- --
Additions................................... -- -- -- -- --
Utilized.................................... (233) (237) -- (262) (732)
------------ ----------- ----------- --------- --------
Balance at September 30, 1998.................. 3,027 1,937 1,506 224 6,694
Adjustments................................. -- -- -- -- --
Additions................................... -- -- -- -- --
Utilized.................................... (1,075) (335) (159) (86) (1,655)
------------ ----------- ----------- --------- --------
Balance at December 31, 1998................... $ 1,952 $ 1,602 $ 1,347 $ 138 $ 5,039
============ =========== =========== ========= ========
</TABLE>
15
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
Plan A
Restructuring Plan A impacted all divisions, and involved merging 18 locations
into existing locations and eliminating overlapping regional operations and
management functions. As of December 31, 1998, 17 locations were merged into
existing locations. The plan also included the termination of approximately 270
employees from operations, administration, and management. As of December 31,
1998, 192 employees were terminated as a result
of the plan. Furthermore, branch shutdown costs include the costs to implement
Best Practice Warehousing at the Gulf South division in order to provide
efficient, consistent, standard service to Gulf South customers similar to the
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.
Costs were estimated based upon the size of the warehouses.
Plan B
During the first quarter of fiscal 1999, the Company established an additional
accrual of $1,503 related to Plan B. Restructuring Plan B related only to the
Gulf South division, and involved merging six additional locations into existing
locations. As a result of the consolidation of the duplicate facilities, lease
termination costs will be incurred through fiscal 2000. At December 31, 1998,
three of the six locations had been shut down. The plan also included the
termination of three employees from operations and management. As of December
31, 1998, no employees were terminated as a result of the plan.
NOTE 5--COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, which defines
comprehensive income as net income plus direct adjustments to shareholders'
equity. The cumulative translation adjustment of certain foreign entities is the
only such direct adjustment recorded by the Company during the three months and
nine months ended December 31, 1998 and 1997, as detailed in the following
table:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(restated) (restated) (restated) (restated)
<S> <C> <C> <C> <C>
Net income.......................................... $ 13,822 $ 8,730 $ 35,997 $ 23,510
============ ============ ============ ============
Other comprehensive income, net of tax:
Foreign currency translation adjustment.......... 20 (172) 99 (791)
------------ ------------ ------------ ------------
Comprehensive income................................ $ 13,842 $ 8,558 $ 36,096 $ 22,719
============ ============ ============ ============
</TABLE>
16
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
NOTE 6--EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, the calculation of basic
earnings per common share and diluted earnings per common share is presented
below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(restated) (restated) (restated) (restated)
<S> <C> <C> <C> <C>
Net income.......................................... $ 13,822 $ 8,730 $ 35,997 $ 23,510
============ ============ ============ ============
Earnings per share:
Basic............................................ $0.20 $0.12 $0.51 $0.34
============ ============ ============ ============
Diluted.......................................... $0.19 $0.12 $0.50 $0.34
============ ============ ============ ============
Weighted average shares outstanding (in thousands):
Common shares.................................... 70,615 69,949 70,481 69,238
Assumed exercise of stock options and warrants... 1,503 1,159 1,250 913
------------ ------------ ------------ ------------
Diluted shares outstanding....................... 72,118 71,108 71,731 70,151
============ ============ ============ ============
</TABLE>
NOTE 7--SEGMENT INFORMATION
The Company has adopted SFAS No. 131, Disclosure About Segments of an Enterprise
and Related Information, which establishes the way public companies report
information about segments. SFAS No. 131 requires segment reporting in interim
periods and disclosures regarding products and services, geographic areas, and
major customers.
The Company's reportable segments are strategic businesses that offer different
products and services to different segments of the health care industry, and are
based upon how management regularly evaluates the Company. These segments are
managed separately because of different customers and products. These segments
include Physician Sales & Service Division (the "Physician Supply Business"),
Diagnostic Imaging, Inc. (the "Imaging Business"), Gulf South Medical Supply,
Inc. (the "Long-Term Care Business"), and WorldMed International, Inc.
("WorldMed Int'l") combined with the Holding Company.
The Physician Supply Business is a distributor of medical supplies, equipment
and pharmaceuticals to primary care and other office-based physicians in the
United States. The Imaging Business is a distributor of medical diagnostic
imaging supplies, chemicals, equipment, and service to the acute and alternate
care markets in the United States. The Long-Term Care Business is a distributor
of medical supplies and other products to the long-term care market. WorldMed
Int'l along with WorldMed, Inc. manages and develops PSS' European medical
equipment and supply distribution market.
17
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
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:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, December 31,
1998 1998
------------ ------------
<S> <C> <C>
NET SALES:
Physician Supply Business $ 168,620 $ 506,956
Imaging Business 136,836 372,795
Long-Term Care Business 85,040 255,993
Other (a) 9,051 18,731
------------ ------------
Total net sales $ 399,547 $ 1,154,475
============ ============
INCOME FROM OPERATIONS:
Physician Supply Business $ 12,614 $ 33,788
Imaging Business 6,266 13,958
Long-Term Care Business 5,474 16,577
Other (a) (1,066) (2,238)
------------ ------------
Total income from operations $ 23,288 $ 62,085
============ ============
DEPRECIATION:
Physician Supply Business $ 1,973 $ 5,739
Imaging Business 1,126 2,648
Long-Term Care Business 368 1,029
Other (a) 50 225
------------ ------------
Total depreciation $ 3,517 $ 9,641
============ ============
AMORTIZATION OF INTANGIBLE AND OTHER ASSETS:
Physician Supply Business $ 506 $ 2,190
Imaging Business 1,124 2,292
Long-Term Care Business 448 1,303
Other (a) -- --
------------ ------------
Total amortization of intangible assets $ 2,078 $ 5,785
============ ============
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business $ 739 $ 1,052
Imaging Business 150 291
Long-Term Care Business 46 354
Other (a) 241 516
------------ ------------
Total provision for doubtful accounts $ 1,176 $ 2,213
============ ============
</TABLE>
(a) Other includes the holding company and the international subsidiaries.
18
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, December 31,
1998 1998
------------ ------------
<S> <C> <C>
CAPITAL EXPENDITURES:
Physician Supply Business $ 4,297 $ 10,047
Imaging Business 2,057 5,370
Long-Term Care Business 492 1,307
Other (a) (195) (92)
------------ ------------
Total capital expenditures $ 6,651 $ 16,632
============ ============
December 31, April 3,
1998 1998
------------ ------------
ASSETS:
Physician Supply Business $ 268,124 $ 320,216
Imaging Business 241,253 158,698
Long-Term Care Business 188,795 196,306
Other (a) 13,206 16,034
------------ ------------
Total capital expenditures $ 711,378 $ 691,254
============ ============
</TABLE>
(a) Other includes the holding company and the international subsidiaries.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Gulf South and certain of its former officers and directors were named as
defendants in two purported class action lawsuits filed on July 21, 1997 related
to disclosures made in the prospectus issued by Gulf South in connection with
its public offering of common stock during 1996. The Company believes that the
allegations contained in the complaints are without merit and intends to defend
vigorously against the claims. However, there can be no assurance that this
litigation will ultimately be resolved on terms that are favorable to the
Company.
In May 1998, the Company and certain of its present directors and officers were
named as defendants in a purported securities class action lawsuit related to
alleged damages suffered by purchasers of the Company's common stock during the
period from December 23, 1997 to May 8, 1998. The claimant seeks an unspecified
amount of damages, including costs and expenses. The Company believes this
lawsuit is without merit and intends to defend it vigorously. The Defendants
filed their motion to dismiss on January 25, 1999. However, this lawsuit is in
its early stages and there can be no assurances that this litigation will
ultimately be resolved on terms that are favorable to the Company.
The Company is named as a defendant in a purported patent infringement claim. In
this lawsuit, the claimant alleges that the urinalysis test strips sold by the
Company under the Penny Saver(TM) label infringe certain patents. The Company is
contesting the claim of infringement and has obtained a written agreement from
the manufacturer of the product indemnifying the Company for the costs of
defense of the suit and for the underlying liability. In addition, the Company
has indemnity rights against the U.S. a distributor of the product pursuant to
its vendor agreement. The parties are currently in settlement negotiations,
however, the Company believes that there will be a favorable settlement within
the next 45 days.
19
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
Although the Company does not manufacture products, the distribution of medical
supplies and equipment entails inherent risks of product liability. The Company
has not experienced any significant product liability claims and maintains
product liability insurance coverage. In addition, the Company is party to
various legal and administrative proceedings and claims arising in the normal
course of business.
While any litigation contains an element of uncertainty, management believes
that the outcome of any proceedings or claims which are pending or known to be
threatened will not have a material adverse effect on the Company's consolidated
financial position, liquidity, or results of operations.
NOTE 9---SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company acquired certain assets, including
accounts receivable, inventories, and equipment of a long-term care distributor,
the common stock of an imaging supply and equipment distributor, and the common
stock of a long-term care distributor. These transactions were accounted for
under the purchase method of accounting. A summary of the details of the
transactions follows:
Number of acquisitions.................................. 3
Total Consideration..................................... $15,484
Cash paid............................................... 8,588
Goodwill recorded....................................... 6,352
Value of Noncompete payments............................ 623
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, 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 $75.0 million, and
restrict payments of dividends.
NOTE 10--RESTATEMENTS
The Company has restated its historical financial statements to include the
effect of certain items as discussed below. The effect of the restatements is as
follows:
20
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31, 1998
----------------------------------------------------
Information
As Systems
Previously Accelerated Immaterial As
Reported Depreciation Poolings Restated
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Net sales......................................... $394,223 $ -- $ 5,324 $ 399,547
Net income........................................ 15,032 (1,107) (103) 13,822
Earnings per share:
Basic.......................................... $0.21 $(0.01) $0.00 $0.20
Diluted........................................ 0.21 (0.02) 0.00 0.19
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended December 31, 1997
------------------------------------------------------
As Gulf South
Previously Operating Immaterial As
Reported Expenses Poolings Restated
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales......................................... $ 330,615 $ -- $ 23,027 $ 353,642
Net income 9,325 (698) 103 8,730
Earnings per share:
Basic.......................................... $0.14 $(0.01) $(0.01) $0.12
Diluted........................................ 0.13 (0.01) 0.00 0.12
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended December 31, 1998
-------------------------------------------------------------------------------------
Information Gulf South
As Systems Gulf South Direct
Previously Accelerated Restructuring Transaction Immaterial As
Reported Depreciation Plan B Costs Poolings Restated
----------- ------------ ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 1,102,832 $ -- $ -- $ -- $ 51,643 $ 1,154,475
Net income 40,178 (2,641) (918) 475 (1,097) 35,997
Earnings per share:
Basic................ $0.57 $(0.04) $(0.01) $0.01 $(0.02) $0.51
Diluted.............. 0.56 (0.04) (0.01) $0.01 (0.02) 0.50
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended December 31, 1997
------------------------------------------------------
As Gulf South
Previously Operating Immaterial As
Reported Expenses Poolings Restated
----------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales......................................... $ 938,920 $ -- $ 74,277 $ 1,013,197
Net income 25,004 (1,962) 468 23,510
Earnings per share:
Basic.......................................... $0.37 $(0.02) $(0.01) $0.34
Diluted........................................ 0.36 (0.02) (0.00) 0.34
</TABLE>
21
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)--(Continued)
(Unaudited)
Information Systems Accelerated Depreciation
The $1,107 and the $2,641 represent the incremental impact on depreciation
expense, net of tax, for the three and nine months ended December 31, 1998,
respectively, related to the replacement of the information systems. Refer to
Note 3--Charges Included in General and Administrative Expenses for a further
discussion regarding the accelerated depreciation.
Gulf South Direct Transaction Costs
Direct transaction costs primarily consist of professional fees, such as
investment banking, legal, and accounting, for services rendered through the
date of the merger. Due to subsequent negotiations and agreements between the
Company and its service provider, actual costs paid were less than costs
originally billed and recorded. As a result, approximately $475, net of tax, of
costs were reversed against general and administrative expenses during the nine
months ended December 31, 1998. Refer to Note 3--Charges Included in General and
Administrative Expenses for further discussion regarding direct transaction
costs.
Operating Expenses
During the three and nine months ended December 31, 1997, Gulf South charged
certain operating expenses to an accrual for merger integration costs and
expenses that were established as a component of goodwill as of the date of the
acquisition. The Company determined that the operating expenses should have been
expensed as incurred and included in the accompanying consolidated statements of
income. As a result, Gulf South restated its condensed consolidated financial
statements to include the effects of recording operating expenses as incurred
and properly stating goodwill and accrued merger costs and expenses.
Gulf South Restructuring Plan B
Gulf South previously recorded $918 million, net of tax, of restructuring costs
and expenses during the period January 1, 1998 to April 3, 1998 and, therefore,
the amount was included in the retained earnings adjustment recorded on April 4,
1998. However, the Company's condensed consolidated financial statements have
been restated to reverse the $918 million charge as certain recognition criteria
were not met. The charge was recognized when the criteria were met, which was
during the three months ended June 30, 1998.
Immaterial Poolings
The Company merged with certain imaging supply and equipment distributors in
stock mergers accounted for under the pooling-of-interests method of accounting.
Due to the immaterial effect of these acquisitions on prior periods, the
Company's previously issued financial statements included in Form 10-Q for the
three and nine months ended December 31, 1998 were not restated for the
immaterial Pooled Entities. During fiscal 1999, the Company made two additional
individually immaterial acquisitions accounted for as poolings of interests. As
such, the Company evaluated the aggregate impact of the individually immaterial
pooling of interest transactions on the Company's current and prior period
financial statements and concluded that the aggregate impact was material to the
Company's consolidated financial position taken as a whole. As a result, the
Company's consolidated financial statements have been restated to include the
historical financial results of the individually immaterial pooling-of-interest
transactions for all periods.
Other Charges
During the three months ended December 31, 1999, the Company incurred
approximately $1,005 of costs related to acquisitions not consummated.
22
<PAGE>
ITEM 2: PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
PSS World Medical, Inc. (the "Company" or "PSS") is a specialty marketer and
distributor of medical products to physicians, alternate-site imaging centers,
long-term care providers, and hospitals through 108 service centers to customers
in all 50 states and five 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
36 imaging distribution service centers with over 700 service specialists and
200 sales representatives ("Imaging Business") serving over 13,000 customer
sites in 35 states. The Imaging Business' primary market is the approximately
5,000 hospitals and other alternate-site imaging companies operating
approximately 50,000 office sites throughout the United States.
Through its wholly owned subsidiary Gulf South Medical Supply, Inc. ("Gulf
South"), the Company is become a leading national distributor of medical
supplies and related products to the long-term care industry in the United
States based on revenues, number of sales representatives, and number of service
centers. Gulf South currently operates 13 distribution service centers with
approximately 130 sales representatives ("Long-Term Care Business") serving over
10,000 long-term care facilities in all 50 states. The Long-Term Care Business'
primary market is comprised of a large number of independent operators, small to
mid-sized local and regional chains, and several national chains representing
over 10,000 long-term care facilities.
In addition to its operations in the United States, the Company, through its
wholly owned subsidiary WorldMed International, Inc. ("WorldMed"), operates
three European service centers ("International Business") distributing medical
products to the physician office and hospital markets in Belgium, France,
Germany, Luxembourg, and the Netherlands.
23
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
INDUSTRY
According to industry estimates, the United States medical supply and equipment
segment of the health care industry represents a $34 billion market comprised of
distribution of medical products to hospitals, home health care agencies,
imaging centers, physician offices, dental offices, and long-term care
facilities. The Company's primary focus includes distribution to the physician
office, providers of imaging services, and long-term care facilities comprising
approximately $14 billion or approximately 40% of the overall market
Revenues of the medical products distribution industry are estimated to be
growing as a result of a growing and aging population, increased health care
awareness, proliferation of medical technology and testing, and expanding
third-party insurance coverage. In addition, the physician market is benefiting
from the shift of procedures and diagnostic testing from hospitals to alternate
sites, particularly physician offices despite a migration of significantly lower
hospital medical product pricing into the physician office market.
The health care industry is subject to extensive government regulation,
licensure, and operating procedures. National health care reform has been the
subject of a number of legislative initiatives by Congress. Such reform
proposals if adopted could impact the medical products distribution industry.
Additionally, the cost of a significant portion of medical care in the United
States is funded by government and private insurance programs. In recent years,
government-imposed limits on reimbursement of hospitals, long-term care
facilities, and other health care providers have impacted spending budgets in
certain markets within the medical products industry. Recently, Congress has
passed radical changes to reimbursements for nursing homes and home care
providers. These changes also effect some distributors who directly bill the
government for these providers.
Over the past few years, the health care industry has undergone significant
consolidation. Physician provider groups, long-term care facilities, and other
alternate-site providers along with the hospitals continue to consolidate.
Consolidation sometimes shifts the medical products purchasing decision to
individuals with whom medical products distributors had no prior selling
relationship. Additionally, the consolidation creates larger customers. The
majority of the market serviced by the Company consists of a large number of
small customers with no individual customer exceeding more than 10% of the
consolidated Company's revenues. However, the Long-Term Care Business depends on
a limited number of large customers for a significant portion of its net sales
and approximately 37% and 38% of the Long-Term Care Business revenues for the
twelve months ended April 3, 1998 and the nine months ended December 31, 1998,
respectively, represented sales to its top five customers. Growth in the
Long-Term Care Business as well as consolidation of the health care industry may
increase the Company's dependence on large customers.
24
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
The condensed consolidated financial statements of PSS World Medical, Inc.
("PSS" or the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position and results of operations for
the periods indicated and give retroactive effect to the mergers with Medical
Imaging Systems, Inc. ("MIS") and TriStar Imaging Systems, Inc. ("TriStar")
acquired during fiscal 1999 and various acquired companies previously accounted
for as immaterial pooling-of-interests transactions (the "Pooled Entities").
These transactions were accounted for under the pooling-of-interests method of
accounting, and accordingly, the accompanying condensed consolidated financial
statements have been retroactively restated as if PSS, MIS, TriStar, and the
Pooled Entities had operated as one entity since inception.
The Company's previously issued financial statements included in Form 10Q for
the three and nine months ended December 31, 1998 were not restated for: (1) the
information systems accelerated depreciation, (2) the reversal of Gulf South
Medical Supply, Inc. ("Gulf South") restructuring charge, (3) the reversal of
Gulf South direct transaction costs and (4) the immaterial Pooled Entities
(refer to Note 10--Restatements). In addition, the financial statements for the
three and nine months ended December 31, 1997 were not restated for: (1) a
correction of an error in recording certain operating expenses at Gulf South,
and (2) the immaterial Pooled Entities (refer to Note 10--Restatements).
The Company's fiscal year ends on the Friday closest to March 31 of each year.
Prior to April 4, 1998, Gulf South's year-end was December 31. The three and
nine months ended September 30, 1997 of Gulf South were consolidated with the
three and nine months ended December 31, 1997 of the Company. In addition, Gulf
South's balance sheet as of December 31, 1997 was consolidated with PSS' balance
sheet as of April 3, 1998. Effective April 4, 1998, Gulf South's fiscal year-end
was changed to conform to the Company's year-end. As such, Gulf South's results
of operations for the period January 1, 1998 to April 3, 1998 are not included
in any of the periods presented in the accompanying condensed consolidated
statements of income. Accordingly, Gulf South's results of operations for the
three months ended April 3, 1998 are reflected as an adjustment to shareholders'
equity of the Company as of April 4, 1998. Refer to the section titled Gulf
South's Results of Operations for the Three Months Ended April 3, 1998 and March
31, 1997 included in Management's Discussion and Analysis of Results of
Operations for further clarification. The Company's three and nine months ended
December 31, 1998 condensed consolidated financial statements include the
combined results of operations for the period from April 4, 1998 to December 31,
1998, of both PSS and Gulf South.
THREE AND NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Net Sales. Net sales for the three months ended December 31, 1998 totaled $399.5
million, an increase of $45.9 million or 13.0% over net sales of $353.6 million
for the three months ended December 31, 1997. Net sales for the nine months
ended December 31, 1998 totaled $1,154.5 million, an increase of $141.3 million
or 13.9% over net sales of $1,013.2 million for the nine months ended December
31, 1997. Approximately $34.9 million and $91.3 million of the increase in
revenues for the three and nine months ended December 31, 1998, respectively,
resulted from revenues of companies acquired subsequent to December 31, 1997 and
revenues of companies acquired prior to December 31, 1997, but which did not
contribute to revenues for the full three and nine month periods ended December
31, 1997. The remaining net sales increase during these periods resulted from
sales growth of existing service centers coupled with incremental sales
generated in connection with exclusive and semi-exclusive vendor relationships.
25
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Gross Profit. Gross profit for the three months ended December 31, 1998 totaled
$109.7 million, an increase of $15.4 million or 16.3% over the three months
ended December 31, 1997 total of $94.3 million. Gross profit for the nine months
ended December 31, 1998 totaled $311.8 million, an increase of $45.9 million or
17.2% over the nine months ended December 31, 1997 total of $265.9 million.
Gross profit as a percentage of net sales was 27.5% and 26.7% for the three
months and 27.0% and 26.3% for the nine months ended December 31, 1998 and 1997,
respectively. The increase in gross margin as a percentage of sales is
attributable to an increase in the sales mix of higher margin diagnostic
equipment, an increase in sales of higher margin private label medical supplies
by the Physician Supply Business, the ability to negotiate lower product
purchasing costs which resulted from increased purchasing volume subsequent to
the Gulf South acquisition, and improved Imaging Business gross margins
resulting from a film vendor maintaining margin dollars rebated to the Company
while reducing film pricing to hospital customers. Although there has been
considerable gross margin pressure from competition and a consolidating customer
base, the Company has successfully maintained its overall gross margins.
General and Administrative Expenses. General and administrative expenses for the
three months ended December 31, 1998 totaled $53.9 million, an increase of $0.5
million or 1.0% over the three months ended December 31, 1997 total of $53.3
million. General and administrative expenses for the nine months ended December
31, 1998 totaled $160.8 million, an increase of $7.0 million or 4.6% over the
nine months ended December 31, 1997 total of $153.7 million. As a percentage of
net sales, general and administrative expenses were 13.5% and 15.0% for the
three months and 13.9% and 15.2% for the nine months ended December 31, 1998 and
1997, respectively.
In addition to typical general and administrative expenses, this income
statement caption includes charges related to merger activity, restructuring
activity, and other special items (refer to Note 3 of the accompanying condensed
consolidated financial statements for further discussion of these charges). The
following table summarizes charges included in general and administrative
expenses in the accompanying consolidated statements of income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(restated) (restated) (restated) (restated)
<S> <C> <C> <C> <C>
Merger costs and expenses........................... $ (16) $3,810 $ 470 $ 5,696
Restructuring costs and expenses.................... 498 -- 3,009 --
Information systems accelerated depreciation........ 1,814 -- 4,323 --
Gulf South operational tax charge................... -- 767 -- 2,301
Other charges....................................... 1,005 -- 1,005 2,457
------------ ------------ ------------ ------------
Total charges included in continuing operations..... $ 3,301 $4,577 $ 8,807 $ 10,454
============ ============ ============ ============
</TABLE>
Selling Expenses. Selling expenses for the three months ended December 31, 1998
totaled $32.5 million, an increase of $6.2 million or 23.4% over the three
months ended December 31, 1997 total of $26.3 million. Selling expenses for the
nine months ended December 31, 1998 totaled $89.0 million, an increase of $14.3
million or 19.2% over the nine months ended December 31, 1997 total of $74.6
million. As a percentage of sales, selling expenses were 8.1% and 7.5% for the
three months ended December 31, 1998 and 1997, respectively, and 7.7% and 7.4%
for the nine months ended December 31, 1998 and 1997, respectively. Selling
expenses as a percentage of sales increased due to a change in the Gulf South
sales commission program from a primarily fixed salary plan to a variable
commission plan, and the company-wide addition of approximately 100 sales
trainees over the number of sales trainees in the comparable prior year period.
The Company utilizes a variable commission plan, which pays commissions based on
gross profit as a percentage of net sales.
26
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Operating Income. Operating income for the three months ended December 31, 1998
totaled $23.3 million, an increase of $8.7 million or 59.8% over the three
months ended December 31, 1997 total of $14.6 million. Operating income for the
nine months ended December 31, 1998 totaled $62.1 million, an increase of $24.5
million or 65.3% over the nine months ended December 31, 1997 total of $37.6
million. As a percentage of sales, operating income was 5.8% and 4.1% for the
three months ended December 31, 1998 and 1997, respectively, and 5.4% and 3.7%
for the nine months ended December 31, 1998 and 1997, respectively.
Interest Expense. Interest expense for three months ended December 31, 1998 and
1997 was approximately $2.7 million. Interest expense for the nine months ended
December 31, 1998 totaled $8.8 million, an increase of $4.9 million or 122.4%
over the nine months ended December 31, 1997 total of $4.0 million. The increase
in interest expense for the nine months ended December 31, 1998 over the
comparable prior year period reflects interest on the $125 million 8.5% senior
subordinated debt which was outstanding for a full nine months during fiscal
1999 compared to fiscal 1998.
Interest and Investment Income. Interest and investment income for the three
months ended December 31, 1998 totaled $0.5 million, a decrease of $1.5 million
or 75.1% over the three months ended December 31, 1997 total of $2.0. Interest
and investment income for the nine months ended December 31, 1998 totaled $3.7
million, an increase of $0.2 million or 6.6% over the nine months ended December
31, 1997 total of $3.4 million. The decrease in interest and investment income
for the three months ended December 31, 1998 over the comparable prior year
period reflects the use of cash previously invested for the purposes of
acquisitions and capital expenditures during the nine months ended December 31,
1998.
Other Income. Other income for the three months ended December 31, 1998 totaled
$1.8 million, an increase of $0.9 million or 90.1% over the three months ended
December 31, 1997 total of $0.9 million. Other income for the nine months ended
December 31, 1998 totaled $3.8 million, an increase of $1.7 million or 80.4%
over the nine months ended December 31, 1997 total of $2.1 million. Other income
consists of finance charges on customer accounts and financing performance
incentives. The increase in other income primarily results from the growth in
the Company's operations.
Provision For Income Taxes. Provision for income taxes for the three months
ended December 31, 1998 totaled $9.1 million, an increase of $3.1 million or
51.8% over the three months ended December 31, 1997 total of $6.0 million.
Provision for income taxes for the nine months ended December 31, 1998 totaled
$24.7 million, an increase of $9.1 million or 58.2% over the nine months ended
December 31, 1997 total of $15.6 million. The income tax provision computation
is affected by the non-deductible nature of certain non-recurring merger costs
and expenses in the period in which they are incurred.
Net Income. Net income for the three months ended December 31, 1998 totaled
$13.8 million, an increase of $5.1 million or 58.3% over the three months ended
December 31, 1997 total of $8.7 million. Net income for the nine months ended
December 31, 1998 totaled $36.0 million, an increase of $12.5 million or 53.1%
over the nine months ended December 31, 1997 total of $23.5 million. As a
percentage of net sales, net income was 3.5% and 2.5% for the three months ended
December 31, 1998 and 1997, respectively, and 3.1% and 2.3% for the nine months
ended December 31, 1998 and 1997, respectively.
GULF SOUTH'S RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 3, 1998 AND
MARCH 31, 1997 (RESTATED)
The Company acquired Gulf South on March 26, 1998 in a transaction accounted for
under the pooling-of-interests method of accounting. The financial statements
have been retroactively restated as if Gulf South and the Company had operated
as one entity since inception. As discussed in Note 1--Basis of Presentation,
due to the consolidation method of the Company and the differing year ends of
PSS and Gulf South, Gulf South's results of operations for the period January 1,
1998 to April 3, 1998 are not reflected in the condensed consolidated statements
of operations for any periods presented. Rather they have been recorded as an
adjustment to equity during the first quarter of
27
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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.
Three Months
Ended
April 3, 1998
-------------
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)
=============
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 million in charges.
<TABLE>
<CAPTION>
Three Months
Ended
April 3, 1998
-------------
<S> <C>
Cost of sales:
Increase allowance for inventory............................................. $ 3,573
-------------
Total charges included in costs of goods sold....................... 3,573
-------------
General and 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....................................................... 2,771
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.
28
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 collectibility 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 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, 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 a $1,577 in charges to settle certain disputes related to vendor
and customer agreements.
29
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Operational Tax Charge
Gulf South recorded an operational tax charge of $9,492, of which $2,771 was
recorded in the quarter ended April 3, 1998, for state and local, sales and use,
and property taxes that are normally charged directly to the customer at no cost
to the Company. Penalties and interest are included in the above charge as Gulf
South did not timely remit payments to tax authorities. The Company reviewed all
available information, including tax exemption notices received, and recorded
charges to expense during the period in which the tax noncompliance issues
arose. See Note 4--Charges Included in General and Administrative Expenses, for
more detailed 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 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.
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, borrowings under the
Company's senior revolving credit facility, and any future public offerings.
30
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Net cash used in operating activities was $10.6 million for the nine months
ended December 31, 1998, compared to net cash provided by operating activities
of $4.6 million for the nine months ended December 31, 1997, due to the timing
of accounts receivable collections, payments of merger and acquisition expenses,
and the timing of vendor payments.
Net cash provided by investing activities was $0.2 million for the nine months
ended December 31, 1998. This primarily resulted from $74.6 million provided by
the sale and maturities of marketable securities offset by $55.7 million related
to purchase business acquisitions and $16.6 million related to capital
expenditures, of which approximately $8.5 million pertained to new information
system expenditures. Net cash used by investing activities was $63.0 million for
the nine months ended December 31, 1997. This use of cash primarily resulted
from $44.8 million related to the purchase of marketable securities with
proceeds of the public debt offering, $7.7 million relate to purchase business
acquisitions, and capital expenditures of $7.6 million.
Net cash used in financing activities was $12.5 million for the nine months
ended December 31, 1998. This primarily resulted from $16.0 million in payoffs
of debt assumed through business acquisitions offset by $3.8 million in proceeds
from the issuance of common stock. Net cash provided by financing activities was
$66.8 million for the nine months ended December 31, 1997. This primarily
resulted from cash provided by the issuance of the $125.0 million senior
subordinated notes and $2.5 million in proceeds from the issuance of common
stock, partially offset by $55.1 million in payoffs of debt assumed through
business acquisitions.
The Company had working capital of $341.2 million and $381.2 million as of
December 31, 1998 and April 3, 1998, respectively. The decrease in working
capital primarily results from an increase in the frequency of purchase business
acquisitions being funded by cash. This recent shift in the source of funding
for purchase business acquisitions results in the conversion of a portion of the
cash outlay into an intangible which is excluded from the calculation of working
capital. Accounts receivable, net of allowances, were $263.5 million and $213.9
million at December 31, 1998 and April 3, 1998, respectively. The annualized
days sales in accounts receivable was approximately 53.8 as of December 31, 1998
and 52.0 days at April 3, 1998.
Inventories were $135.5 million and $126.9 million as of December 31, 1998 and
April 3, 1998, respectively. The Company had annualized inventory turnover of
8.8x and 8.7x for the nine months ended December 31, 1998 and the year ended
April 3, 1998, respectively.
31
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents EBITDA and other financial data for the three and
nine months ended December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income before provision for income taxes $ 22,912 $ 14,720 $ 60,741 $ 39,148
Plus: Interest Expense 2,701 2,837 8,834 3,972
------------ ------------ ------------ ------------
EBIT (a) 25,613 17,557 69,575 43,120
Plus: Depreciation and amortization 5,799 2,876 15,426 8,230
------------ ------------ ------------ ------------
EBITDA (b) 31,412 20,433 85,001 51,350
Unusual Charges Included in Continuing Operations(h) 1,487 4,577 4,484 10,454
Cash Paid for Unusual Charges Included in Continuing
Operations (4,922) (1,695) (17,920) (4,471)
------------ ------------ ------------ ------------
Adjusted EBITDA (c) 27,977 23,315 71,565 57,333
EBITDA Coverage (d) 11.6x 7.2x 9.6x 12.9x
EBITDA Margin (e) 7.9% 5.8% 7.4% 5.1%
Adjusted EBITDA Coverage (f) 10.4x 8.2x 8.1x 14.4x
Adjusted EBITDA Margin (g) 7.0% 6.6% 6.2% 5.7%
Cash (used in) provided by operating activities $(10.6) $ 4.6
Cash provided by (used in) investing activities $ 0.2 $(63.0)
Cash (used in) provided by financing activities $(12.5) $ 66.8
</TABLE>
(a) EBIT represents income before income taxes plus interest expense.
(b) EBITDA represents EBIT plus depreciation and amortization. EBITDA is not a
measure of performance or financial condition under generally accepted
accounting principles ("GAAP"). EBITDA is not intended to represent cash
flow from operations and should not be considered as an alternative measure
to income from operations or net income computed in accordance with GAAP,
as an indicator of the Company's operating performance, as an alternative
to cash flow from operating activities, or as a measure of liquidity. In
addition, EBITDA does not provide information regarding cash flows from
investing and financing activities which are integral to assessing the
effects on the Company's financial position and liquidity as well as
understanding the Company's historical growth. The Company believes that
EBITDA is a standard measure of liquidity commonly reported and widely used
by analysts, investors, and other interested parties in the financial
markets. However, not all companies calculate EBITDA using the same method
and the EBITDA numbers set forth above may not be comparable to EBITDA
reported by other companies.
(c) Adjusted EBITDA represents EBITDA plus unusual charges included in
continuing operations less cash paid for unusual charges included in
continuing operations.
(d) EBITDA coverage represents the ratio of EBITDA to interest expense.
(e) BITDA 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) The three and nine months ended December 31, 1998 exclude $1,814 and
$4,323, respectively, of information systems accelerated depreciation. The
additional depreciation is included in the depreciation and amortization
line in the above table.
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
32
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
certain restrictive covenants that, among other things, limit the Company's
ability to incur additional indebtedness. Provided, however, that no event of
default exist, additional indebtedness may be incurred if the Company maintains
a consolidated fixed charge coverage ratio, after giving effect to such
additional indebtedness, of greater than 2.0 to 1.0. The Company believes it is
in compliance with all debt covenants as of December 31, 1998 and April 3, 1998.
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, 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 $75.0 million, and
restrict payments of dividends.
As of December 31, 1998, the Company has not entered into any material working
capital commitments that require funding. The Company believes that the expected
cash flows from operations, available borrowing under the credit facility, and
capital markets are sufficient to meet the Company's anticipated future
requirements for working capital, capital expenditures, and acquisitions for the
foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of 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%.
Year 2000
During the third quarter of fiscal 1999, management accelerated planned year
2000 compliance modifications and upgrades to the Company's existing hardware
and software systems. The Company is currently in the phase of coding and
testing software changes and expects completion of this phase by the end of
March 1999. The final phase of the year 2000 compliance plan is expected to
begin in April 1999 with implementation of modifications and upgrades to
existing systems and is scheduled to be completed by July 1999. The European
division and the Long-term Care business hardware and software systems are
currently year 2000 compliant. The Imaging division currently has 25 of 31
service centers as well as its corporate location hardware and software systems
converted to its new 2000 compliant system. The Physician Supply business begins
implementation of its hardware and software system in April 1999. Ongoing
testing will continue through the end of calendar 1999. In addition, the Company
is currently formulating a non-information system audit plan to identify
non-information operational risks at its field branches.
33
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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. These New Systems will be used in several key areas of the
Company's business, including inventory management, purchasing, order
processing, shipping, receiving, accounts payable, accounts receivable, and
financial reporting. The Company expects to incur internal payroll costs,
consulting fees, and hardware and software costs for preparation and
implementation of these New Systems.
The total expected costs related to the conversion of existing systems and
implementation of the New systems is estimated to be approximately $15.0 million
through fiscal 2000, with $8.5 million incurred through December 31, 1998. The
anticipated impact and costs of the project is based on management's best
estimates using information currently available. There can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Based on its current estimates and information currently available,
the Company does not anticipate that the costs associated with this project will
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows in future periods.
The potential risks associated with the year 2000 issues include, but are not
limited to, temporary disruption of the Company's operations in the areas of
inventory management, purchasing, order processing, shipping, receiving,
accounts payable, accounts receivable, and financial reporting. In addition,
communications with customers, vendors, and other outside parties may be
disrupted. Implementation of the New System entails contacting suppliers to
ensure compatibility with the Company's information systems and to discuss year
2000 compliance issues. There can be no assurance that the systems of other
companies which the Company's systems rely upon will be timely converted, or
that such failure to convert by another company would not have a material
adverse effect on the Company's systems and results of operations.
The Company is in the process of updating its information technology disaster
recovery plan to include year 2000 contingencies that may arise. Although the
Company anticipates that minimal business disruption will occur as a result of
the year 2000 issues based upon currently available information, incomplete or
untimely resolution of year 2000 issues by either the Company or significant
suppliers, customers and critical business partners could have a material
adverse impact on the Company's consolidated financial position, results of
operations and/or cash flows in future periods.
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigations
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business and
economic conditions ;successful implementation of the Company's year 2000
compliance plan, and other factors described from time to time in the Company's
reports filed with the Securities and Exchange Commission. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
34
<PAGE>
PART II: OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
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. 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 Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and Rule 10b-5 promulgated thereunder. The
allegations are based upon a decline in the PSS stock price following
announcement by PSS in May 1998 regarding the Gulf South Merger which resulted
in earnings below analyst's expectations. The plaintiff seeks damages, including
costs and expenses. PSS believes that the allegations contained in the complaint
are without merit and intends to defend vigorously against the claims. The
defendants filed their motion to dismiss on January 25, 1999. 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, are named as defendants in two purported securities class action
lawsuits entitled Ernest Klein v. Gulf South Medical Supply, Inc., et al., Civil
Action No. 3:97cv526WS, and Ann Krupnick v. Gulf South Medical Supply, Inc., et
al., Civil Action No. 3:97cv525BN. Both actions, which were filed on July 21,
1997, are pending in the United States District Court for the Southern District
of Mississippi, Jackson Division. The plaintiff in the Klein action alleges, for
himself and for a purported class of similarly situated stockholders who
allegedly purchased stock in Gulf South's June 1996 public offering of its
common stock, that the defendants engaged in violations of certain provisions of
the Securities Act of 1933, as amended ("Securities Act"), and Mississippi state
law. The plaintiff in the Krupnick action alleges for herself and for a
purported class of similarly situated stockholders who allegedly purchased Gulf
South Common Stock between May 2, 1996 and July 22, 1996, that the defendants
engaged in certain violations of the Exchange Act, Rule 10b-5 promulgated
thereunder and Mississippi state law. Plaintiffs allege that the defendants
artificially inflated the price of Gulf South stock by representing that Gulf
South was "well positioned" to grow by increasing its sales to existing
customers, including one of its largest customers Living Centers of America,
after defendants had been informed by Living Centers that its distribution
arrangement with Gulf South was being terminated in favor of a rival medical
supply distributor. On August 21, 1998, the court filed an Order dismissing all
the allegations in the Krupnick action. That case is presently on appeal to the
United States Court of Appeals for the 5th Circuit. The same Order also
dismissed the claims against Defendants Hixon, Piper, Tibbitts, Pritchard,
Bayer, and Gulf South under section 12(2) of the Securities Act and
corresponding claims against Defendants Hixon and Gulf South under section 15 of
the Securities Act and Miss. Code Ann. Sections 75-71-717(a)(2) and 75-71-719 in
the Klein action. Plaintiffs' claims under section 11 of the Securities Act
remain pending in the Klein case. Plaintiffs seek damages, including costs and
expenses. PSS believes that the allegations contained in the remaining claims
are also without merit and intends to defend vigorously against the claims.
However, there can be no assurance that this litigation will ultimately be
resolved on terms that are favorable to PSS.
PSS has been 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 alleges that certain of the
urinalysis test strips sold under the Penny SaverTM name infringe four Bayer
patents. The products are made by YeongDong Pharmaceuticals, which has agreed in
writing to indemnify and defend the Company against the infringement claims.
YeongDong Pharmaceuticals denies the products infringe the patents. In addition,
PSS has indemnity rights against the U.S. distributor of the product, BioSys
Laboratories, pursuant to its vendor agreement. Chemical analysis testing of the
products conducted under the joint supervision of the parties, however,
indicates that some representations YeongDong Pharmaceuticals made to the
Company about the technology used by YeongDong Pharmaceuticals in one of the
tests on the strip were incorrect. PSS continues to vigorously contest Bayer's
claims, but has agreed to remove those Penny SaverTM urinalysis test strip
products containing a test pad for leukocytes. The parties are currently in
settlement negotiations and PSS believes that there will be a favorable
settlement within the next 45 days. However, there can be no assurance that this
litigation will ultimately be resolved on terms that are favorable to PSS.
35
<PAGE>
PART II: OTHER INFORMATION (Continued)
ITEM 1--LEGAL PROCEEDINGS (Continued)
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.
ITEM 2--CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) On October 28, 1998, PSS issued an aggregate of 255,512 shares of common
stock, $.01 par value per share, to the former shareholders of Tristar
Imaging Systems, Inc. in exchange for all of the outstanding shares of
capital stock of Tristar. An additional 33,133 shares are subject to
issuance to the former shareholders of Tristar pending the resolution of
potentially indemnifiable claims. The issuance of securities was made in
reliance on the exemption from registration provided under Section 4(2) of
the Securities Act of 1933, as amended, as a transaction by an issuer not
involving a public offering. All of the securities were acquired by the
recipients for investment and with no view toward a public resale or
distribution without registration. The recipients qualified as accredited
investors, the offers and sales were made without any public solicitation,
and the stock certificates bear restrictive legends.
(d) Not applicable.
36
<PAGE>
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------------------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation dated March 15, 1994, as amended.(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, Salamon Brothers Inc. and
NationsBanc Montgomery Securities, Inc.(2)
4.3 Form of 81/2% Senior Subordinated Note due 2007, including Form of Guarantee (Private Notes).(2)
4.4 Form of 81/2% Senior Subordinated Note due 2007, including Form of Guarantee (Exchange Notes).(2)
4.5 Shareholder Protection Rights Agreement, dated as of April 20, 1998, between PSS World Medical,
Inc. and Continental Stock Transfer & Trust Company, as Rights Agent.(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)
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)
</TABLE>
37
<PAGE>
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------------------------------------------------------------------------------------------------
<S> <C>
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)
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.
(b) Reports on Form 8-K
None.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on February 15, 1998.
PSS WORLD MEDICAL, INC.
/s/ DAVID A. SMITH
----------------------------
David A. Smith
Executive Vice President and
Chief Financial Officer
39
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINGS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10Q/A FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000920527
<NAME> PSS WORLD MEDICAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-02-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 58,734
<SECURITIES> 476
<RECEIVABLES> 263,473
<ALLOWANCES> 0
<INVENTORY> 135,502
<CURRENT-ASSETS> 514,466
<PP&E> 43,019
<DEPRECIATION> 0
<TOTAL-ASSETS> 711,378
<CURRENT-LIABILITIES> 173,237
<BONDS> 129,311
0
0
<COMMON> 707
<OTHER-SE> 406,917
<TOTAL-LIABILITY-AND-EQUITY> 711,378
<SALES> 399,547
<TOTAL-REVENUES> 399,547
<CGS> 289,862
<TOTAL-COSTS> 289,862
<OTHER-EXPENSES> 81,363
<LOSS-PROVISION> 2,213
<INTEREST-EXPENSE> 3,040
<INCOME-PRETAX> 22,433
<INCOME-TAX> 9,090
<INCOME-CONTINUING> 13,822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,822
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.19
</TABLE>
