FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
[ ] 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 August 8, 2000 a total of 71,077,236 shares of common stock, par
value $.01 per share, of the registrant were outstanding.
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets - June 30, 2000 and March 31, 2000 3
Condensed Consolidated Statements of Operations -
For the Three Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements - June 30, 2000 and 1999 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 2 - Change in Securities and Use of Proceeds 22
Item 6 - Exhibits and Reports on Form 8-K 23
SIGNATURES 26
</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>
June 30, March 31,
2000 2000
------------------- ------------------
(Unaudited) *
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 41,830 $ 60,414
Marketable securities 1,861 4,328
Accounts receivable, net 286,133 284,441
Inventories, net 165,661 178,038
Employee advances 877 973
Prepaid expenses and other 55,702 57,515
------------------- ------------------
Total current assets 552,064 585,709
Property and equipment, net 67,785 65,783
Other Assets:
Intangibles, net 199,080 202,242
Other 25,036 19,683
------------------- ------------------
Total assets $ 843,965 $ 873,417
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 118,690 $ 124,448
Accrued expenses 36,641 35,434
Current maturities of long-term debt and capital lease obligations 2,465 4,274
Other 7,005 7,482
------------------- ------------------
Total current liabilities 164,801 171,638
Long-term debt and capital lease obligations, net of current portion 229,572 254,959
Other 5,578 7,193
------------------- ------------------
Total liabilities 399,951 433,790
------------------- ------------------
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, 71,077,236
shares issued and outstanding at June 30, 2000 and March 31, 2000 711 711
Additional paid-in capital 349,186 349,186
Retained earnings 96,575 90,951
Cumulative other comprehensive income (1,736) (390)
------------------- ------------------
444,736 440,458
Unearned ESOP shares (722) (831)
------------------- ------------------
Total shareholders' equity 444,014 439,627
------------------- ------------------
Total liabilities and shareholders' equity $ 843,965 $ 873,417
=================== ==================
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated statements
</TABLE>
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
--------------------------------
June 30, 2000 June 30, 1999
--------------- ----------------
<S> <C> <C>
Net sales $ 470,213 $ 437,001
Cost of goods sold 357,159 329,774
--------------- ----------------
Gross profit 113,054 107,227
General and administrative expenses 69,765 58,026
Selling expenses 29,378 27,323
--------------- ----------------
Income from operations 13,911 21,878
--------------- ----------------
Other income (expense):
Interest expense (5,035) (3,511)
Interest and investment income 700 451
Other income 812 1,058
--------------- ----------------
(3,523) (2,002)
--------------- ----------------
Income before provision for income taxes and 10,388 19,876
cumulative effect of accounting change
Provision for income taxes 4,764 8,191
--------------- ----------------
Income before cumulative effect of accounting change 5,624 11,685
Cumulative effect of accounting change -- (1,444)
--------------- ----------------
Net income $ 5,624 $ 10,241
=============== ================
Earnings per share - Basic:
Income before cumulative effect of accounting change $ 0.08 $ 0.16
Cumulative effect of accounting change -- (0.02)
--------------- ----------------
Net income $ 0.08 $ 0.14
=============== ================
Earnings per share - Diluted:
Income before cumulative effect of accounting change $ 0.08 $ 0.16
Cumulative effect of accounting change -- (0.02)
--------------- ----------------
Net income $ 0.08 $ 0.14
=============== ================
The accompanying notes are an integral part of these condensed consolidated statements.
</TABLE>
4
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
June 30, 2000 June 30,1999
------------------ -----------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net income $ 5,624 $ 10,241
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of accounting change -- 1,444
Depreciation and amortization 5,474 4,485
Amortization of debt issuance costs 201 183
Provision for doubtful accounts 1,484 151
Gain (loss) on sale of fixed assets 7 (33)
Changes in operating assets and liabilities, net of effects from business
acquisitions:
Accounts receivable, net (3,172) (1,148)
Inventories 12,377 25,546
Prepaid expenses and other current assets (3,142) (7,045)
Other assets (2,831) (2,965)
Accounts payable, accrued expenses and other liabilities (3,134) (14,173)
------------------ -----------------
Net cash provided by operating activities 12,888 16,686
------------------ -----------------
Cash Flows From Investing Activities:
Purchases of marketable securities -- (9,168)
Proceeds from sale of fixed assets 8 38
Capital expenditures (4,407) (5,147)
Purchases of businesses, net of cash acquired -- (13,085)
Payments on noncompete agreements (168) (486)
------------------ -----------------
Net cash used in investing activities (4,567) (27,848)
------------------ -----------------
Cash Flows From Financing Activities:
Proceeds from borrowings 43 11,000
Repayment of borrowings (27,074) (1,720)
Principal payments under capital lease obligations (35) (78)
Proceeds from issuance of common stock -- 8
Other 161 (263)
Net cash (used in) provided by financing activities (26,905) 8,947
------------------ -----------------
Net decrease in cash and cash equivalents (18,584) (2,215)
Cash and cash equivalents, beginning of period 60,414 41,106
------------------ -----------------
Cash and cash equivalents, end of period $ 41,830 $ 38,891
================== =================
The accompanying notes are an integral part of these condensed consolidated statements.
</TABLE>
5
<PAGE>
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
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.
The accompanying condensed consolidated financial statements should be read
in conjunction with the financial statements and related notes in the
Company's 2000 Annual Report on Form 10-K. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States have been omitted pursuant to the Securities and Exchange Commission
rules and regulations.
Financial statements for the Company's subsidiaries outside the United
States are translated into U.S. dollars at period-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 Company operates on a thirteen week quarter which ends on the Friday
closest to each calendar quarter end. For purposes of presentation and
clarity, calendar quarter dates will be used for discussion and tables in
this filing.
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 fiscal 2000 amounts have been reclassified to conform to fiscal
2001 presentation.
NOTE 2 - BUSINESS ACQUISITIONS
Purchase Acquisitions
There were no acquisitions during the three months ended June 30, 2000.
During the three months ended June 30, 1999, the Company acquired certain
assets and assumed certain liabilities of one physician supply and
equipment distributor, four imaging supply and equipment distributors, and
two long-term care distributors. The following is a summary of the
transactions:
June 30, 1999
-------------
Number of acquisitions.............................. 7
Total consideration................................. $ 20,552
Cash paid, net of cash acquired..................... 13,085
Goodwill recorded................................... 10,931
Value of Noncompete Agreements...................... 575
6
<PAGE>
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.
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 excess of the purchase price over the estimated fair value of the net
assets acquired has been recorded as goodwill and is amortized over 15 to
30 years.
The accompanying consolidated financial statements reflect the preliminary
allocation of the purchase price. The allocation of the purchase price,
performed using values and estimates available as of the date of the
financial statements, has not been finalized due to certain pre-acquisition
contingencies identified by the Company and the nature of the estimates
required in the establishment of the Company's merger integration plans.
Accordingly, goodwill associated with these acquisitions may increase or
decrease in the next twelve months.
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
the Company's common stock and is recorded when earned as additional
purchase price. The maximum amount of remaining contingent consideration is
approximately $13.5 million (payable through fiscal 2003).
During the three months ended June 30, 2000, there were no adjustments to
goodwill.
During the three months ended June 30, 1999, the Company recorded $593 of
merger integration costs and expenses directly to goodwill as incurred as
these costs were contemplated at the time of acquisition. In addition, the
Company recorded $990 of additional goodwill at the time an integration
plan was formalized.
NOTE 3 - CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES
Charges Included In General and Administrative Expenses
In addition to typical general and administrative expenses, this income
statement caption includes charges related to merger activity,
restructuring activity, and other special items. The following table
summarizes charges included in general and administrative expenses in the
accompanying consolidated statements of operations:
Three Months Ended
June 30, 2000 June 30, 1999
------------- -------------
Merger costs and expenses $ 1,575 $ 372
Restructuring costs and expenses 1,240 513
Other 786 --
------------- -------------
Total $ 3,601 $ 885
============= =============
7
<PAGE>
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 EITF 95-14, Recognition of
Liabilities in Anticipation of a Business Combination ("EITF 95-14"), are
met. Merger costs and expenses recorded at the commitment date primarily
include charges for involuntary employee termination costs, branch
shut-down costs, lease termination costs, and other exit costs.
If the criteria described in EITF 94-3 or EITF 95-14 are not met, the
Company records merger costs and expenses as incurred. Merger costs
expensed as incurred include the following: (1) costs to pack and move
inventory from one facility to another or within a facility in a
consolidation of facilities, (2) relocation costs paid to employees in
relation to an acquisition accounted for under the pooling-of-interests
method of accounting, (3) systems or training costs to convert the acquired
companies to the current existing information system, and (4) training
costs related to conforming the acquired companies operational policies to
that of the Company's operational policies. In addition, amounts incurred
in excess of the original amount accrued at the commitment date are
expensed as incurred.
Effective February 1, 2000, the Board of Directors approved and adopted the
PSS World Medical, Inc. Officer Retention Bonus Plan and the PSS World
Medical, Inc. Corporate Office Employee Retention Bonus Plan (collectively
the "Retention Plans"). As part of the Company's strategic alternatives
process, management adopted these plans to retain certain officers and key
employees during the transition period. During the three months ended June
30, 2000, the Company accrued $1,271 related to the Retention Plans.
In addition, merger costs and expenses for the three months ended June 30,
2000 and 1999 included $304 and $372, respectively, of merger charges
expensed as incurred, which primarily related to branch shutdown costs.
Refer to Note 4, Accrued Merger and Restructuring Costs and Expenses, for
further discussion regarding the merger plans.
Restructuring Costs and Expenses
Restructuring costs and expenses for the three months ended June 30, 2000
and 1999 included $1,240 and $727, respectively, of charges that were
expensed as incurred, which primarily relate to other exit costs. Other
exit costs include costs to pack and move inventory, costs to set up new
facilities, employee relocation costs, and other related facility closure
costs. In addition, during the three months ended June 30, 1999, the
Company reversed $214 of restructuring costs and expenses into income,
which related to an involuntary employee termination costs for
restructuring Plan A. Refer to Note 4, Accrued Merger and Restructuring
Costs and Expenses, for further discussion regarding restructuring plans.
Other
During the three months ended June 30, 2000, the Imaging Business incurred
$94 of professional fees for acquisitions not consummated. In addition, the
Company incurred $692 in legal and professional fees and other costs
pursuant to the strategic alternative process announced in January 2000.
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.
8
<PAGE>
Generally, completion of the integration plans will occur within one year
from the date in which the plans are 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 sheet, were $969 and $1,089 at June 30,
2000 and March 31, 2000, respectively. The discussion and rollforward of
the accrued merger costs and expenses below summarize the significant and
nonsignificant integration plans adopted by management for business
combinations accounted for under the purchase method of accounting and
pooling-of-interests method of accounting. Integration plans are considered
to be significant if the charge recorded to establish the accrual is in
excess of 5% of consolidated pretax income.
Significant Pooling-of-Interests Business Combination Plan
The Company formalized and adopted an integration plan in December 1997 to
integrate the operations of S&W X-Ray, Inc. ("S&W") with the Imaging
Business. As of June 30, 2000, all of the employees have been terminated
and all of the seven identified distribution facilities have been shut
down. Therefore, all costs related to the merger plan had been incurred at
June 30, 2000, except for lease termination costs for one location for
which payment will extend through fiscal 2002. During the three months
ended June 30, 2000, $22 of lease expense was charged against the accrual
leaving a remaining accrual of $80.
Nonsignificant Poolings-of-Interests Business Combination Plans
The Imaging Business acquired TriStar Imaging Systems, Inc. ("TriStar") in
October 1998, and management formalized and adopted an integration plan in
late fiscal 1999 to integrate the operations of the acquired company. All
costs related to the merger plan had been incurred at June 30, 2000, except
for lease termination costs for which payment will extend through fiscal
2007. During the three months ended June 30, 2000, $30 of lease expense was
charged against the accrual leaving a remaining accrual of $515.
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. The following is a summary of
the merger activity for the three months ended June 30, 2000 which related
to three nonsignificant purchase business combinations completed during
fiscal 1999:
9
<PAGE>
Involuntary
Employee Lease
Termination Termination
Costs Costs Total
------------- ------------- --------------
Balance at March 31, 2000 $ 56 $ 386 $ 442
Adjustments -- -- --
Additions -- -- --
Utilized (39) (29) (68)
------------- ------------- --------------
Balance at June 30, 2000 $ 17 $ 357 $ 374
============= ============= ==============
The Imaging Business acquired South Jersey X-Ray, Inc. in October 1998, and
management formalized and adopted an integration plan during the three
months ended June 30, 1999 to integrate the operations of the acquired
company. Approximately $307 of the $374 remaining accrued merger costs and
expenses at June 30, 2000 relate to this integration plan. As of June 30,
2000, all locations have been shut down and all employees were terminated
as a result of the plan. However, lease termination payments will extend
through fiscal 2004.
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 implemented a restructuring plan during the fourth
quarter of fiscal 1998 which impacted all divisions ("Plan A").
Subsequently, the Company adopted a second restructuring plan during the
first quarter of fiscal 1999 related to the Gulf South division ("Plan B")
to further consolidate its operations.
During the second quarter of fiscal 2000, management evaluated the
Company's overall cost structure and implemented cost reductions in order
to meet internal profitability targets. In addition, management decided to
improve its distribution model and relocate the corporate office for the
GSMS division to Jacksonville, Florida where the corporate offices for the
DI and PSS divisions exist. The Company implemented the restructuring plan
during the second quarter of fiscal 2000, which impacted all divisions
("Plan C"). The total number of employees to be terminated was 272.
During the fourth quarter of fiscal 2000, the Imaging Business' management
made a discretionary decision to change its business strategy and the way
it operates to improve future operations. These changes include
restructuring the Imaging Business sales force, terminating approximately
50 service engineers, and closure of two distribution centers ("Plan D").
Accrued restructuring costs and expenses related to Plans A, B, C and D,
classified as accrued expenses in the accompanying consolidated balance
sheets, totaled $1,149 and $1,607 at June 30, 2000 and March 31, 2000,
respectively. The following is a summary of the restructuring plan activity
for the three months ended June 30, 2000:
<TABLE>
<CAPTION>
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at March 31, 2000 $ 376 $ 857 $ 374 $ 1,607
Adjustments -- -- -- --
Additions -- -- -- --
Utilized (270) (145) (43) (458)
------------- ------------- -------------- --------------
Balance at June 30, 2000 $ 106 $ 712 $ 331 $ 1,149
============= ============= ============== ==============
</TABLE>
10
<PAGE>
Plan A
As of December 31, 1999, all employees were terminated and all of the
locations were merged into existing locations. The accruals related to this
plan were fully utilized at June 30, 2000.
Plan B
As of December 31, 1999, all of the six locations had been shut down and
all employees were terminated as a result of the plan. Approximately $152
of lease termination payments remain accrued at June 30, 2000 for which
payments will extend through fiscal 2002.
Plan C
All employees have been terminated at March 31, 2000. Accrued restructuring
costs and expenses related to Plan C at June 30, 2000 were approximately
$997, of which $560 relates to lease terminations, $106 to involuntary
employee terminations, and $331 to branch shut down costs.
Plan D
All employees have been terminated at June 30, 2000, and the accrued
restructuring costs and the accruals related to this plan were fully
utilized at June 30, 2000.
NOTE 5 - COMPREHENSIVE INCOME
Comprehensive income is defined as net income plus direct adjustments to
shareholders' equity. The following details the components of comprehensive
income for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Net income........................................ $ 5,624 $ 10,241
------------- -------------
Other comprehensive (expense) income, net of tax:
Foreign currency translation adjustment....... 161 (263)
Unrealized loss on available for sale security (1,507) --
------------- -------------
Comprehensive income.............................. $ 4,278 $ 9,978
============= =============
</TABLE>
NOTE 6 - EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, the calculation of
basic net earnings per common share and diluted earnings per common share
is presented below (share amounts in thousands, except per share data):
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
June 30, June 30,
2000 1999
------------- --------------
<S> <C> <C>
Net income..................................................... $ 5,624 $ 10,241
============= ==============
Earnings per share - Basic:
Income before cumulative effect of accounting change........ $ 0.08 $ 0.16
Cumulative effect........................................... -- (0.02)
------------- --------------
Net income.................................................. $ 0.08 $ 0.14
============= ==============
Earnings per share - Basic:
Income before cumulative effect of accounting change........ $ 0.08 $ 0.16
Cumulative effect........................................... -- (0.02)
------------- --------------
Net income.................................................. $ 0.08 $ 0.14
============= ==============
Weighted average shares outstanding:
Common shares............................................... 71,128 70,796
Assumed exercise of stock options........................... 123 355
------------- --------------
Diluted shares outstanding.................................. 71,251 71,151
============= ==============
</TABLE>
NOTE 7 - segment information
SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, 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. ("DI"
or the "Imaging Business"), Gulf South Medical Supply, Inc. ("GSMS" or 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 office-based physicians in the United
States. DI is a distributor of medical diagnostic imaging supplies,
chemicals, equipment, and service to the acute and alternate-care markets
in the United States. GSMS is a distributor of medical supplies and related
products to the long-term care market in the United States. WorldMed Int'l
along with WorldMed, Inc. manages and develops PSS' European medical
equipment and supply distribution market
The Company primarily evaluates the operating performance of its segments
based on net sales and income from operations. The following table presents
financial information about the Company's business segments:
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
June 30, 2000 June 30, 1999
------------- -------------
NET SALES:
<S> <C> <C>
Physician Supply Business $ 177,215 $ 172,905
Imaging Business 196,750 164,140
Long-Term Care Business 91,197 92,203
Other (a) 5,051 7,753
------------- -------------
Total net sales $ 470,213 $ 437,001
============= =============
CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES:
Physician Supply Business $ 75 $ 12
Imaging Business 1,170 322
Long-Term Care Business 387 551
Other (a) 1,969 --
------------- -------------
Total charges included in general and
administrative expenses $ 3,601 $ 885
============= =============
INCOME FROM OPERATIONS:
Physician Supply Business $ 11,587 $ 11,258
Imaging Business 3,496 6,960
Long-Term Care Business 1,789 3,105
Other (a) (2,961) 555
------------- -------------
Total income from operations $ 13,911 $ 21,878
============= =============
DEPRECIATION:
Physician Supply Business $ 1,009 $ 985
Imaging Business 813 685
Long-Term Care Business 461 346
Other (a) 107 65
------------- -------------
Total depreciation $ 2,390 $ 2,081
============= =============
AMORTIZATION OF INTANGIBLE AND OTHER ASSETS:
Physician Supply Business $ 428 $ 518
Imaging Business 2,005 1,266
Long-Term Care Business 560 540
Other (a) 292 263
------------- -------------
Total amortization of intangible and other assets $ 3,285 $ 2,587
============= =============
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business $ (77) $ (7)
Imaging Business 367 (342)
Long-Term Care Business 1,194 500
------------- -------------
Total provision for doubtful accounts $ 1,484 $ 151
============= =============
CAPITAL EXPENDITURES:
Physician Supply Business $ 2,756 $ 2,453
Imaging Business 1,227 1,283
Long-Term Care Business 200 1,129
Other (a) 224 282
------------- -------------
Total capital expenditures $ 4,407 $ 5,147
============= =============
June 30, 2000 March 31, 2000
------------- --------------
ASSETS:
Physician Supply Business $ 242,763 $ 243,020
Imaging Business 341,217 346,073
Long-Term Care Business 186,806 182,024
Other (a) 73,179 102,300
------------- -------------
Total assets $ 843,965 $ 873,417
============= =============
(a) Other includes the holding company and the International subsidiaries
</TABLE>
13
<PAGE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain executive officers which
provide that in the event of their termination or resignation, under
certain conditions, the Company may be required to continue salary payments
and provide insurance for a period ranging from 12 to 36 months for the
Chief Executive Officer and from 3 to 12 months for other executives and to
repurchase a portion or all of the shares of common stock held by the
executives upon their demand at the fair market value at the time of
repurchase. The period of salary and insurance continuation and the level
of stock repurchases are based on the conditions of the termination or
resignation.
During fiscal 2000, the Board of Directors approved and adopted the PSS
World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical,
Inc. Corporate Office Employee Retention Bonus Plan. Refer to Note 3,
Charges included in General and Administrative Expenses for further
discussion.
PSS and certain of its current officers and directors were named as
defendants in a purported securities class action lawsuit filed on or about
May 28, 1998. The allegations are based upon a decline in the PSS stock
price following announcements by PSS in May 1998 regarding the Gulf South
merger that resulted in earnings below analyst's expectations. The Company
believes that the allegations contained in the complaints are without merit
and intends to defend vigorously against the claims. However, the lawsuit
is in the earliest stages, and there can be no assurances that this
litigation will ultimately be resolved on terms that are favorable to the
Company.
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability.
The Company has not experienced any significant product liability claims
and maintains product liability insurance coverage. In addition, the
Company is party to various legal and administrative proceedings and claims
arising in the normal course of business. While any litigation contains an
element of uncertainty, management believes that the outcome of any
proceedings or claims which are pending or known to be threatened will not
have a material adverse effect on the Company's consolidated financial
position, liquidity, or results of operations.
On September 30, 1999, DI entered into a three year distributorship
agreement with an imaging supply vendor. The agreement stipulates that,
among other things, in the event of termination of the agreement due to a
change in control of DI, the Company will pay liquidated damages to the
vendor in the amount of the lesser of $6 million or $250,000 times the
number of months remaining under the agreement.
NOTE 9 - AGREEMENT TO MERGE WITH FISHER SCIENTIFIC INTERNATIONAL, INC.
The Company entered into an Agreement and Plan of Merger dated June 21,
2000 with Fisher Scientific International, Inc. ("Fisher"), pursuant to
which PSS and Fisher will combine business operations and PSS will become a
wholly owned subsidiary of Fisher. The merger is subject to various
conditions, including approval of the shareholders of PSS and Fisher,
filings with and compliance with securities and antitrust laws, the
financial and operating performance of PSS and certain other matters.
14
<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, home care providers, and hospitals
through 101 service centers to customers in all 50 states and four 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 51 medical supply distribution service
centers with approximately 735 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 34 imaging distribution service
centers with approximately 825 service specialists and 210 sales
representatives ("Imaging Business") serving over 45,000 customer sites in
42 states. The Imaging Business' primary market is the approximately 5,000
acute-care hospitals, 3,000 imaging centers, and 100,000 private practice
physicians, veterinarians and chiropractors.
Through its wholly owned subsidiary Gulf South Medical Supply, Inc.
("GSMS"), the Company is a leading national distributor of medical supplies
and related products to the long-term care industry in the United States
based on revenues, number of sales representatives, and number of service
centers. GSMS currently operates 14 distribution service centers with
approximately 131 sales representatives ("Long-Term Care Business") serving
over 14,000 long-term care accounts in all 50 states. The Long-Term Care
Business' primary market is comprised of a large number of independent
operators, small to mid-sized local and regional chains, and several
national chains representing over 17,000 long-term care sites.
In addition to its operations in the United States, the Company, through
its wholly owned subsidiary WorldMed International, Inc. ("WorldMed"),
operates two European service centers ("International Business")
distributing medical products to the physician office and hospital markets
in Belgium, France, Germany, and Luxembourg.
INDUSTRY
According to industry estimates, the United States medical supply and
equipment segment of the health care industry represents a $34 billion
market comprised of distribution of medical products to hospitals, home
health care agencies, imaging centers, physician offices, dental offices,
and long-term care facilities. The Company's primary focus includes
distribution to the physician office, providers of imaging services, and
long-term care facilities that comprise $14 billion or approximately 40% of
the overall market.
15
<PAGE>
Revenues of the medical products distribution industry are estimated to be
growing as a result of a growing and aging population, increased health
care awareness, proliferation of medical technology and testing, and
expanding third-party insurance coverage. In addition, the physician market
is benefiting from the shift of procedures and diagnostic testing from
hospitals to alternate sites, particularly physician offices, despite a
migration of significantly lower hospital medical product pricing into the
physician office market.
The health care industry is subject to extensive government regulation,
licensure, and operating procedures. National health care reform has been
the subject of a number of legislative initiatives by Congress.
Additionally, government and private insurance programs fund the cost of a
significant portion of medical care in the United States. In recent years,
government-imposed limits on reimbursement of hospitals, long-term care
facilities, and other health care providers have affect spending budgets in
certain markets within the medical products industry. Recently, Congress
has passed radical changes to reimbursements for nursing homes and home
care providers. The industry has struggled with these changes and the
ability of providers, distributors, and manufacturers to adopt to the
changes is not yet determined. These changes also effect some distributors
who directly bill the government for these providers. The industry
estimates that approximately 19% of the beds represented by homes in the
long-term care industry have filed for bankruptcy protection, which also is
the Company's percentage for fiscal 2000.
Over the past few years, the health care industry has undergone significant
consolidation. Physician provider groups, long-term care facilities, and
other alternate-site providers along with the hospitals continue to
consolidate. The consolidation creates new and larger customers. However,
the majority of the market serviced by the Company remains a large number
of small customers with no single customer exceeding 10% of the
consolidated Company's revenues. However, the Long-Term Care Business
depends on a limited number of large customers for a significant portion of
its net sales and approximately 37% of the Long-Term Care Business revenues
for the three months ended December 31, 1999 represented sales to its top
five customers. Growth in the Long-Term Care Business, as well as
consolidation of the health care industry, may increase the Company's
dependence on large customers.
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the results of
operations for the three months ended June 30, 2000 and 1999.
THREE MONTHS ENDED JUNE 30, 2000 VERSUS THREE MONTHS ENDED JUNE 30, 1999
Net Sales. Net sales for the three months ended June 30, 2000 totaled
$470.2 million, an increase of 33.2 million, or 7.6%, over the three months
ended June 30, 1999 total of $437.0 million. Although the majority of the
sales growth is due to acquisitions completed in fiscal 2000, the Company
has successfully implemented its strategies to (i) convert and replace
manufacturer recalled products in its Physician division, (ii) replace with
new products the revenues interrupted by supplier backorders in the Imaging
division, and (iii) maintain revenue while tightening credit policies in
the Long-term Care division.
16
<PAGE>
Gross Profit. Gross profit for the three months ended June 30, 2000 totaled
$113.1 million, an increase of $5.9 million, or 5.5%, over the three months
June 30, 1999 total of $107.2 million. The increase in gross profit dollars
is primarily attributable to the sales growth described above. Gross profit
as a percentage of net sales was 24.1% and 24.5% for the three months ended
June 30, 2000 and 1999, respectively. The decrease in gross profit as a
percent of net sales is attributable to (i) the increased mix of the
Imaging division revenues as a percent of total revenues, (ii) the decrease
in gross margin in the Imaging division as a result of vendor supply
interruption of parts which has decreased higher margin service labor
revenues, offset by (iii) an increase in the sales mix of higher margin
diagnostic equipment and service, (iv) an increase in sales of higher
margin private label products, (v) the effect of negotiated lower product
purchasing costs which resulted, and (vi) the elimination of lower
margin acquired Imaging Business revenues.
Beginning in fiscal 1999 and continuing into fiscal 2000, the Company has
experienced margin pressures in the Long-Term Care Business as a result of
its large chain customers renegotiating prices due to the implementation of
PPS. The Company expects this trend to continue in the Long-Term Care
Business.
General and Administrative Expenses. General and administrative expenses
for the three months ended June 30, 2000 totaled $69.8 million, an increase
of $11.8 million, or 20.3%, from the three months ended June 30, 1999 total
of $58.0 million. General and administrative expense as a percentage of net
sales increased to 14.8% from 13.3% for the comparable three-month period.
General and administrative expenses includes charges related to merger
activity, restructuring activity, and other special items. See
Note 3, Charges Included in General and Administrative Expenses, to the
condensed consolidated financial statements for additional discussion.
In addition to items characterized as charges related to merger activity,
restructuring activity, and other special items, the Company has
incurred incremental costs to implement its strategies to replace and
convert products recalled and backordered by manufacturers. These
incremental costs have not been leveraged with incremental sales. The
sales generated by incremental costs have only replaced recalled and
backordered revenues. The Company believes there will be a return to prior
levels of cost leveraging in future periods.
Selling Expenses. Selling expenses for the three months ended June 30, 2000
totaled $29.4 million, an increase of $2.1 million, or 7.7%, over the three
months ended June 30, 1999 total of $27.3 million. Selling expense as a
percentage of net sales was approximately 6.3% for the three months ended
June 30, 2000 and 1999. The Company utilizes a variable commission plan,
which pays commissions based on gross profit as a percentage of net sales.
Operating Income. Operating income for the three months ended June 30, 2000
totaled $13.9 million, a decrease of $8.0 million, or 36.5%, over the three
months ended June 30, 1999 total of 21.9 million. As a percentage of net
sales, operating income decreased to 3.0% from 5.0% from the comparable
prior year period primarily due to the impact of the factors described
above.
Interest Expense. Interest expense for the three months ended June 30, 2000
totaled $5.0 million, an increase of $1.5 million, or 42.9%, over the three
months ended June 30, 1999 total of $3.5 million. The increase in interest
expense for the three month period is primarily attributable to higher debt
balances under the revolving credit facility over the prior year period
primarily due to acquisitions completed during fiscal 2000.
Interest and Investment Income. Interest and investment income for the
three months ended June 30, 2000 totaled $0.7 million, an increase of $0.2
million, or 40%, over the three months ended June 30, 1999 total of $0.5
million.
17
<PAGE>
Other Income. Other income for the three months ended June 30, 2000 totaled
$0.8 million, a decrease of $0.3 million, or 27.3%, over the three months
ended June 30, 1999 total of $1.1 million. Normally, other income primarily
consists of finance charges on customer accounts and financing performance
incentives.
Provision for Income Taxes. Provision for income taxes for the three months
ended June 30, 2000 totaled $4.8 million, a decrease of $3.4 million, or
41.5%, over the three months ended June 30, 1999 total of $8.2 million. The
effective income tax rate was approximately 45.9% and 41.2% for the three
months ended June 30, 2000 and 1999, respectively. The effective tax rate
is generally higher than the Company's statutory rate due to the to the
nondeductible nature of certain merger related costs and the impact of the
Company's foreign subsidiary.
Net Income. Net income for the three months ended June 30, 2000 totaled
$5.6 million, a decrease of $4.6 million, or 45.1%, over the three months
ended June 30, 1999 total of $10.2 million. As a percentage of net sales,
net income decreased to 1.2% from 2.3% for the comparable prior year period
primarily due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business grows, its cash and working capital requirements
will also continue to increase as a result of the need to finance
acquisitions and anticipated growth of the Company's operations. This
growth will be funded through a combination of cash flow from operations,
revolving credit borrowings and proceeds from any future public offerings.
Net cash provided by operating activities was $12.9 million and $16.7
million for the three months ended June 30, 2000 and 1999, respectively.
The variation in operating cash flows primarily results from a decrease in
operating income as discussed in prior sections of the MD&A.
Net cash used in investing activities was ($4.6) million and ($27.8)
million for the three months ended June 30, 2000 and 1999, respectively.
The decrease in cash outflows from investing activities primarily results
from a reduction of purchase business combinations over the comparable
period and a reduction in investments made in marketable securities.
Net cash (used in) provided by financing activities was ($26.9) million and
$8.9 million for the three months ended June 30, 2000 and 1999,
respectively. The increase in cash outflows for financing activities
primarily results from a net $27 million principal payment on the revolving
credit facility during the three months ended June 30, 2000. This payment
was funded by approximately $21 million of investments that were held at
March 31, 2000 and $6 million of operating cash flow.
The Company had working capital of $387.3 million and $414.1 million as of
June 30, 2000 and March 31, 2000, respectively. Accounts receivable, net of
allowances, were $286.1 million and $284.4 million at June 30, 2000 and
March 31, 2000. The average number of days sales in accounts receivable
outstanding was approximately 54.6 and 55.8 days for the three months ended
June 30, 2000 and the year ended March 31, 2000, respectively.
Inventories were $165.7 million and $178.0 million as of June 30, 2000 and
March 31, 2000, respectively. The Company had inventory turnover of 8.3x
and 8.0x for the three months ended June 30, 2000 and the year ended March
31, 2000, respectively.
The following table presents EBITDA and other financial data for the three
months ended June 30, 2000 and June 30, 1999 (in thousands):
18
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
June 30, 2000 June 30, 1999
------------- -------------
Other Financial Data:
<S> <C> <C>
Income before provision for income taxes and $ 10,388 $ 19,876
cumulative effect of accounting change
Plus: Interest Expense 5,035 3,511
------------- -------------
EBIT (a) 15,423 23,387
Plus: Depreciation and amortization 5,474 4,485
------------- -------------
EBITDA (b) 20,897 27,872
Unusual Charges Included in Continuing Operations 3,601 885
Cash Paid For Unusual Charges Included in Continuing (2,534) (3,384)
Operations
------------- -------------
Adjusted EBITDA (c) $ 21,964 $ 25,373
EBITDA Coverage (d) 4.2x 7.9x
EBITDA Margin (e) 4.4% 6.4%
Adjusted EBITDA Coverage (f) 4.4x 7.2x
Adjusted EBITDA Margin (g) 4.7% 5.8%
Cash provided by operating activities $ 12,888 $ 16,686
Cash used in investing activities $ (4,567) $ (27,848)
Cash (used in) provided by financing activities $ (26,905) $ 8,947
In addition, the following presents the calculation of EBITDA, as defined
in the Merger Agreement with Fisher Scientific International, Inc.:
June 30, 2000
-------------
Operating income $ 13,911
Plus: Depreciation and amortization 5,474
Merger, nonrecurring and restructuring
charges and expenses 3,601
Interest income on trade receivables 606
EBITDA, as defined (h) $ 23,592
</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) EBITDA margin represents the ratio of EBITDA to net sales.
(f) Adjusted EBITDA coverage represents the ratio of Adjusted EBITDA to
interest expense.
(g) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to net
sales.
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<PAGE>
(h) As defined in article 8.2(e) of the Merger Agreement included in
Form 8-K which was filed on June 27, 2000.
On October 7, 1997, the Company issued, in a private offering under Rule
144A of the Securities Act of 1933, an aggregate principal amount of $125.0
million of its 8.5% senior subordinated notes due in 2007 (the "Private
Notes") with net proceeds to the Company of $119.5 million after deduction
for offering costs. The Private Notes are unconditionally guaranteed on a
senior subordinated basis by all of the Company's domestic subsidiaries. On
February 10, 1998, the Company closed its offer to exchange the Private
Notes for senior subordinated notes (the "Notes") of the Company with
substantially identical terms to the Private Notes (except that the Notes
do not contain terms with respect to transfer restrictions). Interest on
the Notes accrues from the date of original issuance and is payable
semiannually on April 1 and October 1 of each year, commencing on April 1,
1998, at a rate of 8.5% per annum. The semiannual payments of approximately
$5.3 million will be funded by the operating cash flow of the Company. No
other principal payments on the Notes are required over the next five
years. The Notes contain certain restrictive covenants that, among other
things, limit the Company's ability to incur additional indebtedness.
Provided, however, that no event of default exist, additional indebtedness
may be incurred if the Company maintains a consolidated fixed charge
coverage ratio, after giving effect to such additional indebtedness, of
greater than 2.0 to 1.0.
On February 11, 1999, the Company entered into a $140.0 million senior
revolving credit facility with a syndicate of financial institutions with
NationsBank, N.A. as principal agent. Borrowings under the credit facility
are available for working capital, capital expenditures, and acquisitions,
and are secured by the common stock and assets of the Company and its
subsidiaries. The credit facility expires February 10, 2004 and borrowings
bear interest at certain floating rates selected by the Company at the time
of borrowing. The credit facility contains certain affirmative and negative
covenants, the most restrictive of which require maintenance of a maximum
leverage ratio of 3.5 to 1.0, maintenance of consolidated net worth of
$337.0 million, and maintenance of a minimum fixed charge coverage ratio of
2.0 to 1.0. In addition, the covenants limit additional indebtedness and
asset dispositions, require majority lender approval on acquisitions with a
total purchase price greater than $75.0 million, and restrict payments of
dividends.
On October 20, 1999, the Company amended its $140.0 million senior
revolving credit facility to allow for repurchases of up to $50.0 million
of the Company's common stock through October 31, 2000. In addition, the
amendment modified the consolidated net worth maintenance covenant to
reduce the $337.0 million minimum compliance level by any repurchases made
by the Company of its common stock.
Effective August 4, 2000, the Company obtained an amendment to its senior
revolving credit agreement. This amendment modifies the leverage ratio from
an original 3.5 to 1.0 to no greater than 3.75 to 1.0 for the quarter ended
June 30, 2000, and no greater than 4.3 to 1.0 for the quarters ended
September 30 and December 31, 2000. In addition, this amendment modifies
the fixed charge coverage ratio from an original 2.0 to 1.0 to no less than
1.5 to 1.0 for the quarters ended June 30, September 30, and December 31,
2000. Subsequent to these periods, the fixed charge coverage and leverage
ratios revert back to their original requirements.
As of June 30, 2000, 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.
20
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2000, the Company did not hold any derivative financial or
commodity instruments. The Company is subject to interest rate risk and
certain foreign currency risk relating to its operations in Europe;
however, the Company does not consider its exposure in such areas to be
material. The Company's interest rate risk is related to its Senior
Subordinated Notes, which bear interest at a fixed rate of 8.5%, and
borrowings under its Credit Facility, which bear interest at variable
rates, at the Company's option, at either the lender's base rate plus 0.25%
(9.75% at June 30, 2000) or LIBOR plus 1.25% (a weighted average of 7.8%
at June 30, 2000).
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
pending merger transaction and its effect on the ongoing operations of the
Company and the risk that it may not be completed, 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; 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.
21
<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-20A. The action, which was filed on or about May 28, 1998, is
pending in the United States District Court for the Middle District of
Florida, Jacksonville Division. An amended complaint was filed on December
11, 1998. The plaintiff alleges, for himself and for a purported class of
similarly situated stockholders who allegedly purchased the Company's stock
between December 23, 1997 and May 8, 1998, that the defendants engaged in
violations of certain provisions of the Exchange Act, and Rule 10b-5
promulgated thereunder. The allegations are based upon a decline in the PSS
stock price following announcement by PSS in May 1998 regarding the Gulf
South Merger which resulted in earnings below analyst's expectations. The
plaintiff seeks indeterminate damages, including costs and expenses. PSS
filed a motion to dismiss the first amended complaint on January 25, 1999.
The court granted that motion without prejudice by order dated February 9,
2000. Plaintiffs filed their second amended complaint on March 15, 2000.
PSS filed a motion to dismiss the second amended complaint on May 1, 2000,
which is pending. PSS believes that the allegations contained in the second
amended complaint are without merit and intends to defend vigorously
against the claims. However, the lawsuit is in the earliest stages, and
there can be no assurance that this litigation will be ultimately resolved
on terms that are favorable to PSS.
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) Not applicable.
(d) Not applicable.
22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this Quarterly Report on
Form 10-Q:
Exhibit
Number Description
--------- ----------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation dated March 15,
1994, as amended.(12)
3.2 Amended and Restated Bylaws dated March 15, 1994.(1)
4.1 Form of Indenture, dated as of October 7, 1997, by and among the
Company, the Subsidiary Guarantors named therein, and SunTrust
Bank, Central Florida, National Association, as Trustee.(2)
4.2 Registration Rights Agreement, dated as of October 7, 1997, by
and among the Company, the Subsidiary Guarantors named therein,
BT Alex. Brown Incorporated, Salomon Brothers Inc. and
NationsBanc Montgomery Securities, Inc.(2)
4.3 Form of 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)
4.5a Amendment to Shareholder Protection Rights Agreement, dated as
of June 21, 2000, between PSS World Medical, Inc. and
Continental Stock Transfer & Trust Company as Rights Agent.
4.6 Agreement and Plan of Merger, dated June 21, 2000, by and among
Fisher Scientific International, Inc., FSI Merger Corporation
and PSS World Medical, Inc.(15)
4.7 Stock Option Agreement, dated June 21, 2000, by and between
Fisher Scientific International, Inc. and PSS World Medical,
Inc.(15)
4.8 Voting Agreement, dated June 21, 2000, by and among PSS World
Medical, Inc. and the stockholders of Fisher Scientific
International, Inc. named therein(15)
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)
10.2a Amendment to Employment Agreement for Patrick C. Kelly(18)
10.3 Incentive Stock Option Plan dated May 14, 1986.(3)
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<PAGE>
Exhibit
Number Description
-------- ----------------------------------------------------------------
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)
10.12 PSS World Medical, Inc. 1999 Long-Term Incentive Plan(16)
10.13 Distributorship Agreement between Abbott Laboratories and
Physician Sales & Service, Inc. (Portions omitted as
confidential--Separately filed with Commission).(5)
10.14 Stock Purchase Agreement between Abbott Laboratories and
Physician Sales & Service, Inc.(5)
10.15 Amendment to Employee Stock Ownership Plan.(7)
10.15a Amendment and Restatement of the Physician Sales and Service,
Inc. Employee Stock Ownership and Savings Plan.(8)
10.15b First Amendment to the Physician Sales and Service, Inc.
Employee Stock Ownership and Savings Plan.(7)
10.16 Third Amended and Restated Agreement and Plan of Merger By and
Among Taylor Medical, Inc. and Physician Sales & Service, Inc.
(including exhibits thereto).(6)
10.17 Agreement and Plan of Merger by and Among Physician Sales &
Service, Inc., PSS Merger Corp. and Treadway Enterprises, Inc.
(8)
10.18 Amended and Restated Agreement and Plan of Merger, dated as of
August 22, 1997, among the Company, Diagnostic Imaging, Inc.,
PSS Merger Corp. and S&W X-ray, Inc.(9)
10.19 Agreement and Plan of Merger dated December 14, 1997 by and
among the Company, PSS Merger Corp. and Gulf South Medical
Supply, Inc.(10)
10.20 Credit Agreement dated as of February 11, 1999 among the
Company, the several lenders from time to time hereto and
NationsBank, N.A., as Agent and Issuing Lender.(14)
10.21 First Amendment dated as of October 20, 1999 to the Credit
Agreement dates as of February 11, 1999 among the Company, the
several lenders from time to time hereto and NationsBank, N.A.
as Agent and Issuing Lender.(17)
27 Financial Data Schedule (for SEC use only)
24
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(1) Incorporated by Reference to the Company's Registration Statement on
Form S-3, Registration No. 33-97524.
(2) Incorporated by Reference to the Company's Registration Statement on
Form S-4, Registration No. 333-39679.
(3) Incorporated by Reference from the Company's Registration Statement on
Form S-1, Registration No. 33-76580.
(4) Incorporated by Reference to the Company's Registration Statement on
Form S-8, Registration No. 33-80657.
(5) Incorporated by Reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 30, 1995.
(6) Incorporated by Reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 29, 1996.
(7) Incorporated by Reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1996.
(8) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed January 3, 1997.
(9) Incorporated by Reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-33453.
(10) Incorporated by Reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-44323.
(11) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 22, 1998.
(12) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 8, 1998.
(13) Incorporated by Reference to the Company's Annual Report on Form 10-K
for the fiscal year ended April 3, 1998.
(14) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed February 23, 1999.
(15) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed June 27, 2000.
(16) Incorporated by Reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999.
(17) Incorporated by Reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1999.
(18) Incorporated by Reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 2000.
(b) Reports on Form 8-K
The following current reports on Form 8-K were filed during the quarter
ended June 30, 2000:
Date of Report Items Reported
-------------- ---------------------------------------------------
May 31, 2000 Announcing that on May 26, 2000, PSS dismissed
Ernst & Young LLP as the accountants for its Gulf
South Medical Supply, Inc. subsidiary and that from
such date, PSS will rely on the opinion of its
primary auditor, Arthur Andersen LLP.
June 9, 2000 Amending the Form 8-K filed on May 31, 2000 to
amend certain items and file the response letter of
Ernst & Young LLP.
June 27, 2000 Announcing that PSS World Medical, Inc. had entered
into an Agreement and Plan of Merger dated June 21,
2000 with Fisher Scientific International, Inc. and
a Stock Option Agreement and Voting Agreement
relating to the proposed merger.
25
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Jacksonville, State
of Florida, on August 8, 2000.
PSS WORLD MEDICAL, INC.
By: /s/ David A. Smith
------------------------------
David A. Smith,
Executive Vice President and
Chief Financial Officer
26
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Exhibit 4.5a
AMENDMENT NO. 1
TO
SHAREHOLDER PROTECTION RIGHTS AGREEMENT
This Amendment No. 1, dated as of June 21, 2000 (this "Amendment"),
between PSS World Medical, Inc., a Florida corporation (the "Company"), and
Continental Stock Transfer & Trust Company, as Rights Agent (the "Rights
Agent"), constitutes the first amendment to the Shareholder Protection Rights
Agreement, dated as of April 20, 1998 (the "Agreement"), between the Company and
the Rights Agent.
W I T N E S S E T H:
WHEREAS, Company proposes to enter into an Agreement and Plan of
Merger, dated as of June 21, 2000 (the "Merger Agreement"), among Fisher
Scientific International, Inc., a Delaware corporation ("Parent"), FSI Merger
Corporation, a Florida corporation ("Merger Sub"), and Company, pursuant to
which Company will represent and warrant, among other things, that that the
Agreement has been amended (a) to render the Agreement inapplicable to the
Merger and the other transactions contemplated thereby, including the Stock
Option Agreement, dated as of the date of the Merger Agreement between Parent
and Company (the "Stock Option Agreement"), (b) to ensure that in connection
with the Merger, the Stock Option Agreement and the transactions contemplated
thereby that (i) Parent and Purchaser, or either of them, are not deemed to be
an Acquiring Person pursuant to the Agreement and (ii) no "Stock Acquisition
Date," "Flip-in Date" or "Flip-Over Transaction or Event" occurs by reason of
the execution and delivery of the Merger Agreement and the transactions
contemplated thereby, including the purchase of any Company Common Stock by
Parent pursuant to the Stock Option Agreement and (c) so that Company will have
no obligations under the Company Rights or the Agreement in connection with the
Merger or the transactions (including any purchase of Company Common Stock
pursuant to the Stock Option Agreement) and the holders of Shares and the
associated Company Rights will have no rights under the Company Rights or the
Company Rights Agreement in connection with the Merger or the transactions
(including any purchase of Company Common Stock pursuant to the Stock Option
Agreement); and
WHEREAS, the Board of Directors of Company has determined that it is
necessary and desirable to amend, pursuant to Section 5.4 of the Agreement, the
Agreement to comply with the terms of the Merger Agreement; and
WHEREAS, the Board of Directors of Company, at a meeting of such Board
duly called and held on June 21, 2000, voted in favor of the adoption of this
Amendment.
NOW, THEREFORE, in consideration of the foregoing, the mutual
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Section 1.1 of the Agreement is hereby amended by adding the
following sentence at the end of the definition of "Acquiring Person" contained
in such Section:
"Notwithstanding the foregoing, no Person shall become an
`Acquiring Person' solely as a result of the execution and delivery of or the
consummation of the transactions contemplated by the Agreement and Plan of
Merger, dated as of June 21, 2000 (the "Merger Agreement"), among Fisher
Scientific International, Inc., a Delaware corporation, and its wholly-owned
subsidiary, FSI Merger Corporation, a Florida corporation, and the Company (the
"Merger Agreement"), and the ancillary agreements thereto, including, without
limitation, the Stock Option Agreement, dated as of the date of the Merger
Agreement, between Parent and Company (the "Stock Option Agreement")."
27
<PAGE>
2. Section 1.1 of the Agreement is hereby amended by adding the
following sentence at the end of the of the definition of "Flip-In Date"
contained in such Section:
"Notwithstanding the foregoing, no `Flip-In Date' shall occur
solely as a result of the execution and delivery of, or the
consummation of the transactions contemplated by, the Merger
Agreement and the ancillary agreements thereto, including,
without limitation, the Stock Option Agreement."
3. Section 1.1 of the Agreement is hereby amended by adding the
following sentence at the end of the definition of "Flip-Over Transaction or
Event" contained in such Section:
"Notwithstanding the foregoing, no `Flip-Over Transaction or
Event' shall occur solely as a result of the execution and
delivery of, or the consummation of the transactions
contemplated by, the Merger Agreement and the ancillary
agreements thereto, including, without limitation, the Stock
Option Agreement."
4. Section 1.1 of the Agreement is hereby amended by adding the
following sentence at the end of the definition of "Separation Time" contained
in such Section:
"Notwithstanding the foregoing, neither the announcement of
the execution and delivery of the Merger Agreement or of the
calling of a shareholders meeting to approve and adopt the
Merger Agreement nor the filing of the Proxy
Statement/Prospectus (as defined in the Merger Agreement) or
any amendment thereto nor any distribution of the prospectus
contained therein nor any other action taken to facilitate the
consummation of the transactions contemplated by the Merger
Agreement and the ancillary agreements thereto shall be deemed
the commencement of a tender or exchange offer for the
purposes of this Agreement."
5. Section 1.1 of the Agreement is hereby amended by adding the
following sentence at the end of the definition of "Stock Acquisition Date"
contained in such Section:
"Notwithstanding the foregoing, no `Stock Acquisition Date'
shall occur solely as a result of the execution and delivery
of, or the consummation of the transactions contemplated by,
the Merger Agreement and the ancillary agreements thereto,
including, without limitation, the Stock Option Agreement."
6. Section 5.14 of the Agreement is hereby amended by adding the
following sentence at the end thereof:
"The execution and delivery of, and the consummation of the
transactions contemplated by, the Merger Agreement and
Amendment No. 1 to this Agreement have been approved as of
June 21, 2000 by the Board of Directors of the Company for all
purposes under this Section 5.14."
7. Terms used herein without definition, but defined in the Agreement,
shall have the meanings assigned to them in the Agreement. Other than as amended
hereby, all other provisions of the Agreement shall remain in full force and
effect.
[Signatures on Next Page]
28
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and attested as of the day and year first above written.
PSS WORLD MEDICAL, INC.
By: /s/ Patrick C. Kelly
-------------------------------
Name: Patrick C. Kelly
Title: Chief Executive Officer
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
By: /s/ William F. Seegraber
---------------------------------
Name: William F. Seegraber
Title: Vice President
29
<PAGE>
PSS WORLD MEDICAL, INC.
June 18, 2000
Continental Stock Transfer & Trust Company, as Rights Agent
Gentlemen:
This is to certify that the attached Amendment No. 1 to Shareholder
Protection Rights Agreement, dated as of June 21, 2000, satisfies the terms of
the first sentence of Section 5.4 of the Shareholder Protection Rights
Agreement, dated as of April 20, 1998, between PSS World Medical, Inc. and
Continental Stock Transfer & Trust Company, as Rights Agent.
PSS WORLD MEDICAL, INC.
By: /s/ Patrick C. Kelly
-------------------------
Name: Patrick C. Kelly
Title: Chief Executive Officer
30
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