-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FdTguS/zIAfTColK9phThox3HcbieYda5vmlvx0hyDc59JBVE4txni+pVAYXQDSD HaILG0I4X3YwBr7maj3z/g== 0000920527-99-000007.txt : 19990817 0000920527-99-000007.hdr.sgml : 19990817 ACCESSION NUMBER: 0000920527-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSS WORLD MEDICAL INC CENTRAL INDEX KEY: 0000920527 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 593500595 STATE OF INCORPORATION: FL FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23832 FILM NUMBER: 99693892 BUSINESS ADDRESS: STREET 1: 4345 SOUTHPOINT BLVD STREET 2: STE 250 CITY: JACKSONVILLE STATE: FL ZIP: 32216 BUSINESS PHONE: 9043323000 MAIL ADDRESS: STREET 1: 4345 SOUTHPOINT BLVD CITY: JACKSONVILLE STATE: FL ZIP: 32216 FORMER COMPANY: FORMER CONFORMED NAME: PHYSICIAN SALES & SERVICE INC /FL/ DATE OF NAME CHANGE: 19940318 10-Q 1 PSS WORLD MEDICAL, INC. FORM 10-Q 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, 1999 [ ] 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 13, 1999, 1999 a total of 70,988,171 shares of common stock, par value $.01 per share, of the registrant were outstanding. PSS WORLD MEDICAL, INC. AND SUBSIDIARIES JUNE 30, 1999 INDEX
PAGE NUMBER -------------------- PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - June 30, 1999 and April 2, 1999 3 Condensed Consolidated Statements of Operations - For the Three Months Ended June 30, 1999 and 1998 (Restated) 4 Condensed Consolidated Statements of Cash Flows - For the Three Months Ended June 30, 1999 and 1998 (Restated) 5 Notes to Condensed Consolidated Financial Statements - June 30, 1999 and 1998 (Restated) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 PART II OTHER INFORMATION Item 1. Legal Proceedings 33 Item 2. Changes in Securities and Use of Proceeds 33 Item 6. Exhibits and Reports on Form 8-K 34 SIGNATURES 37
2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except Share Data)
June 30, April 2, 1999 1999 ---------- --------- (Unaudited) * Current Assets: Cash and cash equivalents......................................................... $ 38,891 $ 41,106 Marketable securities............................................................. 9,170 3 Accounts receivable, net.......................................................... 278,779 272,996 Inventories, net.................................................................. 132,666 153,626 Employee advances................................................................. 770 702 Prepaid expenses and other........................................................ 66,753 59,413 --------- --------- Total current assets..................................................... 527,029 527,846 --------- --------- Property and equipment, net.......................................................... 51,643 48,167 Other Assets: Intangibles, net.................................................................. 158,018 146,082 Other............................................................................. 21,210 21,286 --------- --------- Total assets............................................................. $757,900 $743,381 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.................................................................. $103,754 $112,966 Accrued expenses.................................................................. 48,279 48,704 Current maturities of long-term debt and capital lease obligations................ 827 1,062 Other............................................................................. 10,492 8,536 --------- --------- Total current liabilities................................................ 163,352 171,268 Long-term debt and capital lease obligations, net of current portion................. 163,475 152,442 Other................................................................................ 2,393 3,111 --------- --------- Total liabilities........................................................ 329,220 326,821 --------- --------- 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, 70,797,599 and 70,796,024 shares issued and outstanding at June 30, 1999 and April 2, 1999, 708 708 respectively................................................................... Additional paid-in capital........................................................ 349,533 349,460 Retained earnings................................................................. 82,521 70,211 Cumulative other comprehensive income............................................. (1,440) (1,177) --------- --------- 431,322 419,202 Unearned ESOP shares.............................................................. (2,642) (2,642) --------- --------- Total shareholders' equity............................................... 428,680 416,560 --------- --------- Total liabilities and shareholders' equity............................... $757,900 $743,381 ========= =========
* Condensed from audited financial statements. The accompanying notes are an integral part of these condensed consolidated statements. 3 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in Thousands, Except Per Share Data)
Three Months Ended -------------------------------- June 30, 1999 June 30, 1998 --------------- --------------- (Restated) Net sales $ $ 436,719 367,562 Cost of goods sold 320,298 270,364 --------------- --------------- Gross profit 116,421 97,198 General and administrative expenses 59,508 54,523 Selling expenses 34,346 26,696 --------------- --------------- Income from operations 22,567 15,979 --------------- --------------- Other income (expense): Interest expense (3,511) (3,093) Interest and investment income 451 1,748 Other income 1,391 762 --------------- --------------- (1,669) (583) --------------- --------------- Income before provision for income taxes 20,898 15,396 Provision for income taxes 8,588 6,528 --------------- --------------- Net income $ 12,310 $ 8,868 =============== =============== Earnings per share: Basic $ 0.17 $ 0.13 =============== =============== Diluted $ 0.17 $ 0.12 =============== =============== Weighted average shares outstanding (in thousands): Basic 70,796 70,384 =============== =============== Diluted 71,151 71,253 =============== ===============
The accompanying notes are an integral part of these condensed consolidated statements. 4 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands)
Three Months Ended ----------------------------------- June 30, 1999 June 30, 1998 ---------------- --------------- (Restated) Cash Flows From Operating Activities: Net income $ 12,310 $ 8,868 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 4,485 5,072 Provision for doubtful accounts 151 317 Gain on sale of fixed assets (33) 0 Deferred compensation 66 222 Changes in operating assets and liabilities, net of effects from business acquisitions: Accounts receivable, net (866) (16,167) Inventories 24,228 7,368 Prepaid expenses and other current assets (6,862) 1,110 Other assets (2,568) (2,219) Accounts payable, accrued expenses and other liabilities (14,225) (24,698) ---------------- --------------- Net cash provided by (used in) operating activities 16,686 (20,127) ---------------- --------------- Cash Flows From Investing Activities: Purchases of marketable securities (9,168) (29,332) Proceeds from sales and maturities of marketable securities 0 77,531 Proceeds from sale of fixed assets 38 0 Capital expenditures (5,147) (2,905) Purchases of businesses, net of cash acquired (13,085) (7,212) Payments on noncompete agreements (486) (886) ---------------- --------------- Net cash (used in) provided by investing activities (27,848) 37,196 ---------------- --------------- Cash Flows From Financing Activities: Proceeds from borrowings 11,000 205 Repayment of borrowings (1,720) (2,109) Principal payments under capital lease obligations (78) (107) Proceeds from issuance of common stock 8 86 ---------------- --------------- Net cash provided by (used in) financing activities 9,210 (1,925) ---------------- --------------- Foreign currency translation adjustment (263) 30 ---------------- --------------- Net decrease in cash and cash equivalents (2,215) 15,174 Cash and cash equivalents, beginning of period 41,106 81,483 ---------------- --------------- Cash and cash equivalents, end of period $ 38,891 $ 96,657 ================ ===============
The accompanying notes are an integral part of these condensed consolidated statements. 5 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (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 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"). The Company's previously issued financial statements included in Form 10Q for the three months ended June 30, 1998 were not restated for (1) the information systems accelerated depreciation, (2) the reversal of GSMS restructuring charge, and (3) the immaterial Pooled Entities (refer to Note 10 - Restatements). These transactions were accounted for under the pooling-of-interests method of accounting, and accordingly, the accompanying consolidated financial statements have been retroactively restated as if PSS, MIS, TriStar, and the Pooled Entities had operated as one entity since inception. 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. 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 subsidiaries outside the United States are translated into U.S. dollars at year-end exchange rates for assets and liabilities and weighted average exchange rates for income and expenses. The resulting translation adjustments are recorded in the other comprehensive income component of shareholders' equity. The results of operations for the interim periods covered by this report may not necessarily be indicative of operating results for the full fiscal year. Certain items have been reclassified to conform to the current year presentation. NOTE 2 - BUSINESS ACQUISITIONS Purchase Acquisitions 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. During the three months ended June 30, 1998, the Company acquired certain assets and assumed certain liabilities of three physician supply and equipment distributors, two imaging supply and equipment distributors, and one long-term care distributors. A summary of the details of the transactions follows: June 30, 1999 June 30, 1998 ------------- ------------- Number of acquisitions...................... 7 6 Total consideration......................... $20,552 $9,555 Cash paid, net of cash acquired............. 13,085 7,841 Goodwill recorded........................... 10,931 2,651 Value of Noncompete Agreements.............. 575 1,105 6 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) 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 fiscal 2000. In addition, the terms of certain of the Company's recent acquisition agreements provide for additional consideration to be paid if the acquired entity's results of operations exceed certain targeted levels. Targeted levels are generally set above the historical experience of the acquired entity at the time of acquisition. Such additional consideration is to be paid in cash or with shares of the Company's common stock and is recorded when earned as additional purchase price. The maximum amount of remaining contingent consideration is approximately $5.9 million (payable through fiscal 2001). The first potential earn-out payment is effective in fiscal 2000. The following table summarizes the adjustments recorded against goodwill during the three months ended June 30, 1999: June 30, 1999 ------------- Merger costs and expenses ................................... $ 593 Integration plan accrual..................................... 990 ------------- $1,583 ============= 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. Refer to Note 4, Accrued Merger and Restructuring Costs and Expenses, for further discussion regarding the integration plan. During the three months ended June 30, 1998, there were no adjustments to goodwill. Pooling-of-Interests Transaction During the three months ended June 30, 1998, the Company merged with an imaging supply and equipment distributor, with aggregate annual revenues of approximately $18.0 million, in a merger accounted for under the pooling-of-interests method. The Company issued approximately 349,000 shares of PSS common stock in connection with this pooling. The accompanying condensed consolidated financial statements have been retroactively restated as if PSS and the pooled company had operated as one entity since inception. 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 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: 7 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) June 30, 1999 June 30, 1998 ------------- ------------- (Restated) Merger costs and expenses.................... $ 372 $ 829 Restructuring costs and expenses............. 513 1,995 Information systems accelerated depreciation. -- 1,499 ------------- ------------- Total ....................................... $ 885 $ 4,323 ============= ============= Merger Costs and Expenses The Company's policy is to accrue merger costs and expenses at the commitment date of an integration plan if certain criteria under EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity ("EITF 94-3") or 95-14, Recognition of Liabilities in Anticipation of a Business Combination ("EITF 95-14"), are met. Merger costs and expenses recorded at the commitment date primarily include charges for involuntary employee termination costs, branch shut-down costs, lease termination costs, and other exit costs. If the criteria described in EITF 94-3 or EITF 95-14 are not met, the Company records merger costs and expenses as incurred. Merger costs expensed as incurred include the following: (1) costs to pack and move inventory from one facility to another or within a facility in a consolidation of facilities, (2) relocation costs paid to employees in relation to an acquisition accounted for under the pooling-of-interests method of accounting, (3) systems or training costs to convert the acquired companies to the current existing information system, 4) training costs related to conforming the acquired companies operational policies to that of the Company's operational policies, and (5) direct transaction costs primarily consist 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 June 30, 1999 included merger charges expensed as incurred, which primarily related to branch shutdown costs. Merger costs and expenses for the three months ended June 30, 1998 included $200 of charges recorded at the commitment date of an integration plan adopted by management and $629 of charges for merger costs expensed as incurred. The merger costs expensed as incurred primarily relate to direct transaction costs from the merger with MIS and the Pooled Entities. Restructuring Costs and Expenses Restructuring costs and expenses for the three months ended June 30, 1999 included $727 of charges for restructuring costs 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, the Company reversed $214 of restructuring costs and expenses into income, which related to an overaccrual for involuntary employee termination costs from restructuring Plan A. Refer to Note 4, Accrued Merger and Restructuring Costs and Expenses, for a further discussion regarding the restructuring plan. 8 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) During the three months ended June 30, 1998, management approved and adopted an additional Gulf South component to its formal plan to restructure the Company. This restructuring plan identified two additional distribution centers and two corporate offices to be merged with existing facilities and identified three executives to be involuntarily terminated. Accordingly, the Company recorded restructuring costs and expenses of $1,503 at the commitment date of the restructuring plan adopted by management. Such costs include branch shutdown costs, lease termination costs, involuntary employee termination costs of $281, $570, and $652, respectively. The remaining $492 of restructuring costs recorded during the three months ended June 30, 1998 represent charges expensed as incurred for other exit costs. Information Systems Accelerated Depreciation In connection with the Gulf South merger during fiscal 1998, management evaluated the adequacy of the combined companies' information systems. The Company concluded that its existing information systems were not compatible with those of Gulf South's and not adequate to support the future internal growth of the combined companies and expected growth resulting from future acquisitions. Pursuant to SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company evaluated the recoverability of the information system assets. Based on the Company's analysis, impairment did not exist at the division level; therefore, management reviewed the depreciation estimates in accordance with Accounting Principles Board ("APB") No. 20, Accounting Changes. Effective April 4, 1998, the estimated useful lives of the PSS, DI, and GSMS division information systems were revised to a range of 12 to 15 months, which was the original estimate of when the new systems implementation would be completed. For the three months ended June 30, 1998, the $1,499 represents the incremental impact on depreciation expense resulting from management's decision to replace its information systems. 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 9 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) 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 $4,242 and $4,084 at June 30, 1999 and April 2, 1999, respectively, as compared to $4,255 and $4,327 at June 30, 1998 and April 3, 1998. The discussion and rollforward of the accrued merger costs and expenses below summarize the significant and nonsignificant integration plans adopted by management for business combinations accounted for under the purchase method of accounting and pooling-of-interests method of accounting. Integration plans are considered to be significant if the charge recorded to establish the accrual is in excess of 5% of consolidated pretax income. Significant Pooling-of-Interests Business Combination Plan The Company formalized and adopted an integration plan in December 1997 to integrate the operations of S&W with the Imaging Business. The following accrued merger costs and expenses were recognized in the accompanying consolidated statements of operations at the commitment date. A summary of the merger activity related to the S&W merger is as follows: Involuntary Employee Lease Branch Termination Termination Shutdown Costs Costs Costs Total ------------ ------------ ----------- ----------- Balance at April 3, 1998 $ 156 $ 540 $ 461 $ 1,157 Adjustments -- -- -- -- Additions -- -- -- -- Utilized (2) -- (143) (145) ============ ============ ============ =========== Balance at June 30, 1998 $ 154 $ 540 $ 318 $ 1,012 ============ ============ ============ =========== 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 June 30, 1998, one employee has been terminated and the remaining six employees are estimated to be terminated by the end of second quarter of fiscal 2000. Management identified seven distribution facilities to be closed and all operations would be ceased due to duplicative functions. Three of the seven identified distribution facilities had been shut down by June 30, 1998, with the remaining four locations estimated to be shut down by the second quarter of fiscal 2000. Included in branch shutdown costs are costs related to contractual obligations that existed prior to the merger date but will provide no ongoing value to the Company. 10 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) Involuntary Employee Lease Branch Termination Termination Shutdown Costs Costs Costs Total ------------ ------------ ----------- ----------- Balance at April 2, 1999 $ 154 $ 540 $ 111 $ 805 Adjustments -- -- -- -- Additions -- -- -- -- Utilized -- (63) (75) (138) ============ ============ ============ =========== Balance at June 30, 1999 $ 154 $ 477 $ 36 $ 667 ============ ============ ============ =========== As of June 30, 1999, one employee has been terminated and the remaining six employees are estimated to be terminated by the end of second quarter of fiscal 2000. Six of the seven identified distribution facilities had been shut down by June 30, 1999, and the final location will be shut down in the second quarter of fiscal 2000. During fiscal 1999, information system programming delays occurred that were not anticipated at the time the integration plan was finalized and adopted by management. As a result, the information system conversion dates for all locations were delayed. The accruals for involuntary employee termination and branch shutdown costs have not been paid in full as of June 30, 1999 because the information system conversion must be completed prior to consolidating distribution facilities. The lease termination costs will be paid through fiscal 2002. Nonsignificant Poolings-of-Interests Business Combination Plans The following accrued merger costs and expenses were recognized in the accompanying consolidated statements of operations at the date in which the integration plan was formalized and adopted by management. A summary of the merger activity related to eight nonsignificant pooling-of-interests business combinations completed during fiscal 1997 through June 30, 1999, respectively, is as follows: Involuntary Employee Lease Branch Termination Termination Shutdown Costs Costs Costs Total ------------ ------------ ----------- ----------- 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 ============ ============ ============ =========== 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 $141 of the $722 accrued merger costs and expenses at June 30, 1998 relate to this integration plan. Involuntary employee termination costs are costs for six employees, including severance and benefits, who represent duplicative functions in the accounting, purchasing, and computer support departments at the acquired company's corporate office. As of June 30, 1998, no employees had been terminated. Management identified one distribution facility to be closed in which all operations would be ceased due to duplicative functions. The Company expects closure of this facility to occur in the second quarter of fiscal 2000. The remaining $581 of the $722 accrued merger costs and expenses at June 30, 1998 relate to several small integration plans that have been completed as of April 2, 1999. 11 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) Involuntary Employee Lease Branch Termination Termination Shutdown Costs Costs Costs Total ------------ ------------ ----------- ----------- Balance at April 2, 1999 $ 74 $ 1,884 $ 236 $ 2,194 Adjustments -- -- -- -- Additions -- -- -- -- Utilized -- (22) (210) (232) ============ ============ ============ =========== Balance at June 30, 1999 $ 74 $ 1,862 $ 26 $ 1,962 ============ ============ ============ =========== The Imaging Business acquired TriStar in October 1998, and management formalized and adopted an integration plan in April 1999 to integrate the operations of the acquired company. Approximately $1,857 of the $1,962 accrued merger costs and expenses at June 30, 1999 relate to this integration plan. Management identified two distribution facilities to be closed in which all operations would be ceased due to duplicative functions, both of which were in the process of being shutdown as of June 30, 1999. Management anticipates this integration plan will be completed during the second quarter of fiscal 2000; however, lease termination payments will extend through fiscal 2007. Significant Purchase Business Combination Plan The Company formalized and adopted an integration plan in September 1997 to integrate the operations of General X-Ray, Inc. ("GXI") with the Imaging Business. The following accrued merger costs and expenses were recognized and additional goodwill was recorded at the commitment date. A summary of the GXI merger accruals is as follows:
Involuntary Employee Lease Branch Relocation Termination Termination Shutdown Costs Costs Costs Costs Total ------------ ----------- ----------- --------- -------- 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 ============ =========== =========== ========= ========
The Company identified nine distribution facilities to be closed and all operations would be ceased due to duplicative functions. Relocation costs were recorded related to the transfer of approximately 15 GXI employees. Involuntary employee termination costs are costs for 19 employees, including severance and benefits, who represent duplicative functions as service and operations leaders, customer service representatives, and accounting personnel at locations where facilities would be combined. As of April 2, 1999, all employees have been terminated and relocated. The plan has been completed as of April 2, 1999, therefore, there is no impact on the three months ended June 30, 1999. 12 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) 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 sevennonsignificant purchase business combinations during fiscal 1998 through the three months ended June 30, 1999 is as follows:
Involuntary Employee Lease Branch Relocation Termination Termination Shutdown Costs Costs Costs Costs Total ------------ ----------- ----------- --------- -------- Balance at April 3, 1998 $ -- $ -- $ -- $ -- $ -- Additions from Gulf South subsidiary -- 102 100 250 452 ------------ ----------- ----------- --------- -------- Balance at April 4, 1998 -- 102 100 250 452 Adjustments -- -- -- -- -- Additions -- -- -- -- -- Utilized -- (11) (2) -- (13) ------------ ----------- ----------- --------- -------- Balance at June 30, 1998 $ -- $ 91 $ 98 $ 250 $ 439 ============ =========== =========== ========= ========
The additions from the Gulf South subsidiary represents the additions of the accrued merger costs and expenses recorded by Gulf South during the period January 1 to April 3, 1998. No amounts were utilized during this period. GSMS formalized and adopted an integration plan during the period January 1 to April 3, 1998. The accrual at June 30, 1998 primarily relates 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 June 30, 1998, 17 employees have been terminated. Management identified 2 distribution facilities to be closed in which all operations would be ceased due to duplicative functions, both of which had been shut down by June 30, 1998. Included in branch shutdown costs are costs related to contractual obligations that existed prior to the merger date but will provide no ongoing value to the Company. During fiscal 1999, information system programming delays occurred that were not anticipated at the time the integration plan was finalized and adopted by management. As a result, the information system conversion dates for all locations were delayed. The accruals for involuntary employee termination and branch shutdown costs have not been paid in full as of June 30, 1999 because the information system conversion must be completed prior to consolidating distribution facilities. The lease termination costs will be paid through fiscal 2002.
Involuntary Employee Lease Branch Relocation Termination Termination Shutdown Costs Costs Costs Costs Total ------------ ----------- ----------- --------- -------- Balance at April 2, 1999 $ 117 $ 545 $ 410 $ 13 $ 1,085 Adjustments -- -- -- -- -- Additions -- 75 690 225 990 Utilized (30) (94) (176) (162) (462) ------------ ----------- ----------- --------- -------- Balance at June 30, 1999 $ 87 $ 526 $ 924 $ 76 $ 1,613 ============ =========== =========== ========= ========
13 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) The Imaging Business acquired Gilbert X-Ray, Inc. in September 1998 and management formalized and adopted two separate integration plans in fiscal 1999 to integrate the operations of the acquired company. Approximately $758 of the $1,613 accrued merger costs and expenses at June 30, 1999 relate to these integration plans. Relocation costs are for five employees of which two had been relocated as of June 30, 1999. Involuntary employee termination costs are costs for twenty-six 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 June 30, 1999, eight employees have been terminated. Management identified eight distribution facilities to be closed in which all operations would be ceased due to duplicative functions, three of which had been shut down by June 30, 1999. 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 these integration plans will be completed during fiscal 2000; however, lease termination payments will extend through fiscal 2003. In addition, 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 $743 of the $1,613 accrued merger costs and expenses at June 30, 1999 relate to this integration plan. Involuntary employee termination costs are costs for fifteen 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 June 30, 1999, two employees have been terminated. Management identified two distribution facilities to be closed in which all operations would be ceased due to duplicative functions, one of which had been shut down by June 30, 1999. 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 the integration plan to be completed during the first quarter of fiscal 2001; 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 began implementing a restructuring plan during the fourth quarter of fiscal 1998 which impacted all divisions ("Plan A"). Subsequently, the Company adopted a second restructuring plan during the first quarter of fiscal 1999 related to the Gulf South division ("Plan B") to further consolidate its operations. The Company recorded a total accrual of $7,971 related to Plan A. Approximately $3,691 of the $7,971 total restructuring charge 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 subsidiary represent restructuring costs and expenses of $4,280 recorded by Gulf South during the unconsolidated period January 1 to April 3, 1998. No amounts were utilized during this period. This charge is included in the retained earnings adjustment recorded on April 4, 1998. 14 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) Accrued restructuring costs and expenses, classified as accrued expenses in the accompanying consolidated balance sheets, were $3,139 and $3,817, at June 30, 1999 and April 2, 1999, respectively, as compared to $7,425 and $3,691 at June 30, 1998 and April 3, 1998, respectively. A summary of the restructuring plan activity is as follows:
Involuntary Employee Lease Branch Termination Termination Shutdown Other Exit Costs Costs Costs Costs Total ------------ ------------ ---------- ------------ ---------- Balance at April 3, 1998 $ 1,570 $ 1,389 $ 627 $ 105 $ 3,691 Additions from Gulf South subsidiary 1,879 406 1,455 540 4,280 ------------ ------------ ---------- ------------ ---------- Balance at April 2, 1999 $ 3,449 $ 1,795 $ 2,082 $ 645 $ 7,971 Adjustments -- -- -- -- -- Additions 652 570 281 -- 1,503 Utilized (842) (191) (857) (159) (2,049) ------------ ------------ ---------- ------------ ---------- Balance at June 30, 1999 $ 3,259 $ 2,174 $ 1,506 $ 486 $ 7,425 ============ ============ ========== ============ ==========
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 June 30, 1998, seven locations were merged into existing locations. The plan also included the termination of approximately 270 employees from operations, administration, and management. As of June 30, 1998, 75 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. The amount of costs was estimated based upon the size of the warehouse. 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 June 30, 1998, two of the six locations had been shut down. The plan also included the termination of three employees from operations and management. As of June 30, 1998, no employees were terminated as a result of the plan. 15 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
Involuntary Employee Lease Branch Termination Termination Shutdown Other Exit Costs Costs Costs Costs Total ------------ ------------ ---------- ------------ ---------- Balance at April 2, 1999 $ 1,601 $ 1,320 $ 896 $ -- $ 3,817 Adjustments (214) -- -- -- (214) Additions -- -- -- -- -- Utilized (128) (257) (79) -- (464) ------------ ------------ ---------- ------------ ---------- Balance at June 30, 1999 $ 1,259 $ 1,063 $ 817 $ -- $ 3,139 ============ ============ ========== ============ ==========
During fiscal 1999, information system programming delays occurred that were not anticipated at the time the integration plan was finalized and adopted by management. As a result, the information system conversion dates for all locations were delayed. The accruals for involuntary employee termination and branch shutdown costs have not been paid in full as of June 30, 1999 because the information system conversion must be completed prior to consolidating distribution facilities. The lease termination costs will be paid through fiscal 2002. Plan A As of June 30, 1999, 232 employees were terminated as a result of the plan. Management anticipates terminating the remaining 38 employees by the end of the fourth quarter of fiscal 2000. As of June 30, 1999, all of the locations were merged into exisiting locations. The remaining locations will be merged in fiscal 2000. Plan B At June 30, 1999, three of the six locations had been shut down and the remaining three locations are scheduled to be shut down in fiscal 2000. As of April 2, 1999, all employees were terminated as a result of the plan, with the related severance payments to be made in fiscal 2000. 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 ended June 30, 1999 and 1998, as detailed in the following table: June 30, 1999 June 30, 1998 ------------- ------------- Net income.................................. $12,310 $8,868 ------------- ------------- Other comprehensive income, net of tax: Foreign currency translation adjustment.. (263) 30 ------------- ------------- Comprehensive income........................ $12,047 $8,898 ============= ============= 16 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) NOTE 6 - EARNINGS PER SHARE In accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share, the calculation of basic earnings per common share and diluted earnings per common share is presented: Three Months Ended ----------- ----------- June 30, June 30, 1999 1998 ----------- ----------- Net income......................................... $12,310 $8,868 =========== =========== Earnings per share: Basic........................................... $0.17 $0.13 =========== =========== Diluted......................................... $0.17 $0.12 =========== =========== Weighted average shares outstanding (in thousands): Common shares................................... 70,796 70,384 Assumed exercise of stock options and warrants.. 355 869 ----------- ----------- Diluted shares outstanding...................... 71,151 71,253 =========== =========== 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. ("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 primary care and other 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 other products to the long-term care market. WorldMed Int'l along with WorldMed, Inc. manages and develops PSS' European medical equipment and supply distribution market. The Company primarily evaluates the operating performance of its segments based on net sales and income from operations. 17 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) The following table presents financial information about the Company's business segments: Three Months Ended --------------------- June 30, June 30, 1999 1998 --------- --------- (Restated) NET SALES: Physician Supply Business $ 173,431 $165,855 Imaging Business 163,332 114,463 Long-Term Care Business 92,203 82,498 Other (a) 7,753 4,746 --------- --------- Total net sales $ 436,719 $367,562 ========= ========= INCOME FROM OPERATIONS: Physician Supply Business $ 11,841 $ 10,464 Imaging Business 7,438 3,425 Long-Term Care Business 2,733 4,632 Other (a) 555 (2,542) --------- --------- Total income from operations $ 22,567 $ 15,979 ========= ========= DEPRECIATION: Physician Supply Business $ 985 $ 2,126 Imaging Business 685 1,006 Long-Term Care Business 346 373 Other (a) 65 100 --------- --------- Total depreciation $ 2,081 $ 3,605 ========= ========= AMORTIZATION OF INTANGIBLE AND OTHER ASSETS: Physician Supply Business $ 518 $ 554 Imaging Business 1,266 549 Long-Term Care Business 540 364 Other (a) 80 -- --------- --------- Total amortization of intangible and other assets $ 2,404 $ 1,467 ========= ========= PROVISION FOR DOUBTFUL ACCOUNTS: Physician Supply Business $ (7) $ 199 Imaging Business (342) 83 Long-Term Care Business 500 -- Other (a) -- 35 --------- --------- Total provision for doubtful accounts $ 151 $ 317 ========= ========= CAPITAL EXPENDITURES: Physician Supply Business $ 2,453 $ 1,550 Imaging Business 1,283 1,071 Long-Term Care Business 1,129 256 Other (a) 282 28 --------- --------- Total capital expenditures $ 5,147 $ 2,905 ========= ========= June 30, April 2, 1999 1999 --------- --------- ASSETS: Physician Supply Business $ 224,610 $236,452 Imaging Business 278,674 277,250 Long-Term Care Business 191,969 174,868 Other (a) 62,647 54,811 --------- --------- Total assets $ 757,900 $743,381 ========= ========= (a) Other includes the holding company and the international subsidiaries. 18 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) 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. A series of related, putative securities class actions were filed against PSS and two officers beginning on or about March 22, 1999. The allegations are based on PSS' announcement that the SEC was reviewing its financial reports for certain prior periods and that PSS would likely be required to retroactively restate its financial statements to reflect the pre-acquisition operating results of certain merger transactions that were accounted for under the pooling of interest accounting method. The actions were consolidated by Order dated July 28, 1999. A consolidated amended complaint will be filed by the plaintiffs by September 24, 1999. The lawsuits are in the earliest stages, and there can be no assurance that this litigation will be ultimately resolved on terms that are favorable to the Company. PSS and certain of its current officers and directors were named as defendants in a purported securities class action lawsuit filed on or about May 28, 1998. The allegations are based upon a decline in the PSS stock price following announcements by PSS in May 1998 regarding the Gulf South merger 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. NOTE 9 - SUBSEQUENT EVENTS Subsequent to June 30, 1999, the Company acquired certain assets, including accounts receivable, inventories, and equipment of two imaging supply and equipment distributors. These transactions were accounted for under the purchase method of accounting. A summary of the details of the transactions follows: Number of acquisitions.......................................... 2 Total consideration............................................. $16,318 Cash paid, net of cash acquired................................. 3,254 Goodwill recorded............................................... 3,415 Value of Noncompete Agreements.................................. 600 19 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Restated) (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) 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: Three Months Ended June 30, 1998 --------------------------------------------------------- Information As Systems GSMS Previously Accelerated Restructuring Immaterial As Reported Depreciation Plan B Poolings Restated ---------- ------------ ------------- ---------- -------- Net sales $342,538 $ -- $ -- $25,024 $367,562 Net income 11,295 (917) (918) (592) 8,868 Earnings per share: Basic $0.16 $(0.01) $(0.01) $(0.01) $0.13 Diluted 0.16 (0.01) (0.01) (0.01) 0.12 Information Systems Accelerated Depreciation The $917 represents the incremental impact on depreciation expense, net of tax, for the three months ended June 30, 1998 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. GSMS 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 historical 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 first quarter of fiscal 1999. Immaterial Poolings The Company merged with certain imaging supply and equipment distributors in stock mergers accounted for under the pooling-of-interests method of accounting. Due to the immaterial effect of these acquisitions on prior periods, the Company's previously issued financial statements included in Form 10Q for the three months ended June 30, 1998 were not restated for the immaterial Pooled Entities. During fiscal 1999, the Company made two additional individually immaterial acquisitions accounted for as poolings of interests. As such, the Company evaluated the aggregate impact of the individually immaterial pooling of interest transactions on the Company's current and prior period financial statements and concluded that the aggregate impact was material to the Company's consolidated financial position taken as a whole. As a result, the Company's consolidated financial statements have been restated to include the historical financial results of the individually immaterial pooling-of-interest transactions for all periods prior to the date of the mergers, as shown above. 20 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 110 service centers to customers in all 50 states and three European countries. Since its inception in 1983, the Company has become a leader in three of the market segments it serves with a focused, market specific approach to customer service, a consultative sales force, strategic acquisitions, strong arrangements with product manufacturers, innovative systems, and a unique culture of performance. The Company, through its Physician Sales & Service division, is the leading distributor of medical supplies, equipment and pharmaceuticals to office-based physicians in the United States based on revenues, number of physician-office customers, number and quality of sales representatives, number of service centers, and exclusively distributed products. Physician Sales & Service currently operates 56 medical supply distribution service centers with approximately 750 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 38 imaging distribution service centers with approximately 730 service specialists and 210 sales representatives ("Imaging Business") serving over 15,000 customer sites in 41 states. The Imaging Business' primary market is the approximately 10,000 hospitals and other alternate-site imaging companies operating approximately 40,000 office sites throughout the United States. Through its wholly owned subsidiary Gulf South Medical Supply, Inc. ("GSMS"), the Company is a leading national distributor of medical supplies and related products to the long-term care industry in the United States based on revenues, number of sales representatives, and number of service centers. GSMS currently operates 13 distribution service centers with approximately 160 sales representatives ("Long-Term Care Business") serving over 14,000 long-term care facilities in all 50 states. The Long-Term Care Business' primary market is comprised of a large number of independent operators, small to mid-sized local and regional chains, and several national chains representing over 17,000 long-term care facilities. In addition to its operations in the United States, the Company, through its wholly owned subsidiary WorldMed International, Inc. ("WorldMed"), operates three European service centers ("International Business") distributing medical products to the physician office and hospital markets in Belgium, France, Germany, Luxembourg, and the Netherlands. INDUSTRY According to industry estimates, the United States medical supply and equipment segment of the health care industry represents a $34 billion market comprised of distribution of medical products to hospitals, home health care agencies, imaging centers, physician offices, dental offices, and long-term care facilities. The Company's primary focus includes distribution to the physician office, providers of imaging services, and long-term care facilities that comprise $14 billion or approximately 40% of the overall market. 21 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Revenues of the medical products distribution industry are estimated to be growing as a result of a growing and aging population, increased health care awareness, proliferation of medical technology and testing, and expanding third-party insurance coverage. In addition, the physician market is benefiting from the shift of procedures and diagnostic testing from hospitals to alternate sites, particularly physician offices, despite a migration of significantly lower hospital medical product pricing into the physician office market. The health care industry is subject to extensive government regulation, licensure, and operating procedures. National health care reform has been the subject of a number of legislative initiatives by Congress. Additionally, the cost of a significant portion of medical care in the United States is funded by government and private insurance programs. In recent years, government-imposed limits on reimbursement of hospitals, long-term care facilities, and other health care providers have impacted spending budgets in certain markets within the medical products industry. Recently, Congress has passed radical changes to reimbursements for nursing homes and home care providers. The industry has struggled with these changes and the ability of providers, distributors, and manufacturers to adopt to the changes is not yet determined. These changes also effect some distributors who directly bill the government for these providers. Over the past few years, the health care industry has undergone significant consolidation. Physician provider groups, long-term care facilities, and other alternate-site providers along with the hospitals continue to consolidate. The consolidation creates new and larger customers. However, the majority of the market serviced by the Company remains a large number of small customers with no single customer exceeding 10% of the consolidated Company's revenues. However, the Long-Term Care Business depends on a limited number of large customers for a significant portion of its net sales and approximately 28% of the Long-Term Care Business revenues for the 3 months ended June 30, 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, 1999 and 1998. The accompanying financial statements 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"). The Company's previously issued financial statements included in Form 10Q for the three months ended June 30, 1998 were not restated for (1) the information systems accelerated depreciation, (2) the reversal of GSMS restructuring charge, and (3) the immaterial Pooled Entities (refer to Note 10 - Restatements). These transactions were accounted for under the pooling-of-interests method of accounting, and accordingly, the accompanying consolidated financial statements have been retroactively restated as if PSS and the Pooled Entities had operated as one entity since inception. THREE MONTHS ENDED JUNE 30, 1999 VERSUS THREE MONTHS ENDED JUNE 30, 1998(restated) Net Sales. Net sales for the three months June 30, 1999 totaled $436.7 million, an increase of $69.1 million, or 18.8%, over the three months ended June 30, 1998 total of $367.6 million. The increase in sales can be attributed to (i) net sales from the acquisition of companies during fiscal year 1998 and 1999 accounted for as purchases; (ii) internal sales growth of centers operating at least two years; (iii) the Company's focus on diagnostic equipment sales; and (iv) incremental sales generated in connection with exclusive and semi-exclusive vendor relationships. 22 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Net sales contributed from acquisitions completed during the three months ended June 30, 1999 totaled approximately $1.3 million and $3.4 million for the Imaging, and Long-Term Care Businesses, respectively. In addition, Physician Supply Business, Imaging, and Long-term Care Business acquisitions completed during the three months ended June 30, 1998 provided approximately $0.6 million, $2.6 million, and $1.5 million, respectively, in additional incremental sales to the three months ended June 30, 1999 results. Gross Profit. Gross profit for the three months ended June 30, 1999 totaled $116.4 million, an increase of $19.2 million, or 19.8%, over the three months ended June 30, 1998 total of $97.2 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 26.7% and 26.4% for the three months ended June 30, 1999 and 1998, respectively. Although there has been considerable gross margin pressure from several industry environmental factors, as well as internal pressure from an increasing mix of Imaging Business revenues at a lower margins, the Company has successfully maintained its overall gross margins. The increase in gross margin as a percentage of sales is attributable to (i) an increase in the sales mix of higher margin diagnostic equipment and service, (ii) an increase in sales of higher margin private label products, and (iii) the effect of negotiated lower product purchasing costs. This is offset by the expansion of imaging revenues with lower gross profit margins. 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. The Company added a net addition of approximately 50 sales representatives in fiscal 1999 to develop sales to independent and regional customers to offset the impact of decreased margins in its chain customer sales. General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 1999 totaled $59.5 million, an increase of $5.0 million, or 9.2%, from the three months ended June 30, 1998 total of $54.5 million. General and administrative expenses as a percentage of net sales decreased to 13.8% from 14.8% for the comparable prior year period. The decrease in general and administrative expenses as a percentage of net sales was a result of (i) a decrease in merger activity, restructuring costs and expenses, and other special items as discussed below, (ii) the continued leveraging of fixed costs of mature service center operations, (iii) the elimination of below average performance centers during fiscal 1999, and (iv) the increased contribution by the Imaging Business which operates at lower general and administrative expenses as a percentage of sales. This is offset by the increase of general and administrative expenses as a percentage of sales by the Gulf South division. In addition to typical general and administrative expenses, this income statement caption includes charges related to merger activity, restructuring activity, and other special items. The following table summarizes charges included in general and administrative expenses in the accompanying consolidated statements of income: June 30, 1999 June 30, 1998 ------------- ------------- (Restated) Merger costs and expenses.................... $ 372 $ 829 Restructuring costs and expenses............. 513 1,995 Information systems accelerated depreciation. -- 1,499 ------------- ------------- Total charges................................ $ 885 $ 4,323 ============= ============= 23 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Merger Costs and Expenses The Company's policy is to accrue merger costs and expenses at the commitment date of an integration plan if certain criteria under EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity ("EITF 94-3") or 95-14, Recognition of Liabilities in Anticipation of a Business Combination ("EITF 95-14"), are met. Merger costs and expenses recorded at the commitment date primarily include charges for direct transaction costs, involuntary employee termination costs, branch shut-down costs, lease termination costs, and other exit costs. If the criteria described in EITF 94-3 or EITF 95-14 are not met, the Company records merger costs and expenses as incurred. Merger costs expensed as incurred include the following: (1) costs to pack and move inventory from one facility to another or within a facility in a consolidation of facilities, (2) relocation costs paid to employees in relation to an acquisition accounted for under the pooling-of-interests method of accounting, (3) systems or training costs to convert the acquired companies to the current existing information system, and (4) training costs related to conforming the acquired companies operational policies to that of the Company's operational policies. In addition, amounts incurred in excess of the original amount accrued at the commitment date are expensed as incurred. Merger costs and expenses for the three months ended June 30, 1999 included merger charges expensed as incurred, which primarily related to branch shutdown costs. Merger costs and expenses for the three months ended June 30, 1998 included $200 of charges recorded at the commitment date of an integration plan adopted by management and $629 of charges for merger costs expensed as incurred. The merger costs expensed as incurred primarily relate to direct transaction costs from the merger with MIS and the Pooled Entities. Refer to Note 1, Basis of Presentation, for further discussion regarding MIS and the immaterial Pooled Entities. Restructuring Costs and Expenses Restructuring costs and expenses for the three months ended June 30, 1999 included $727 of charges for restructuring costs 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, the Company reversed $214 of restructuring costs and expenses into income, which related to an overaccrual for involuntary employee termination costs from restructuring Plan A. Refer to Note 4, Accrued Merger and Restructuring Costs and Expenses, for a further discussion regarding the restructuring plan. During the three months ended June 30, 1998, management approved and adopted an additional Gulf South component to its formal plan to restructure the Company. This restructuring plan identified two additional distribution centers and two corporate offices to be merged with existing facilities and identified three executives to be involuntarily terminated. Accordingly, the Company recorded restructuring costs and expenses of $1,503 at the commitment date of the restructuring plan adopted by management. Such costs include branch shutdown costs, lease termination costs, involuntary employee termination costs of $281, $570, and $652, respectively. The remaining $492 of restructuring costs recorded during the three months ended June 30, 1998 represent charges expensed as incurred for other exit costs. 24 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Information Systems Accelerated Depreciation In connection with the Gulf South merger during fiscal 1998, management evaluated the adequacy of the combined companies' information systems. The Company concluded that its existing information systems were not compatible with those of Gulf South's and not adequate to support the future internal growth of the combined companies and expected growth resulting from future acquisitions. Pursuant to SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company evaluated the recoverability of the information system assets. Based on the Company's analysis, impairment did not exist at the division level; therefore, management reviewed the depreciation estimates in accordance with Accounting Principles Board ("APB") No. 20, Accounting Changes. Effective April 4, 1998, the estimated useful lives of the PSS, DI, and GSMS division information systems were revised to a range of 12 to 15 months, which was the original estimate of when the new systems implementation would be completed. For the three months ended June 30, 1998, the $1,499 represents the incremental impact on depreciation expense resulting from management's decision to replace its information systems. Selling Expenses. Selling expenses for the three months ended June 30, 1999 totaled $34.3 million, an increase of $7.6 million, or 28.5%, over the three months ended June 30, 1998 total of $26.7 million. Selling expense as a percentage of net sales was approximately 7.9% and 7.3% for the three months ended June 30, 1999 and 1998, respectively. The Company utilizes a variable commission plan, which pays commissions based on gross profit as a percentage of net sales. During the later part of fiscal 1999, sales commissions as a percent of net sales increased due (i) to the addition of new sales representatives which are currently paid salary but in the future will convert to a variable commission plan to increase or replace existing low performance sales representatives, (ii) acquisition of sales representatives at the Imaging Business that are in transition to the Company's commission plan, and (iii) the short-term impact of the Long-Term Care Business changing of its compensation plan for its sales representatives. Operating Income. Operating income for the three months ended June 30, 1999 totaled $21.7 million, an increase of $5.7 million, or 35.6%, over the three months ended June 30, 1998 total of $16.0 million. As a percentage of net sales, operating income increased to 5.0% from 4.4% from the comparable prior year period. As discussed in the analysis of general and administrative expenses, the three months ended June 30, 1998 operating results include higher levels of operating charges related to merger activity, restructuring costs and expenses, and other unusual items than the three months ended June 30, 1999. Interest Expense. Interest expense for the three months ended June 30, 1999 totaled $3.5 million, an increase of $0.4 million, or 12.9%, over the three months ended June 30, 1998 total of $3.1 million. The increase in interest expense over the comparable prior year period primarily results from borrowings under the $140.0 million senior revolving credit facility to fund the acquisition of companies during the five months ended June 30, 1999. Interest and Investment Income. Interest and investment income for the three months ended June 30, 1999 totaled $.05 million, a decrease of $1.2 million, or 70.6%, over the three months ended June 30, 1998 total of $1.7 million. This change primarily resulted from a lower level of invested capital due to the use of cash and investments to fund capital expenditures and business acquisitions during fiscal 1999. Other Income. Other income for the three months ended June 30, 1999 totaled $1.4 million, an increase of $0.6 million, or 75.0%, over the three months ended June 30, 1998 total of $0.8 million. Other income consists of finance charges on customer accounts and financing performance incentives. 25 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Provision for Income Taxes. Provision for income taxes for the three months ended June 30, 1999 totaled $8.6 million, an increase of $2.1 million, or 32.3%, over the three months ended June 30, 1998 total of $6.5 million. This increase primarily resulted from the increase in taxable income due to the factors discussed above. The effective income tax rate was 41.1% and 42.4% for the three months ended June 30, 1999 and 1998, 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, 1999 totaled $12.3 million, an increase of $3.4 million, or 38.2%, over the three months ended June 30, 1998 total of $8.9 million. As a percentage of net sales, net income increased to 2.8% from 2.4% 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 (used in) operating activities was $16.7 million and ($20.1) million for the three months ended June 30 1999 and 1998, respectively. The increase in fiscal 1999 operating cash flow over prior years was primarily attributable to: (i) an increase in net income for the period, (ii) a reduction in cash paid for merger and restructuring accruals established in the current and prior years, iii) a reduction in accounts receivable growth from acquisitions, iv) reduced inventory levels and iv) the completion of working capital requirements of the best practices and distribution upgrades at Gulf South. Net cash (used in) provided by investing activities was ($27.8) million and $37.2 million for the three months ended June 30, 1999 and 1998, respectively. These funds were primarily utilized to finance the acquisition of new service centers and capital expenditures. Cash flows from investing activities during the three months ended June 30, 1998, include approximately $48.2 million of net proceeds from sales and maturities of marketable securities. The increase in capital expenditures in fiscal year 1999 is primarily attributable to new computer systems being implemented across all the Company's divisions. Net cash provided by (used in) financing activities was $9.2 million and ($1.9) million for the three months ended June 30, 1999 and 1998, respectively. During the three months ended June 30, 1999, the Company borrowed $11.0 million from its revolving credit facility to fund business acquisitions. The Company had working capital of $363.7 million and $356.6 million as of June 30, 1999 and April 2, 1999, respectively. Accounts receivable, net of allowances, were $278.8 million and $273.0 million at June 30, 1999 and April 2, 1999, respectively. The average number of days sales in accounts receivable outstanding was approximately 56.9 and 56.0 days for the three months ended June 30, 1999 (annualized) and the year ended April 2, 1999, respectively. For the three months ended June 30, 1999, the Company's Physician Supply, Imaging, and Long-Term Care Businesses had annualized days sales in accounts receivable of approximately 56.5, 49.9, and 69.1 days, respectively. 26 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Inventories were $132.7 million and $153.6 million as of June 30, 1999 and April 2, 1999, respectively. The Company had inventory turnover of 9.0x and 8.1x times for the three months ended June 30, 1999 (annualized) and the year ended April 2, 1999, respectively. For the three months ended June 30, 1999, the Company's Physician Supply, Imaging, and Long-Term Care Businesses had annualized inventory turnover of 8.9x, 9.3x, and 8.6x, respectively. Inventory financing historically has been achieved through negotiating extended payment terms from suppliers. The following table presents EBITDA and other financial data for the three months ended June 30, 1999 and 1998 (in thousands): Three Months Ended -------------- ------------- June 30, 1999 June 30, 1998 -------------- ------------- (Restated) Other Financial Data: Income before provision for income taxes $ 20,898 $ 15,396 Plus: Interest Expense 3,511 3,093 -------------- ------------- EBIT (a) 24,409 18,489 Plus: Depreciation and amortization 4,485 5,072 -------------- ------------- EBITDA (b) 28,894 23,561 Unusual Charges Included in Continuing Operations (h) 885 4,323 Cash Paid For Unusual Charges Included in Continuing Operations (3,384) (4,394) -------------- ------------- Adjusted EBITDA (c) 26,395 23,490 EBITDA Coverage (d) 8.2x 7.6x EBITDA Margin (e) 6.6% 6.4% Adjusted EBITDA Coverage (f) 7.5x 7.6x Adjusted EBITDA Margin (g) 6.0% 6.4% Cash provided by (used in) operating activities $16,686 ($20,127) Cash (used in) provided by investing activities (27,848) 37,196 Cash provided by (used in) financing activities 9,210 (1,925) _____________ (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. 27 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) (e) EBITDA margin represents the ratio of EBITDA to net sales. (f) Adjusted EBITDA coverage represents the ratio of Adjusted EBITDA to interest expense. (g) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to net sales. (h) June 30, 1998 excludes $1,499 of information systems accelerated depreciation. On October 7, 1997, the Company issued, in a private offering under Rule 144A of the Securities Act of 1933, an aggregate principal amount of $125.0 million of its 8.5% senior subordinated notes due in 2007 (the "Private Notes") with net proceeds to the Company of $119.5 million after deduction for offering costs. The Private Notes are unconditionally guaranteed on a senior subordinated basis by all of the Company's domestic subsidiaries. On February 10, 1998, the Company closed its offer to exchange the Private Notes for senior subordinated notes (the "Notes") of the Company with substantially identical terms to the Private Notes (except that the Notes do not contain terms with respect to transfer restrictions). Interest on the Notes accrues from the date of original issuance and is payable semiannually on April 1 and October 1 of each year, commencing on April 1, 1998, at a rate of 8.5% per annum. The semiannual payments of approximately $5.3 million will be funded by the operating cash flow of the Company. No other principal payments on the Notes are required over the next five years. The Notes contain certain restrictive covenants that, among other things, limit the Company's ability to incur additional indebtedness. Provided, however, that no event of default exist, additional indebtedness may be incurred if the Company maintains a consolidated fixed charge coverage ratio, after giving effect to such additional indebtedness, of greater than 2.0 to 1.0. On February 11, 1999, the Company entered into a $140.0 million senior revolving credit facility with a syndicate of financial institutions with NationsBank, N.A. as principal agent. Borrowings under the credit facility are available for working capital, capital expenditures, and acquisitions, and are secured by the common stock and assets of the Company and its subsidiaries. The credit facility expires February 10, 2004 and borrowings bear interest at certain floating rates selected by the Company at the time of borrowing. The credit facility contains certain affirmative and negative covenants, the most restrictive of which require maintenance of a maximum leverage ratio of 3.5 to 1.0, maintenance of consolidated net worth of $337.0 million, and maintenance of a minimum fixed charge coverage ratio of 2.0 to 1.0. In addition, the covenants limit additional indebtedness and asset dispositions, require majority lender approval on acquisitions with a total purchase price greater than $75.0 million, and restrict payments of dividends. The Company was not in compliance with its covenants at June 30, 1999, due to failure to meet certain timely filing requirements and exceeding capital expenditures limitations by $2.2 million in the quarter ended April 2, 1999. However, a limited waiver was obtained by the Company from the lending group. As of June 30, 1999, the Company has not entered into any material working capital commitments that require funding. The Company believes that the expected cash flows from operations, available borrowing under the credit facility, and capital markets are sufficient to meet the Company's anticipated future requirements for working capital, capital expenditures, and acquisitions for the foreseeable future. 28 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of June 30, 1999, the Company did not hold any derivative financial or commodity instruments. The Company is subject to interest rate risk and certain foreign currency risk relating to its operations in Europe; however, the Company does not consider its exposure in such areas to be material. The Company's interest rate risk is related to its Senior Subordinated Notes, which bear interest at a fixed rate of 8.5%, and borrowings under its Credit Facility, which bear interest at variable rates, at the Company's option, at either the lender's base rate (7.75% at June 30, 1999) or the LIBOR rate plus 1.125% (6.19% at June 30, 1999). YEAR 2000 READINESS DISCLOSURE The following disclosure is a "Year 2000 Readiness Disclosure" within the context of the Year 2000 Information and Readiness Disclosure Act to the extent allowed by that Act. Year 2000 Problem Many computer programs and hardware with embedded technology use only two digits to identify a year in a date field within a program (e.g., "98" or "02"). These programs or hardware may fail to distinguish dates in the "2000s" from dates in the "1900s" due to the two digit date fields. If uncorrected, such programs and hardware with date sensitive operations may malfunction or fail to operate after 1999 (and possibly before the year 2000 in some instances). Company's Year 2000 Program and Systems The Company has developed, and is implementing, a Year 2000 program to address both information technology ("IT") and non-IT systems. The Company's business applications reside on a group of mini computers, servers and personal computers. The Company also uses laptop computers that serve as sales force and service technician automation tools. The Company's IT systems include computer and data network hardware, internally developed software, and software purchased or licensed from external vendors. The Company's non-IT systems include equipment which uses date-sensitive embedded technology. Principal non-IT systems include telecommunications and warehouse equipment. The Company initiated a Year 2000 compliance program during May 1998, and the progress of this program has been communicated regularly to the Audit Committee of the Company's Board of Directors. The Company's approach to address the Year 2000 compliance program includes the following phases: inventory, assessment, planning, remediation, testing, and implementation, third party risk management, and business continuity planning. Company's State of Year 2000 Readiness The Company believes that its existing systems are substantially Year 2000 compliant, except that the Company lacks sufficient information to determine the Year 2000 status of recently acquired companies. The recently acquired companies are scheduled to be converted to the Company's substantially compliant systems before the end of September 1999. The Company substantially completed inventory, assessment, and plans for remediation of its critical IT systems during the quarter ended December 1998. Remediation and testing of these critical systems included upgrading, replacing, or modifying non-compliant components, and was substantially completed during the quarter ended March 1999. Implementation of these remediation efforts is now substantially complete, and has been 29 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) substantially complete since the quarter ended June 1999. As a precaution against possible errors or omissions to our remediation efforts, ongoing testing of all systems, critical and non-critical is targeted to continue through the end of September 1999. Additional remediation will occur as licensors offer remedies to Year 2000 issues or in the event undetected system non-compliance issues are uncovered. As stated above, recent acquisitions of companies by the Imaging Business have added to our remediation efforts. The Company does not fully know the state of Year 2000 readiness of the acquired companies. As a result, seven acquired service centers are targeted to be integrated into the imaging division's distribution IT system as branches prior to the end of September 1999. Currently, the Imaging Business has 30 of 37 service centers and its corporate location systems converted to its new system, which the Company believes is Year 2000 compliant. The progress of these integrations will be closely monitored, the Year 2000 readiness of these branches will be assessed, and contingency plans will be modified accordingly. The Company is also in the process of completing an inventory and assessment of its non-critical IT and all non-IT systems. Remediation efforts of non-critical systems include the development and implementation of ICONWeb, a new enhanced version of the Physician Supply Business sales force automation software, and the remediation of the Accuscan software that Gulf South provides its customers to monitor and order inventory. The new ICONWeb software, which includes enhanced functionality, is currently being piloted and is targeted for complete implementation prior to the end of November 1999. Remediated software has been implemented at approximately 90% of the customers currently using Accuscan. The remaining customers are targeted for implementation prior to the end of September 1999. The Company estimates that it will complete inventories, assessments, planning, remediation, and testing of all other non-critical IT and all non-IT systems by the end of September 1999. Costs for Company's Year 2000 Program The total costs of addressing the Company's Year 2000 readiness issues are not expected to be material to the Company's financial condition or results of operations. Since initiation of its program in calendar year 1998, the Company has expensed approximately $0.7 million on a worldwide basis in costs on a pretax basis to address its Year 2000 readiness issues. These expenditures include information system replacement and embedded technology upgrade costs of $0.4 million, supplier and customer compliance costs of $0.1 million and all other costs of $0.2 million. The Company currently estimates that the total of such costs for addressing its internal Year 2000 readiness, on a worldwide basis, will approximate $1.7 million in the aggregate on a pretax basis. These costs are being expensed as they are incurred, except for purchases of computer hardware and other equipment, which are capitalized as property and equipment and depreciated over the equipment's estimated useful lives in accordance with the Company's normal accounting policies. All costs are being funded through operating cash flows. No projects material to the financial condition, or results of operations of the Company have been deferred or delayed as a result of the Year 2000 program. A large part of the Year 2000 effort has been accomplished through the redeployment of existing resources. The cost of such redeployment or of internal management time has not been specifically quantified. As reported previously, concurrent with the Year 2000 modifications and upgrades to existing systems, the Company is currently replacing a majority of its internal information systems hardware and software with new systems ("New Systems") that the Company believes are Year 2000 compliant. The aforementioned amounts specifically exclude the costs associated with the implementations, but not the testing of these "New Systems" which are being installed primarily to integrate operations and achieve additional information technology functionality. Both internal and external resources are being used to identify, correct and test the Company's systems for Year 2000 compliance. A Year 2000 program manager has been assigned to coordinate the Company's Year 2000 compliance program at all of the Company's divisions. To assist the Company in meeting its Year 2000 responsibilities, the Company has contracted with external consultants specializing in Year 2000 readiness assessments. The goal of these consultants was to assist the Company in evaluating the 30 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Year 2000 programs, processes and progress of its U.S. divisions, and to help identify any remaining areas of effort advisable. The Company's original cost estimates for testing, third party Year 2000 risks, and contingency planning were revised as a result of the consultant's independent assessment of the scope of the Company's program. These consultants will be engaged through the end of calendar year 1999. The Company's Year 2000 efforts will be assessed and reported to executive management as part of this ongoing engagement. In addition, the Company has engaged its attorneys and other outside consultants to assist or examine selected critical areas. The Company has consulted insurance professionals and is exploring possible mitigation of Year 2000 risks through purchasing insurance. Budgeted costs for these ongoing engagements are estimated at $0.8 million and are included in the total costs estimates above. With respect to non-IT system issues, the Company is unable to estimate its remediation costs since it does not have available information upon which to measure the cost of Year 2000 compliance in this area. While the total costs to become Year 2000 compliant in the non-IT system area are not known at this time, management does not believe that such costs will have a material adverse effect on the business, financial position, or results of operations of the Company. Third Party Year 2000 Risks and Potential Worst Case Scenario The Company could be adversely affected if critical manufacturers, suppliers, customers, banks, payers, utilities, transportation companies, or other business partners fail to properly remediate their systems to achieve Year 2000 compliance. As planned, the Company has initiated communications, which include soliciting written responses to questionnaires, inquiries and follow-up meetings, with critical manufacturers, suppliers, customers and other business partners to determine the extent to which any Year 2000 issues affecting such third parties would affect the Company. Such communications are ongoing and are expected to continue through the end of calendar year 1999, with action plans developed and implemented as necessary. The Company has established a plan for ongoing monitoring of critical manufacturers, suppliers, customers, and other business partners during calendar year 1999. However, many critical manufacturers, suppliers, customers and other business partners have as yet, either declined to provide the requested assurances or have limited the scope of assurances to which they are willing to commit. Naturally, most third parties are unwilling to guarantee that they will achieve Year 2000 compliance. Some of the significant customers of the Long Term Care division have indicated that they have not completed the remediation and implementation of the systems at all of their nursing home centers. They believe that these efforts will be completed prior to year end, but have created alternative plans to revert to manual procedures for administering patient care. They believe that such reversions to manual procedures will not significantly affect their operations. Currently, these customers operate many of their existing centers manually without automated patient care systems. The Company is subject to risk should Government or private payers (including insurers) fail to become Year 2000 compliant and, therefore, be unable to make full or timely reimbursement to the Company's customers. For example, if the Federal government were unable to make payments under the Medicaid or Medicare programs due to Year 2000 failures, the Company's customers that derive a significant portion of their revenues from these government programs could be adversely affected. Such a situation could have a material adverse affect on the Company's cash flows, financial position, or results of operations by reducing the ability of customers to pay for products purchased from the Company. Since the Company's Year 2000 plan is dependent in part upon these suppliers, customers and other key third parties being Year 2000 compliant, there can be no assurance that the Company's efforts to assess third parties' Year 2000 readiness will be able to prevent a material adverse effect on the Company's business, financial position, or results of operations in future periods should a significant number of third parties experience business disruptions as a result of their lack of Year 2000 compliance. Additionally, third party failures to adequately address the Year 2000 issue could significantly disrupt the Company's operations and possibly lead to litigation against the Company. The costs and expenses associated with any such failure or litigation, or with any disruptions in the economy in general as a result of the Year 2000, are not presently estimable but could have a material adverse effect on the Company's business and results of operations. 31 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Other Year 2000 Risks and Contingency Planning Management of the Company believes that its Year 2000 compliance program will be effective in avoiding significant adverse consequences due to Year 2000 problems with its systems. The Company has, however, begun mitigating identified risks, and is developing contingency plans to address situations that may arise where the Company's systems or third party systems experience Year 2000 problems. As part of this effort, the Company has been assessing the viability of its entire supply chain and is developing contingency plans to provide alternatives in the event Year 2000 related issues arise. Current contingency alternatives center on human resource issues, substitute sources of utilities, inventory management, and the development of a rapid response capability and a monitoring process for critical communications during the transition into the Year 2000. The Company is developing and executing employee awareness plans to assist with the implementation of the Company's Year 2000 efforts. The Company is alerting customers of their need to address Year 2000 problems, specifically their need to address risks associated with non-compliant IT and non-IT equipment that they may have been or are relying on. If the Company were to experience significant Year 2000 problems due to a failure in its systems or a third party's systems, the Company would revert to interim manual methods of conducting business. In developing contingency plans, the Company will be prioritizing its systems and affected operations, and developing emergency measures to address potential systems failures that could significantly affect the Company's business operations. Likewise, the Company's contingency plans will address Year 2000 risks associated with Year 2000 potential failures experienced by third parties. Additionally, the Company is in the process of updating its information technology disaster recovery plan to include Year 2000 contingencies that may arise. Risks to achieving Year 2000 compliance include the availability of resources, the Company's ability to discover and correct potential Year 2000 problems which could have a serious impact on specific systems, equipment or facilities, and the ability of the Company's significant vendors, payers and customers to make their systems Year 2000 compliant. Even with contingency plans in place, there can be no assurance that Company will avoid experiencing problems relating to Year 2000 problems. 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. 32 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A series of related, putative securities class actions were filed against PSS and two officers in the United States District Court for the Middle District of Florida, Jacksonville Division, beginning on or about March 22, 1999 seeking to recover indeterminate damages, interest, costs and attorneys' fees for a class of stock purchasers between June 16, 1998 and March 10, 1999. The claims are based on alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), Rule 10b-5 and "control person" liability arising out of PSS' announcement that the SEC was reviewing its financial reports for certain prior periods and that PSS would likely be required to retroactively restate its financial statements to reflect the pre-acquisition operating results of certain merger transactions that were accounted for under the pooling of interest accounting method. The actions were consolidated by Order dated July 28, 1999 and are styled Panopoulos v. PSS World Medical, Inc. et al., Consolidated Case No. 99-268-civ-J-21B. A consolidated amended complaint will be filed by September 24, 1999. The lawsuits are in the earliest stages, and there can be no assurance that this litigation will be ultimately resolved on terms that are favorable to PSS. PSS and certain of its current officers and directors are named as defendants in a purported securities class action lawsuit entitled Jack Hirsch v. PSS World Medical, Inc., et al., Civil Action No. 98-502-cv-J-21A. The action, which was filed on or about May 28, 1998, is pending in the United States District Court for the Middle District of Florida, Jacksonville Division. An amended complaint was filed on December 11, 1998. The plaintiff alleges, for himself and for a purported class of similarly situated stockholders who allegedly purchased the Company's stock between December 23, 1997 and May 8, 1998, that the defendants engaged in violations of certain provisions of the Exchange Act, and Rule 10b-5 promulgated thereunder. The allegations are based upon a decline in the PSS stock price following announcement by PSS in May 1998 regarding the Gulf South merger that resulted in earnings below analyst's expectations. The plaintiff seeks indeterminate damages, including costs and expenses. PSS believes that the allegations contained in the complaint are without merit and intends to defend vigorously against the claims. The defendants filed their motions to dismiss on January 25, 1999 and are pending. However, the lawsuit is in the earliest stages, and there can be no assurance that this litigation will be ultimately resolved on terms that are favorable to PSS. 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. 33 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 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 8 1/2% Senior Subordinated Note due 2007, including Form of Guarantee (Private Notes).(2) 4.4 Form of 8 1/2% Senior Subordinated Note due 2007, including Form of Guarantee (Exchange Notes).(2) 4.5 Shareholder Protection Rights Agreement, dated as of April 20, 1998, between PSS World Medical, Inc. and Continental Stock Transfer & Trust Company, as Rights Agent.(11) 10.1 Registration Rights Agreement between the Company and Tullis-Dickerson Capital Focus, LP, dated as of March 16, 1994.(3) 10.2 Employment Agreement for Patrick C. Kelly.(14) 10.3 Incentive Stock Option Plan dated May 14, 1986.(3) 10.4 Shareholders Agreement dated March 26, 1986, between the Company, the Charthouse Co., Underwood, Santioni and Dunaway.(3) 10.5 Shareholders Agreement dated April 10, 1986, between the Company and Clyde Young.(3) 10.6 Shareholders Agreement between the Company and John D. Barrow.(3) 10.7 Amended and Restated Directors Stock Plan.(7) 10.8 Amended and Restated 1994 Long-Term Incentive Plan.(7) 10.9 Amended and Restated 1994 Long-Term Stock Plan.(7) 10.10 1994 Employee Stock Purchase Plan.(4) 10.11 1994 Amended Incentive Stock Option Plan.(3) 10.13 Distributorship Agreement between Abbott Laboratories and Physician Sales & Service, Inc.(Portions omitted as confidential--Separately filed with Commission).(5) 10.14 Stock Purchase Agreement between Abbott Laboratories and Physician Sales & Service, Inc.(5) 34 Exhibit Number Description 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) 27 Financial Data Schedule (for SEC use only) ______________ (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. (b) Reports on Form 8-K None. 35 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 August 16, 1999. PSS WORLD MEDICAL, INC. /s/ DAVID A. SMITH ----------------------- David A. Smith Executive Vice President and Chief Financial Officer 37 EX-27 2 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFRENCE TO SUCH FINACIAL STATEMENTS. 0000920527 PSS WORLD MEDICAL, INC. 1,000 3-MOS MAR-31-2000 APR-03-1999 JUN-30-1999 38,891 9,170 283,821 5,042 132,666 67,523 85,663 32,020 757,900 163,352 125,000 0 0 708 427,972 757,900 436,719 436,719 320,298 320,298 94,673 151 3,511 20,898 8,588 12,310 0 0 0 12,310 0.17 0.17
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