29
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 DECEMBER 31, 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 February 11, 2000 a total of 71,020,641 shares of common stock,
par value $.01 per share, of the registrant were outstanding.
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
DECEMBER 31, 1999
INDEX
PAGE NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1999 and April 2, 1999 3
Condensed Consolidated Statements of Operations -
For the Three and Nine Months Ended December 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
For the Three and Nine Months Ended December 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements -
December 31, 1999 and 1998 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 6. Exhibits and Reports on Form 8-K 38
SIGNATURES 30
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)
December 31, April 2,
1999 1999
------------------- ------------------
(Unaudited) *
ASSETS
Current Assets:
Cash and cash equivalents $ 31,394 $ 41,106
Marketable securities 10,681 3
Accounts receivable, net 322,289 272,996
Inventories, net 198,152 153,626
Employee advances 779 702
Prepaid expenses and other 78,017 59,413
------------------- ------------------
Total current assets 641,312 527,846
Property and equipment, net 58,934 48,167
Other Assets:
Intangibles, net 190,302 146,082
Other 25,002 21,286
=================== ==================
Total assets $ 915,550 $ 743,381
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 155,939 $ 112,966
Accrued expenses 42,845 48,704
Current maturities of long-term debt and capital lease obligations 4,774 1,062
Other 17,545 8,536
------------------- ------------------
Total current liabilities 221,103 171,268
Long-term debt and capital lease obligations, net of current portion 231,855 152,442
Other 6,382 3,111
------------------- ------------------
Total liabilities 459,340 326,821
------------------- ------------------
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, 71,016,141 and
70,796,024 shares issued and outstanding at December 31, 1999 and April 2,
1999, respectively 710 708
Additional paid-in capital 349,637 349,460
Retained earnings 109,234 70,211
Cumulative other comprehensive income (1,242) (1,177)
------------------- ------------------
458,339 419,202
Unearned ESOP shares (2,129) (2,642)
------------------ -------------------
Total shareholders' equity 456,210 416,560
------------------ -------------------
Total liabilities and shareholders' equity $ 915,550 $ 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 Nine Months Ended
-------------------------------- ---------------------------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
-------------------------------- ---------------------------------
Net sales $ 462,093 $ 399,547 $ 1,351,052 $ 1,154,475
Cost of goods sold 338,041 289,862 988,877 842,691
--------------- ---------------- ---------------- ----------------
Gross profit 124,052 109,685 362,175 311,784
General and administrative expenses 62,307 53,913 186,958 160,746
Selling expenses 38,802 32,484 109,622 88,953
--------------- ---------------- ---------------- ----------------
Income from operations 22,943 23,288 65,595 62,085
--------------- ---------------- ---------------- ----------------
Other income (expense):
Interest expense (4,063) (2,701) (10,436) (8,834)
Interest and investment income 380 506 1,308 3,651
Other income 1,551 1,819 9,904 3,839
--------------- ---------------- ---------------- ----------------
(2,132) (376) 776 (1,344)
--------------- ---------------- ---------------- ----------------
Income before provision for income taxes 20,811 22,912 66,371 60,741
Provision for income taxes 8,885 9,090 27,348 24,744
=============== ================ ================ ================
Net income $ 11,926 $ 13,822 $ 39,023 $ 35,997
=============== ================ ================ ================
Earnings per share:
Basic $ 0.17 $ 0.20 $ 0.55 $ 0.51
=============== ================ ================ ================
Diluted $ 0.17 $ 0.19 $ 0.55 $ 0.50
=============== ================ ================ ================
Weighted average shares outstanding (in thousands):
Basic 71,075 70,615 71,006 70,481
=============== ================ ================ ================
Diluted 71,250 72,118 71,257 71,731
=============== ================ ================ ================
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)
Nine Months Ended
------------------------------------
December 31, December 31,
1999 1998
------------------ -----------------
Cash Flows From Operating Activities:
Net income $ 39,023 $ 35,997
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 14,427 15,426
Provision for doubtful accounts 2,897 2,213
Gain on sale of fixed assets (296) --
Amortization of unearned ESOP 435 --
Deferred compensation 198 222
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Accounts receivable, net (40,283) (41,518)
Inventories (28,233) 9,549
Prepaid expenses and other current assets (13,645) (1,129)
Other assets (6,469) (2,627)
Accounts payable, accrued expenses and other liabilities 24,097 (28,708)
------------------ -----------------
Net cash used in operating activities (7,849) (10,575)
------------------ -----------------
Cash Flows From Investing Activities:
Purchases of marketable securities (10,665) (50,559)
Proceeds from sales and maturities of marketable securities -- 125,133
Proceeds from sale of fixed assets 2,003 --
Capital expenditures (17,893) (16,632)
Purchases of businesses, net of cash acquired (45,975) (55,678)
Payments on noncompete agreements (5,081) (2,032)
------------------ -----------------
Net cash (used in) provided by investing activities (77,611) 232
------------------ -----------------
Cash Flows From Financing Activities:
Proceeds from borrowings 79,487 --
Repayment of borrowings (3,489) (16,044)
Principal payments under capital lease obligations (245) (299)
Proceeds from issuance of common stock 60 3,838
------------------ -----------------
Net cash provided by (used in) financing activities 75,813 (12,505)
------------------ -----------------
Foreign currency translation adjustment (65) 99
------------------ -----------------
Net decrease in cash and cash equivalents (9,712) (22,749)
Cash and cash equivalents, beginning of period 41,106 81,483
================== =================
Cash and cash equivalents, end of period $ 31,394 $ 58,734
================== =================
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 AND NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements of PSS World Medical, Inc.
("PSS" or the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position and results of operations for
the periods indicated.
The accompanying condensed consolidated financial statements should be read in
conjunction with the financial statements and related notes in the Company's
1999 Annual Report on Form 10-K/A. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to the Securities and
Exchange Commission rules and regulations.
Financial statements for the Company's 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 Company operates on a thirteen week quarter which ends on the Friday closest
to each calendar quarter end. For purposes of presentation and clarity, calendar
quarter dates will be used for discussion and tables in this filing.
The results of operations for the interim periods covered by this report may not
necessarily be indicative of operating results for the full fiscal year.
NOTE 2 - BUSINESS ACQUISITIONS
Purchase Acquisitions
During the three months ended December 31, 1999, the Company acquired certain
assets and assumed certain liabilities of four imaging supply and equipment
distributors. A summary of the details of the transactions follows:
December 31, 1999
-----------------
Number of acquisitions.................... 4
Total consideration....................... $ 16,884
Cash paid, net of cash acquired........... 12,007
Goodwill recorded......................... 9,670
Value of Noncompete Agreements............ 820
6
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS DECEMBER 31, 1999 AND 1998 -Continued
(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 30 years.
The accompanying consolidated financial statements reflect the preliminary
allocation of the purchase price. The allocation of the purchase price,
performed using values and estimates available as of the date of the financial
statements, has not been finalized due to certain pre-acquisition contingencies
identified by the Company and the nature of the estimates required in the
establishment of the Company's merger integration plans. Accordingly, goodwill
associated with these acquisitions may increase or decrease in the next twelve
months.
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 the
Company's common stock and is recorded when earned as additional purchase price.
The maximum amount of remaining contingent consideration is approximately $13.5
million (payable through fiscal 2003). The first potential earn-out payment is
payable during the fourth quarter of Fiscal 2000.
The following table summarizes the adjustments recorded against goodwill during
the three months ended December 31, 1999:
Three Months Ended
December 31, 1999
--------------------
Merger costs and expenses..................... $ (19)
--------------------
$ (19)
====================
During the three months ended December 31, 1999, the Company recorded $42 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
reversed $61 of the relocation accrual. Refer to Note 4, Accrued Merger and
Restructuring Costs and Expenses, for further discussion regarding the merger
plan.
7
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS DECEMBER 31, 1999 AND 1998 -Continued
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
NOTE 3 - CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES
Charges Included In General and Administrative Expenses
In addition to typical general and administrative expenses, this income
statement caption includes charges related to merger activity, restructuring
activity, and other special items. The following table summarizes charges
included in general and administrative expenses in the accompanying consolidated
statements of income:
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
Merger costs and expenses $ (14) $ 989 $ (260) $ 1,475
Restructuring costs and expenses 1,589 498 9,808 3,009
Information systems accelerated
depreciation -- 1,814 -- 4,323
Other (1,221) -- (1,221) --
----------------- ----------------- ----------------- -----------------
Total $ 354 $ 3,301 $ 8,327 $ 8,807
================= ================= ================= =================
Merger Costs and Expenses
The Company's policy is to accrue merger costs and expenses at the commitment
date of an integration plan if certain criteria under EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity ("EITF 94-3") or 95-14, Recognition of Liabilities in Anticipation of a
Business Combination ("EITF 95-14"), are met. Merger costs and expenses recorded
at the commitment date primarily include charges for involuntary employee
termination costs, branch shut-down costs, lease termination costs, and other
exit costs.
If the criteria described in EITF 94-3 or EITF 95-14 are not met, the Company
records merger costs and expenses as incurred. Merger costs expensed as incurred
include the following: (1) costs to pack and move inventory from one facility to
another or within a facility in a consolidation of facilities, (2) relocation
costs paid to employees in relation to an acquisition accounted for under the
pooling-of-interests method of accounting, (3) systems or training costs to
convert the acquired companies to the current existing information system, (4)
training costs related to conforming the acquired companies operational policies
to that of the Company's operational policies, and (5) direct transaction costs
primarily consisting of investment banking, legal, accounting, and filing fees
related to mergers with the Company. In addition, amounts incurred in excess of
the original amount accrued at the commitment date are expensed as incurred.
Merger costs and expenses for the three months ended December 31, 1999 included
$399 of merger charges expensed as incurred, which primarily related to branch
shutdown costs. In addition, the company reversed $413 of merger costs and
expenses into income, which related to an over accrual for lease termination
costs and an over accrual for employee termination benefits. Refer to Note 4,
Accrued Merger and Restructuring Costs and Expenses, for further discussion
regarding the merger plan.
8
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS DECEMBER 31, 1999 AND 1998 -Continued
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
Restructuring Costs and Expenses
Restructuring costs and expenses for the three months ended December 31, 1999
included $2,590 of charges that were expensed as incurred, which primarily
relate to other exit costs. Other exit costs include costs to pack and move
inventory, costs to set up new facilities, employee relocation costs, and other
related facility closure costs. In addition, the company reversed $1,001 of
restructuring costs into income, which related to over accruals for lease
termination costs and involuntary employee termination costs. Refer to Note 4,
Accrued Merger and Restructuring Costs and Expenses, for further discussion
regarding the restructuring plan.
Other
During the three months ended December 31, 1999, the Company performed an
analysis and reversed $1,221 of a previously recorded operating tax charge
reserve.
NOTE 4 - ACCRUED MERGER AND RESTRUCTURING COSTS AND EXPENSES
Summary of Accrued Merger Costs and Expenses
In connection with the consummation of business combinations, management often
develops formal plans to exit certain activities, involuntarily terminate
employees, and relocate employees of the acquired companies. Management's plans
to exit an activity often include identification of duplicate facilities for
closure and identification of facilities for consolidation into other
facilities.
Generally, completion of the integration plans will occur within one year from
the date in which the plans were formalized and adopted by management. However,
intervening events occurring prior to completion of the plan, such as subsequent
acquisitions or system conversion issues, can significantly impact a plan that
had been previously established. Such intervening events may cause modifications
to the plans and are accounted for on a prospective basis. At the end of each
quarter, management reevaluates its integration plans and adjusts previous
estimates.
As part of the integration plans, certain costs are recognized at the date in
which the plan is formalized and adopted by management (commitment date). These
costs are generally related to employee terminations and relocation, lease
terminations, and branch shutdown. In addition, there are certain costs that do
not meet the criteria for accrual at the commitment date and are expensed as the
plan is implemented (refer to Note 3, Charges Included in General and
Administrative Expenses). Involuntary employee termination costs are employee
severance costs and termination benefits. Lease termination costs are lease
cancellation fees and forfeited deposits. Branch shutdown costs include costs
related to facility closure costs. Employee relocation costs are moving costs of
employees of an acquired company in transactions accounted for under the
purchase method of accounting.
Accrued merger costs and expenses, classified as accrued expenses in the
accompanying consolidated balance sheet, were $1,951 at December 31, 1999. The
discussion and roll forward 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.
9
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS DECEMBER 31, 1999 AND 1998 - Continued
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
Significant Pooling-of-Interests Business Combination Plan
The Company formalized and adopted an integration plan in December 1997 to
integrate the operations of S&W X-Ray, Inc. ("S&W") with the Imaging Business.
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
Termination Termination
Costs Costs Total
------------ ------------- --------------
Balance at September 30, 1999 $ 122 $ 429 $ 551
Adjustments (113) (300) (413)
Additions -- -- --
Utilized (9) (6) (15)
============ ============= ==============
Balance at December 31, 1999 $ 0 $ 123 $ 123
============ ============= ==============
As of December 31, 1999, all of the employees have been terminated, and all of
the seven identified distribution facilities had been shut down. During the
three months ended December 31, 1999, management determined that all costs
related to the merger plan had been incurred except for lease termination costs
for one location that will be paid through fiscal 2002. Management was able to
renegotiate lease buy outs for all locations except one. In addition,
settlements were made with several employees for involuntary termination costs
which caused actual costs to be less than management's original estimate.
Therefore, an adjustment of $413 was made to reverse the over accrual of
involuntary employee termination costs and lease termination costs. Refer to
Note 3, Charges Included in General and Administrative Expenses.
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 for the three months ended December 31, 1999, which related to
four nonsignificant pooling-of-interests business combinations completed during
fiscal 1999, is as follows:
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
------------- ------------- -------------- --------------
Balance at September 30, 1999 $ 74 $ 791 $ 25 $ 890
Adjustments -- -- -- --
Additions -- -- -- --
Utilized -- (101) (1) (102)
------------- ------------- -------------- --------------
Balance at December 31, 1999 $ 74 $ 690 $ 24 $ 788
============= ============= ============== ==============
The Imaging Business acquired TriStar Imaging Systems, Inc. ("TriStar") in
October 1998, and management formalized and adopted an integration plan in April
1999 to integrate the operations of the acquired company. Approximately $711 of
the $788 accrued merger costs and expenses at December 31, 1999 relate to this
integration
10
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS DECEMBER 31, 1999 AND 1998 - Continued
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
plan. This integration plan was completed during the second quarter of fiscal
2000 with all facilities being shut down; however, lease termination payments
will extend through fiscal 2007.
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 for the three months
ended December 31, 1999 which related to three nonsignificant purchase business
combinations completed during fiscal 1999, is as follows:
Involuntary
Employee Lease Branch
Relocation Termination Termination Shutdown
Costs Costs Costs Costs Total
------------ ------------- ------------- --------------- --------------
Balance at September 30, 1999 $ 86 $ 434 $ 722 $ 34 $ 1,276
Adjustments (61) -- -- -- (61)
Additions -- -- -- -- --
Utilized -- -- (156) (19) (175)
------------ ------------- ------------- --------------- --------------
Balance at December 31, 1999 $ 25 $ 434 $ 566 $ 15 $ 1,040
============ ============= ============= =============== ==============
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 $670 of the
$1,040 accrued merger costs and expenses at December 31, 1999 relate to these
integration plans. Relocation costs are for five employees of which three had
been relocated as of December 31, 1999. During the three months ended December
31, 1999, management determined that the remaining other people identified in
the integration plans would not be relocated. Therefore, a goodwill adjustment
of $61 was made to reverse the accrual for relocation for these two employees.
Management expects to pay out the remaining relocation costs accrual during the
fourth quarter of fiscal 2000. 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 December 31, 1999, nine employees have been
terminated. Management identified eight distribution facilities to be closed in
which all operations would be ceased due to duplicative functions, all of which
had been shut down by December 31, 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 $370 of the $1,040 accrued merger costs and expenses at December
31, 1999 relate to this integration plan. As of December 31, 1999, all locations
have been shut down and all employees were terminated as a result of the plan.
However, lease termination payments will extend through fiscal 2004.
Summary of Accrued Restructuring Costs and Expenses
Primarily as a result of the impact of the Gulf South merger, in order to
improve customer service, reduce costs, and improve productivity and asset
utilization, the Company decided to realign and consolidate its operations.
Accordingly, the Company 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.
11
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS DECEMBER 31, 1999 AND 1998 - Continued
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
Accrued restructuring costs and expenses related to Plans A and B, classified as
accrued expenses in the accompanying consolidated balance sheets, were $1,159 at
December 31, 1999. A summary of the restructuring plan activity for the three
months ended December 31, 1999 is as follows:
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
------------- ------------- -------------- --------------
Balance at September 30, 1999 $ 1,161 $ 696 $ 635 $ 2,492
Adjustments (892) (85) -- (977)
Additions -- -- -- --
Utilized (147) (183) (26) (356)
------------- ------------- -------------- --------------
Balance at December 31, 1999 $ 122 $ 428 $ 609 $ 1,159
============= ============= ============== ==============
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 December 31, 1999 because
the information system conversion must be completed prior to consolidating
distribution facilities. The lease termination costs will be paid through fiscal
2002.
During the three months ended December 31, 1999, management negotiated a
settlement on one lease which caused actual lease termination costs to be less
than management's original estimate. In addition, settlements were made with
several employees for involuntary employee termination costs that caused actual
costs to be less than management's original estimate. Therefore, an adjustment
of $85 was made to the lease termination costs accrual and an adjustment of $892
was made to the involuntary employee termination costs accrual to reflect the
change in estimated costs and expenses. Although all locations identified in
Plan A and Plan B have been shutdown, costs are still being incurred relating to
these branch shutdowns. Management will review the branch shutdown costs during
the fourth quarter of fiscal 200 to determine if an adjustment should be made.
Refer to Note 3, Charges Included in General and Administrative Expenses.
Plan A
As of December 31, 1999, all employees were terminated as a result of the plan,
with the related severance payments to be made in the fourth quarter of fiscal
2000. As of December 31, 1999, all of the locations were merged into existing
locations.
Plan B
As of December 31, 1999, all of the six locations had been shut down. As of
September 30, 1999, all employees were terminated as a result of the plan, with
the related severance payments to be made in the fourth quarter of fiscal 2000.
During the second quarter of fiscal 2000, management evaluated the Company's
overall cost structure and implemented cost reductions in order to meet internal
profitability targets. In addition, management decided to improve its
distribution model and relocate the corporate office for the GSMS division to
Jacksonville, Florida where the corporate offices for the DI and PSS divisions
exist. The Company began implementing the restructuring plan during the second
quarter of fiscal 2000, which impacted all divisions ("Plan C").
Accrued restructuring costs and expenses related to Plan C were $1,950 at
December 31, 1999.
12
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS DECEMBER 31, 1999 AND 1998 - Continued
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
A summary of the restructuring plan activity for the three months ended December
31, 1999 is as follows:
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
------------- ------------- -------------- --------------
Balance at September 30, 1999 $ 1,952 $ -- $ 461 $ 3,521
Adjustments (2) (22) -- (24)
Additions -- -- -- --
Utilized (1,335) (150) (62) (1,547)
------------- ------------- -------------- --------------
Balance at December 31, 1999 $ 615 $ 936 $ 399 $ 1,950
============= ============= ============== ==============
Plan C
Plan C involved the shutdown of the Jackson, MS, corporate office of Gulf South,
merging 14 operating locations into existing locations, and eliminating
overlapping regional operations and management functions. As of December 31,
1999, 11 locations were merged into existing locations and the Gulf South
corporate office had been integrated with the Jacksonville corporate office. The
plan also included the termination of approximately 250 employees from
operations, administration, and management. As of December 31, 1999, 209
employees were terminated as a result of the plan.
During the three months ended December 31, 1999, management negotiated a
settlement on one lease which caused actual lease termination costs to be less
than management's original estimate. In addition, settlements were made with two
employees for involuntary employee termination costs which caused actual costs
to be less than management's original estimate. Therefore, an adjustment of $22
was made to the lease termination costs accrual and an adjustment of $2 was made
to the involuntary employee termination costs accrual to reflect the changes in
estimated costs and expenses. Refer to Note 3, Charges Included in General and
Administrative Expenses.
NOTE 5 - COMPREHENSIVE INCOME
Comprehensive income is defined 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 and nine months ended December 31, 1999 and 1998, as detailed in the
following table:
Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
Net income.......................... $ 11,926 $ 13,822 $ 39,023 $ 35,997
================= ================= ================= =================
Other comprehensive (expense)
income, net of tax:
Foreign currency translation
adjustment.................... (106) 20 (65) 99
----------------- ----------------- ----------------- -----------------
Comprehensive income................ $ 11,820 $ 13,842 $ 38,958 $ 36,096
================= ================= ================= =================
13
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS DECEMBER 31, 1999 AND 1998 - Continued
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
NOTE 6 - EARNINGS PER SHARE
The calculation of basic earnings per common share and diluted earnings per
common share is as follows:
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
December December 31, December December
31, 1999 1998 31, 1999 31, 1998
------------- -------------- ------------- --------------
Net income........................................ $ 11,926 $ 13,822 $ 39,023 $ 35,997
============= ============== ============= ==============
Earnings per share:
Basic.......................................... $ 0.17 $ 0.20 $ 0.55 $ 0.51
============= ============== ============= ==============
Diluted........................................ $ 0.17 $ 0.19 $ 0.55 $ 0.50
============= ============== ============= ==============
Weighted average shares outstanding (in thousands):
Common shares.................................. 71,075 70,615 71,006 70,481
Assumed exercise of stock options and warrants. 175 1,503 251 1,250
------------- -------------- ------------- --------------
Diluted shares outstanding..................... 71,250 72,118 71,257 71,731
============= ============== ============= ==============
NOTE 7 - SEGMENT INFORMATION
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
14
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS December 31, 1999 AND 1998 - Continued
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
The Company primarily evaluates the operating performance of its segments based
on net sales and income from operations. The following table presents financial
information about the Company's business segments:
Three Months Ended Nine Months Ended
----------------------------------- ------------------------------------
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
NET SALES:
Physician Supply Business $ 177,712 $ 168,620 $ 530,859 $ 506,956
Imaging Business 184,193 136,836 520,038 372,795
Long-Term Care Business 92,581 85,040 276,872 255,993
Other (a) 7,607 9,051 23,283 18,731
----------------- ----------------- ----------------- -----------------
Total net sales $ 462,093 $ 399,547 $ 1,351,052 $ 1,154,475
================= ================= ================= =================
INCOME FROM OPERATIONS:
Physician Supply Business $ 11,730 $ 12,614 $ 35,867 $ 33,788
Imaging Business 7,777 6,266 22,170 13,958
Long-Term Care Business 3,561 5,474 7,563 16,577
Other (a) (125) (1,066) (5) (2,238)
----------------- ----------------- ----------------- -----------------
Total income from operations $ 22,943 $ 23,288 $ 65,595 $ 62,085
================= ================= ================= =================
CHARGES INCLUDED IN GENERAL AND
ADMINISTRATIVE EXPENSES:
Physician Supply Business $ 360 $ 1,043 $ 1,590 $ 2,775
Imaging Business 447 709 2,261 2,654
Long-Term Care Business (482) 441 3,507 2,133
Other (a) 29 1,108 969 1,245
----------------- ----------------- ----------------- -----------------
Total charges included in general and
administrative expenses $ 354 $ 3,301 $ 8,327 $ 8,807
================= ================= ================= =================
DEPRECIATION:
Physician Supply Business $ 1,065 $ 1,973 $ 3,046 $ 5,739
Imaging Business 839 1,126 2,390 2,648
Long-Term Care Business 337 368 1,148 1,029
Other (a) 67 50 167 225
----------------- ----------------- ----------------- -----------------
Total depreciation $ 2,308 $ 3,517 $ 6,751 $ 9,641
================= ================= ================= =================
AMORTIZATION OF INTANGIBLE AND OTHER ASSETS:
Physician Supply Business $ 417 $ 506 $ 1,480 $ 2,190
Imaging Business 1,538 1,124 4,235 2,292
Long-Term Care Business 604 448 1,765 1,303
Other (a) 100 -- 196 --
----------------- ----------------- ----------------- -----------------
Total amortization of intangible and
other assets $ 2,659 $ 2,078 $ 7,676 $ 5,785
================= ================= ================= =================
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business $ 434 $ 739 $ 700 $ 1,052
Imaging Business 597 150 840 291
Long-Term Care Business 500 46 1,357 354
Other (a) (8) 241 -- 516
----------------- ----------------- ----------------- -----------------
Total provision for doubtful accounts $ 1,523 $ 1,176 $ 2,897 $ 2,213
================= ================= ================= =================
CAPITAL EXPENDITURES:
Physician Supply Business $ 2,914 $ 4,297 $ 8,882 $ 10,047
Imaging Business 1,267 2,057 4,947 5,370
Long-Term Care Business 1,226 492 3,078 1,307
Other (a) 453 (195) 986 (92)
----------------- ----------------- ----------------- -----------------
Total capital expenditures $ 5,860 $ 6,651 $ 17,893 $ 16,632
================= ================= ================= =================
(a) Other includes the holding company and the International subsidiaries
15
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS DECEMBER 31, 1999 AND 1998 - Continued
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
December 31, 1999 April 2, 1999
----------------- -------------
ASSETS:
Physician Supply Business $ 255,519 $ 236,452
Imaging Business 375,628 277,250
Long-Term Care Business 218,512 174,868
Other (a) 65,891 54,811
----------------- -------------
Total assets $ 915,550 $ 743,381
================= =============
(a) Other includes the holding company and the International subsidiaries
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.
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.
16
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 106 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 52 medical supply distribution service centers with
approximately 721 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 900 service
specialists and 250 sales representatives ("Imaging Business") serving over
17,000 customer sites in 42 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 141 sales
representatives ("Long-Term Care Business") serving over 10,000 long-term care
facilities in all 50 states. The Long-Term Care Business' primary market is
comprised of a large number of independent operators, small to mid-sized local
and regional chains, and several national chains representing over 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.
17
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 37.1% of the Long-Term
Care Business revenues for the three months ended December 31, 1999 represented
sales to its top five customers. Growth in the Long-Term Care Business, as well
as consolidation of the health care industry, may increase the Company's
dependence on large customers.
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the results of
operations for the three and nine months ended December 31, 1999 and 1998.
tHREE AND NINE MONTHS ENDED December 31, 1999 VersUs three AND NINE months ended
December 31, 1998
Net Sales. Net sales for the three months ended December 31, 1999 totaled $462.1
million, an increase of $62.6 million, or 15.7%, over the three months ended
December 31, 1998 total of $399.5 million. Net sales for the nine months ended
December 31, 1999 totaled $1,351.1 million, an increase of $196.6 million, or
17.0%, over the nine months ended December 31, 1998 total of $1,154.5 million.
The increase in sales can be attributed to (i) net sales from the acquisition of
companies during fiscal years 1999 and 2000 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.
18
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
For the three months ended December 31, 1999, net sales contribution from
acquisitions totaled approximately $1.9 million, $36.3 million, and $9.3 million
for the Physician Supply, Imaging, and Long-Term Care Businesses, respectively.
For the nine months ended December 31, 1999, net sales contribution from
acquisitions totaled approximately $6.1 million, $133.7 million, and
$25.7 million for the Physician Supply, Imaging, and Long-Term Care Businesses,
respectively. These amounts reflect the incremental impact of acquisitions
completed during fiscal years 1999 and 2000 on the comparable three and nine
month results.
Gross Profit. Gross profit for the three months ended December 31, 1999 totaled
$124.1 million, an increase of $14.4 million, or 13.1%, over the three months
December 31, 1998 total of $109.7 million. Gross profit for the nine months
ended December 31, 1999 totaled $362.2 million, an increase of $50.4 million, or
16.2%, over the nine months ended December 31, 1998 total of $311.8 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 26.9% and 27.4%
for the three months ended December 31, 1999 and 1998, respectively, and 26.8%
and 27.0% for the nine months ended December 31, 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 lower margins, the Company has successfully
maintained its overall gross margins. Gross margin as a percentage of
sales increased due 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, (iii) the effect of negotiated lower product
purchasing costs which resulted, and (iv) the elimination of lower margin
acquired Imaging Business revenues. This is offset by the expansion of imaging
revenues with lower gross profit margins and lower sequential margins in the
Long-Term Care Business.
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 December 31, 1999 totaled $62.3 million, an increase of $8.4
million, or 15.6%, from the three months ended December 31, 1998 total of $53.9
million. General and administrative expense as a percentage of net sales was
13.5% for the comparable three-month period. General and administrative expenses
for the nine months ended December 31, 1999 totaled $187.0 million, an increase
of $26.3 million, or 16.4%, from the nine months ended December 31, 1998 total
of $160.7 million. General and administrative expense as a percentage of net
sales was 13.8% and 13.9% for the comparable nine-month period.
In addition to typical general and administrative expenses, this income
statement caption includes charges related to merger activity, restructuring
activity, and other special items (refer to Note 3 of the accompanying condensed
consolidated financial statements for further discussion of these charges). The
following table summarizes charges included in general and administrative
expenses in the accompanying consolidated statements of income:
Three Months Ended Nine Months Ended
-------------------------------------------------------------------------
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
Merger costs and expenses $ (14) $ 989 $ (260) $ 1,475
Restructuring costs and expenses 1,589 498 9,808 3,009
Information systems accelerated
depreciation -- 1,814 -- 4,323
Other (1,221) -- (1,221) --
----------------- ----------------- ----------------- -----------------
Total $ 354 $ 3,301 $ 8,327 $ 8,807
================= ================= ================= =================
19
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Selling Expenses. Selling expenses for the three months ended December 31, 1999
totaled $38.8 million, an increase of $6.3 million, or 19.4 %, over the three
months ended December 31, 1998 total of $32.5 million. Selling expense as a
percentage of net sales was approximately 8.4% and 8.1% for the three months
ended December 31, 1999 and 1998, respectively. Selling expenses for the nine
months ended December 31, 1999 totaled $109.6 million, an increase of $20.6
million, or 23.1%, over the nine months ended December 31, 1998 total of $89.0
million. Selling expense as a percentage of net sales was approximately 8.1% and
7.7% for the nine months ended December 31, 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 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 December 31, 1999
totaled $22.9 million, a decrease of $0.4million, or 1.7%, over the three months
ended December 31, 1998 total of 23.3 million. As a percentage of net sales,
operating income decreased to 5.0% from 5.8% from the comparable prior year
period primarily due to the impact of the factores described above. Operating
income for the nine months ended December 31, 1999 totaled $65.6 million, an
increase of $3.5 million, or 5.6%, over the nine months ended December 31,
1998 total of $62.1 million. As a percentage of net sales, operating
income decreased to 4.9% from 5.4% from the comparable prior year period
primarily due to the factors described above.
Interest Expense. Interest expense for the three months ended December 31, 1999
totaled $4.1 million, an increase of $1.4 million, or 51.9%, over the three
months ended December 31, 1998 total of $2.7 million. Interest expense for the
nine months ended December 31, 1999 totaled $10.4 million, an increase of $1.6
million, or 18.2%, over the nine months ended December 31, 1998 total of $8.8
million. The increase in interest expense for the three and nine month periods
is primarily attributable to an increase of outstanding debt under the revolving
credit facility.
Interest and Investment Income. Interest and investment income for the three
months ended December 31, 1999 totaled $0.4 million, a decrease of $0.1 million,
or 20%, over the three months ended December 31, 1998 total of $0.5 million.
Interest and investment income for the nine months ended December 31, 1999
totaled $1.3 million, a decrease of $2.4 million, or 64.9%, over the nine months
ended December 31, 1998 total of $3.7 million. These decreases primarily
resulted from lower levels 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 December 31, 1999 totaled
$1.6 million, an decrease of $0.2 million, or 11.1%, over the three months ended
December 31, 1998 total of $1.8 million. Other income for the nine months ended
December 31, 1999 totaled $9.9 million, an increase of $6.1 million, or 160.5%,
over the nine months ended December 31, 1998 total of $3.8 million. Normally,
other income primarily consists of finance charges on customer accounts and
financing performance incentives. Included in other income for the nine months
ended December 31, 1999 was approximately $6.5 million relating to a favorable
medical x-ray film antitrust settlement claim.
Provision for Income Taxes. Provision for income taxes for the three months
ended December 31, 1999 totaled $8.9 million, a decrease of $0.2 million, or
2.2%, over the three months ended December 31, 1998 total of $9.1 million. The
effective income tax rate was 42.8% and 39.7% for the three months ended
December 31, 1999 and 1998, respectively. Provision for income taxes for nine
months ended December 31, 1999 totaled $27.3 million, an increase of $2.6
million, or 10.5%, over the nine months ended December 31, 1998 total of $24.7
million. The
20
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
effective income tax rate was 41.1% and 40.6% for the nine months ended December
31, 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 December 31, 1999 totaled
$11.9 million, a decrease of $1.9 million, or 13.8%, over the three months ended
December 31, 1998 total of $13.8 million. As a percentage of net sales, net
income decreased to 2.6% from 3.5% for the comparable prior year period
primarily due to the factors described above. Net income for the nine months
ended December 31, 1999 totaled $39.0 million, an increase of $3.0 million, or
8.3%, over the nine months ended December 31, 1998 total of $36.0 million. As a
percentage of net sales, net income decreased to 2.9% from 3.1% 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 used in operating activities was $(7.8) million and $(10.6) million
for the nine months ended December 31, 1999 and 1998, respectively.
Cash flows from operations during the three months ended December
31, 1999 were impacted by approximately $40.0 million of additional inventory
carried by PSS, DI and GSMS due to Year 2000 build-up. In addition,
accounts receivable increased approximately $20 million primarily due to
disruptions caused by the transition of the Gulf South administrative
offices and functions to Jacksonville, FL. The Company expects normalization
of these balances by March 31, 2000.
Net cash used in investing activities was $(77.6) million and $0.2 million
for the three months ended December 31, 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 for the nine months
ended December 31, 1998, include approximately $74.6 million of net proceeds
from sales and maturities of marketable securities. The increase in capital
expenditures in fiscal years 1999 and 2000 over prior fiscal years is primarily
attributable to new computer systems being implemented across all the Company's
divisions.
Net cash provided by (used in) financing activities was $75.8 million and
$(12.5) million for the nine months ended December 31, 1999 and 1998,
respectively. During the nine months ended December 31, 1999, the Company
borrowed $46.0 million from its revolving credit facility to fund business
acquisitions and $30.0 million for working capital purposes described above in
cash used in operating activities.
The Company had working capital of $420.2 million and $356.6 million as of
December 31, 1999 and April 2, 1999, respectively. Accounts receivable, net of
allowances, were $322.3 million and $273.0 million at December 31, 1999 and
April 2, 1999, respectively. The average number of days sales in accounts
receivable outstanding was approximately 59.5 and 56.0 days for the nine months
ended December 31, 1999 (annualized) and the year ended April 2, 1999,
respectively. For the nine months ended December 31, 1999, the Company's
Physician Supply, Imaging, and Long-Term Care Businesses had annualized days
sales in accounts receivable of approximately 55.7, 52.7, and 77.6 days,
respectively.
21
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Inventories were $198.2 million and $153.6 million as of December 31, 1999 and
April 2, 1999, respectively. The Company had inventory turnover of 7.5x and
8.1x times for the nine months ended December 31, 1999 (annualized) and the
year ended April 2, 1999, respectively. For the nine months ended December 31,
1999, the Company's Physician Supply, Imaging, and Long-Term Care Businesses had
annualized inventory turnover of 7.6x, 7.7x, and 7.2, respectively.
The following table presents EBITDA and other financial data for the three and
nine months ended December 31, 1999 and 1998 (in thousands):
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Other Financial Data:
Income before provision for income taxes $ 20,811 $ 22,912 $ 66,371 $ 60,741
Plus: Interest Expense 4,063 2,701 10,436 8,834
------------ ------------ ------------ ------------
EBIT (a) 24,874 25,613 76,807 69,575
Plus: Depreciation and amortization 4,967 5,595 14,427 15,426
------------ ------------ ------------ ------------
EBITDA (b) 29,841 31,208 91,234 85,001
Unusual Charges Included in Continuing Operations (h) 354 1,487 8,327 4,484
Cash Paid For Unusual Charges Included in Continuing Operations (5,192) (4,922) (13,205) (17,920)
------------ ------------ ------------ ------------
Adjusted EBITDA (c) $ 25,003 $ 27,773 $ 86,356 $ 71,565
EBITDA Coverage (d) 7.3x 11.6x 8.7x 9.6x
EBITDA Margin (e) 6.5% 7.8% 6.8% 7.4%
Adjusted EBITDA Coverage (f) 6.2x 10.3x 8.3x 8.1x
Adjusted EBITDA Margin (g) 5.4% 7.0% 6.4% 6.2%
Cash used in operating activities $ (7.8) $ (10.6)
Cash (used in) provided by investing activities $ (77.6) $ 0.2
Cash provided by (used in) financing activities $ 75.8 $ (12.5)
(a) EBIT represents income before income taxes plus interest expense.
(b) EBITDA represents EBIT plus depreciation and amortization. EBITDA is not a
measure of performance or financial condition under generally accepted
accounting principles ("GAAP"). EBITDA is not intended to represent cash
flow from operations and should not be considered as an alternative measure
to income from operations or net income computed in accordance with GAAP,
as an indicator of the Company's operating performance, as an alternative
to cash flow from operating activities, or as a measure of liquidity. In
addition, EBITDA does not provide information regarding cash flows from
investing and financing activities which are integral to assessing the
effects on the Company's financial position and liquidity as well as
understanding the Company's historical growth. The Company believes that
EBITDA is a standard measure of liquidity commonly reported and widely used
by analysts, investors, and other interested parties in the financial
markets. However, not all companies calculate EBITDA using the same method
and the EBITDA numbers set forth above may not be comparable to EBITDA
reported by other companies.
(c) Adjusted EBITDA represents EBITDA plus unusual charges included in
continuing operations less cash paid for unusual charges included in
continuing operations.
(d) EBITDA coverage represents the ratio of EBITDA to interest expense.
(e) EBITDA margin represents the ratio of EBITDA to net sales.
(f) Adjusted EBITDA coverage represents the ratio of Adjusted EBITDA to
interest expense.
(g) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to net
sales.
(h) The three and nine months ended December 31, 1998 exclude $1,814 and
$4,323, respectively, of information systems accelerated depreciation.
22
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
On October 7, 1997, the Company issued, in a private offering under Rule 144A of
the Securities Act of 1933, an aggregate principal amount of $125.0 million of
its 8.5% senior subordinated notes due in 2007 (the "Private Notes") with net
proceeds to the Company of $119.5 million after deduction for offering costs.
The Private Notes are unconditionally guaranteed on a senior subordinated basis
by all of the Company's domestic subsidiaries. On February 10, 1998, the Company
closed its offer to exchange the Private Notes for senior subordinated notes
(the "Notes") of the Company with substantially identical terms to the Private
Notes (except that the Notes do not contain terms with respect to transfer
restrictions). Interest on the Notes accrues from the date of original issuance
and is payable semiannually on April 1 and October 1 of each year, commencing on
April 1, 1998, at a rate of 8.5% per annum. The semiannual payments of
approximately $5.3 million will be funded by the operating cash flow of the
Company. No other principal payments on the Notes are required over the next
five years. The Notes contain certain restrictive covenants that, among other
things, limit the Company's ability to incur additional indebtedness. Provided,
however, that no event of default exist, additional indebtedness may be incurred
if the Company maintains a consolidated fixed charge coverage ratio, after
giving effect to such additional indebtedness, of greater than 2.0 to 1.0.
On February 11, 1999, the Company entered into a $140.0 million senior revolving
credit facility with a syndicate of financial institutions with NationsBank,
N.A. as principal agent. Borrowings under the credit facility are available for
working capital, capital expenditures, and acquisitions, and are secured by the
common stock and assets of the Company and its subsidiaries. The credit facility
expires February 10, 2004 and borrowings bear interest at certain floating rates
selected by the Company at the time of borrowing. The credit facility contains
certain affirmative and negative covenants, the most restrictive of which
require maintenance of a maximum leverage ratio of 3.5 to 1.0, maintenance of
consolidated net worth of $337.0 million, and maintenance of a minimum fixed
charge coverage ratio of 2.0 to 1.0. In addition, the covenants limit additional
indebtedness and asset dispositions, require majority lender approval on
acquisitions with a total purchase price greater than $75.0 million, and
restrict payments of dividends.
On October 20, 1999, the Company amended its $140.0 million senior revolving
credit facility to allow for repurchases of up to $50.0 million of the Company's
common stock through October 31, 2000. In addition, the amendment modified the
consolidated net worth maintenance covenant to reduce the $337.0 million minimum
compliance level by any repurchases made by the Company of its common stock.
The Company was in compliance with the debt covenants under the Notes and credit
facility as of December 31, 1999.
As of December 31, 1999, the Company has not entered into any material working
capital commitments that require funding. The Company believes that the expected
cash flows from operations, available borrowing under the credit facility, and
capital markets are sufficient to meet the Company's anticipated future
requirements for working capital, capital expenditures, and acquisitions for the
foreseeable future.
Quantitative and qualitative disclosures about market risk
As of December 31, 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 plus 0.25% (8.5% at December 31, 1999) or LIBOR plus 1.25% (a
weighted average of 7.3% at December 31, 1999).
23
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
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 implemented, 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 included 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. The Company substantially completed inventory, assessment, and plans
for remediation of its critical IT systems during the quarter ended December
1998. Remediation and testing of these critical systems included upgrading,
replacing, or modifying non-compliant components, and was substantially
completed during the quarter ended March 1999. Implementation of these
remediation efforts is now substantially complete, and has been substantially
complete since the quarter ended June 1999. As a precaution against possible
errors or omissions to our remediation efforts, the Company tested substantially
all systems, critical and non-critical. These tests were substantially completed
in the quarter ended September 1999.
The Company has completed an inventory and assessment of its non-critical IT and
all non-IT systems. Remediation efforts of non-critical systems have included
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, has been successfully implemented. Remediated software has been
implemented for the customers currently using Accuscan. The Company has
substantially completed inventories, assessments, planning , remediation, and
testing of all other non-critical IT and all non-IT systems.
24
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
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 $2.0 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 $0.2 million and all
other costs of $1.4 million. As of the time of this filing, the Company
currently estimates that all costs necessary for addressing its internal Year
2000 readiness, on a worldwide basis have been incurred and have not materially
changed from original estimates. These costs have been expensed as incurred,
except for purchases of computer hardware and other equipment, which were
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.
Both internal and external resources were used to identify, correct and test the
Company's systems for Year 2000 compliance. A Year 2000 program manager was
assigned to coordinate the Company's Year 2000 compliance program at all of the
Company's divisions. To assist the Company in meeting its Year 2000
responsibilities, the Company has contracted with external consultants
specializing in Year 2000 readiness assessments. The goal of these consultants
was to assist the Company in evaluating the Year 2000 programs, processes and
progress of its U.S. divisions, and to help identify any remaining areas of
effort advisable. The Company's original cost estimates for testing, third party
Year 2000 risks, and contingency planning were revised as a result of the
consultant's independent assessment of the scope of the Company's program. These
consultants were engaged through the end of calendar year 1999. The Company's
Year 2000 efforts were assessed and reported to executive management as part of
this ongoing engagement. In addition, the Company engaged its attorneys and
other outside consultants to assist or examine selected critical areas. The
Company has consulted insurance professionals and has explored possible
mitigation of Year 2000 risks through purchasing insurance.
Third Party Year 2000 Risks and Potential Worst Case Scenario
The Company could have been adversely affected if critical manufacturers,
suppliers, customers, banks, payers, utilities, transportation companies, or
other business partners failed to properly remediate their systems to achieve
Year 2000 compliance. The Company initiated communications, which included
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. The Company established a plan for
ongoing monitoring of critical manufacturers, suppliers, customers, and other
business partners during calendar year 1999.
The Company was subject to risk if Government or private payers (including
insurers) failed to become Year 2000 compliant and, therefore, be unable to make
full or timely reimbursement to the Company's customers. 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 were 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
25
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
business and results of operations. Based on the information available at the
time of this filing, the Company does not know of any adverse affects or of Year
2000 failures of critical third parties.
Other Year 2000 Risks and Contingency Planing
Management of the Company believes that its Year 2000 compliance program has
been effective in avoiding significant adverse consequences due to Year 2000
problems with its systems. The Company developed contingency plans to address
potential Year 2000 problems. The Company developed and executed employee
awareness plans to assist with the implementation of the Company's Year 2000
efforts. The Company alerted 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 relying on. If the Company
experienced significant Year 2000 problems due to a failure in its systems or a
third party's systems, the Company would have reverted to interim manual methods
of conducting business. It was not necessary for the Company to exercise any of
its contingency or disaster recovery plans.
Based on the information available at the time of this filing, the Company has
not experienced any significant Year 2000 related issues that would have an
adverse effect on the Company's business operations and financial condition.
There can be no assurance, however, that all potential Year 2000 related issues
have been discovered.
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated financial performance revenues,
gross margins and earnings, statements regarding the Company's current business
strategy and strategic alternatives, 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 outcome of the Company's review of its strategic
alternatives, which is uncertain is uncertain at this time; the availability of
sufficient capital to finance the Company's business plans on terms satisfactory
to the Company; competitive factors; the ability of the Company to adequately
defend or reach a settlement of outstanding litigations and investigations
involving the Company or its management; changes in labor, equipment and capital
costs; changes in regulations affecting the Company's business; future
acquisitions or strategic partnerships; general business and economic
conditions; and other factors described from time to time in the Company's
reports filed with the Securities and Exchange Commission. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
26
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PSS and certain of its current officers and directors are named as defendants in
a purported securities class action lawsuit entitled Jack Hirsch v. PSS World
Medical, Inc., et al., Civil Action No. 98-CV-502. 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, which are pending. However, the lawsuit is in the earliest
stages, and there can be no assurance that this litigation will be ultimately
resolved on terms that are favorable to PSS.
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.
27
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)
10.12 PSS World Medical, Inc. 1999 Long-Term Incentive Plan.(15)
10.13 Distributorship Agreement between Abbott Laboratories and Physician
Sales & Service, Inc. (Portions omitted as confidential--Separately
filed with Commission).(5)
28
Exhibit
Number Description
10.14 Stock Purchase Agreement between Abbott Laboratories and Physician
Sales & Service, Inc.(5)
10.15 Amendment to Employee Stock Ownership Plan.(7)
10.15a Amendment and Restatement of the Physician Sales and Service, Inc.
Employee Stock Ownership and Savings Plan.(8)
10.15b First Amendment to the Physician Sales and Service, Inc. Employee Stock
Ownership and Savings Plan.(7)
10.16 Third Amended and Restated Agreement and Plan of Merger By and
Among Taylor Medical, Inc. and Physician Sales & Service, Inc.
(including exhibits thereto).(6)
10.17 Agreement and Plan of Merger by and Among Physician Sales & Service,
Inc., PSS Merger Corp. and Treadway Enterprises, Inc.(8)
10.18 Amended and Restated Agreement and Plan of Merger, dated as of
August 22, 1997, among the Company, Diagnostic Imaging, Inc., PSS Merger
Corp. and S&W X-ray, Inc.(9)
10.19 Agreement and Plan of Merger dated December 14, 1997 by and among
the Company, PSS Merger Corp. and Gulf South Medical Supply, Inc.(10)
10.20 Credit Agreement dated as of February 11, 1999 among the Company,
the several lenders from time to time hereto and NationsBank, N.A., as
Agent and Issuing Lender.(14)
10.21 First Amendment dated as of October 20, 1999 to the Credit Agreement
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.
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.
(15) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999.
(b) Reports on Form 8-K
None.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on February 14, 2000.
PSS WORLD MEDICAL, INC.
/s/ DAVID A. SMITH
-----------------------------
David A. Smith
Executive Vice President and
Chief Financial Officer
30
EXHIBIT 10.21
EXECUTION COPY
FIRST AMENDMENT dated as of October 20, 1999 (this "First Amendment"), to the
Credit Agreement dated as of February 11, 1999 (the "Credit Agreement"), among
PSS World Medical, Inc., a Florida corporation (the "Borrower"), the several
lenders party to the Credit Agreement (the "Lenders") and Bank of America, N.A.,
formerly known as NationsBank, N.A., as agent for the Lenders (the "Agent") and
as issuing lender.
The Borrower has requested the Agent and the Lenders to make certain
changes to the Credit Agreement. The parties hereto have agreed, subject to the
terms and conditions hereof, to amend the Credit Agreement as provided herein.
Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to such terms in the Credit Agreement (the Credit Agreement,
as amended by, and together with, this First Amendment, and as hereinafter
amended, modified, extended or restated from time to time, being called the
"Amended Agreement").
Accordingly, the parties hereto hereby agree as follows:
SECTION 1.01. Amendment to Section 1.1. The definition of "Consolidated
Net Worth" in Section 1.1 of the Credit Agreement is hereby amended by deleting
the period at the end thereof and adding the following phrase to the end
thereof:
", but adding thereto amounts paid by the Borrower with respect to
repurchases of common stock of the Borrower from any Person pursuant to Section
7.7(d)."
SECTION 1.02. Amendment to Section 7.7. Section 7.7 of the Credit
Agreement is hereby amended by deleting the period at the end of clause (c)
thereof and adding the following clause (d) to the end thereof:
"and (d) repurchases of common stock of the Borrower from any Person,
other than repurchases of common stock of the Borrower made pursuant to Section
7.7(c), provided (i) that the aggregate amount paid in all such repurchases
pursuant to this clause (d) shall not exceed $50,000,000 and (ii) that all such
repurchases shall occur no later than October 31, 2000."
SECTION 1.03. Representations and Warranties. The Borrower hereby
represents and warrants to each Lender and the Agent, as follows: (a) The
representations and warranties set forth in Section 5 of the Amended Agreement,
and in each other Credit Document, are true and correct in all material respects
on and as of the date hereof and on and as of the First Amendment Effective Date
(as hereinafter defined) with the same effect as if made on and as of the date
hereof or the First Amendment Effective Date, as the case may be, except to the
extent such representations and warranties expressly relate solely to an earlier
date.
(b) Each of the Borrower and the other Credit Parties is in
compliance with all the terms and conditions of the Amended Agreement and the
other Credit Documents on its part to be observed or performed and no Event of
Default has occurred and is continuing.
(c) The execution, delivery and performance by the Borrower of
this First Amendment have been duly authorized by the Borrower.
(d) This First Amendment constitutes the legal, valid and
binding obligation of the Borrower, enforceable against it in accordance with
its terms.
1
(e) The execution, delivery and performance by the Borrower of this First
Amendment (i) do not (A) violate or conflict with any provision of its articles
or certificate of incorporation or bylaws or other organizational or governing
documents of the Borrower, (B) violate, contravene or conflict with any
Requirement of Law applicable to the Borrower or its Properties, (C) violate,
contravene or conflict with contractual provisions of, cause an event of default
under, or give rise to material increased, additional, accelerated or guaranteed
rights of the Borrower under, any indenture, loan agreement, mortgage, deed of
trust, contract or other agreement or instrument to which it is a party or by
which it may be bound, or (D) result in or require the creation of any Lien
(other than the Lien of the Collateral Documents) upon or with respect to the
Borrower's Properties and (ii) do not require any consents under, result in a
breach of or constitute (alone or with notice or lapse of time or both) a
default or give rise to increased, additional, accelerated or guaranteed rights
of any person under any such indenture, agreement or instrument.
SECTION 1.04. Effectiveness. This First Amendment shall become
effective only upon satisfaction of the following conditions precedent (the
first date upon which each such condition has been satisfied being herein called
the "First Amendment Effective Date"):
(a) The Agent shall have received duly executed counterparts
of this First Amendment which, when taken together, bear the authorized
signatures of the Borrower and the Required Lenders.
(b) The Agent and the Lenders shall be satisfied that the
representations and warranties set forth in Section 1.03 of this First Amendment
are true and correct on and as of the First Amendment Effective Date and that no
Default or Event of Default has occurred and is continuing.
(c) There shall not be any action pending or any judgment,
order or decree in effect which, in the judgment of the Agent or the Lenders, is
likely to restrain, prevent or impose materially adverse conditions upon
performance by the Borrower or any other Credit Party of its obligations under
the Amended Agreement.
(d) The Agent shall have received such other documents, legal
opinions, instruments and certificates relating to this First Amendment as they
shall reasonably request and such other documents, legal opinions, instruments
and certificates shall be satisfactory in form and substance to the Agent and
the Lenders. All corporate and other proceedings taken or to be taken in
connection with this First Amendment and all documents incidental thereto,
whether or not referred to herein, shall be satisfactory in form and substance
to the Agent and the Lenders.
(e) The Borrower shall have paid all fees and expenses
referred to in Section 1.06 of this First Amendment.
SECTION 1.05. APPLICABLE LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK.
SECTION 1.06. Expenses. The Borrower shall pay (i) all reasonable
out-of-pocket expenses incurred by the Agent and the Lenders in connection with
the preparation, negotiation, execution, delivery and enforcement of this First
Amendment, including, but not limited to, the reasonable fees and disbursements
of counsel to the Agent and (ii) an amendment fee payable to the Agent in the
aggregate amount of 10 basis points on the Commitment of each Lender as of the
First Amendment Effective Date, payable to each of the Lenders executing this
First Amendment on or prior to the First Amendment Effective Date.
SECTION 1.07. Counterparts. This First Amendment may be executed in any
number of counterparts, each of which shall constitute an original but all of
which when taken together shall constitute but one agreement. Delivery of an
executed counterpart of a signature page to this First Amendment by telecopier
shall be effective as delivery of a manually executed counterpart of this First
Amendment.
2
SECTION 1.08. Credit Documents. Except as expressly set forth herein,
the amendments provided herein shall not by implication or otherwise limit,
constitute a waiver of, or otherwise affect the rights and remedies of the
Lenders or the Agent under the Amended Agreement or any other Credit Document,
nor shall they constitute a waiver of any Event of Default, nor shall they
alter, modify, amend or in any way affect any of the terms, conditions,
obligations, covenants or agreements contained in the Amended Agreement or any
other Credit Document. Each of the amendments provided herein shall apply and be
effective only with respect to the provisions of the Amended Agreement
specifically referred to by such amendments. Except as expressly amended herein,
the Amended Agreement and the other Credit Documents shall continue in full
force and effect in accordance with the provisions thereof. As used in the
Amended Agreement, the terms "Agreement", "herein", "hereinafter", "hereunder",
"hereto" and words of similar import shall mean, from and after the date hereof,
the Amended Agreement. [signature pages to follow]
3
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed by duly authorized officers, all as of the date first above
written.
PSS WORLD MEDICAL, INC., as Borrower
By: /s/ David A. Smith
-------------------------------
Name: David A. Smith
Title: Executive Vice President and Chief Financial Officer
BANK OF AMERICA, N.A.,
formerly known as
NationsBank, N.A., as
Agent, as Issuing Lender
and as a Lender
By: /s/ Johnathan H. Hudson
-------------------------------
Name: Johnathan H. Hudson
Title: Officer
BANKERS TRUST COMPANY, as a Lender
By: /s/ G. Andrew Keith
-------------------------------
Name: G. Andrew Keith
Title: Vice President
4
SUNTRUST BANK, NORTH FLORIDA, N.A., as a Lender
By: /s/ C. William Buchholz
-------------------------------
Name: C. William Buchholz
Title: First Vice President
FIRST UNION NATIONAL BANK, as a Lender
By: /s/ Joyce L. Barry
-------------------------------
Name: Joyce L. Barry
Title: Senior Vice President
5