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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-23832
PSS WORLD MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2280364
(State or other jurisdiction (IRS employer
of incorporation) identification number)
4345 Southpoint Blvd.
Jacksonville, Florida 32216
(Address of principal executive offices) (Zip code)
Registrant's telephone number (904) 332-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of February 8, 1999 a total of 70,763,069 shares of common stock,
par value $.01 per share, of the registrant were outstanding.
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
DECEMBER 31, 1998
INDEX
PAGE NUMBER
--------------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and April 3, 1998 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 29
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 32
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 3,
1998 1998
-------------- --------------
(Unaudited) *
ASSETS
Current Assets:
Cash and cash equivalents $ 58,734 $ 82,491
Marketable securities 476 81,550
Accounts receivable, net 264,649 210,042
Inventories 136,541 122,502
Prepaid expenses and other 59,560 45,699
-------------- -------------
Total current assets 519,960 542,284
Property and equipment, net 40,721 24,871
Other Assets:
Intangibles, net 133,955 90,134
Other 19,464 19,493
-------------- --------------
Total assets $ 714,100 $ 676,782
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 107,176 $ 105,642
Accrued expenses 47,788 42,657
Current maturities of long-term debt and capital lease obligations 3,249 2,794
Other 18,681 7,058
-------------- -------------
Total current liabilities 176,894 158,151
Long-term debt and capital lease obligations, net of current portion 125,853 128,113
Other 1,288 2,621
-------------- -------------
Total liabilities 304,035 288,885
-------------- -------------
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $.01 par value; 150,000,000 shares authorized,
70,707,166 and 69,563,937 shares issued and outstanding at
December 31, 1998 and April 3, 1998, respectively 707 696
Additional paid-in capital 347,763 341,679
Retained earnings 64,386 45,522
-------------- -------------
412,856 387,897
Unearned ESOP Shares (2,791) --
-------------- -------------
Total shareholders' equity 410,065 387,897
-------------- -------------
Total liabilities and shareholders' equity $ 714,100 $ 676,782
============== =============
* 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,
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
Net sales $ 394,223 $ 330,615 $ 1,102,831 $ 938,921
Cost of goods sold 285,019 239,919 795,964 684,825
--------------- ---------------- --------------- ---------------
Gross profit 109,204 90,696 306,867 254,096
General and administrative expenses 51,570 49,984 150,135 142,886
Selling expenses 32,431 25,346 88,508 71,673
--------------- ---------------- --------------- ---------------
Income from operations 25,203 15,366 68,224 39,537
--------------- ---------------- --------------- ---------------
Other income (expense):
Interest expense (2,690) (2,596) (8,724) (3,208)
Interest and investment income 506 2,026 3,648 3,412
Other income 1,819 947 3,827 2,079
---------------- --------------- --------------- ---------------
(365) 377 (1,249) 2,283
--------------- ---------------- --------------- ---------------
Income before provision for income taxes 24,838 15,743 66,975 41,820
Provision for income taxes 9,806 6,418 26,801 16,818
--------------- ---------------- --------------- ---------------
Net income $ 15,032 $ 9,325 $ 40,174 $ 25,002
=============== ================ =============== ===============
Earnings per share:
Basic $ 0.21 $ 0.14 $ 0.57 $ 0.37
=============== =============== =============== ===============
Diluted $ 0.21 $ 0.13 $ 0.56 $ 0.36
=============== =============== =============== ===============
Weighted average shares outstanding (in thousands):
Basic 70,540 68,879 70,184 67,961
=============== =============== =============== ===============
Diluted 72,043 70,038 71,434 68,720
=============== =============== =============== ===============
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,
1998 1997
---------------- ---------------
Cash Flows From Operating Activities:
Net income $ 40,174 $ 25,002
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 11,178 8,230
Provision for doubtful accounts 2,213 1,104
Merger and other non-recurring costs and expenses 1,181 6,997
Deferred compensation 222 --
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Accounts receivable, net (41,518) (21,765)
Inventories 9,549 (10,078)
Prepaid expenses and other current assets (1,204) (1,946)
Other assets (2,627) (6,992)
Accounts payable, accrued expenses and other liabilities (30,303) 3,531
---------------- ---------------
Net cash (used in) provided by operating activities (11,135) 4,083
---------------- ---------------
Cash Flows From Investing Activities:
Purchases, maturities, and sales of marketable securities, net 74,574 (73,750)
Capital expenditures (16,632) (7,577)
Purchases of businesses, net of cash acquired (55,677) (7,691)
Payments on noncompete agreements (2,032) (2,959)
---------------- ---------------
Net cash (used in) provided by investing activities 233 (91,977)
---------------- ---------------
Cash Flows From Financing Activities:
Proceeds from public debt offering, net of debt issue cost -- 119,459
Repayments of borrowings (16,044) (55,112)
Principal payments under capital lease obligations (299) --
Proceeds from issuance of common stock 3,838 2,482
---------------- ---------------
Net cash used in financing activities (12,505) 66,829
---------------- ---------------
Foreign currency translation adjustment -- 167
---------------- ---------------
Net decrease in cash and cash equivalents (23,407) (20,898)
Cash and cash equivalents, beginning of period 82,141 105,129
---------------- ---------------
Cash and cash equivalents, end of period $ 58,734 $ 84,231
================ ===============
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
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements of PSS World Medical, Inc.
("PSS" or the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position and results of operations for
the periods indicated and give retroactive effect to the mergers with S&W X-Ray,
Inc. ("S&W") and Gulf South Medical Supply, Inc. ("Gulf South"). These
transactions were accounted for under the pooling-of-interests method of
accounting, and accordingly, the accompanying condensed consolidated financial
statements have been retroactively restated as if PSS, S&W, and Gulf South had
operated as one entity since inception.
Prior to April 4, 1998, PSS' year-end was the Friday closest to March 31,
while Gulf South's year end was December 31. Due to the different fiscal year
ends of Gulf South and PSS prior to April 4, 1998, the three and nine months
ended September 30, 1997 of Gulf South were consolidated with the three and nine
months ended December 31, 1997 of the Company. In addition, Gulf South's balance
sheet as of December 31, 1997 was consolidated with PSS' balance sheet as of
April 3, 1998. Effective April 4, 1998, Gulf South's fiscal year end was changed
to conform to the Company's fiscal year end. As a result of this change in
fiscal year ends, the three and nine months ended December 31, 1998 reflect the
operating results of PSS World Medical, Inc. and all subsidiaries, including
Gulf South, for the same months. The results of operations for Gulf South for
the period January 1 to April 3, 1998, are not included in any of the periods
presented in the statements of operations, but are reflected as an adjustment to
retained earnings of the consolidated Company as of April 4, 1998. During the
period January 1 to April 3, 1998, Gulf South recorded a net loss of $20.9
million, which includes unusual pre-tax operating charges of $37.4 million.
Refer to the section titled Gulf South's Results of Operation for the Three
Months Ended April 3, 1998 and March 31, 1997 included in Management's
Discussion and Analysis of Results of Operations for further clarification. The
following table provides a rollforward of retained earnings from April 3, 1998
to December 31, 1998 (in millions):
Rollforward of
Retained Earnings
----------------
Retained earnings, 4/3/98 $ 45.5
Gulf South results of operations, 1/1/98 to 4/3/98 (20.9)
Net income for the nine months ended 12/31/98 40.2
Pooling-of-interests business combinations (0.4)
----------------
Retained earnings, 12/31/98 $ 64.4
================
The accompanying condensed consolidated financial statements should be read
in conjunction with the financial statements and related notes in the Company's
1998 Annual Report on Form 10-K. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to the Securities and
Exchange Commission rules and regulations.
Financial statements for the Company's subsidiary outside the United States
are translated into U.S. dollars at quarter-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are immaterial and reflected in additional
paid-in capital.
The results of operations for the interim periods covered by this report
may not necessarily be indicative of operating results for the full fiscal year.
Certain items have been reclassified to conform to the current year
presentation.
6
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
NOTE 2 - BUSINESS ACQUISITIONS
Immaterial Pooling
During the three months ended December 31, 1998, the Company merged with an
imaging supply and equipment distributor with aggregate annual revenues of
approximately $40.0 million, in a merger accounted for under the
pooling-of-interests method. The Company issued approximately 294,000 shares of
PSS common stock in connection with this pooling. Due to the immaterial effect
of this acquisition on prior periods, the Company's historical financial
statements have not been restated. Accordingly, the results of operations have
been reflected in the condensed consolidated financial statements prospectively
from the acquisition date and a retained deficit of approximately $1.2 million
of the acquired company has been recorded as an adjustment to the retained
earnings of PSS.
Purchase Acquisitions
During the three months ended December 31, 1998, the Company acquired
certain assets, including accounts receivable, inventories, and equipment, of
two imaging supply and equipment distributors and the common stock of two
additional imaging supply and equipment distributors. The four transactions were
accounted for under the purchase method of accounting and the acquired companies
had aggregate annual revenues of approximately $39.0 million. The aggregate
consideration consisted of approximately $11.2 million cash. The excess of the
purchase price paid over the estimated fair value of the net assets acquired was
approximately $9.9 million, in aggregate, and has been recorded as goodwill to
be amortized on a straight-line basis over 30 years.
The operations of the acquired companies have been included in the Company's
results of operations subsequent to the date of acquisition. Supplemental pro
forma information is not presented, as the impact on the Company's results of
operations is not material.
As of December 31, 1998, management has not formalized plans to exit
certain activities or involuntarily terminate or relocate employees of the
acquired companies. Management anticipates that plans will be formalized during
the fourth quarter of fiscal 1999 and such plans will include facility closures
and consolidations, involuntary employee terminations, and relocation of
acquired company employees. As a result, additional liabilities totaling
approximately $3.0 million may be recorded as an adjustment to goodwill during
the fourth quarter of fiscal 1999.
7
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
NOTE 3 - CHARGES IN CONTINUING OPERATIONS
Charges Included In General and Administrative Expenses
General and administrative expenses include unusual operating charges
related to merger costs and expenses resulting from merger activity,
restructuring costs and expenses, and other unusual items. The following table
summarizes the components of the unusual operating charges included in general
and administrative expenses (in thousands):
Three Months Ended Nine Months Ended
--------------------------- --------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Merger costs and expenses:
Direct transaction costs $ 1,033 $ 410 $ 1,033 $ 1,123
Involuntary employee termination -- 1,361 -- 1,387
Other exit costs -- 2,015 300 3,115
------------ ------------ ------------ ------------
Total merger costs and expenses 1,033 3,786 1,333 5,625
Other unusual items:
Forfeiture of deferred compensation (152) -- (152) --
Gulf South operational tax charges -- 767 -- 2,301
ESOP cost of acquired company -- -- -- 2,457
------------ ------------ ------------ ------------
Total unusual items (152) 767 (152) 4,758
Total charges included in continuing operations $ 881 $ 4,553 $ 1,181 $ 10,383
============ ============ ============ ============
During Fiscal 1999, $152,000 of deferred compensation was forfeited by
terminated employees and recognized in income by the Company. In addition, the
Company has incurred professional fees and other expenses of merger related
activity of $1.3 million.
During fiscal 1998, Gulf South recorded operational charges primarily
related to state and local, sales and use, and property taxes that are normally
charged directly to the customer at no cost to the Company. In addition,
penalties and interest are included in the charges because payments to tax
authorities were not remitted by Gulf South in a timely manner. Gulf South
changed its tax compliance procedures subsequent to fiscal 1998; therefore,
management believes these tax charges will be nonrecurring.
The ESOP cost of acquired company is a result of the merger with S&W X-Ray,
Inc. ("S&W") in the second quarter of fiscal 1998. S&W sponsored a leveraged
employee stock ownership plan ("S&W ESOP") that covered all employees with one
year of service. The Company accounted for this ESOP in accordance with SOP
93-6. Accordingly, the debt of the ESOP was recorded as debt of the Company, and
the shares pledged as collateral were reported as unearned ESOP shares in the
balance sheet. As shares were released from collateral, the Company reported
compensation expense equal to the then current market price of the shares, and
the shares became outstanding for the earnings-per-share (EPS) computation.
During fiscal 1998, the Company released the remaining shares to the S&W ESOP
participants. Accordingly, approximately $2.5 million of related expense was
recognized in fiscal 1998.
8
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Summary of Accrued Merger Costs and Expenses
Accrued merger costs and expenses, classified as accrued expenses in the
accompanying consolidated balance sheets, were $1.7 million and $6.7 million,
at December 31, 1998 and April 3, 1998, respectively. A summary of the merger
activity is as follows (in thousands):
Involuntary
Direct Employee Employee
Transaction Relocation Termination Other Exit
Costs Costs Costs Costs Total
------------ --------- --------- ----------- ------------
Balance at April 3, 1998 $ 764 $ 337 $ 986 $ 4,588 $ 6,675
Gulf South conforming adjustment 5,179 -- (167) 134 5,146
------------ --------- --------- ----------- ------------
Balance at April 4, 1998 5,943 337 819 4,722 11,821
Additions 100 -- 74 126 300
Utilized (786) (5) (92) (782) (1,665)
------------ --------- --------- ----------- ------------
Balance at June 30, 1998 5,257 332 801 4,066 10,456
Adjustments 325 (196) (415) 286 --
Additions -- -- -- -- --
Utilized (4,296) (82) (70) (1,511) (5,959)
------------ --------- --------- ----------- ------------
Balance at September 30, 1998 1,286 54 316 2,841 4,497
Adjustments 224 40 -- (264) --
Additions -- -- -- -- --
Utilized (1,311) (94) (3) (1,401) (2,809)
------------ --------- --------- ----------- ------------
Balance at December 31, 1998 $ 199 $ -- $ 313 $ 1,176 $ 1,688
============ ========= ========== ============ ============
Upon consummation of a business combination, management develops formal
plans to exit certain activities, involuntarily terminate employees, and
relocate employees of the acquired companies. Management's plans to exit an
activity include identification of duplicate facilities for closure and
identification of facilities for consolidation into other facilities. Management
anticipates completion of these plans will occur within one year from the date
in which the plans were formalized.
Direct transaction costs primarily consist of investment banking, legal,
accounting, and filing fees related to mergers with the Company. Employee
relocation costs are moving costs of employees of an acquired company in a
transaction accounted for under the purchase method of accounting. Involuntary
employee termination costs are employee severance costs and termination
benefits. Other exit costs include facility closure, fixed asset write-offs, and
lease termination costs. These liabilities were recognized as of the
consummation date of the acquisitions. As the Company executes a plan to exit an
activity, differences may arise between actual and estimated utilization of
merger accruals. During the second and third quarters of fiscal 1999, the
Company reallocated certain reserves to reflect anticipated increases in direct
transaction costs and decreases in employee relocation and involuntary employee
termination costs.
The Gulf South conforming adjustment is the result of i) accrued merger
costs and expenses of $5.7 million recorded by Gulf South during the
unconsolidated period January 1 to April 3, 1998 directly related to the merger
with PSS World Medical, Inc. which closed on March 26, 1998 (refer to Note 1
- -Basis of Presentation for a discussion regarding the different year ends of
Gulf South and the Company), ii) the utilization of reserves of $1.0 million
during the period January 1 to April 3, 1998, and iii) accrued merger costs and
expenses of $0.4 million related to an acquisition consummated by Gulf South
during the unconsolidated period.
9
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Summary of Accrued Restructuring Costs and Expenses
Accrued restructuring costs and expenses, classified as accrued expenses in
the accompanying consolidated balance sheets, were $3.1 million and $3.8
million, at December 31, 1998 and April 3, 1998, respectively. A summary of the
restructuring activity is as follows (in thousands):
Involuntary
Employee
Termination Other Exit
Costs Costs Total
------------- ------------- -------------
Balance at April 3, 1998 $ 1,117 $ 2,633 $ 3,750
Gulf South conforming adjustment 2,531 3,252 5,783
Adjustment ------------- ------------- -------------
Balance at April 4, 1998 3,648 5,885 9,533
Additions -- -- --
Utilized (1,365) (1,360) (2,725)
------------- ------------- -------------
Balance at June 30, 1998 2,283 4,525 6,808
Additions -- -- --
Utilized (835) (1,439) (2,274)
------------- ------------- -------------
Balance at September 30, 1998 1,448 3,086 4,534
Adjustments 450 (450) --
Additions -- -- --
Utilized (815) (661) (1,476)
------------- ------------- -------------
Balance at December 31, 1998 $ 1,083 $ 1,975 $ 3,058
============= ============= =============
In order to improve customer service, reduce costs, and improve
productivity and asset utilization, the Company decided to realign and
consolidate its operations. This restructuring plan, which resulted primarily
from the Gulf South merger and was formalized by the end of fiscal 1998,
involved merging 18 locations into existing locations, and eliminating
overlapping regional operations and management functions. The plan also included
the termination of approximately 290 employees from operations, administration,
and management. As of December 31, 1998, approximately 238 employees were
terminated as a result of the plan. Management anticipates terminating the
remaining 52 employees by the end of fiscal 1999.
The Company recorded a total charge of approximately $9.5 million to
complete this restructuring. These charges include costs for severance and
benefits to terminate employees, facility closure costs, and other costs to
complete the consolidation of the operations. Approximately $3.7 million of the
total restructuring charge was recorded in the statement of operations for the
fiscal year ended April 3, 1998. The Gulf South conforming adjustment to the
accrued restructuring costs and expenses is a result of the restructuring costs
and expenses of $5.8 million recorded by Gulf South during the unconsolidated
period January 1 to April 3, 1998. These charges directly relate to the merger
with PSS World Medical, Inc. which closed on March 26, 1998. Refer to Note 1
- -Basis of Accounting for a discussion regarding the different year-ends of Gulf
South and the Company.
10
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
As the Company executes the restructuring plan, differences may arise
between actual and estimated utilization of restructuring accruals. During the
third quarter of fiscal 1999, the Company reallocated certain reserves to
reflect anticipated increases in involuntary employee termination costs and
decreases in other exit costs.
NOTE 4 - COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, which
defines comprehensive income as net income plus direct adjustments to
shareholders' equity. The cumulative translation adjustment of certain foreign
entities is the only such direct adjustment recorded by the Company during the
three and nine months ended December 31, 1998 and 1997, and is immaterial for
all periods presented.
NOTE 5 - EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share, the calculation of basic earnings per common share and
diluted earnings per common share is presented below (dollar and share amounts
in thousands, except per share data):
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ -------------
Net income $ 15,032 $ 9,325 $ 40,174 $ 25,002
Earnings per share:
Basic 0.21 0.14 0.57 0.37
============ ============ ============ =============
Diluted 0.21 0.13 0.56 0.36
============ ============ ============ =============
Weighted average shares outstanding (in thousands):
Common shares 70,540 68,879 70,184 67,961
Assumed exercise of stock options and warrants 1,503 1,159 1,250 759
------------ ------------ ------------ -------------
Diluted shares outstanding 72,043 70,038 71,434 68,720
============ ============ ============ =============
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Gulf South and certain of its former officers and directors were named as
defendants in two purported class action lawsuits filed on July 21, 1997 related
to disclosures made in the prospectus issued by Gulf South in connection with
its public offering of common stock during 1996. The Company believes that the
allegations contained in the complaints are without merit and intends to defend
vigorously against the claims. However, there can be no assurance that this
litigation will ultimately be resolved on terms that are favorable to the
Company.
In May 1998, the Company and certain of its present directors and officers
were named as defendants in a purported securities class action lawsuit related
to alleged damages suffered by purchasers of the Company's common stock during
the period from December 23, 1997 to May 8, 1998. The claimant seeks an
unspecified amount of damages, including costs and expenses. The Company
believes this lawsuit is without merit and intends to defend it vigorously. The
Defendants filed their motion to dismiss on January 25, 1999. However, this
lawsuit is in its early stages and there can be no assurances that this
litigation will ultimately be resolved on terms that are favorable to the
Company.
11
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The Company is named as a defendant in a purported patent infringement
claim. In this lawsuit, the claimant alleges that the urinalysis test strips
sold by the Company under the Penny Saver(TM) label infringe certain patents.
The Company is contesting the claim of infringement and has obtained a written
agreement from the manufacturer of the product indemnifying the Company for the
costs of defense of the suit and for the underlying liability. In addition, the
Company has indemnity rights against the U.S. distributor of the product
pursuant to its vendor agreement. The parties are currently in settlement
negotiations, however, the Company believes that there will be a favorable
settlement within the next 45 days.
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability. The
Company has not experienced any significant product liability claims and
maintains product liability insurance coverage. In addition, the Company is
party to various legal and administrative proceedings and claims arising in the
normal course of business.
While any litigation contains an element of uncertainty, management
believes that the outcome of any proceedings or claims which are pending or
known to be threatened will not have a material adverse effect on the Company's
consolidated financial position, liquidity, or results of operations.
NOTE 7 - SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company acquired certain assets,
including accounts receivable, inventories, and equipment of a long-term care
distributor, the common stock of an imaging supply and equipment distributor,
and the common stock of a long-term care distributor. These transactions were
accounted or under the purchase method of accounting.
1999
(dollars in millions) ------
Number of acquisitions............................. 3
Cash paid.......................................... $9.0
Goodwill recorded.................................. 6.2
Noncompete payments................................ 0.6
On February 11, 1999, the Company entered into a $140.0 million senior
revolving credit facility with a syndicate of financial institutions with
NationsBank, N.A. as principal agent. Borrowings under the credit facility are
available for working capital, capital expenditures, and acquisitions, and are
secured by the common stock and assets of the Company and its subsidiaries. The
credit facility expires February 10, 2004 and borrowings bear interest at
certain floating rates selected by the Company at the time of borrowing. The
credit facility contains certain affirmative and negative covenants, the most
restrictive of which, require maintenance of a maximum leverage ratio of 3.5 to
1, maintenance of consolidated net worth of $337.0 million, and maintenance of a
minimum fixed charge coverage ratio of 2.0 to 1. In addition, the covenants
limit additional indebtedness and asset dispositions, require majority lender
approval on acquisitions with a total purchase price greater than $75.0 million,
and restrict payments of dividends.
12
ITEM 2. PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
PSS World Medical, Inc. (the "Company" or "PSS") is a specialty marketer
and distributor of medical products to physicians, alternate-site imaging
centers, long-term care providers, and hospitals through 108 service centers to
customers in all 50 states and 5 European countries. Since its inception in
1983, the Company has become a leader in all three market segments it serves
with a focused, market specific approach to customer services, a consultative
sales force, strategic acquisitions, strong arrangements with product
manufacturers, and a unique culture of performance.
The Company, through its Physician Sales & Service division, is the leading
distributor of medical supplies, and equipment to office-based physicians in the
United States based upon revenues, number and quality of sales representatives,
number of service centers, and exclusively distributed products. Physician Sales
& Service currently operates 56 medical supply distribution service centers with
approximately 730 sales representatives ("Physician Supply Business") serving
over 100,000 physician offices (representing approximately 50% of all physician
offices) in all 50 states. The Physician Supply Business' primary market is the
approximately 400,000 physicians who practice medicine in approximately 200,000
office sites throughout the United States.
The Company, through its wholly owned subsidiary Diagnostic Imaging, Inc.
("DI"), is the leading distributor of medical diagnostic imaging supplies,
chemicals, equipment, and service to the acute care and alternate-care markets
in the United States based on revenues, number of service specialists, number of
distribution centers, and number of sales representatives. DI currently operates
36 imaging distribution service centers with over 700 service specialists and
200 sales representatives ("Imaging Business") serving over 13,000 customer
sites in 35 states. The Imaging Business' primary market is the approximately
5,000 hospitals and other alternate-site imaging companies operating
approximately 50,000 office sites throughout the United States.
Through its wholly owned subsidiary Gulf South Medical Supply, Inc. ("Gulf
South"), the Company has become a leading national distributor of medical
supplies and related products to the long-term care industry in the United
States based on revenues, number of sales representatives, and number of service
centers. Gulf South currently operates 13 distribution service centers with
approximately 130 sales representatives ("Long-Term Care Business") serving over
10,000 long-term care facilities in all 50 states. The Long-Term Care Business'
primary market is comprised of a large number of independent operators, small to
mid-sized local and regional chains, and several national chains representing
over 10,000 long-term care facilities.
In addition to its operations in the United States, the Company, through
its wholly owned subsidiary WorldMed International, Inc. ("WorldMed"), operates
three European service centers ("International Business") distributing medical
products to the physician office and hospital markets in Belgium, France,
Germany, Luxembourg, and the Netherlands.
13
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
INDUSTRY
According to industry estimates, the United States medical supply and
equipment segment of the health care industry represents a $34 billion market
comprised of distribution of medical products to hospitals, home health care
agencies, imaging centers, physician offices, dental offices, and long-term care
facilities. The Company's primary focus includes distribution to the physician
office, providers of imaging services, and long-term care facilities comprising
approximately $14 billion or approximately 40% of the overall market
Revenues of the medical products distribution industry are estimated to be
growing as a result of a growing and aging population, increased health care
awareness, proliferation of medical technology and testing, and expanding
third-party insurance coverage. In addition, the physician market is benefiting
from the shift of procedures and diagnostic testing from hospitals to alternate
sites, particularly physician offices despite a migration of significantly lower
hospital medical product pricing into the physician office market.
The health care industry is subject to extensive government regulation,
licensure, and operating procedures. National health care reform has been the
subject of a number of legislative initiatives by Congress. Such reform
proposals if adopted could impact the medical products distribution industry.
Additionally, the cost of a significant portion of medical care in the United
States is funded by government and private insurance programs. In recent years,
government-imposed limits on reimbursement of hospitals, long-term care
facilities, and other health care providers have impacted spending budgets in
certain markets within the medical products industry. Recently, Congress has
passed radical changes to reimbursements for nursing homes and home care
providers. These changes also effect some distributors who directly bill the
government for these providers.
Over the past few years, the health care industry has undergone significant
consolidation. Physician provider groups, long-term care facilities, and other
alternate-site providers along with the hospitals continue to consolidate. This
consolidation sometimes shifts the medical products purchasing decision to
individuals with whom medical products distributors had no prior selling
relationship. Additionally, the consolidation creates larger customers. The
majority of the market serviced by the Company consists of a large number of
small customers with no individual customer exceeding more than 10% of the
consolidated Company's revenues. However, the Long-Term Care Business depends on
a limited number of large customers for a significant portion of its net sales
and approximately 37% and 38% of the Long-Term Care Business revenues for the
twelve months ended April 3, 1998 and the nine months ended December 31, 1998,
respectively, represented sales to its top five customers. Growth in the
Long-Term Care Business as well as consolidation of the health care industry may
increase the Company's dependence on large customers.
14
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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, 1998 and 1997. Due
to the differing fiscal year ends of Gulf South Medical Supply, Inc. and PSS
World Medical, Inc. prior to April 4, 1998, the three and nine months ended
September 30, 1997 of Gulf South were consolidated with the three and nine
months ended December 31, 1997 of the Company. With the change in Gulf South's
fiscal year end to conform with that of the Company on April 4, 1998, the three
and nine months ended December 31, 1998 reflect the operating results of PSS
World Medical, Inc. and all subsidiaries, including Gulf South, for the same
months. The results of operations for Gulf South for the period January 1 to
April 3, 1998, are not reflected in the condensed consolidated statements of
operations for any of the periods presented, but are reflected as an adjustment
to retained earnings of the consolidated Company as of April 4, 1998. During the
period January 1 to April 3, 1998, Gulf South recorded a net loss of $20.9
million, which includes pre-tax unusual operating charges of $37.4 million.
Refer to the section titled Gulf South's Results of Operation for the Three
Months Ended April 3, 1998 and March 31, 1997 included in Management's
Discussion and Analysis of Results of Operations for further clarification.
THREE AND NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Net Sales. Net sales for the three months ended December 31, 1998 totaled
$394.2 million, an increase of $63.6 million or 19.2% over net sales of $330.6
million for the three months ended December 31, 1997. Net sales for the nine
months ended December 31, 1998 totaled $1,102.8 million, an increase of $163.9
million or 17.5% over net sales of $938.9 million for the nine months ended
December 31, 1997. Approximately $___ million and $___ million of the increase
in revenues for the three and nine months ended December 31, 1998, respectively,
resulted from revenues of companies acquired subsequent to December 31, 1997 and
revenues of companies acquired prior to December 31, 1997, but which did not
contribute to revenues for the full three and nine month periods ended December
31, 1997. The remaining net sales increase during these periods resulted from
sales growth of existing service centers coupled with incremental sales
generated in connection with exclusive and semiexclusive vendor relationships.
Gross Profit. Gross profit for the three months ended December 31, 1998
totaled $109.2 million, an increase of $18.5 million or 20.4% over the three
months ended December 31, 1997 total of $90.7 million. Gross profit for the nine
months ended December 31, 1998 totaled $306.8 million, an increase of $52.7
million or 20.7% over the nine months ended December 31, 1997 total of $254.1
million. Gross profit as a percentage of net sales was 27.7% and 27.4% for the
three months and 27.8% and 27.1% for the nine months ended December 31, 1998 and
1997, respectively. The increase in gross margin as a percentage of sales is
attributable to an increase in the sales mix of higher margin diagnostic
equipment, an increase in sales of higher margin private label medical supplies
by the Physician Supply Business, the ability to negotiate lower product
purchasing costs which resulted from increased purchasing volume subsequent to
the Gulf South acquisition, and improved Imaging Business gross margins
resulting from a film vendor maintaining margin dollars rebated to the Company
while reducing film pricing to hospital customers. Although there has been
considerable gross margin pressure from competition and a consolidating customer
base, the Company has successfully maintained its overall gross margins.
15
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
General and Administrative Expenses. General and administrative expenses
for the three months ended December 31, 1998 totaled $51.6 million, an increase
of $1.6 million or 3.2% over the three months ended December 31, 1997 total of
$50.0 million. General and administrative expenses for the nine months ended
December 31, 1998 totaled $150.1 million, an increase of $7.2 million or 5.0%
over the nine months ended December 31, 1997 total of $142.9 million. As a
percentage of net sales, general and administrative expenses were 13.1% and
15.1% for the three months and 13.6% and 15.2% for the nine months ended
December 31, 1998 and 1997, respectively.
Included in general and administrative expenses for the three months ended
December 31, 1998 and 1997 are unusual operating charges of approximately $0.9
million and $4.5 million, respectively. In addition, for the nine months ended
December 31, 1998 and 1997, general and administrative expenses include unusual
operating charges of approximately $1.2 million and $10.4 million, respectively.
Excluding unusual operating charges, adjusted general and administrative
expenses for the three months ended December 31, 1998 totaled $50.7 million, an
increase of $5.2 million or 11.4% over the three months ended December 31, 1997
adjusted total of $45.5 million. Adjusted general and administrative expenses
for the nine months ended December 31, 1998 totaled $148.9 million, an increase
of $16.4 million or 12.4% over the nine months ended December 31, 1997 adjusted
total of $132.5 million. As a percentage of net sales, adjusted general and
administrative expenses were 12.9% and 13.8% for the three months and 13.5% and
14.1% for the nine months ended December 31, 1998 and 1997, respectively.
Excluding the effect of the unusual operating charges, the decrease in general
and administrative expenses as a percentage of net sales resulted from the
continued leveraging of costs such as rents, salaries, and other fixed overhead
expenses that have not increased as quickly as the growth in revenues. In
addition, the Imaging Business, which operates with lower general and
administrative expenses than the Company as a whole, has grown and contributes a
greater portion of overall general and administrative expenses.
General and administrative expenses include unusual operating charges
related to merger costs and expenses resulting from merger activity,
restructuring costs and expenses, and other unusual items. The following table
summarizes the components of the unusual operating charges included in general
and administrative expenses (in thousands):
Three Months Ended Nine Months Ended
--------------------------- -------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ -----------
Merger costs and expenses:
Direct transaction costs $ 1,033 $ 410 $ 881 $ 1,123
Involuntary employee termination -- 1,361 -- 1,387
Other exit costs -- 2,015 300 3,115
------------ ------------ ------------ ------------
Total merger costs and expenses 1.033 3,786 1,181 5,625
Other unusual items:
Forfeiture of deferred compensation (152) -- (152) --
Gulf South operational tax charge -- 767 -- 2,301
ESOP cost of acquired company -- -- -- 2,457
------------ ------------ ------------ ------------
Total unusual items (152) 767 (152) 4,758
Total unusual charges included in continuing operations $ 881 $ 4,553 $ 1,181 $ 10,383
============ ============ ============ ============
16
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Merger Costs and Expenses
In connection with Company's merger activity, PSS incurs transaction costs
directly related to the merger. In addition, management develops formal plans to
exit certain activities, including the involuntary termination of certain
employees. Management's plans to exit an activity include identification of
duplicate facilities for closure and identification of facilities for
consolidation into other facilities. Management anticipates completion of these
plans will occur within one year from the date in which the plans were
formalized.
Direct transaction costs primarily consist of investment banking, legal,
accounting, and filing fees related to the Company's merger activity.
Involuntary employee termination costs are employee severance costs and
termination benefits. Other exit costs include facility closure, fixed asset
write-offs, and lease termination costs. These costs were recognized as of the
consummation date of the acquisitions.
Other Unusual Items
During fiscal 1998, Gulf South recorded operational charges primarily
related to state and local, sales and use, and property taxes that are normally
charged directly to the customer at no cost to the Company. In addition,
penalties and interest are included in the charges because payments to tax
authorities were not remitted by Gulf South in a timely manner. Gulf South
changed its tax compliance procedures subsequent to fiscal 1998; therefore,
management believes these tax charges will be nonrecurring.
The ESOP cost of acquired company is a result of the merger with S&W X-Ray,
Inc. ("S&W") in the second quarter of fiscal 1998. S&W sponsored a leveraged
employee stock ownership plan ("S&W ESOP") that covered all employees with one
year of service. The Company accounted for this ESOP in accordance with SOP
93-6. Accordingly, the debt of the ESOP was recorded as debt of the Company, and
the shares pledged as collateral were reported as unearned ESOP shares in the
balance sheet. As shares were released from collateral, the Company reported
compensation expense equal to the then current market price of the shares, and
the shares became outstanding for the earnings-per-share (EPS) computation.
During fiscal 1998, the Company released the remaining shares to the S&W ESOP
participants. Accordingly, approximately $2.5 million of related expense was
recognized in fiscal 1998.
Selling Expenses. Selling expenses for the three months ended December 31,
1998 totaled $32.4 million, an increase of $7.1 million or 28.1% over the three
months ended December 31, 1997 total of $25.3 million. Selling expenses for the
nine months ended December 31, 1998 totaled $88.5 million, an increase of $16.8
million or 23.4% over the nine months ended December 31, 1997 total of $71.7
million. As a percentage of sales, selling expenses were 8.2% and 7.7% for the
three months ended December 31, 1998 and 1997, respectively, and 8.0% and 7.6%
for the nine months ended December 31, 1998 and 1997, respectively. Selling
expenses as a percentage of sales increased due to a change in the Gulf South
sales commission program from a primarily fixed salary plan to a variable
commission plan, and the company-wide addition of approximately 100 sales
trainees over the number of sales trainees in the comparable prior year period.
The Company utilizes a variable commission plan, which pays commissions based on
gross profit as a percentage of net sales.
17
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Operating Income. Operating income for the three months ended December 31,
1998 totaled $25.2 million, an increase of $9.8 million or 63.6% over the three
months ended December 31, 1997 total of $15.4 million. Operating income for the
nine months ended December 31, 1998 totaled $68.2 million, an increase of $28.7
million or 72.7% over the nine months ended December 31, 1997 total of $39.5
million. As a percentage of sales, operating income was 6.4% and 4.7% for the
three months ended December 31, 1998 and 1997, respectively, and 6.2% and 4.2%
for the nine months ended December 31, 1998 and 1997, respectively. As discussed
in the analysis of general and administrative expenses, operating results
include unusual operating charges related to merger activity, restructuring
costs and expenses, and other unusual items.
The following table reconciles the effect of the unusual operating charges
included in continuing operations on operating income (in thousands):
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------- ------------
Operating Income $ 25,203 $ 15,366 $ 68,224 $ 39,537
Total unusual charges included in continuing operations 881 4,553 1,181 10,383
------------ ------------ ------------- ------------
Adjusted Operating Income $ 26,084 $ 19,919 $ 69,405 $ 49,920
============ ============ ============= ============
Excluding the effect of unusual operating charges, adjusted operating
income for the three months ended December 31, 1998 totaled $26.1 million, an
increase of $6.2 million or 31.2% over the three months ended December, 1997
adjusted total of $19.9 million. Adjusted operating income for the nine months
ended December 31, 1998 totaled $69.4 million, an increase of $19.5 million or
39.1% over the nine months ended December 31, 1997 adjusted total of $49.9
million due to the factors previously discussed. As a percentage of sales,
adjusted operating income was 6.6% and 6.0% for the three months ended December
31, 1998 and 1997, respectively, and 6.3% and 5.3% for the nine months ended
December 31, 1998 and 1997, respectively.
Interest Expense. Interest expense for three months ended December 31, 1998
and 1997 was approximately $2.7 million. Interest expense for the nine months
ended December 31, 1998 totaled $8.7 million, an increase of $5.5 million or
171.9% over the nine months ended December 31, 1997 total of $3.2 million. The
increase in interest expense for the nine months ended December 31, 1998 over
the comparable prior year period reflects interest on the $125 million 8.5%
senior subordinated debt which was outstanding for a full nine months during
fiscal 1999.
Interest and Investment Income. Interest and investment income for the
three months ended December 31, 1998 totaled $0.5 million, a decrease of $1.5
million or 75.0% over the three months ended December 31, 1997 total of $2.0.
Interest and investment income for the nine months ended December 31, 1998
totaled $3.6 million, an increase of $0.2 million or 5.9% over the nine months
ended December 31, 1997 total of $3.4 million. The decrease in interest and
investment income for the three months ended December 31, 1998 over the
comparable prior year period reflects the use of cash previously invested for
the purposes of acquisitions and capital expenditures during the nine months
ended December 31, 1998.
Other Income. Other income for the three months ended December 31, 1998
totaled $1.8 million, an increase of $0.9 million or 100% over the three months
ended December 31, 1997 total of $0.9 million. Other income for the nine months
ended December 31, 1998 totaled $3.8 million, an increase of $1.8 million or
85.7% over the nine months ended December 31, 1997 total of $2.1 million. Other
income consists of finance charges on customer accounts and financing
performance incentives. The increase in other income primarily results from the
growth in the Company's operations.
18
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Provision For Income Taxes. Provision for income taxes for the three months
ended December 31, 1998 totaled $9.8 million, an increase of $3.4 million or
53.1% over the three months ended December 31, 1997 total of $6.4 million.
Provision for income taxes for the nine months ended December 31, 1998 totaled
$26.8 million, an increase of $10.0 million or 59.5% over the nine months ended
December 31, 1997 total of $16.8 million. The income tax provision computation
is affected by the non-deductible nature of certain non-recurring merger costs
and expenses in the period in which they are incurred.
Net Income. Net income for the three months ended December 31, 1998 totaled
$15.0 million, an increase of $5.7 million or 61.3% over the three months ended
December 31, 1997 total of $9.3 million. Net income for the nine months ended
December 31, 1998 totaled $40.2 million, an increase of $15.2 million or 60.8%
over the nine months ended December 31, 1997 total of $25.0 million. As a
percentage of net sales, net income was 3.8% and 2.8% for the three months ended
December 31, 1998 and 1997, respectively, and 3.6% and 2.7% for the nine months
ended December 31, 1998 and 1997, respectively.
Excluding the effect of unusual operating charges, adjusted net income for
the three months ended December 31, 1998 totaled $15.6 million, an increase of
$3.3 million or 26.8% over the three months ended December 31, 1997 total of
$12.3 million. Adjusted net income for the nine months ended December 31, 1998
totaled $41.2 million, an increase of $10.0 million or 32.1% over the nine
months ended December 31, 1997 total of $31.2 million. As a percentage of net
sales, adjusted net income was 4.0% and 3.7% for the three months ended December
31, 1998 and 1997, respectively, and 3.7% and 3.3% for the nine months ended
December 31, 1998 and 1997, respectively.
The following table presents net income and earnings per share for the
three and nine months ended December 31, 1998 and 1997, as reported, and
adjusted net income and earnings per share excluding unusual operating charges
(in millions, except per share amounts):
Three Months Ended Nine Months Ended
--------------------------------------- ---------------------------------------
December 31, 1998 December 31, 1997 December 31, 1998 December 31, 1997
------------------- ------------------ ------------------ ------------------
Net income................... $ 15.0 $ 9.3 $ 40.2 $ 25.0
Adjusted net income (a)...... $ 15.6 $ 12.3 $ 41.2 $ 31.2
Earnings per share:
Basic..................... $ 0.21 $ 0.14 $ 0.57 $ 0.37
Diluted................... $ 0.21 $ 0.13 $ 0.56 $ 0.36
Adjusted earnings per share (a):
Basic..................... $ 0.22 $ 0.18 $ 0.59 $ 0.46
Diluted................... $ 0.22 $ 0.18 $ 0.58 $ 0.45
(a) Adjusted net income and adjusted earnings per share for the three and nine
months ended December 31, 1998 and 1997 excludes the effect of unusual
operating charges, net of tax, included in general and administrative
expenses. See the discussion concerning the nature of the unusual operating
charges in the general and administrative section of Management's
Discussion and Analysis of the Results of Operations.
19
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
GULF SOUTH'S RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
APRIL 3, 1998 AND MARCH 31, 1997
The Company acquired Gulf South on March 26, 1998 in a transaction
accounted for as a pooling-of-interests. The financial statements have been
retroactively restated as if Gulf South and the Company had operated as one
entity since inception. As discussed in Note 1 - Basis of Presentation, due to a
change in Gulf South's fiscal year end to conform with that of the Company, the
results of operations of Gulf South for the period January 1, 1998 to April 3,
1998 are not reflected in the condensed consolidated statements of operations
for any periods presented. Following is management's discussion and analysis of
the financial condition and results of operations of Gulf South for the three
months ended April 3, 1998 as compared to the three months ended March 28, 1997.
Three Months Ended April 3, 1998 versus March 28, 1997 (Gulf South subsidiary
only)
During the three months ended April 3, 1998, in connection with the merger
with the Company, Gulf South recorded merger costs and expenses of $7.1 million,
restructuring costs and expenses of $5.8 million, and other unusual items of
$24.5 million. Management believes these charges are either direct transaction
costs, or of a nonrecurring or unusual nature and are not indicative of the
future results of Gulf South. Management's discussion and analysis addresses the
comparative quarters excluding the impact of these unusual charges. The
components of the $37.4 million unusual charges are specifically addressed below
under the caption Charges Included in Continuing Operations as well as Note 3 -
Charges in Continuing Operations in the Condensed Consolidated Financial
Statements herein.
The following table includes the unaudited results of Gulf South for the
three months ended April 3, 1998 as adjusted for the unusual charges discussed
above and the three months ended March 28, 1997 (in thousands):
Removal of Three Months
Three Months the Effect Ended Three Months
Ended of Unusual April 3, 1998 Ended
(Unaudited) April 3, 1998 Charges As Adjusted March 28, 1997
--------------- ------------ -------------- ----------------
Net sales $ 87,018 $ -- $ 87,018 $ 64,609
Cost of good sold 69,202 (3,573) 65,629 47,860
--------------- ------------ -------------- ----------------
Gross profit 17,816 3,573 21,389 16,749
General and administrative 47,963 (33,870) 14,093 8,878
Selling expenses 2,939 -- 2,939 2,279
--------------- ------------ -------------- ----------------
Income (loss) from operations (33,086) 37,443 4,357 5,592
Other income, net 321 -- 321 465
--------------- ------------ -------------- ----------------
Income (loss) before provision for income (32,765) 37,443 4,678 6,057
taxes
Provision (benefit) for income taxes (11,862) 13,597 1,735 2,246
=============== ============ ============== ================
Net income (loss) $ (20,903) $ 23,846 $ 2,943 $ 3,811
=============== ============ ============== ================
20
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Net Sales. Net sales for the three months ended April 3, 1998 totaled $87.0
million, an increase of $22.4 million or 34.7% over net sales of $64.6 million
for the three months ended March 31, 1997. The increase in net sales was
attributable to the addition of national chain customers and the acquisition of
a medical supply company during the three months ended December 31, 1997 which
contributed approximately $5.8 million during the three months ended April 3,
1998. The acquisition was accounted for utilizing the purchase method of
accounting and accordingly the results of the acquired company is included from
the date of acquisition.
Gross Profit. Gross profit, excluding the unusual charges discussed above,
for the three months ended April 3, 1998 totaled $21.4 million, an increase of
$4.7 million or 28.1% over the three months ended March 31, 1997 total of $16.7
million due to higher sales. Gross profit, as a percentage of net sales was
24.6% and 25.9% for the three months ended April 3, 1998 and March 31, 1997,
respectively. The decrease in gross profit as a percentage of net sales is
attributable to i) the increase in the portion of the customer base represented
by national chain customers which produce lower gross profit as a percentage of
sales but require lower distribution costs as a percentage of sales, and ii) the
lower gross profit percentage of the company acquired. Historically, management
has raised the gross profit percentage of acquired companies by reducing
purchase costs as a result of increased purchase volume.
General and Administrative Expenses. General and administrative expenses,
excluding the unusual charges discussed above, for the three months ended April
3, 1998 totaled $14.1 million, an increase of $5.2 million or 58.4% over the
three months ended March 31, 1997 total of $8.9 million. As a percentage of net
sales, general and administrative expenses were 16.2% and 13.7% for the three
months ended April 3, 1998 and March 31, 1997, respectively. The increase in
general and administrative expenses as a percentage of net sales is primarily
attributable to increased operating costs, inefficiencies due to Gulf South's
merger with the Company, and loss of efficiencies resulting from the process of
integrating acquired distribution centers.
21
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Charges Included in Continuing Operations. During the three months ended
April 3, 1998, Gulf South recorded $37.4 million in charges related to merger
and restructuring costs and expenses, asset impairment charges, and other
unusual operating charges. The following table summarizes the major categories
of these charges.
Three Months
Ended
April 3, 1998
---------------
Merger costs and expenses:
Direct transaction costs $ 5,271
Involuntary employee termination 178
Other exit costs 1,625
--------------
Total merger costs and expenses 7,074
Restructuring costs and expenses:
Involuntary employee termination 2,462
Other exit costs 3,322
--------------
Total restructuring costs and expenses 5,784
Other unusual items:
Increase in allowance for doubtful accounts 5,114
Increase in allowance for obsolete inventory 3,573
Gulf South operational tax charges, litigation
expenses, and other unusual charges 13,853
Asset impairment charges 2,045
--------------
Total unusual items 24,585
Total unusual charges included in continuing operations $ 37,443
==============
Merger and Restructuring Costs and Expenses
A majority of the merger and restructuring costs and expenses component of
these charges are directly related to the merger with PSS World Medical, Inc.
which closed on March 26, 1998. Refer to Note 3 - Charges In Continuing
Operations for a summary of the components and nature of items classified as
merger and restructuring costs and expenses.
Other Unusual Items
The increase in the allowances for accounts receivable and inventory
reflect the differing plans, uses and collection efforts between current
management of the Company and former management of Gulf South, and are the
result of applying accounting methods at Gulf South consistent with those of the
Company. Subsequent to establishing these allowance accounts, Gulf South charged
off a significant portion against the allowances as the result of
non-realization of accounts receivable and inventories. The valuation allowance
for inventory was recorded as an adjustment to cost of sales and the valuation
allowance for accounts receivable was recorded as an adjustment to general and
administrative expenses for the three months ended April 3, 1998.
Gulf South operational tax charges, litigation expenses, and other unusual
charges primarily relate to the Gulf South operational tax issues discussed in
Note 3 - Charges in Continuing Operations. In addition, these charges include
expenses related to a settled dispute between Gulf South and a competitor, and
accruals for anticipated expenses related to certain pending Gulf South related
litigation further discussed in Note 6 - Commitments and Contingencies.
22
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The asset impairment charges relate to the impairment of goodwill and
information systems. The goodwill impairment relates to a prior Gulf South
acquisition where a dispute with the acquired company's prior owners and
management resulted in the loss of key employees and all information related to
the acquired customer base which affected Gulf South's ability to conduct
business. The information systems impairment charge relates to a decision made
by management in the fourth quarter of fiscal 1998 to replace its current
information systems. Due to the merger with PSS World Medical, Inc., management
concluded that its existing information systems were not compatible with those
of PSS. As a result, management determined that the value of the related assets
had been impaired and an impairment charge was recorded. The amount of the
impairment charge was the excess of the carrying value over the fair value of
the assets.
Selling Expenses. Selling expenses for the three months ended April 3, 1998
totaled $2.9 million, an increase of $0.6 million or 26.1% over the three months
ended March 31, 1997 total of $2.3 million. As a percentage of sales, selling
expenses decreased to 3.4% for the three months ended April 3, 1998 from 3.5%
for the three months ended March 31, 1997. The decrease in selling expense as a
percentage of net sales is the result of the increase in the portion of the
customer base represented by national chain customers on which Gulf South does
not pay sales commissions.
Operating Income. Operating income, excluding the charges discussed above,
for the three months ended April 3, 1998 totaled $4.4 million, a decrease of
$1.2 million or 21.4% over the three months ended April 3, 1997 total of $5.6
million. Operating income decreased primarily due to i) the change in accounting
for operating costs of companies, ii) infrastructure investments made in
connection with the strategic objectives of the Company, and iii) the lower
gross profit percentage of companies acquired, each discussed above.
Provision For Income Taxes. Gulf South recorded a tax benefit for income
taxes for the three months ended April 3, 1998, of $11.9 million compared to a
tax provision of $2.2 million for the three months ended March 31, 1998. The
benefit primarily resulted from the $37.4 million in unusual charges related to
merger and restructuring costs, asset impairment charges, and other unusual
operating charges recorded during the three months ended April 3, 1998.
Net Income. Net income, excluding the charges discussed above, for the
three months ended April 3, 1998 totaled $2.9 million, a decrease of $1.1
million or 28.9% over the three months ended March 31, 1997 total of $3.8
million. The decrease in net income is attributable to the factors discussed in
Operating Income above, and the decrease in investment income of $144,000 due to
the use of cash and investments for business acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business grows, its cash and working capital requirements
will also continue to increase as a result of the need to finance acquisitions
and anticipated growth of the Company's operations. This growth will be funded
through a combination of cash flow from operations, borrowings under the
Company's senior revolving credit facility, and any future public offerings.
Net cash used in operating activities was $11.1 million for the nine months
ended December 31, 1998, compared to net cash provided by operating activities
of $4.1 million for the nine months ended December 31, 1997, due to the timing
of accounts receivable collections, payments of merger and acquisition expenses,
and the timing of vendor payments.
23
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Net cash provided by investing activities was $0.2 million for the nine
months ended December 31, 1998. This primarily resulted from $74.6 million
provided by the sale and maturities of marketable securities offset by $55.7
million related to purchase business acquisitions and $16.6 million related to
capital expenditures, of which approximately $8.5 million pertained to new
information system expenditures. Net cash used by investing activities was $92.0
million for the nine months ended December 31, 1997. This use of cash primarily
resulted from $73.8 million related to the purchase of marketable securities
with proceeds of the public debt offering, $7.7 million relate to purchase
business acquisitions, and capital expenditures of $7.6 million.
Net cash used in financing activities was $12.5 million for the nine months
ended December 31, 1998. This primarily resulted from $16.0 million in payoffs
of debt assumed through business acquisitions offset by $3.8 million in proceeds
from the issuance of common stock. Net cash provided by financing activities was
$66.8 million for the nine months ended December 31, 1997. This primarily
resulted from cash provided by the issuance of the $125.0 million senior
subordinated notes and $2.5 million in proceeds from the issuance of common
stock, partially offset by $55.1 million in payoffs of debt assumed through
business acquisitions.
The Company had working capital of $343.1 million and $384.1 million as of
December 31, 1998 and April 3, 1998, respectively. The decrease in working
capital primarily results from an increase in the frequency of purchase business
acquisitions being funded by cash. This recent shift in the source of funding
for purchase business acquisitions results in the conversion of a portion of the
cash outlay into an intangible which is excluded from the calculation of working
capital. Accounts receivable, net of allowances, were $264.6 million and $210.0
million at December 31, 1998 and April 3, 1998, respectively. The annualized
days sales in accounts receivable was approximately 58.1 as of December 31, 1998
and 54.3 days at April 3, 1998.
Inventories were $136.5 million and $122.5 million as of December 31, 1998
and April 3, 1998, respectively. The Company had annualized inventory turnover
of 8.2x and 8.3x for the nine months ended December 31, 1998 and the year ended
April 3, 1998, respectively.
Earnings before interest expense, taxes, depreciation and amortization
("EBITDA") totaled approximately $86.9 million for the nine months ended
December 31, 1998. EBITDA margin and coverage was approximately 7.9% and 10.0x,
respectively, for the same period. Excluding the effects of unusual charges
included in operating income, adjusted EBITDA totaled approximately $88.1
million for the nine months ended December 31, 1998. Adjusted EBITDA margin and
coverage was approximately 8.0% and 10.1x, respectively, for the same period.
24
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The following table presents EBITDA and other financial data for the three
and nine months ended December 31, 1998 and 1997 (in millions):
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ -------------
Income before provision for income taxes $ 41.8 $ 24.8 $ 15.7 $ 67.0
Plus: Interest Expense 2.7 2.6 8.7 3.2
EBIT (a) 27.5 18.3 75.7 45.0
Plus: Depreciation and amortization 4.1 2.8 11.2 8.2
EBITDA (b) 31.6 21.1 86.9 53.2
Unusual Charges Included in Continuing Operations 0.9 4.5 1.2 10.4
Adjusted EBITDA (c) 32.5 25.6 88.1 63.6
Adjusted interest expense (d) 2.7 2.6 8.7 8.5
EBITDA Coverage (e) 11.7x 8.1x 10.0x 6.3x
EBITDA Margin (f) 8.0% 6.4% 7.9% 5.7%
Adjusted EBITDA Coverage (g) 12.0x 9.8x 10.1x 7.5x
Adjusted EBITDA Margin (h) 8.2% 7.7% 8.0% 6.8%
Cash (used in) provided by operating activities $(11.1) $ 4.1
Cash provided by (used in) investing activities $ 0.2 $(92.0)
Cash (used in) provided by financing activities $(12.5) $ 66.8
- ---------------------------
(a) EBIT represents income before income taxes and interest expense.
(b) EBITDA represents EBIT plus depreciation and amortization.
(c) Adjusted EBITDA represents EBITDA plus unusual charges included in
continuing operations.
(d) Adjusted interest expense equals historical interest expense plus an
estimate of interest expense on the $125.0 million 8.5%senior subordinated
notes for any period prior to the issuance of the notes in October 1997.
(e) EBITDA coverage represents the ratio of EBITDA to adjusted interest expense.
(f) EBITDA margin represents the ratio of EBITDA to net sales.
(g) Adjusted EBITDA coverage represents the ratio of Adjusted EBITDA to
adjusted interest expense.
(h) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to net
sales.
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. Adjusted EBITDA as defined in the Company's $125.0 million 8.5%
senior subordinated note indenture is provided for the holders of those notes.
25
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.
The Company believes it is in compliance with all debt covenants as of December
31, 1998 and April 3, 1998
On February 11, 1999, the Company entered into a $140.0 million senior
revolving credit facility with a syndicate of financial institutions with
NationsBank, N.A. as principal agent. Borrowings under the credit facility are
available for working capital, capital expenditures, and acquisitions, and are
secured by the common stock and assets of the Company and its subsidiaries. The
credit facility expires February 10, 2004 and borrowings bear interest at
certain floating rates selected by the Company at the time of borrowing. The
credit facility contains certain affirmative and negative covenants, the most
restrictive of which require maintenance of a maximum leverage ratio of 3.5 to
1, maintenance of consolidated net worth of $337.0 million, and maintenance of a
minimum fixed charge coverage ratio of 2.0 to 1. In addition, the covenants
limit additional indebtedness and asset dispositions, require majority lender
approval on acquisitions with a total purchase price greater than $75.0 million,
and restrict payments of dividends.
As of December 31, 1998, the Company has not entered into any material
working capital commitments that require funding. The Company believes that the
expected cash flows from operations, available borrowing under the credit
facility, and capital markets are sufficient to meet the Company's anticipated
future requirements for working capital, capital expenditures, and acquisitions
for the foreseeable future.
Year 2000
During the third quarter of fiscal 1999, management accelerted planned year
2000 compliance modifications and upgrades to the Company's existing hardware
and software systems. The Company is currently in the phase of coding and
testing software changes and expects completion of this phase by the end of
March 1999. The final phase of the year 2000 compliance plan is expected to
begin in April 1999 with implementation of modifications and upgrades to
existing systems and is scheduled to be completed by July 1999. The European
division and the Long-term Care business hardware and software systems are
currently year 2000 compliant. The Imaging division currently has 25 of 31
service centers as well as its corporate location hardware and software systems
converted to its new 2000 compliant system. The Physician Supply business begins
implementation of its hardware and software system in April 1999. Ongoing
testing will continue through the end of calendar 1999. In addition, the Company
is currently formulating a non-information system audit plan to identify
non-information operational risks at its field branches.
Concurrent with the year 2000 modifications and upgrades to existing
systems, the Company is currently replacing a majority of its internal
information systems hardware and software with new systems ("New Systems") that
are year 2000 compliant. These New Systems will be used in several key areas of
the Company's business, including inventory management, purchasing, order
processing, shipping, receiving, accounts payable, accounts receivable, and
financial reporting. The Company expects to incur internal payroll costs,
consulting fees, and hardware and software costs for preparation and
implementation of these New Systems.
The total expected costs related to the conversion of existing systems and
implementation of the New systems is estimated to be approximately $15.0 million
through fiscal 2000, with $8.5 million incurred through December 31, 1998. The
anticipated impact and costs of the project is based on management's best
estimates using information currently available. There can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Based on its current estimates and information currently available,
the Company does not anticipate that the costs associated with this project will
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows in future periods.
26
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The potential risks associated with the year 2000 issues include, but are
not limited to, temporary disruption of the Company's operations in the areas of
inventory management, purchasing, order processing, shipping, receiving,
accounts payable, accounts receivable, and financial reporting. In addition
communications with customers, vendors, and other outside parties may be
disrupted. Implementation of the New System entails contacting suppliers to
ensure compatibility with the Company's information systems and to discuss year
2000 compliance issues. There can be no assurance that the systems of other
companies which the Company's systems rely upon will be timely converted, or
that such failure to convert by another company would not have a material
adverse effect on the Company's systems and results of operations.
The Company is in the process of updating its information technology
disaster recovery plan to include year 2000 contingencies that may arise.
Although the Company anticipates that minimal business disruption will occur as
a result of the year 2000 issues based upon currently available information,
incomplete or untimely resolution of year 2000 issues by either the Company or
significant suppliers, customers and critical business partners could have a
material adverse impact on the Company's consolidated financial position,
results of operations and/or cash flows in future periods.
All statements contained herein that are not historical facts, including,
but not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigations
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business and
economic conditions ;successful implementation of the Company's year 2000
compliance plan, and other factors described from time to time in the Company's
reports filed with the Securities and Exchange Commission. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
27
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PSS and certain of its current officers and directors are named as
defendants in a purported securities class action lawsuit entitled Jack Hirsch
v. PSS World Medical, Inc., et al., Civil Action No. 98-502-cv-J-21A. The
action, which was filed on or about May 28, 1998, is pending in the United
States District Court for the Middle District of Florida. An amended complaint
was filed on December 11, 1998. The plaintiff alleges, for himself and for a
purported class of similarly situated stockholders who allegedly purchased the
Company's stock between December 23, 1997 and May 8, 1998, that the defendants
engaged in violations of certain provisions of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and Rule 10b-5 promulgated thereunder.
The allegations are based upon a decline in the PSS stock price following
announcement by PSS in May 1998 regarding the Gulf South Merger which resulted
in earnings below analyst's expectations. The plaintiff seeks damages, including
costs and expenses. PSS believes that the allegations contained in the complaint
are without merit and intends to defend vigorously against the claims. The
defendants filed their motion to dismiss on January 25, 1999. However, the
lawsuit is in the earliest stages, and there can be no assurance that this
litigation will be ultimately resolved on terms that are favorable to PSS.
Gulf South and certain of its current and former officers and directors,
among others, are named as defendants in two purported securities class action
lawsuits entitled Ernest Klein v. Gulf South Medical Supply, Inc., et al., Civil
Action No. 3:97cv526WS, and Ann Krupnick v. Gulf South Medical Supply, Inc., et
al., Civil Action No. 3:97cv525BN. Both actions, which were filed on July 21,
1997, are pending in the United States District Court for the Southern District
of Mississippi, Jackson Division. The plaintiff in the Klein action alleges, for
himself and for a purported class of similarly situated stockholders who
allegedly purchased stock in Gulf South's June 1996 public offering of its
common stock, that the defendants engaged in violations of certain provisions of
the Securities Act of 1933, as amended ("Securites Act"), and Mississippi state
law. The plaintiff in the Krupnick action alleges for herself and for a
purported class of similarly situated stockholders who allegedly purchased Gulf
South Common Stock between May 2, 1996 and July 22, 1996, that the defendants
engaged in certain violations of the Exchange Act, Rule 10b-5 promulgated
thereunder and Mississippi state law. Plaintiffs allege that the defendants
artificially inflated the price of Gulf South stock by representing that Gulf
South was "well positioned" to grow by increasing its sales to existing
customers, including one of its largest customers Living Centers of America,
after defendants had been informed by Living Centers that its distribution
arrangement with Gulf South was being terminated in favor of a rival medical
supply distributor. On August 21, 1998, the court filed an Order dismissing all
the allegations in the Krupnick action. That case is presently on appeal to the
United States Court of Appeals for the 5th Circuit. The same Order also
dismissed the claims against Defendants Hixon, Piper, Tibbitts, Pritchard,
Bayer, and Gulf South under section 12(2) of the Securities Act and
corresponding claims against Defendants Hixon and Gulf South under section 15 of
the Securities Act and Miss. Code Ann. Sections 75-71-717(a)(2) and 75-71-719 in
the Klein action. Plaintiffs' claims under section 11 of the Securities Act
remain pending in the Klein case. Plaintiffs seek damages, including costs and
expenses. PSS believes that the allegations contained in the remaining claims
are also without merit and intends to defend vigorously against the claims.
However, there can be no assurance that this litigation will ultimately be
resolved on terms that are favorable to PSS.
PSS has been named in a purported patent infringement suit filed by Bayer
Corp. in the United States District Court for the Middle District of Florida
(No. 89-235 Civ. J-21A). In this lawsuit, Bayer alleges that certain of the
urinalysis test strips sold under the Penny SaverTM name infringe four Bayer
patents. The products are made by YeongDong Pharmaceuticals, which has agreed
in writing to indemnify and defend the Company against the infringement claims.
YeongDong Pharmaceuticals denies the products infringe the patents. In addition,
PSS has indemnity rights against the U.S. distributor of the product, BioSys
Laboratories, pursuant to its vendor agreement. Chemical analysis testing of the
products conducted under the joint supervision of the parties, however,
indicates that some representations YeongDong Pharmaceuticals made to the
Company about the technology used by YeongDong Pharmaceuticals in one of the
tests on the strip were incorrect. PSS continues to vigorously contest Bayer's
claims, but has agreed to remove those Penny SaverTM urinalysis test strip
products containing a test pad for leukocytes. The parties are currently in
settlement negotiations, PSS believes that there will be a favorable settlement
within the next 45 days. However, there can be no assurance that this litigation
will ultimately be resolved on terms that are favorable to PSS.
28
ITEM 1. LEGAL PROCEEDINGS (continued)
Although PSS does not manufacture products, the distribution of medical
supplies and equipment entails inherent risks of product liability. PSS is a
party to various legal and administrative legal proceedings and claims arising
in the normal course of business. However, to date, 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 PSS' consolidated financial position, liquidity, or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) On October 28, 1998, PSS issued an aggregate of 255,512 shares of
common stock, $.01 par value per share, to the former shareholders
of Tristar Imaging Systems, Inc. in exchange for all of the
outstanding shares of capital stock of Tristar. An additional
33,133 shares are subject to issuance to the former shareholders
of Tristar pending the resolution of potentially indemnifiable
claims. The issuance of securities was made in reliance on the
exemption from registration provided under Section 4(2) of the
Securities Act of 1933, as amended, as a transaction by an issuer
not involving a public offering. All of the securities were
acquired by the recipients for investment and with no view toward
a public resale or distribution without registration. The
recipients qualified as accredited investors, the offers and sales
were made without any public solicitation, and the stock
certificates bear restrictive legends.
(d) Not applicable.
29
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, Salamon Brothers Inc. and
NationsBanc Montgomery Securities, Inc.(2)
4.3 Form of 81/2% Senior Subordinated Note due 2007, including Form of Guarantee (Private Notes).(2)
4.4 Form of 81/2% Senior Subordinated Note due 2007, including Form of Guarantee (Exchange Notes).(2)
4.5 Shareholder Protection Rights Agreement, dated as of April 20, 1998, between PSS World Medical,
Inc. and Continental Stock Transfer & Trust Company, as Rights Agent.(11)
10.1 Registration Rights Agreement between the Company and Tullis-Dickerson Capital Focus, LP, dated as
of March 16, 1994.(3)
10.2 Employment Agreement for Patrick C. Kelly.(13)
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)
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
Exhibit
Number Description
- ----------- ---------------------------------------------------------------------------------------------------
10.13 Distributorship Agreement between Abbott Laboratories and Physician Sales & Service, Inc.
(Portions omitted as confidential--Separately filed with Commission).(5)
10.14 Stock Purchase Agreement between Abbott Laboratories and Physician Sales & Service, Inc.(5)
10.15 Amendment to Employee Stock Ownership Plan.(7)
10.15a Amendment and Restatement of the Physician Sales and Service, Inc. Employee Stock Ownership and
Savings Plan.(7)
10.15b First Amendment to the Physician Sales and Service, Inc. Employee Stock Ownership and Savings
Plan.(7)
10.16 Third Amended and Restated Agreement and Plan of Merger By and Among Taylor Medical, Inc. and
Physician Sales & Service, Inc. (including exhibits thereto).(6)
10.17 Agreement and Plan of Merger by and Among Physician Sales & Service, Inc., PSS Merger Corp. and
Treadway Enterprises, Inc.(8)
10.18 Amended and Restated Agreement and Plan of Merger, dated as of August 22, 1997, among the Company,
Diagnostic Imaging, Inc., PSS Merger Corp. and S&W X-ray, Inc.(9)
10.19 Agreement and Plan of Merger dated December 14, 1997 by and among the Company, PSS Merger Corp.
and Gulf South Medical Supply, Inc.(10)
27 Financial Data Schedule (for SEC use only)
(1) Incorporated by Reference to the Company's Registration Statement on Form
S-3, Registration No. 33-97524.
(2) Incorporated by Reference to the Company's Registration Statement on
Form S-4, Registration No. 333-39679.
(3) Incorporated by Reference from the Company's Registration Statement on
Form S-1, Registration No. 33-76580.
(4) Incorporated by Reference to the Company's Registration Statement on
Form S-8, Registration No. 33-80657.
(5) Incorporated by Reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 30, 1995.
(6) Incorporated by Reference to the Company's Annual Report on Form 10-K
for the fiscal year ended March 29, 1996.
(7) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996.
(8) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed January 3, 1997.
(9) Incorporated by Reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-33453.
(10) Incorporated by Reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-44323.
(11) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 22, 1998.
(12) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 8, 1998.
(13) Incorporated by Reference to the Company's Annual Report on Form 10-K
for the fiscal year ended April 3, 1998.
(b)Reports on Form 8-K
None.
31
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 16, 1998.
PSS WORLD MEDICAL, INC.
/s/ DAVID A. SMITH
----------------------------
David A. Smith
Executive Vice President and
Chief Financial Officer
32