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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2000 Commission File Number 0-23832
PSS WORLD MEDICAL, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-2280364
(State of incorporation) (I.R.S. Employer
Identification No.)
4345 Southpoint Boulevard
Jacksonville, Florida 32216
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 332-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
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 such 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.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of common stock, par value $0.01 per share (the
"Common Stock") held by nonaffiliates, based upon the closing sales price,
was approximately $684,456,000 as of June 21, 2000. In the determination of
this amount, affiliates include all of the Company's officers, directors
and persons known to the Company to be beneficial owners of more than five
percent of the Company's Common Stock. This amount should not be deemed
conclusive for any other purpose. As of June 21, 2000, a total of
71,077,236 shares of the Company's Common Stock were outstanding.
Document Incorporated by Reference
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 2000 Annual Meeting of Stockholders of the
Registrant which will be filed with the Securities and Exchange Commission not
later than 120 days after March 31, 2000.
1
PART I
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following: the
pending merger transaction, the availability of sufficient capital to finance
the Company's business plans on terms satisfactory to the Company; competitive
factors; the ability of the Company to adequately defend or reach a settlement
of outstanding litigations and investigations involving the Company or its
management; changes in labor, equipment and capital costs; changes in
regulations affecting the Company's business; future acquisitions or strategic
partnerships; general business and economic conditions; and other factors
described from time to time in the Company's reports filed with the Securities
and Exchange Commission. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which statements are made
pursuant to the Private Securities Litigation Reform Act of 1995 and, as such,
speak only as of the date made.
Item 1. Business
GENERAL
PSS World Medical, Inc. (the "Company" or "PSS") is a specialty marketer and
distributor of medical products to physicians, alternate-site imaging centers,
long-term care providers, home care providers, and hospitals through 101 service
centers to customers in all 50 states and four European countries. Since its
inception in 1983, the Company has become a leader in three of the market
segments it serves with a focused, market specific approach to customer service,
a consultative sales force, strategic acquisitions, strong arrangements with
product manufacturers, innovative systems, and a unique culture of performance.
The Company, through its Physician Sales & Service division, is the leading
distributor of medical supplies, equipment and pharmaceuticals to office-based
physicians in the United States based on revenues, number of physician-office
customers, number and quality of sales representatives, number of service
centers, and exclusively distributed products. Physician Sales & Service
currently operates 51 medical supply distribution service centers with
approximately 735 sales representatives ("Physician Supply Business") serving
over 100,000 physician offices (representing approximately 50% of all physician
offices) in all 50 states. The Physician Supply Business' primary market is the
approximately 400,000 physicians who practice medicine in approximately 200,000
office sites throughout the United States.
The Company, through its wholly owned subsidiary Diagnostic Imaging, Inc.
("DI"), is the leading distributor of medical diagnostic imaging supplies,
chemicals, equipment, and service to the acute care and alternate-care markets
in the United States based on revenues, number of service specialists, number of
distribution centers, and number of sales representatives. DI currently operates
34 imaging distribution service centers with approximately 900 service
specialists and 230 sales representatives ("Imaging Business") serving over
45,000 customer sites in 42 states. The Imaging Business' primary market
includes approximately 5,000 acute-care hospitals, 3,000 imaging centers, and
100,000 private practice physicians, veterinarians and chiropractors.
Through its wholly owned subsidiary Gulf South Medical Supply, Inc. ("GSMS"),
the Company is a leading national distributor of medical supplies and related
products to the long-term care industry in the United States based on revenues,
number of sales representatives, and number of service centers. GSMS currently
operates 14 distribution service centers with approximately 131 sales
representatives ("Long-Term Care Business") serving over 14,000 long-term care
accounts in all 50 states. The Long-Term Care Business' primary market is
comprised of a large number of independent operators, small to mid-sized local
and regional chains, and several national chains representing over 17,000
long-term care sites.
In addition to its operations in the United States, the Company, through its
wholly owned subsidiary WorldMed International, Inc. ("WorldMed"), operates two
European service centers ("International Business") distributing medical
products to the physician office and hospital markets in Belgium, France,
Germany and Luxembourg.
2
COMPANY STRATEGY
The Company's objectives are to be the leading distributor and marketer of
medical products to office-based physicians, providers of imaging services, and
long-term care providers in the United States, and to enhance operating
performance. The key components of the Company's strategy to achieve these
objectives are to continue to:
Expand Operating Margins. The Company is pursuing several initiatives to enhance
its operating margins. With respect to sales, the Company is focusing its
efforts on higher-margin accounts, penetration of existing customer accounts and
on sales of diagnostic equipment, often on an exclusive or semi-exclusive basis,
that involves ongoing sales of higher-margin reagents and/or higher margin
service contracts. With respect to its product line, the Company seeks to
generate high sales volumes of selected products and to obtain such products on
a discounted basis from manufacturers. With respect to its operations locations,
the Company will continue to evaluate rationalization of its service center
locations during fiscal 2001 to increase efficiency and eliminate centers with
below average performance. Finally, with respect to its service center expansion
program, the Company intends to emphasize acquisitions over new-center
development, thus avoiding the substantial start-up losses associated with
new-center development.
Pursue Strategic Acquisitions. The Company has made 51, 46, 6, and 8,
acquisitions since fiscal year 1989 in its Physician Supply, Imaging, Long-Term
Care, and International Businesses, respectively (excludes acquisitions made by
the Company's subsidiaries and divisions prior to PSS World Medical, Inc.
ownership). After consummating a merger or acquisition, the Company begins an
intensive process of converting the acquired company to its business model
through information systems conversion, personnel development and training, and
service and product expansion. The Company intends to continue to acquire local,
regional, and other distributors in new and existing markets where it can
leverage its distribution infrastructure, expand its geographic coverage, add
service and sales competence, and gain market share.
Utilize Sophisticated Information Systems (See Information Systems discussion).
During fiscal 2000, the Company deployed its ICONwebSM system. The ICONwebSM is
a sales force automation system that has increased the time available to sales
representatives for selling and improved the efficiency of the support staff and
operations of the distribution centers. Approximately 60% of the Physician
Supply Business revenues are processed through this Internet based system.
In addition, during fiscal 2000, the Company began the process of implementing
the JD Edwards OneWorld ERP system. The Company has already successfully
implemented the JD Edwards OneWorld general ledger and accounts payable systems
to its PSS and GSMS divisions. The DI division has nearly completed the JD
Edwards World ERP systems rollout which started in October 1999.
In fiscal 2001, the Company plans to roll out its newest digital marketplace
development of myPSS.com, myDII.com and myGS.com. This will be the next
generation of e-Commerce for all PSS World Medical, Inc. divisions. The
Long-Term Care division currently processes approximately $480,000 a day through
its GS Online Internet site with approximately 34% of their total revenues
processed through e-commerce. The Company will continue to pursue the
development of sophisticated systems that improve operational efficiency, reduce
fixed and variable costs of its infrastructure, improve access to the Company by
its customers, and reduce costs in the supply channel.
Provide Differentiated, High Quality Service. The Company believes its success
to date has been based largely on its ability to provide superior customer
service, including same-day, next-day, and scheduled delivery, guaranteed
service specialist response, and "no-hassle" returns. Unlike its competitors,
which generally ship products via common carrier, the Company operates a fleet
of over 1,500 delivery and service vehicles enabling it to provide same-day or
next day delivery and service to virtually all of its customers.
Historically, the Company has differentiated itself from the competition
servicing the office-based physician market by providing consistent, same-day
delivery on a national basis. The Company again is distinguishing itself from
the competition by providing a metropolitan two-hour and a four-hour rural
technical service specialist deployment guarantee through its Imaging Business.
In addition, the Company's Long-Term Care Business has increased next day or
scheduled self-delivery on Company leased vehicles from 8% to 50% of orders
during fiscal 2000.
3
Offer a Broad Product Line Emphasizing Exclusive Products. The Company seeks to
meet all of the medical products needs of office-based physicians, providers of
imaging services and providers of long-term care. The Company currently stocks
over 56,000 medical products in its Physician Supply Business, over 8,000
imaging products in its Imaging Business, and over 20,000 medical products in
its Long-Term Care Business. The Company also seeks to establish exclusive
distribution and marketing arrangements for selected products. In the United
States, PSS currently has exclusive or semi-exclusive marketing arrangements for
certain products with Abbott Laboratories, Biosound Esaote, Inc., Candela
Corporation, Derma Genesis, Inc., Hologic, Inc., Philips Medical Systems,
Siemens AG, Sonosite, Inc., Trex Medical Corporation, and other leading
manufacturers. The Company believes that its sophisticated selling efforts,
highly trained sales force, and large customer base provide manufacturers with a
unique sales channel through which to distribute new and existing products and
technology that require consultative selling.
Enhance Selling Capabilities. The Company believes its sales force and managers
are its most valuable corporate assets and focuses not only on the recruitment
of sales personnel with superior sales aptitude, but also on the initial and
continued development of its sales force and management through training at The
University, its in-house educational center. The Company believes investment in
personnel and training enable it to provide high-quality service to its
customers, offer sophisticated product lines, and attract manufacturers that
desire a means of rapidly bringing new products and technology to market.
INDUSTRY
According to industry estimates, the United States medical supply and equipment
segment of the health care industry represents a $34 billion market comprised of
distribution of medical products to hospitals, home health care agencies,
imaging centers, physician offices, dental offices, and long-term care
facilities. The Company's primary focus includes distribution to the physician
office, providers of imaging services, and long-term care facilities that
comprise $14 billion or approximately 40% of the overall market.
Revenues of the medical products distribution industry are estimated to be
growing as a result of a growing and aging population, increased health care
awareness, proliferation of medical technology and testing, and expanding
third-party insurance coverage. In addition, the physician market is benefiting
from the shift of procedures and diagnostic testing from hospitals to alternate
sites, particularly physician offices, despite a migration of significantly
lower hospital medical product pricing into the physician office market.
The health care industry is subject to extensive government regulation,
licensure, and operating procedures. National health care reform has been the
subject of a number of legislative initiatives by Congress. Additionally,
government and private insurance programs fund the cost of a significant portion
of medical care in the United States. In recent years, government-imposed limits
on reimbursement of hospitals, long-term care facilities, and other health care
providers have affected spending budgets in certain markets within the
medical products industry. Recently, Congress has passed radical changes to
reimbursements for nursing homes and home care providers. The industry has
struggled with these changes and the ability of providers, distributors and
manufacturers to adopt to the changes is not yet determined. These changes also
affect some distributors who directly bill the government for these providers.
The industry estimates that approximately 19% of the beds represented by homes
in Long-Term Care industry have filed for bankruptcy protection, which also is
the Company's percentage for fiscal 2000.
Over the past few years, the health care industry has undergone significant
consolidation. Physician provider groups, long-term care facilities, and other
alternate-site providers along with the hospitals continue to consolidate. The
consolidation creates new and larger customers. However, the majority of the
market serviced by the Company remains a large number of small customers with no
single customer exceeding 10% of the Company's consolidated revenues. However,
the Long-Term Care Business depends on a limited number of large customers for a
significant portion of its net sales and approximately 37% of the Long-Term Care
Business revenues for the 12 months ended March 31, 2000 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.
4
ACQUISITIONS
A significant portion of the medical supply and equipment distribution business
in the United States includes locally owned and operated distributors. The
Company believes that in the United States, there are approximately 200 locally
owned companies serving the non-imaging physician-supply market, approximately
300 locally owned companies serving the imaging-supply market, and approximately
100 locally owned companies serving the long-term care market. The
physician-supply market has experienced rapid consolidation in recent years. The
Company believes that consolidation is occurring due to local and regional
distributors experiencing: (i) a lack of purchasing and administrative economies
of scale; (ii) reduced access to medical equipment lines as manufacturers seek
to reduce marketing costs by minimizing the number of distributors they use;
(iii) consolidation among providers, who are increasingly seeking to reduce the
number of suppliers from which they purchase medical products; (iv) a lack of
resources for continued development and training of personnel for maintenance,
expansion or replacement of existing business; and (v) a lack of resources to
develop new distribution system technologies and services.
The Company's Physician Supply Business has grown from one service center
located in Jacksonville, Florida, in 1983 to 51 service centers currently.
Historically, the Company's growth has been accomplished through both the
start-up of service centers and the acquisition of local and regional medical
supply and equipment distributors. The Company believes there are a few
attractive full line physician supply distributors in the United States to
acquire. In the future, the Company will focus its efforts on those few
companies and new groups of specialty distributors of products like orthopedics,
podiatry, opthalmics, and various diagnostic equipment lines.
With the November 1996 acquisition of a medical diagnostic imaging supply and
equipment distributor, the Company began the operations of its Imaging Business
through its wholly owned subsidiary Diagnostic Imaging, Inc. Subsequent
acquisitions have resulted in 34 Imaging Business service centers (after
consolidation of certain centers) currently serving customers in 42 states. The
Company will focus on acquisitions that (i) improve its core competency in the
service and sales of high-end imaging equipment, (ii) leverage its existing
infrastructure, (iii) strengthen its geographic reach and market share
penetration in film handling and chemistry products, and (iv) improve the
quality of its product offering and management expertise.
With the March 1998 acquisition of Gulf South Medical Supply, Inc., the Company
became a leading national distributor of medical supplies and related products
to the long-term care industry. Gulf South provides products and services to
over 14,000 long-term care accounts in all 50 states. Now that the Company has
consolidated the number of Long-Term Care Business distribution centers to 14
and has completed the implementation of its best practices distribution
overhaul, the Company will begin to seek acquisitions that leverage its
infrastructure and increase its market share.
The Company believes acquisitions will remain a core strategy for its existing
businesses as well as a means for leveraging its core competencies in new areas
of medical distribution.
SALES, SERVICE, AND DISTRIBUTION
The Company focuses on complete customer satisfaction, which it characterizes to
its customers as "no hassle" service. Consistent with this approach, the Company
offers its customers same-day, next-day, or scheduled delivery service on a
regular basis, highly trained, consultative sales professionals, a broad product
line including medical supplies, sophisticated diagnostic equipment and
reagents, and pharmaceuticals, no minimum order size, and permits returns of
unused, saleable products for instant credit, guaranteed response and dispatch
of service specialists, as well as repair and service of imaging equipment.
The Company has increased its emphasis on national customer accounts, including
large physician group practices, physician practice management companies,
physician-hospital organizations, physician management service organizations,
large long-term care chains, and group purchasing organizations. In selling to
these national accounts, the Company emphasizes its core strengths of rapid
delivery and service, stockless inventory, competitive pricing, consultative
selling, broad product lines, exclusive products which increase practice revenue
and enhance the quality of care, customer usage reporting, and high service
levels.
5
PHYSICIAN SUPPLY BUSINESS
The Physician Supply Business currently maintains a highly decentralized
distribution network of 51 service centers operating approximately 530 delivery
vans servicing customers throughout the United States. This distribution
network, along with the Company's Instant Customer Order Network ("ICONWebSM"),
has enabled the Physician Supply Business to provide same-day delivery service
on a consistent basis. Customer orders received by 10:30 a.m. at the local
service center are delivered the same day within a 100-mile radius. Within a
30-mile radius, orders received by noon are delivered the same day.
Through over 735 sales representatives, the Physician Supply Business
distributes medical supplies and equipment to physicians in over 100,000 office
sites nationally. Generally, each sales representative is responsible for
calling on approximately 125 physician offices, with a minimum goal of visiting
each office once every one to two weeks.
IMAGING BUSINESS
The Company's Imaging Business operates in a similar decentralized format as the
Physician Supply Business and distributes over 8,000 types of medical imaging
supplies, chemicals, and equipment to the acute-care hospital and alternate-care
markets. Since its inception in November 1996, DI has successfully integrated 46
acquisitions to construct a nationwide distribution and service channel with 34
full service branches, 14 distribution centers, 230 salespeople and 900 service
technicians reaching over 45,000 customer sites in 42 states. DI has focused on
rapidly consolidating the diagnostic imaging distribution market and
transforming its acquired companies into an integrated national sales and
service channel. Each full service branch is capable of providing a broad array
of imaging products including consumables, imaging equipment and equipment
service. DI has established stand-alone distribution and service centers that
support its branches to facilitate the highest level of customer service. The
Company employs its own drivers and uses it own fleet of delivery vehicles in
order to provide scheduled point-of-use and just-in-time deliveries.
In addition to providing delivery of over 8,000 imaging products, the Imaging
Business currently provides imaging equipment service through approximately 900
service specialists who provide technical assistance and maintenance on imaging
equipment. Customer service requests for service specialists are guaranteed to
receive a two-hour response in metropolitan areas and a four-hour response in
rural areas. The Company believes this service guarantee, coupled with the
significant number of highly qualified service specialists, positions it as the
service leader in the industry.
LONG-TERM CARE BUSINESS
The Company entered the Long-Term Care Business with the acquisition of Gulf
South Medical Supply, Inc. in March 1998. The Long-Term Care Business currently
operates 14 full-service regional distribution centers. Coupled with a team of
approximately 131 sales representatives, the Long-Term Care Business is able to
provide consistent and reliable service to customers ranging from independent
nursing homes to large national chains, as well as providers of home health care
and subacute, rehabilitation, and transitional care that operate in different
geographic areas. Currently, the Long-Term Care Business provides service to
approximately 14,000 long-term care accounts nationally and offers a product
line consisting of over 20,000 products.
In addition to distribution of medical and related products, the Company's
Long-Term Care Business provides its customers support services developed to
meet the customer's needs. These services include: (i) usage reports designed to
help customers manage supply requirements, prepare forecasts and track
multifacility purchases; (ii) inventory control processes that enable the
customer to order products on a just-in-time basis and monitor patient's
utilization of products for Medicaid and Medicare reimbursement; and (iii)
customized services including customized invoices, bar code labels, and
customized order guides.
INTERNATIONAL BUSINESS
The Company's International Business distributes medical products to
office-based physicians and hospitals in Belgium, France, Germany and Luxembourg
and began operations in April 1996 with the acquisition of its service center in
Leuven, Belgium. The International Business currently operates two European
service centers located in Belgium and Germany, employing approximately 26 sales
representatives and approximately 100 total employees.
6
The Company's Physician Supply, Imaging, Long-Term Care, and International
Business service centers operate as profit centers led by a management team that
typically includes a sales leader and an operations leader, and a service leader
in the Imaging Business service centers. Each service center employs sales
representatives and staff, including purchasing agents, customer service
representatives, and warehouse and delivery personnel. Employees are compensated
based upon both individual and service center performance. Both leadership and
employee bonuses are based largely upon asset management, attainment of goals,
and operating profit performance.
PRODUCTS
The Company is required to carry a significant investment in inventory to meet
the rapid delivery requirements of its customers. During the 12 months ended
March 31, 2000, no vendor accounted for more than 10%, except for Eastman Kodak,
which accounted for approximately 22% of the Company's inventory purchases. The
Company's ability to maintain good relations with its vendors will affect the
profitability of the business.
PHYSICIAN SUPPLY BUSINESS
Through its Physician Supply Business, the Company distributes medical products
consisting of medical supplies, diagnostic equipment, and pharmaceuticals. The
following is a discussion of the over 56,000 types of medical products offered
by the Physician Supply Business.
Medical Supplies. The Physician Supply Business sells a broad range of medical
supplies, including various types and sizes of paper goods, needles and
syringes, gauze and wound dressings, surgical instruments, sutures, latex
gloves, orthopedic soft goods and casting products, wood tongue blades and
applicators, sterilization and intravenous solutions, specimen containers,
diagnostic equipment reagents, and diagnostic rapid test kits for pregnancy,
strep, mononucleosis, chlamydia, H-Pylori, and bladder cancer.
Medical Equipment. The Physician Supply Business equipment lines include blood
chemistry analyzers, automated cell and differential counters, immunoassay
analyzers, bone densitometers, exam tables and furniture, electrocardiograph
monitors and defibrillators, cardiac stress systems, cardiac and OB/GYN
ultrasound, holter monitors, flexible sigmoidoscopy scopes, hyfracators, laser
and endoscopy surgical units, autoclaves, spirometers, pulse oximeters,
tympanometers, and microscopes. Demand for diagnostic equipment has been
increasing recently, reflecting in part, technological advances that enable
increasingly sophisticated diagnostic tests to be performed in the physician's
office. Sales of diagnostic equipment, while generally lower in gross margin
than supplies, normally entail the ongoing reordering of disposable diagnostic
reagents that generally yield higher margins.
Pharmaceuticals. The Company's pharmaceutical sales include vaccines,
injectables, and ointments. Because of the changing dynamics in the
pharmaceutical industry, particularly the reduction of sales personnel focused
on the physicians' offices, pharmaceutical manufacturers are increasingly
seeking alternative means of distribution. The Company believes that its
consultative sales approach and its emphasis on training have allowed PSS to be
highly effective in selling pharmaceuticals to the physician-office market.
IMAGING BUSINESS
The Imaging Business distributes a broad range of approximately 8,000 consumable
SKU's and 25 various equipment product lines. In addition, the Company employs
approximately 900 service specialists that provide equipment maintenance and
repair.
Imaging Supplies. Imaging supplies are primarily the supplies and accessories
used each time a diagnostic image such as a chest x-ray, CT or mammogram is
created. The Company's product portfolio includes x-ray film, processing
chemicals, contrast agents, barium, filing and mailing products, film viewing
devices, darkroom products, protective materials, and other miscellaneous
imaging accessories.
7
Imaging Equipment. The Imaging Business equipment lines include processors, wet
and dry laser cameras, automated film handling equipment, radiographic
equipment, radiographic and fluoroscopic equipment ("R&F"), digital R&F,
electrophysiology equipment, mammography systems, bone densitometry, C-Arms,
digital upgrades, computed tomography scanners ("CT"), cardiac cath labs,
vascular labs, magnetic resonance imaging ("MRI") equipment, picture archiving
and communication systems ("PACS"), computed radiography equipment, and urology
systems.
Imaging Service Specialist. Through approximately 900 service specialists, the
Imaging Business currently provides on-site preventive maintenance, emergency
service, and parts for all of the above-mentioned imaging equipment sold.
Long-Term Care Business
The Long-Term Care Business offers over 20,000 medical and related products
consisting largely of name brand items including medical supplies, incontinent
supplies, personal care items, enteral feeding supplies, medical instruments,
and respiratory and ostomy supplies.
Medical Supplies. Medical supplies consist of wound care supplies, needles and
syringes, gauze, sutures, various types of exam gloves, urological supplies, and
blood and urine testing supplies and test kits.
Incontinent Supplies and Personal Care Items. These items include adult diapers
and underpads, as well as soaps and shampoos, personal hygiene items, various
paper products and bedside utensils.
Enteral Feeding Supplies. Enteral feeding supplies include nutritional
supplements, pump sets, and intravenous tubing and solutions.
Other. Other items offered by the Company include medical instruments, oxygen
supplies, trach and suction supplies, and over-the-counter pharmaceuticals.
INTERNATIONAL BUSINESS
The International Business distributes medical supplies, equipment and
pharmaceuticals similar to those provided by the Physician Supply Business to
four European countries. The International Business offers products to the
European physician office and hospital markets.
RECRUITMENT AND DEVELOPMENT
The Company believes its leaders and sales force are its most valuable assets.
Accordingly, the Company invests significant resources in recruiting, training
and developing these employees. Over the past ten years, the Company has refined
its recruitment practices and development procedures for its Physician Supply
Business, and the Company developed similar training programs for the sales
representatives and service specialists of its Imaging and Long-Term Care
businesses. The Company's comprehensive program includes the following:
Recruitment. The Company has developed a recruitment program to help provide it
with a source of mobile and committed sales representatives. The Company
believes that it is a leader in its industry in recruiting sales representatives
on college and university campuses. The Company's recruiters use
state-of-the-art marketing materials to attract candidates who demonstrate
superior sales aptitude. The Company also recruits college graduates with up to
five years experience in business, government or the military as operational
leadership trainees.
8
Initial Development. Each sales trainee is initially recruited to work for PSS
World Medical, Inc. and is first brought to The University for education about
the business and each division, introduction to officers, and orientation on the
culture. This is followed with placement in one of several training branches at
one of the three divisions. Each trainee is then assigned to a service center
for longer-term training. Under the supervision of local leaders, training
consists of a combination of self-study, individual instruction and interaction
with customers and vendors. Such training includes 16 one-week courses providing
instruction on products, procedures, and selling skills. During this development
program, the trainee attends The University for additional training. Individual
progress is measured weekly through formal testing and role playing, resulting
in continued advancement to graduation, usually within 16 weeks. PSS designs the
program to be strenuous and of the trainees that enter, only 70% successfully
complete the program. Upon graduation, the newly appointed sales representative
assumes responsibility for the first available sales territory, within a
preferred region, regardless of location. The Company typically has
approximately 50 sales candidates at various stages of the training process. The
Company believes that the level of its expenditures in developing new sales
representatives and its ability to place new sales representatives quickly in a
new region is unique within the industry. The new sales graduate is placed on a
salary-to-commission conversion program.
Operations Management. The Company's development program for its operations
leadership trainees consists of approximately 12 months of intensive training
and development. After recruitment, the operations management trainee is
transferred to at least three service centers and is given various and gradually
increasing levels of responsibility. The trainee is assigned to an operations
management position when it becomes available at a service center, regardless of
location. The Company has available approximately five operations management
trainees to support its growth at any given time.
Technical Service Specialists. The Imaging Business has implemented an intensive
service training schedule in which the vast majority of its over 900 service
specialists will be participating in some manner in the upcoming fiscal year.
The Company recently successfully completed its first basic x-ray class. The
Company recently constructed its own state-of-the-art 5,000 square foot
Diagnostic Imaging training center where it will provide classes on all aspects
of the imaging business including film handling equipment, basic x-ray, basic
imaging, laser imager and mammography equipment. During fiscal 2001, the Company
trained over 150 service specialists in The University's classes on customer
skills and communications. In addition, a large number of service specialists
will attend classes provided by various equipment manufacturers.
Continued Development. The Company recently developed an advanced sales
development program for experienced successful sales representatives designed to
improve effectiveness, performance, and extend the value proposition provided to
the customer. This new class is an extension of several programs in place to
train experienced sales representatives on new technology and new products. The
Company also provides several programs to continue development of its sales and
leadership organization. The programs provided by The University include a
leadership program for senior sales representatives, a general leaders program
for first-year leaders that emphasizes creativity and innovation, and a senior
leadership development program. In addition, the Company encourages its sales
representatives to participate in industry-accredited self-study programs. Every
sales representative routinely attends local sales meetings, annual sales and
marketing meetings, key vendor product conferences and continuing education
programs at The University. Additionally, the Company holds training programs
for customer service, purchasing and other field operations.
On March 31, 2000, the Company had approximately 1,122 sales representatives,
900 imaging service specialists, and 5,190 total employees. The Company
considers its employee relations to be excellent.
INFORMATION SYSTEMS
PSS WORLD MEDICAL, INC.
Strategic ERP and eCommerce Digital Marketplace Systems Development
PSS World Medical is in the process of implementing the JD Edwards OneWorld ERP
system. The Company successfully deployed the JD Edwards OneWorld general ledger
and accounts payable systems to its PSS and Gulf South divisions during fiscal
1999. The Company has also successfully deployed the JD Edwards One World
accounts receivable, inventory, purchasing, customer service, and order entry
systems to one Physician Supply Business service center. Rollout to the other 50
Physician Supply Business service centers will begin in the first quarter of
fiscal 2001. The system uses state-of-the-art client server technology to
deliver an easy to use end user interface that will reduce overall training
costs and boost productivity amongst PSS and Gulf South knowledge workers. The
system runs on an Oracle 8.05 database with HP9000 Unix hardware and a high
availability Citrix Server farm.
9
PSS World Medical is also developing its next generation eCommerce sites. The
company will launch myPSS.com, myDII.com and myGSMS.com during fiscal 2001.
These sites are being built on a BEA Web Logic Java application server. Database
services are being provided by Oracle and hardware on the Company's strategic
Unix platform, HP/UX. The sites will offer a community for physician, imaging,
and long-term care e-commerce users to access the Company's three divisions.
These sites will also let the Company connect and integrate with other
healthcare specific digital marketplaces with our XML based connectivity engine.
PHYSICIAN SUPPLY BUSINESS
Sales Force Automation / Internet Automation:
ICONwebSM is a sales force automation tool that allows the Physician Supply
Business sales representatives to access critical customer information and place
orders from any location using a standard laptop computer system. ICONwebSM
provides the sales representatives with customer pricing, contracts, backorders,
inventory levels, account status and instant ordering. ICONwebSM has increased
time available for selling, decreased operating expenses in the service centers,
and enhanced the Company's ability to provide same-day delivery to customers.
During fiscal 2000 the Physician Supply Business successfully deployed the
ICONwebSM system. The Company believes this system is the first Internet based
sales force automation system designed and used specifically for inventory
management and purchasing for the medical practice. Company's customers can also
access ICONwebSM through the Internet at http://www.iconweb.com after receiving
their personal password from the Company. All Company customers, regardless of
size, with access to the Internet, are given access to services and on-line
information, including: (i) on-line order placement and confirmation; (ii)
customer specific pricing, product availability, back orders and utilization
reports; (iii) working capital management reports; and (iv) practice compliance
assistance for OSHA and CLIA, including a database of medical safety sheets.
ICONwebSM accounts for 60% of all PSS orders that are processed on a monthly
basis. The system has allowed the Physician Supply Business to cut its internal
customer service staff in half over the past seven years. ICONwebSM processes
approximately $450 million of annualized revenue through the Internet for the
Physician Supply Business.
eCommerce / Digital Marketplace Development
The expected rollout date for myPSS.com is September 2000, and it will include
an all-in-one destination for physicians. This is the next generation of
e-Commerce for all PSS World Medical, Inc. divisions. The site will allow
customers to access inventory, account information, and order all 56,000
Physician Supply items on the site. The site will allow for the expansion into
other digital marketplaces over the next 12 months. The system is built on
leading edge products like the BEA WebLogic Java application server, Oracle
8.05, and HP/UX and XML. The system runs on an HP9000 N class machine from
Hewlett Packard. The system will allow PSS to compete with dot com companies on
an even scale with the added advantage of bricks and mortar support over the
next few years. The Company believes this will be the most strategic system in
our portfolio. The successful implementation of the JD Edwards ERP system has
helped make this customer facing Internet site a reality.
Proof of Delivery / Logistics Systems
QuickTrack is a delivery automation system that was completed in August 1998.
The system provides electronic signature recognition and web based proof of
delivery and has significantly increased PSS' customer service responsiveness to
customer order inquiries.
10
IMAGING BUSINESS
ERP Systems
The Imaging Business has nearly completed the JD Edwards World ERP system
rollout that was started in October of 1997. The Imaging Business maintains this
centralized system with rollover capability to an offsite facility in the event
the current system is unavailable. The current system runs on the AS/400 model
740 using several software packages. JD Edwards supports the core business
functions such as accounts payable, accounts receivable, general ledger, and
distribution. MDSI supports the service component of the business, and there are
several add-in components such as RF-Smart (warehouse-management), Premenos
(EDI), and Quadrant (faxing from the AS400). The current general ledger and
accounts payable system is integrated with PSS World Medical, but will be
replaced by the Company's consolidated general ledger and accounts payable
system in fiscal 2001.
Systems development for the Imaging Business for 2001, will be focused on
complex equipment and order fulfillment capabilities as well as enhancing the
service dispatch system for the divisions over 900 service specialists in order
to handle increased growth in these two areas.
eCommerce / Digital Marketplace Development
MyDII.com will be rolled out in the third quarter of fiscal 2001 and will
include an all-in-one destination for imaging customers. The site will allow
customers to access inventory, account information, and order all Imaging
business items on the site. The site will allow for the expansion into other
digital marketplaces over the next 12 months. The system is built on leading
edge products like the BEA WebLogic Java application server, Oracle 8.05, and
HP/UX and XML. The system runs on an HP9000 N class machine from Hewlett
Packard. The system will allow the Company to compete with dot com companies on
an even scale with the added advantage of bricks and mortar support over the
next few years. We feel this is the most strategic system in our portfolio. The
successful implementation of the JD Edwards ERP system has helped make this
customer facing Internet site a reality.
LONG-TERM BUSINESS
ERP Systems
Gulf South maintains a centralized computing environment that allows for real
time data updates and access by our remote branch locations via a wide area
network. The Gulf South distribution system was designed and developed in-house,
specifically for the medical supply distribution industry. This distribution
system is connected to the PSS World Medical general ledger and accounts payable
system. Once the new PSS distribution system is implemented, the existing Gulf
South distribution system will be replaced by the OneWorld JD Edwards Company
system.
eCommerce / Digital Marketplace Development
Gulf South has developed an Internet based sales force automation application
(RepNet) and a customer on-line ordering application (GSOnline). RepNet provides
the Gulf South sales force with immediate access to customer account data and
historical purchasing activity, product and inventory data, and remote sales
quotes and sales order entry capabilities. This system has greatly improved the
amount of information available to our mobile sales force and increased the
level of service provided to our customer. GSOnline is an Internet based order
entry and historical reporting application developed specifically for the Gulf
South customer. Through GSOnline a customer can access their specific account
pricing and product formularies, inquire on product availability, place orders
and view order status, and perform history reporting.
Customer Systems
In addition, Gulf South offers its customers Accuscan, a barcode based inventory
control and ancillary billing software package designed specifically for the
long-term care and home health industries. Accuscan allows a customer to
maintain a real time inventory count and order products on a just-in-time basis,
as well as to monitor patients' utilization of products.
The effectiveness of Internet access to improve efficiencies of distribution in
the health care industry is being tested and developed by current and new
participants of the health care industry. Approximately $480,000 a day of
long-term care sales are currently being processed through GSOnline by the
Long-Term Care Business with approximately 34% of all of its sales processed
through e-Commerce.
11
Purchasing and vendor relationships
The Company aggressively seeks to purchase the medical supplies and equipment it
distributes at the lowest possible price through volume discounts, rebates and
product line consolidation. The Company's materials management group negotiates
all of its contract terms with vendors. Individual orders are placed by the
Company's purchasing agents located at the Company's service centers, who are
responsible for purchasing and maintaining the inventory. Supplies and equipment
are delivered directly from vendors to the service centers.
The Company aggressively pursues the opportunity to market and sell medical
equipment and supplies on an exclusive basis. Manufacturers of medical
diagnostic equipment and supplies typically offer distribution rights only to a
selected group of distributors and are increasingly seeking to reduce the number
of distributors selling their products to end users in an effort to reduce the
cost associated with marketing and field support. The Company has been
successful in assisting manufacturers in their development and marketing plans
and in obtaining the exclusive right to sell certain products. The Company
believes that its ability to capture such distribution rights represents a
significant barrier to the entry of competitors.
In addition, the Company continually seeks vendor relationships on an exclusive
or semi-exclusive basis providing the Company with a competitive advantage and
providing the manufacturer with one distribution channel comprised of 1,122
highly-trained, consultative sales representatives. Following is a list of
manufacturers that the Company currently maintains such relationships and the
type of product offered:
Manufacturer Product
Abbott Laboratories.......... Blood chemistry analyzers, hematology products,
immunoassay analyzers, rapid tests, and
reagents
Biosound..................... Ultrasound equipment
Candela...................... Laser equipment
Derma Genesis................ Particle skin resurfacing
Dornier...................... Urology Systems
Hologic...................... Bone densitometry analyzers
Philips Medical Systems...... Surgical C-Arms, R&F, radiographic systems,
PAC's, CT, MRI
R2 .......................... Mammography ImageCheckerTM
Siemens...................... Ultrasound equipment
Sonosite .................... Hand-held ultrasound equipment
Trex Medical Corporation..... Mammography, cardiac cath labs, radiographic and
R&F systems
Ultraguide................... Ultrasound biopsy guidance systems
Vendor relationships are an integral part of the Company's businesses. Marketing
and sales support, performance incentives, product literature, samples,
demonstration units, training, marketing intelligence, distributor discounts and
rebates, and new products are strategic to the Company's future success.
In the Imaging Business, prices of consumable imaging products, primarily films
and film related products, are influenced significantly by three manufacturers
through distributor discounts and rebates. These distributor/manufacturer
relationships affect the profitability of the Company's Imaging Business.
Additionally, the development of new technology may change the manner in which
diagnostic imaging services are provided. In the event of such technological
changes, the Company's ability to obtain distribution agreements or develop
vendor relationships to distribute such new technology will impact the Company's
operations.
COMPETITION
The Company operates in a highly competitive environment. The Company's
principal competitors are the few multimarket medical distributors that are
full-line, full-service medical supply companies, most of which are national in
scope and manufacturers that sell their products both to distributors and/or
directly to users, including office-based physicians and hospitals. The national
multi-market medical distributors and manufacturers have sales representatives
competing directly with PSS, are substantially larger in size, and have
substantially greater financial resources than the Company. There are also
numerous local dealers and mail order firms that distribute medical supplies and
equipment within the same market as the Company. Most local dealers are
privately owned and operate with limited product lines. There are several mail
order firms that distribute medical supplies on a national or regional basis.
12
REGULATORY MATTERS
General
Federal, state, and local governments extensively regulate the provision of
medical devices and over-the-counter pharmaceutical products, as well as the
distribution of prescription pharmaceutical products. Applicable Federal and
state statutes and regulations require the Company to meet various standards
relating, among other things, to licensure, personnel, maintenance of proper
records, equipment and quality assurance programs.
The Company believes it substantially complies with applicable Federal and state
laws. However, if a state or the Federal government finds that the Company has
not complied with these laws, then the Company could be required to change its
way of operating, and this could have a negative impact on the Company. The
Company believes that the health care services industry will continue to be
subject to extensive regulation at the Federal, state, and local levels. The
Company cannot predict the scope and effect of future regulation and enforcement
on its business and cannot predict whether health care reform will require the
Company to change its operations or whether such reform will have a negative
impact on the Company.
The Food, Drug and Cosmetic Act, Prescription Drug Marketing Act and Controlled
Substances Act
The Company's business is subject to regulation under the federal Food, Drug,
and Cosmetic Act, the Prescription Drug Marketing Act of 1987, the Controlled
Substances Act, and state laws applicable to the distribution and manufacture of
medical devices and over-the-counter pharmaceutical products, as well as the
distribution of prescription pharmaceutical products. In addition, the Company
is subject to regulations issued by the Food and Drug Administration, the Drug
Enforcement Administration and comparable state agencies relating to these
areas.
The federal Food, Drug, and Cosmetic Act generally regulates the manufacture of
drug and medical devices shipped in interstate commerce, including such matters
as labeling, packaging, storage and handling of such products. The Prescription
Drug Marketing Act of 1987, which amended the federal Food, Drug and Cosmetic
Act, establishes certain requirements applicable to the wholesale distribution
of prescription drugs, including the requirement that wholesale drug
distributors be registered with the Secretary of Health and Human Services or be
licensed in each state in which they conduct business in accordance with
federally established guidelines on storage, handling, and records maintenance.
Under the Controlled Substances Act, the Company, as a distributor of controlled
substances, is required to obtain annually a registration from the United States
Attorney General in accordance with specified rules and regulations and is
subject to inspection by the Drug Enforcement Administration acting on behalf of
the United States Attorney General. The Company is required to maintain licenses
and permits for the distribution of pharmaceutical products and medical devices
under the laws of the states in which it operates.
The Anti-Kickback Statute
Under Medicare, Medicaid, and other government-funded health care programs such
as the CHAMPUS program, Federal and state governments enforce a Federal law
called the Anti-Kickback Statute. The Anti-Kickback Statute prohibits any person
from offering or paying any type of benefit to another person in exchange for
the referral of items or services covered by Medicare, Medicaid or other
federally-subsidized program. Remuneration prohibited by the Anti-Kickback
Statute includes the payment or transfer of anything of value. Many states also
have similar anti-kickback statutes.
The Anti-Kickback Statute is a broad law, and courts have not been consistent in
their interpretations of it. Courts have stated that, under certain
circumstances, the Anti-Kickback Statute is violated when just one purpose, as
opposed to the primary purpose, of a payment is to induce referrals. To clarify
what acts or arrangements will not be subject to prosecution by the Department
of Justice, the Department of Health and Human Services ("DHHS") adopted a set
of safe harbor regulations and has proposed additional safe harbor regulations.
DHHS continues to publish clarifications to these safe harbors. If an
arrangement does not meet all of the requirements of a safe harbor, it does not
mean that the arrangement is necessarily illegal or will be prosecuted under the
Anti-Kickback Statute.
13
An arrangement must meet a number of specific requirements in order to enjoy the
benefits of the applicable safe harbor. Meeting the requirements of a safe
harbor will protect an arrangement from enforcement action by the government.
The Company seeks to satisfy as many safe harbor requirements as possible when
it is structuring its business arrangements. The types of arrangements covered
by safe harbors that are not subject to enforcement actions by the government
include, but are not limited to, certain investments in companies whose stock is
traded on a national exchange, certain small company investments in which
physician ownership is limited, rental of space, rental of equipment, personal
services contracts, management contracts, sales of physician practices,
physician referral services, warranties, discounts, payments to employees, and
group purchasing organizations. Despite the Company's efforts to meet safe
harbor requirements whenever possible and otherwise comply with the
Anti-Kickback Statute, a government agency might take a position contrary to the
interpretations made by the Company or may require the Company to change its
practices. If an agency were to take such a position, it could adversely affect
the Company.
The Health Insurance Portability and Accountability Act of 1996
In an effort to combat health care fraud, Congress included several anti-fraud
measures in the Health Insurance Portability and Accountability Act of 1996,
also called HIPAA. Among other things, HIPAA broadened the scope of certain
fraud and abuse laws, extended criminal penalties for Medicare and Medicaid
fraud to other Federal health care programs, and expanded the authority of the
Office of Inspector General to exclude persons and entities from participating
in the Medicare and Medicaid programs. HIPAA also extended the Medicare and
Medicaid civil monetary penalty provisions to other Federal health care
programs, increased the amounts of civil monetary penalties, and established a
criminal health care fraud statute.
Federal health care offenses under HIPAA include health care fraud and making
false statements relating to health care matters. Under HIPAA, among other
things, any person or entity that knowingly and willfully defrauds or attempts
to defraud a health care benefit program is subject to a fine, imprisonment, or
both. Also under HIPAA, any person or entity which knowingly and willfully
falsifies, conceals or covers up a material fact or makes any materially false
or fraudulent statements in connection with the delivery of or payment for
health care services by a health care benefit plan is subject to a fine,
imprisonment, or both.
The Company seeks to satisfy HIPAA when it is structuring its business
arrangements. However, a government agency might take a position contrary to the
interpretations made by the Company or may require the Company to change its
practices. If an agency were to take such a position, it could adversely affect
the Company.
Other Laws
The Company is also subject to regulation in the European countries where its
International Business markets its products. Many of the laws and regulations
applicable in such countries are similar to those described above. The national
health or social security organizations of certain countries require the
products distributed by the Company to be qualified before they can be marketed
in those countries.
Health Care Legislation
Federal, state and foreign laws and regulations regarding the sale and
distribution of medical supplies, equipment and devices by the Company are
subject to change. The Company cannot predict what impact, if any, such changes
might have on its business. Any new legislation or regulations, or new
interpretations of existing statutes and regulations, governing the manner in
which the Company provides services could have a material impact on the Company
and could adversely affect its profitability. In addition, the Company's
physician and other health care customers are subject to significant federal and
state regulation. There can be no assurance that regulations that impact their
practices will not have a material adverse impact on the Company's business.
14
Item 2. Properties
At March 31, 2000, the Company maintained 101 service centers providing service
to 50 states throughout the United States, as well as Belgium, France, Germany
and Luxembourg. All locations are leased by the Company with the exception of
the Imaging Business service center located in Syracuse, New York, and
the International Business service center located in Leuven, Belgium. The
following table identifies the locations of the Company's service centers and
the areas that they serve.
PHYSICIAN SUPPLY BUSINESS
Service Center Location States Serviced Service Center Location States Serviced
----------------------- --------------- ----------------------- ---------------
Albany, NY CT, NY, VT Memphis, TN AR, MS, TN
Atlanta, GA AL, GA Minneapolis, MN IA, MN, MT, ND, SD, WI
Baltimore, MD MD, PA, VA, WV New Orleans, LA AL, FL, LA, MS, TX
Birmingham, AL AL, MS Norfolk, VA NC, VA, WV
Charlotte, NC NC, SC, TN, VA Omaha, NE CO, IA, NE, WY
Chattanooga, TN AL, GA, TN Orlando, FL FL
Chicago, IL IL, IN, WI Philadelphia, PA DE, NJ, NY, PA
Cincinnati, OH IN, KY, OH, WV, IL Phoenix, AZ AZ, NU, UT
Cleveland, OH OH, MI Pittsburgh, PA MD, NY, OH, PA, WV
Columbia, SC GA, SC Portland, OR CA, OR, WA
Dallas, TX OK, TX Raleigh, NC NC, VA
Deerfield Beach, FL FL Richmond, VA VA
Denver, CO CO, NM, WY Roanoke, VA TN, VA
Honolulu, HI MI Rochester, NY NY
Houston, TX HI Salt Lake City, UT CO, ID, MT, NV, UT
Jackson, MS OK, TX San Antonio, TX TX
Jacksonville, FL LA, MS San Diego, CA CA
Kansas City, KS FL, GA, SC San Francisco, CA CA
Knoxville, TN IA, IL, KS, MO Seattle, WA AK, WA
Lafayette, LA KY, NC, TN St. Louis, MO IL, MO
Little Rock, AR LA St. Petersburg, FL FL
Long Island, NY AR, TX Tallahassee, FL AL, FL, GA
Los Angeles, CA (North) MA, NJ, NY Tulsa, OK AK, MO, OK
Los Angeles, CA (South) CA Union, NJ NJ, NY
Louisville, KY IN, KY Wareham, MA CT, MA, ME, NH, RI
Lubbock, TX TX, CO, NM
IMAGING BUSINESS
Service Center Location States Serviced Service Center Location States Serviced
- ----------------------- --------------- ----------------------- ---------------
Albany, NY CT, MA, NJ, NY, VT, Lynnwood, WA AK, ID, MT, OR, WA
Albuquerque, NM AZ, CO, NM, TX Machesney Park, IL IA, IL, WI
Atlanta, GA GA, SC Memphis, TN AR, MS, TN
Apopka, FL AL, FL, GA, NC, SC, VA Miro Loma, CA AZ, CA, NV
Birmingham, AL AL, FL, MS New Orleans, LA AL, FL, LA, MS, TN
Charlotte, NC NC, SC Phoenix, AZ (2) AZ
Clinton Township, MI MI, OH Pompano Beach, FL FL
Columbia, SC SC, NC Raleigh, NC NC
Dallas, TX AR, LA, OK, TX Roanoke, VA NC, TN, VA, WV
Del City, OK KS, OK Rochester, NY OH, NY, PA
Delran, NJ MD, NJ, NY, PA, VA, Salt Lake City, UT ID, NV, UT, WY
Fresno, CA CA San Antonio, TX TX
Houston, TX TX San Leandro, CA CA, NV, OR, WA
Indianapolis, IN IN, KY Schofield, WI IA, MI, MN, WI
Jacksonville, FL FL, GA St. Louis, MO IL, KY, MO
Knoxville, TN GA, KY, TN Syracuse, NY NY, PA
Las Vegas, NV NV, UT Tampa, FL FL
15
LONG-TERM CARE BUSINESS
Service Center Location States Serviced Service Center Location States Serviced
- ----------------------- --------------- ----------------------- ---------------
Atlanta, GA AL, GA, SC, TN Madison, WI IA, MD, MN, NE, WI
Columbus, OH IN, OH, PA, WV Manchester, NH ME, NH, RI
Dallas, TX KS, LA, NM, OK, TX Orlando, FL FL, GA
Denver, CO CO, WY Omaha, NE IA, KS, MO, NE, ND, SD
Harrisburg, PA NJ, NY, OH, PA, VA, WV Raleigh, NC NC, SC, VA, WV
Jackson, MS AL, LA, MS, TN Sacramento, CA CA, OR, WA
Los Angeles, CA CA, NV San Antonio, TX LA, NM, TX
INTERNATIONAL BUSINESS
Service Center Location Country Serviced Service Center Location Country Serviced
- ----------------------- --------------- ----------------------- ---------------
Leuven, Belgium Belgium, France, Dusseldorf, Germany Germany
Germany, Luxembourg
In the aggregate, the Company's service centers consist of approximately 2.8
million square feet, of which all is leased, with the exception of the locations
in Syracuse, New York, and Leuven, Belgium, under lease agreements with
expiration dates ranging from April 30, 2000 to November 15, 2009. The
Company's service centers range in size from approximately 500 square feet to
91,000 square feet.
The corporate offices of PSS consist of approximately 85,000 square feet of
leased office space located at 4345 Southpoint Boulevard, Jacksonville, Florida
32216. The lease for this space expires in March 2007.
At March 31, 2000, the Company's facilities provided adequate space for the
Company's operations. Throughout the Company's history of growth, the Company
has been able to secure the required facilities.
16
Item 3. 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, Jacksonville Division. An amended complaint
was filed on December 11, 1998. The plaintiff alleges, for himself and for a
purported class of similarly situated stockholders who allegedly purchased the
Company's stock between December 23, 1997 and May 8, 1998, that the defendants
engaged in violations of certain provisions of the Exchange Act, and Rule 10b-5
promulgated thereunder. The allegations are based upon a decline in the PSS
stock price following announcement by PSS in May 1998 regarding the Gulf South
Merger which resulted in earnings below analyst's expectations. The plaintiff
seeks indeterminate damages, including costs and expenses. PSS believes that the
allegations contained in the complaint are without merit and intends to defend
vigorously against the claims. However, the lawsuit is in the earliest stages,
and there can be no assurance that this litigation will be ultimately resolved
on terms that are favorable to PSS.
Although PSS does not manufacture products, the distribution of medical supplies
and equipment entails inherent risks of product liability. PSS is a party to
various legal and administrative legal proceedings and claims arising in the
normal course of business. However, PSS has not experienced any significant
product liability claims and maintains product liability insurance coverage.
While any litigation contains an element of uncertainty, management believes
that, other than as discussed above, the outcome of any proceedings or claims
which are pending or known to be threatened will not have a material adverse
effect on the Company's consolidated financial position, liquidity, or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
17
PART II
Item 5. Market for the Registrant's Common Shares and Related Shareholder
Matters
Shares of PSS World Medical, Inc.'s Common Stock are quoted on the NASDAQ
National Market under the ticker symbol "PSSI." The following table reflects the
range of the NASDAQ reported high and low closing sale prices of the Company's
Common Stock during the periods indicated:
Quarter Ended High Low
- ---------------------------------------------- ------- -------
April 3, 1998................................. 26.00 18.31
June 30, 1998................................. 24.13 12.06
September 30,1998............................. 20.50 14.13
December 31, 1998............................. 23.25 15.63
April 2, 1999................................. 23.00 8.81
July 2, 1999.................................. 12.75 8.78
October 3, 1999............................... 11.94 8.41
December 31, 1999............................. 11.38 6.53
March 31, 2000................................ 10.88 6.22
As of March 31, 2000, there were 1,700 holders of record and approximately
17,000 beneficial holders of the Company's Common Stock.
Since inception, the Company has neither declared nor paid cash dividends on the
Common Stock. The Company expects that earnings will be retained for the growth
and development of the Company's business. Accordingly, the Company does not
anticipate that any dividends will be declared on the Common Stock for the
foreseeable future.
18
Item 6. Selected Financial Data
The following selected financial data of the Company for fiscal years 1996
through 2000 have been derived from the Company's consolidated financial
statements, which give retroactive effect to the mergers accounted for as
pooling of interests. The fiscal 1998 and 1997 consolidated financial statements
combine the December 31, 1997 and December 31, 1996 financial statements of Gulf
South with the April 3, 1998 and March 28, 1997 financial statements of PSS,
respectively. Effective April 4, 1998, Gulf South's fiscal year-end was changed
to conform to the Company's year-end. As such, Gulf South's results of
operations for the period January 1, 1998 to April 3, 1998 are not included in
any of the periods presented in the accompanying consolidated statements of
income. Accordingly, Gulf South's results of operations for the three months
ended April 3, 1998 are reflected as an adjustment to shareholders' equity of
the Company as of April 4, 1998. The Company's fiscal 1999 consolidated
financial statements include the combined results of operations for the period
from April 4, 1998 to April 2, 1999, of both PSS and Gulf South.
Fiscal Year Ended
---------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ---------- ---------- ----------- -----------
(Dollars in Thousands, Except Per Share Data)
Income Statement Data:
Net sales $ 719,214 $1,166,286 $1,381,786 $1,564,505 $1,793,536
Gross profit 194,711 286,183 365,768 421,908 472,354
Selling and G&A expenses 159,578 269,136 333,689 348,055 427,645
Income before cumulative effect of
accounting change
10,706 13,259 15,299 43,741 22,184
Cumulative effect of accounting
change -- -- -- -- (1,444)
Net income 10,706 13,259 15,299 43,741 20,740
Basic earnings per share:
Income before accounting change $0.19 $0.20 $0.22 $0.62 $0.31
Net income $0.19 $0.20 $0.22 $0.62 $0.29
Diluted earnings per share:
Income before accounting change $0.19 $0.20 $0.22 $0.61 $0.31
Net income $0.19 $0.20 $0.22 $0.61 $0.29
Weighted average shares outstanding
Basic 55,813 66,207 69,575 70,548 70,966
Diluted 57,360 66,957 70,545 71,398 71,185
Balance Sheet Data:
Working capital $ 211,835 $ 267,754 $ 376,239 $ 355,277 $ 414,071
Total assets 351,553 510,376 686,737 743,381 873,417
Long-term liabilities 10,622 8,459 138,178 155,553 262,152
Total equity 242,091 350,397 380,060 416,560 439,627
19
------------------------------------------
Fiscal Year Ended
------------------------------------------
1998 1999 2000
------------- ------------ -----------
(Dollars in thousands, except per share data)
Other Financial Data:
Income before provision for income taxes and cumulative effect
of accounting change $ 32,660 $ 73,681 $ 41,527
Plus: Interest Expense 7,517 11,522 15,457
------------- ------------ -----------
EBIT (a) 40,177 85,203 56,984
------------- ------------ -----------
Plus: Depreciation and amortization 10,691 19,498 20,288
------------- ------------ -----------
EBITDA (b) 50,868 104,701 77,272
Unusual Charges Included in Continuing Operations (h) 32,007 10,303 7,741
Cash Paid For Unusual Charges Included in Continuing Operations (24,476) (29,134) (20,414)
------------- ------------ -----------
Adjusted EBITDA (c) 58,399 85,870 64,599
EBITDA Coverage (d) 6.8x 9.1x 5.0x
EBITDA Margin (e) 3.7% 6.7% 4.3%
Adjusted EBITDA Coverage (f) 7.8x 7.5x 4.2x
Adjusted EBITDA Margin (g) 4.2% 5.4% 3.6%
Cash provided by (used in) operating activities $ 27,936 $ (18,704) $ 16,971
Cash used in investing activities (47,969) (28,914) (94,322)
Cash provided by financing activities 64,006 7,590 96,659
(a) EBIT represents income before income taxes plus interest expense.
(b) EBITDA represents EBIT plus depreciation and amortization. EBITDA is not a
measure of performance or financial condition under generally accepted
accounting principles ("GAAP"). EBITDA is not intended to represent cash
flow from operations and should not be considered as an alternative measure
to income from operations or net income computed in accordance with GAAP,
as an indicator of the Company's operating performance, as an alternative
to cash flow from operating activities, or as a measure of liquidity. In
addition, EBITDA does not provide information regarding cash flows from
investing and financing activities which are integral to assessing the
effects on the Company's financial position and liquidity as well as
understanding the Company's historical growth. The Company believes that
EBITDA is a standard measure of liquidity commonly reported and widely used
by analysts, investors, and other interested parties in the financial
markets. However, not all companies calculate EBITDA using the same method
and the EBITDA numbers set forth above may not be comparable to EBITDA
reported by other companies.
(c) Adjusted EBITDA represents EBITDA plus unusual charges included in
continuing operations less cash paid for unusual charges included in
continuing operations.
(d) EBITDA coverage represents the ratio of EBITDA to interest expense.
(e) EBITDA margin represents the ratio of EBITDA to net sales.
(f) Adjusted EBITDA coverage represents the ratio of Adjusted EBITDA to
interest expense.
(g) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to net sales.
(h) Unusual charges included in continuing operations primarily represent
charges outlined in Note 4 to the accompanying consolidated financial
statements. Fiscal 1999 excludes $5,379 of information systems accelerated
depreciation. Fiscal 2000 is offset by $6,500 of class action lawsuit
settlement income.
20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the consolidated financial condition
and consolidated results of operations of PSS should be read in conjunction with
the more detailed information contained in the Consolidated Financial Statements
and Notes thereto included elsewhere in this Form 10-K.
All dollar amounts presented below are in thousands, except per share data.
COMPANY GROWTH
The Company has grown rapidly in recent years through mergers and acquisitions,
same-center growth and new-center development. The number of company service
centers has grown from two at the end of fiscal year 1984 to 101 as of March 31,
2000, including 51 Physician Supply Business service centers, 34 Imaging
Business service centers, 14 Long-Term Care Business Service centers and 2
International Business service centers. In order of priority, the Company's
growth has been accomplished primarily through: (i) acquiring local and regional
Imaging Business medical products distributors; (ii) acquiring local and
regional Physician Supply Business medical-products distributors; (iii)
acquiring Gulf South Medical Supply, Inc. thereby forming the basis of the
Company's Long-Term Care Business; (iv) increasing sales from existing service
centers; and (v) increasing sales of diagnostic equipment.
The following table depicts the number of service centers, sales and service
representatives and states served by the Company for the fiscal years indicated.
See Item 2.--Properties for a list of the Company's service centers.
Fiscal Year Ended (2)
-------------------------------------------
1996 1997 1998 1999 2000
Total Company: ------ ------ ------ ------- ------
Sales representatives...... 813 924 957 1,118 1,122
Service Specialists........ 112 223 390 727 900
Service centers............ 90 103 111 110 101
States served.............. 50 50 50 50 50
Physician Supply Business:
Sales representatives...... 692 720 703 731 735
Service centers............ 64 61 61 56 51
States served.............. 50 50 50 50 50
Imaging Business (1):
Sales representatives...... 30 73 116 194 230
Service specialists........ 112 223 390 727 900
Service centers............ 8 21 25 37 34
States served.............. 9 16 27 41 42
Long-Term Care Business:
Sales representatives...... 91 107 110 170 131
Service centers............ 18 19 22 14 14
States served.............. 50 50 50 50 50
International Business:
Sales representatives...... -- 24 28 23 26
Service centers............ -- 2 3 3 2
Countries served........... -- 5 5 5 4
(1) All Imaging Business data for periods prior to November 1996 reflect
pre-merger financial data of companies acquired through pooling-of-
interests transactions.
(2) Excludes pre-acquisition data of companies acquired by PSS World Medical,
Inc. unless otherwise noted.
21
ACQUISITION PROGRAM
The Company views the acquisition of medical product distributors as an
integral part of its growth strategy. The Physician Supply Business has grown
from one service center located in Jacksonville, Florida, in 1983 to 51 at the
end of fiscal 2000. The Imaging Business and International Business began with
acquisitions in fiscal year 1997 and have grown primarily through acquisitions
to 34 and two service centers, respectively, to date. The Long-Term Care
Business was developed through the acquisition of Gulf South Medical Supply,
Inc. in March 1998 and has acquired four long-term care companies during fiscal
years 1999 and 2000. Since fiscal 1995 the Company has accelerated its
acquisition of medical products distributors both in number and in size of the
operations acquired.
The following table sets forth the number of acquisitions of the Company and the
prior revenues of the companies acquired for the periods indicated (in
thousands):
Fiscal Year Ended (1)
---------------------------------------------------------------
1996 1997 1998 1999 2000
-------- ---------- ---------- ---------- ----------
Number of acquisitions..................... 11 10 15 27 24
Prior year revenues for acquired companies (2) $ 167,600 $ 241,700 $ 498,942 $ 294,428 $ 173,664
(1) Excludes pre-acquisition data of companies acquired by PSS World Medical,
Inc.
(2) Reflects 12-month trailing revenues for companies prior to their
acquisition by PSS World Medical, Inc. and is not necessarily reflective of
actual revenues under continued operations following an acquisition.
OPERATING HIGHLIGHTS
The following tables set forth information regarding the Company's net sales by
business and other operating trends for the periods indicated (in millions):
Fiscal Year Ended
--------------------------------------
1998 1999 2000
--------- --------- ---------
Net Sales
Physician Supply Business...... $ 662.5 $ 677.4 $ 705.8
Imaging Business............... 409.7 524.8 700.8
Long-Term Care Business........ 287.6 342.4 362.5
International Business......... 22.0 19.9 24.4
Total Company......... $1,381.8 $1,564.5 $1,793.5
Fiscal Year Ended
--------------------------------------
1998 1999 2000
--------- --------- ---------
Percentage of Net Sales
Physician Supply Business...... 48.0% 43.3% 39.4%
Imaging Business............... 29.7 33.5 39.1
Long-Term Care Business........ 20.8 21.9 20.2
International Business......... 1.5 1.3 1.3
Total Company......... 100.0% 100.0% 100.0%
Fiscal Year Ended
--------------------------------------
1998 1999 2000
--------- --------- ---------
Gross Profit Trends
Total Company 26.5% 27.0% 26.3%
22
Fiscal Year Ended
--------------------------------------
1998 1999 2000
--------- --------- ---------
Income From Operations
Physician Supply Business...... $ 16.9 $ 42.7 $ 32.7
Imaging Business............... 6.5 16.3 20.3
Long-Term Care Business........ 14.0 17.2 (5.0)
International Business......... (5.3) (2.3) (3.3)
Total Company......... $ 32.1 $ 73.9 $ 44.7
Fiscal Year Ended
-------------------
1999 2000
------ ------
Operating Trends:
Average Days Sales Outstanding. 55.2 55.8
Average Inventory Turnover..... 8.2x 8.0x
Accounts receivable, net of allowances, were $284.4 million and $271.8 million
at March 31, 2000 and April 2, 1999, respectively. Inventories were $178.0
million and $153.6 million and as of March 31, 2000 and April 2, 1999,
respectively.
The following table sets forth certain liquidity trends of the Company for the
periods presented (in millions):
Fiscal Year Ended
-------------------
1999 2000
------ ------
Liquidity Trends:
Cash and Investments.......... $ 41.1 $ 60.4
Working Capital............... 355.3 414.1
RESULTS OF OPERATIONS
Fiscal 2000 was a challenging year for the Healthcare industry and specifically
the Company. In addition, the fourth quarter was significantly difficult for
several reasons. First, the Balanced Budget Act of 1996 and the implementation
of its Prospective Payment System ("PPS") financially impacted many segments of
Healthcare, including many, if not all, of the customers, distributors and
manufacturers in the Long Term Care industry.
The Company's Long-Term Care division distributes to approximately 10,000
customers representing approximately 1.0 million Long Term Care beds, of which a
dozen customers representing approximately 1,600 homes and 190,000 Long-Term
Care beds, or approximately 19%, filed for Chapter 11 or 7 bankruptcy protection
in fiscal 2000. Several of the Long-Term Care division's largest customers
resolved or disclosed their plans for unsecured creditors, including the
Company, in the fourth quarter ending March 31, 2000. As a result, in the fourth
quarter, the Long-Term Care division recorded $8.0 million of specific customer
receivable reserves and $1.5 million in general customer receivable reserves. In
addition, the Imaging Business recorded $2.6 million of specific customer
receivable reserves related to branch shutdowns where there was a
discontinuation of the business relationships and related to computer
integration where there was a loss of records.
In addition, during the third quarter, the Company's Long-Term Care Business
customer receivables increased approximately $17.0 million due to its
restructuring plan and the move of the collection efforts from Jackson, MS to
Jacksonville, FL. In the fourth quarter, the Company estimated it incurred $600
of incremental interest expense and $500 of incremental labor and collection
costs to restore collection effectiveness in Jacksonville, FL to the previous
customer receivable levels. In addition, in response to the above referenced
credit difficulties the Company placed approximately 3,800 Long-Term Care
customers on credit hold, which is estimated to have reduced fourth quarter
revenue by approximately $5.2 million and operating profit by approximately
$1.0 million. The Company has subsequently been able to remove approximately
1,000 customers from credit hold due to customer payments.
23
Second, the Company's two most significant suppliers had manufacturing product
recalls and production issues which materially disrupted availability of
products to the Company's Physician and Imaging divisions.
The Physician division supplier, which represents approximately 17% of its
revenues, had both an F.D.A. negotiated recall and a specific product line
supplier recall. The Company estimates the impact to its fourth quarter was as
follows:
Pre-tax
Operating
Revenues Profit
---------- ----------
Estimated loss from recall of products $ 11,378 $ 2,457
Estimate of equipment and medical supply loss due to the sales force
and product specialists removed from their normal sales function to
support the recall, replacement and transition function 6,522 1,583
Estimate of lost leasing fees,vendor incentives, rebates and other costs -- 2,641
Inventory reserve recorded for recalled reagents -- 1,000
---------- ----------
$ 17,900 $ 7,681
========== ==========
The Imaging division supplier which represents approximately 10% of its revenues
had a manufacturing production related disruption that created a material back
order of equipment and parts. The Company estimates that the impact on its
fourth quarter of fiscal 2000 was as follows for the Imaging division:
Pre-tax
Operating
Revenues Profit
---------- ----------
Estimated lost orders from unavailable equipment supply $ 10,000 $ 1,800
Estimated lost orders from parts supply and related service labor 800 700
---------- ----------
$ 10,800 $ 2,500
========== ==========
Third, due to the poor stock performance of the Company and issues described
above, the Company announced that it had hired Donaldson, Lufkin & Jenrette
(DLJ) to assist the Company in evaluating various strategic alternatives. This
announcement caused a significant distraction for the employees of the Company,
of which the impact in the fourth quarter on revenues and operating profit
cannot be sufficiently estimated by the Company. In addition, the Company had
several items totaling $3.1 million which came to the attention of the Company
in the fourth quarter which are a result of Y2K inventory buildup, branch
shutdowns and reserves which the Company believes are not part of ongoing
operations.
The Company also had unusual charges included in continuing operations for
merger activity, restructuring activity and other special items (see Note 4,
Changes Included in General and Administrative Expenses) in fiscal 2000 of
$14,241 and in the fourth quarter of $5,915.
The table below sets forth for each of the fiscal years 1998 through 2000
certain financial information as a percentage of net sales. The following
financial information includes the pre-acquisition financial information of
companies acquired as poolings of interests. The fiscal 1998 consolidated
financial statements combine the December 31, 1997 financial statements of Gulf
South with the April 3, 1998 financial statements of PSS, respectively.
Effective April 4, 1998, Gulf South's fiscal year-end was changed to conform to
the Company's year-end. As such, Gulf South's results of operations for the
period January 1, 1998 to April 3, 1998 are not included in any of the periods
presented in the accompanying consolidated statements of income. Accordingly,
Gulf South's results of operations for the three months ended April 3, 1998 are
reflected as an adjustment to shareholders' equity of the Company as of April 4,
1998. The Company's fiscal 1999 and 2000 consolidated financial statements
include the combined results of operations for the periods from April 4, 1998 to
April 2, 1999, and April 3, 1999 to March 31, 2000 of both PSS and Gulf South.
Refer to Note 3, Gulf South's Results of Operations for the Three Months Ended
April 3, 1998, in the accompanying consolidated financial statements for the
results of Gulf South for the three months ended April 3, 1998.
24
Fiscal Year Ended
------------------------------
1998 1999 2000
------- ------- ------
Income Statement Data
Net sales............................ 100.0% 100.0% 100%
Gross profit......................... 26.5 27.0 26.3
General and administrative expenses.. 17.0 14.6 15.5
Selling expenses..................... 7.1 7.6 8.4
Operating income..................... 2.3 4.7 2.5
Net income ......................... 1.1 2.8 1.2
FISCAL YEAR ENDED MARCH 31, 2000 VERSUS FISCAL YEAR ENDED APRIL 2, 1999
Net Sales. Net sales for fiscal year 2000 totaled $1.79 billion, an increase of
$229.0 million, or 14.6%, over the fiscal year 1999 total of $1.56 billion. The
increase in sales can be attributed to (i) net sales from the acquisition of
companies during fiscal year 1999 and 2000 accounted for as purchases; (ii)
internal sales growth of centers operating at least two years; (iii) the
Company's focus on diagnostic equipment sales; (iv) incremental sales generated
in connection with exclusive and semi-exclusive vendor relationships; but (v)
offset by sales lost from manufacturer recalls and supply issues.
Gross Profit. Gross profit for fiscal year 2000 totaled $472.3 million, an
increase of $50.4 million, or 12.0%, over the fiscal year 1999 total of $421.9
million. The increase in gross profit dollars is primarily attributable to the
sales growth described above. Gross profit as a percentage of net sales was
26.3% and 27.0% for fiscal years 2000 and 1999, respectively. Although there has
been considerable gross margin pressure from competition and a consolidating
customer base, as well as internal pressure from an increase of Imaging Business
revenues at a lower margin, the Company has successfully maintained its overall
gross margins. The slight decrease in gross margin as a percentage of sales is
attributable to (i) an increase in the sales mix of higher margin diagnostic
equipment and service; (ii) an increase in sales of higher margin private label
supplies by all division; and (iii) the ability to negotiate lower product
purchasing costs which resulted from increased purchasing volume subsequent to
the Gulf South acquisition; (iv) offset by the expansion of imaging revenues
with lower gross profit margins and loss of higher margin equipment in the
fourth quarter due to product recall and supply issues.
During fiscal 2000, the Company experienced continued margin pressures in the
Long-Term Care Business as a result of its large chain customers renegotiating
prices due to the implementation of PPS. The Company expects this trend to
continue in the Long-Term Care Business.
General and Administrative Expenses. General and administrative expenses for
fiscal year 2000 totaled $277.6 million, an increase of $49.0 million, or 21.4%,
from the fiscal year 1999 total of $228.6 million. General and administrative
expenses as a percentage of net sales, increased to 15.5% for fiscal year 2000
from 14.6% for fiscal year 1999. The increase in general and administrative
expenses as a percentage of net sales was a result of (i) write-offs, reserves
and costs associated with long-term care customer receivables, (ii) loss of
revenues from manufacturer recalls and supply issues without loss of costs
associated with servicing those products, (iii) integration of systems and
branch shutdowns in the Imaging division (iv) incremental costs associated with
product recalls, replacement, transition and training of new product replacing
old products without revenues for replacement products, or new products, and
(v)costs and lack of focus associated with the Company's strategic alternatives
process.
In addition to typical general and administrative expenses, this line includes
charges related to merger activity, restructuring activity, and other special
items. See Note 4, Charges Included in General and Administrative Expenses,
to the consolidated financial statements for additional discussion.
Selling Expenses. Selling expenses for fiscal year 2000 totaled $150.1 million,
an increase of $30.7 million, or 25.7%, over the fiscal year 1999 total of
$119.4 million. Selling expense as a percentage of net sales was approximately
8.4% and 7.6% for fiscal years 2000 and 1999, respectively. The increase in
selling expense as a percentage of net sales increased as a result of (i)
incremental commissions incurred on product recalls, replacement and transition
without recognition of revenue, (ii) replacement of lost Long-Term Care chain
business without commission costs by new regional accounts revenue that are
commissioned, (iii) salaries of equipment representatives not leveraged with
sales due to supply issues, and (iv) lack of focus and performance associated
with the strategic alternative process.
25
Operating Income. Operating income for fiscal year 2000 totaled $44.7 million, a
decrease of $29.2 million, or 39.5%, over the fiscal year 1999 total of $73.9
million. As a percentage of net sales, operating income for fiscal year 2000
decreased to 2.5% from 4.7% for fiscal year 1999 as a result of the factors
discussed above.
Interest Expense. Interest expense for fiscal year 2000 totaled $15.5 million,
an increase of $4.0 million, or 34.8%, over the fiscal year 1999 total of $11.5
million. The increase in interest expense in fiscal 2000 over fiscal 1999 was
due to (i) borrowings used in connection with acquisitions during fiscal 2000,
(ii) inventory build up associated with product recalls and Y2K inventory
overstock, (iii) cash used in connection with capital expenditures of which most
was invested in new systems and e-commerce and (iv) increase in Long-Term Care
Business customer receivables due to its restructuring of the collection efforts
from Jackson, Mississippi to Jacksonville, Florida.
Interest and Investment Income. Interest and investment income for fiscal 2000
totaled $1.8 million, a decrease of $2.9 million, or 61.7%, over the fiscal year
1999 total of $4.7 million. The decrease primarily resulted from lower levels of
invested capital due to the use of cash and investments to fund capital
expenditures and business acquisitions during fiscal 2000.
Other Income. Other income for fiscal 2000 totaled $10.4 million, an increase of
$3.8 million, or 57.6%, over the fiscal year 1999 total of $6.6 million. Other
income consists of finance charges on customer accounts. Other income for fiscal
year 2000 includes $6.5 million received related to a favorable medical x-ray
film antitrust settlement claim.
Provision for Income Taxes. Provision for income taxes for fiscal year 2000
totaled $19.3 million, a decrease of $10.6 million, or 35.5 %, over the fiscal
year 1999 total of $29.9 million. This decrease primarily resulted from the
decrease in taxable income due to the factors discussed above. The effective
income tax rate was 46.6% in fiscal year 2000 versus 40.6% in fiscal 1999. The
effective tax rate is generally higher than the Company's statutory rate due
to the nondeductible nature of certain merger related costs and the impact
of the Company's foreign subsidiary, both of which were higher in 2000 than
1999. In addition, the reduction of taxable income in 2000 resulted in the
permanent items having a greater impact on the effective rate than in fiscal
1999.
Net Income. Net income for fiscal year 2000 totaled $20.7 million, a decrease of
$23.0 million, or 52.6%, over the fiscal year 1999 total of $43.7 million. As a
percentage of net sales, net income decreased to 1.2% for fiscal year 2000 from
2.8% for fiscal year 1999 due primarily to the factors described above. In
addition, the Company has changed its method of accounting for equipment sales
and contingent rebate income effective April 3, 1999. As such, during fiscal
2000 the Company recorded the cumulative effect of the change in accounting
principle, which reduced net income for the year ended March 31, 2000 by $1.4
million ($2.4 pre-tax).
FISCAL YEAR ENDED APRIL 2, 1999 VERSUS FISCAL YEAR ENDED APRIL 3, 1998
Net Sales. Net sales for fiscal year 1999 totaled $1.56 billion, an increase of
$182.7 million, or 13.2%, over the fiscal year 1998 total of $1.38 billion. The
increase in sales can be attributed to (i) net sales from the acquisition of
companies during fiscal year 1998 and 1999 accounted for as purchases; (ii)
internal sales growth of centers operating at least two years; (iii) the
Company's focus on diagnostic equipment sales; and (iv) incremental sales
generated in connection with exclusive and semi-exclusive vendor relationships.
Net sales contributed from acquisitions completed in fiscal 1999 totaled
approximately $5.6 million, $74.4 million, and $8.4 million for the Physician
Supply, Imaging, and Long-Term Care Businesses, respectively. In addition,
Physician Supply Business and Imaging Business acquisitions completed during
fiscal 1998 provided approximately $7.0 million and $27.9 million, respectively,
in additional incremental sales to fiscal 1999.
The Company experienced a sequential decline in fourth quarter net sales in its
Long-Term Care Business due to the implementation of the PPS for reimbursement
of Medicare patients in long-term care facilities.
26
Gross Profit. Gross profit for fiscal year 1999 totaled $421.9 million, an
increase of $56.1 million, or 15.3%, over the fiscal year 1998 total of $365.8
million. The increase in gross profit dollars is primarily attributable to the
sales growth described above. Gross profit as a percentage of net sales was
27.0% and 26.5% for fiscal years 1999 and 1998, respectively. Although there has
been considerable gross margin pressure from competition and a consolidating
customer base, as well as internal pressure from an increase of Imaging Business
revenues at a lower margin, the Company has successfully maintained its overall
gross margins. The increase in gross margin as a percentage of sales is
attributable to (i) an increase in the sales mix of higher margin diagnostic
equipment and service, (ii) an increase in sales of higher margin private label
medical supplies by the Physician Supply Business, and (iii) the ability to
negotiate lower product purchasing costs which resulted from increased
purchasing volume subsequent to the Gulf South acquisition. This is offset by
the expansion of imaging revenues with lower gross profit margins. During fiscal
1999, the Company experienced margin pressures in the Long-Term Care Business as
a result of its large chain customers renegotiating prices due to the
implementation of PPS.
General and Administrative Expenses. General and administrative expenses for
fiscal year 1999 totaled $228.6 million, a decrease of $6.5 million, or 2.8%,
from the fiscal year 1998 total of $235.1 million. General and administrative
expenses as a percentage of net sales, decreased to 14.6% for fiscal year 1999
from 17.0% for fiscal year 1998. The decrease in general and administrative
expenses as a percentage of net sales was a result of (i) a decrease in changes
related to merger activity, restructuring activity, and other special items as
discussed in Note 4 of the accompanying financial statements, (ii) the continued
leveraging of fixed costs of mature service center operations, (iii) the
elimination of below average performance centers during fiscal 1999, and (iv)
the increased contribution by the Imaging Business which operates at lower
general and administrative expenses as a percentage of sales.
In addition to typical general and administrative expenses, this line includes
charges related to merger activity, restructuring activity, and other special
items. See Note 4 for a more detailed discussion of such amounts.
Selling Expenses. Selling expenses for fiscal year 1999 totaled $119.4 million,
an increase of $20.8 million, or 21.1%, over the fiscal year 1998 total of $98.6
million. Selling expense as a percentage of net sales was approximately 7.6% and
7.1% for fiscal years 1999 and 1998, respectively. The Company utilizes a
variable commission plan, which pays commissions based on gross profit as a
percentage of net sales. In fiscal 1999, sales commissions as a percent of net
sales increased due (i) to the addition of new sales representatives to increase
or replace existing low performance sales representatives, (ii) acquisition of
sales representatives at the Imaging Business that are in transition to the
Company's commission plan, and (iii) the short-term impact of the Long-Term Care
Business changing of its compensation plan for its sales representatives.
Operating Income. Operating income for fiscal year 1999 totaled $73.9 million,
an increase of $41.8 million, or 130.2%, over the fiscal year 1998 total of
$32.1 million. As a percentage of net sales, operating income for fiscal year
1999 increased to 4.7% from 2.3% for fiscal year 1998. As discussed in the
analysis of general and administrative expenses, 1998 operating results include
higher levels of operating charges related to merger activity, restructuring
costs and expenses, and other unusual items than 1999.
Interest Expense. Interest expense for fiscal year 1999 totaled $11.5 million,
an increase of $4.0 million, or 53.3%, over the fiscal year 1998 total of $7.5
million. The increase in interest expense in fiscal 1999 over the comparable
prior year period primarily reflects interest on the $125.0 million, 8.5% senior
subordinated debt that was outstanding for a full 12 months during fiscal 1999
versus five months outstanding during fiscal 1998.
Interest and Investment Income. Interest and investment income for fiscal 1999
totaled $4.7 million, a decrease of $0.5 million, or 9.6%, over the fiscal year
1998 total of $5.2 million.
Other Income. Other income for fiscal 1999 totaled $6.6 million, an increase of
$3.8 million, or 135.7%, over the fiscal year 1998 total of $2.8 million. Other
income consists of finance charges on customer accounts and financing
performance incentives. Other income for fiscal year 1999 includes a gain of
$0.4 million from the sale of property and equipment.
Provision for Income Taxes. Provision for income taxes for fiscal year 1999
totaled $29.9 million, an increase of $12.5 million, or 71.8%, over the fiscal
year 1998 total of $17.4 million. This increase primarily resulted from the
increase in taxable income due to the factors discussed above. The effective
income tax rate was 40.6% in fiscal year 1999 versus 53.2% in fiscal 1998. The
effective tax rate is generally higher than the Company's statutory rate due
to the nondeductible nature of certain merger related costs and the impact
of the Company's foreign subsidiary, both of which were higher in 1998 than
1999.
27
Net Income. Net income for fiscal year 1999 totaled $43.7 million, an increase
of $28.4 million, or 185.6%, over the fiscal year 1998 total of $15.3 million.
As a percentage of net sales, net income increased to 2.8% for fiscal year 1999
from 1.1% for fiscal year 1998 due primarily to the factors described above.
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
under the pooling-of-interests method of accounting. The financial statements
have been retroactively restated as if Gulf South and the Company had operated
as one entity since inception. As discussed in Note 1, Background and Summary of
Significant Accounting Policies, due to the consolidation method of the Company
and the differing year ends of PSS and Gulf South, Gulf South's results of
operations for the period January 1, 1998 to April 3, 1998 are not reflected in
the consolidated statements of operations for any periods presented. Rather they
have been recorded as an adjustment to equity during the first quarter of fiscal
1999. Following is management's discussion and analysis of the financial
condition and results of operations of Gulf South for the three months ended
April 3, 1998 as compared to the three months ended March 31, 1997.
The following table summarizes Gulf South's results of operations for the three
months ended April 3, 1998 and the three months ended March 31, 1997 (in
thousands):
Three Months Three Months
Ended Ended
April 3, 1998 March 31, 1997
------------- --------------
(Unaudited)
Net sales............................... $ 87,018 $ 64,609
Cost of goods sold...................... 73,108 48,027
------------- --------------
Gross profit............................ 13,910 16,582
General and administrative expenses..... 31,721 11,223
Selling expenses........................ 2,939 2,279
------------- --------------
(Loss) income from operations........... (20,750) 3,080
Other income, net....................... 321 465
------------- --------------
(Loss) income before provision for
income taxes........................ (20,429) 3,545
(Benefit) provision for income taxes.... (5,395) 1,260
------------- --------------
Net (loss) income....................... $ (15,034) $ 2,285
============= ==============
In connection with the merger with the Company, Gulf South recorded an allowance
for obsolete inventory of $1.9 million, a charge of $5.6 million to cost of
goods sold to reconcile Gulf South's financial statements to its underlying
books and records, merger costs and expenses of $5.7 million, restructuring
costs and expenses of $4.3 million, and other unusual items of $7.3 million
during the three months ended April 3, 1998. The components of the $24.8 million
of unusual charges are specifically addressed below under the captions Gross
Profit and General and Administrative Expenses as well as Note 3, Gulf South's
Results of Operations for the Three Months Ended April 3, 1998, and Note 4,
Charges Included in General and Administrative Expenses, in the Notes to the
Consolidated Financial Statements included herein.
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 using the purchase method of accounting
and, accordingly, the results of the acquired company are included from the date
of acquisition.
Gross Profit. Gross profit for the three months ended April 3, 1998 totaled
$13.9 million, a decrease of $2.7 million or 16.3% over the three months ended
March 31, 1997 total of $16.6 million. Gross profit, as a percentage of net
sales was 16.0% and 25.7% 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) an item to reconcile Gulf South's financial statements to
its underlying books and records, as discussed below, (ii) an allowance for
obsolete inventory charge, as discussed below, (iii) 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 (iv) the lower gross profit percentage of the company
acquired.
28
During the three months ended April 3, 1998, a $1.9 million allowance for
obsolete inventory charge was recorded. This charge is directly related to a
change of plans, uses, and disposition efforts which new Gulf South management
had as compared to prior management. Gulf South previously disclosed in its
fiscal 1996 Form 10-K that they had generally been able to return any unsold or
obsolete inventory to the manufacturer, resulting in negligible inventory
write-offs. Gulf South's prior management had a policy of keeping old or
overstocked inventory on the warehouse shelf until the inventory could
ultimately be sold. As such, this policy kept the inventory on the books with
what was deemed to be an appropriate obsolescence reserve.
New management, on the other hand, determined that it was not cost effective,
from an operational standpoint, to continue warehousing and financing such old
or overstocked inventory. Also, the Company does not normally allow product with
less than desirable box or labeling conditions to be shipped to its customers.
As such, consistent with the operational policies at the Company's other
divisions, management decided to dispose of certain inventories that did not
meet the Company's dating, box condition, or labeling requirements, or in which
excessive quantities existed.
This decision to significantly alter Gulf South's inventory retention and buying
policies, and, therefore, to dispose of the related inventories resulted in a
change in the ultimate valuation of the impacted inventories. This charge was
recognized in the period in which management made the decision to dispose of the
affected inventory, which was Gulf South's quarter ended April 3, 1998.
Additionally, during the quarter ending April 3, 1998, a $5.6 million charge was
recorded to reconcile GSMS' financial statements to its underlying books and
records. Through a review of accounting records, management believes this charge
is appropriately related to cost of goods sold.
General and Administrative Expenses. General and administrative expenses for the
three months ended April 3, 1998 totaled $31.7 million, an increase of $20.5
million or 183.0% over the three months ended March 31, 1997 total of $11.2
million. As a percentage of net sales, general and administrative expenses were
36.5% and 17.4% 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 (i) merger costs and
expenses, (ii) restructuring costs and expenses, (iii) other unusual items, (iv)
increased operating costs, (v) inefficiencies due to Gulf South's merger with
the Company, and (vi) loss of efficiencies resulting from the process of
integrating acquired distribution centers.
The following table summarizes the components of the charges included in general
and administrative expenses as outlined in (i), (ii), and (iii) above (in
thousands):
Three Months
Ended
April 3, 1998
--------------
Direct transaction costs related to the merger........ $ 5,656
Restructuring costs and expenses...................... 4,281
Legal fees and settlements............................ 2,700
Operational tax charge ............................... 2,772
Goodwill impairment charge............................ 1,664
Other................................................. 273
--------------
Total charges included in general & administrative
expenses.................. $ 17,346
==============
Direct Transaction Costs Related to the Merger. Direct transaction costs
primarily consist of professional fees, such as investment banking, legal, and
accounting, for services rendered through the date of the merger. As of March
31, 2000, all direct transaction costs were paid. Due to subsequent negotiations
and agreements between the Company and a service provider, actual costs paid
were less than costs originally billed and recorded. As a result, approximately
$777 of costs were reversed against general and administrative expenses during
the quarter ended September 30, 1998.
29
Restructuring Costs and Expenses. In order to improve customer service, reduce
costs, and improve productivity and asset utilization, the Company decided to
realign and consolidate its operations with Gulf South. The restructuring costs
and expenses, which directly relate to the merger with PSS World Medical, Inc.,
were recorded during the three months ended April 3, 1998. During this time
period, management approved and committed to a plan to integrate and restructure
the business of Gulf South.
The Company recorded restructuring costs and expenses for lease terminations
costs, severance and benefits to terminate employees, facility closure, and
other costs to complete the consolidation of the operations. The following table
summarizes the components of the restructuring charge.
Lease termination costs............................. $ 977
Involuntary employee termination costs.............. 1,879
Branch shutdown costs............................... 885
Other exit costs.................................... 540
---------
$ 4,281
=========
Legal Fees and Settlements. Gulf South recorded a $2,000 accrual for legal fees
specifically related to class action lawsuits, which Gulf South, the Company,
and certain present and former directors and officers were named as defendants.
These lawsuits are further discussed in Note 18, Commitments and Contingencies.
In addition, Gulf South recorded $700 in charges related to a customer supply
agreement.
Operational Tax Charge. Gulf South recorded an operational tax charge of $9,492,
of which $2,772 was recorded in the quarter ended April 3, 1998, for state and
local, sales and use, and property taxes that are normally charged directly to
the customer at no cost to the Company. Penalties and interest are included in
the above charge as Gulf South did not timely remit payments to tax authorities.
The Company reviewed all available information, including tax exemption notices
received, and recorded charges to expense, during the period in which the tax
noncompliance issues arose. See Note 4, Charges Included in General and
Administrative Expenses, for more discussion related to this issue.
Goodwill Impairment Charges. The $1,664 goodwill impairment charge relates
primarily to a prior Gulf South acquisition. During the quarter ended April 3,
1998, a dispute with the acquired company's prior owners and management resulted
in the loss of key employees and all operational information related to the
acquired customer base. This ultimately affected Gulf South's ability to conduct
business related to this acquisition, and impacted Gulf South's ability to
recover the value assigned to the goodwill asset.
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.
(Loss) Income from Operations. Loss from operations for the three months ended
April 3, 1998 totaled $(20.8) million, a decrease of $23.9 million or 771.0%
over the three months ended March 31, 1997 income from operations of $3.1
million. Operating income decreased primarily due to (i) significant 1998
charges to cost of sales and general and administrative expenses, (ii)
infrastructure investments made in connection with the strategic objectives of
the Company, and (iii) the lower gross profit percentage of companies acquired,
each discussed above.
Provision For Income Taxes. Gulf South recorded an income tax benefit for income
taxes for the three months ended April 3, 1998, of $5.4 million compared to a
tax provision of $1.3 million for the three months ended March 31, 1997. The
1998 benefit primarily resulted from the $25.1 million in unusual charges
related to merger and restructuring costs, asset impairment charges, and other
operating charges recorded during the three months ended April 3, 1998. The
effective rate of Gulf South's tax benefit during 1998 was lower than the
statutory rate, primarily due to the nondeductible nature of certain of Gulf
South's direct transaction costs.
Net (Loss) Income. Net loss for the three months ended April 3, 1998 totaled
$(15.0) million, a decrease of $17.3 million or 752.2% over the three months
ended March 31, 1997 net income of $2.3 million. The decrease in net income is
primarily attributable to the factors discussed in Gross Profit and Charges
Included in General and Administrative Expenses above.
30
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business grows, its cash and working capital requirements will
also continue to increase as a result of the need to finance acquisitions and
anticipated growth of the Company's operations. This growth will be funded
through a combination of cash flow from operations, revolving credit borrowings
and proceeds from any future public offerings.
Net cash provided by (used in) operating activities was $27.9 million, $(18.7)
million, and $17.0 million, in fiscal years 1998, 1999, and 2000, respectively.
The increase in operating cash flows during fiscal 2000 primarily resulted from
increased collections of accounts receivable and reductions in cash payments in
satisfaction of merger and restructuring costs.
Net cash used in investing activities was $48.0 million, $28.9 million, and
$94.3 million, in fiscal years 1998, 1999, and 2000, respectively. During fiscal
2000, the Company used approximately $68.2 million of cash for purchase business
acquisitions and related non-compete payments for these acquisitions as well as
acquisitions completed in prior fiscal years. In addition, approximately $15.8
million of the $27.2 million of capital expenditures relate to hardware
purchases and software development costs for the Physician division's JD Edwards
One World ERP system, completion of the Imaging division's JD Edwards World ERP
systems, and e-commerce initiatives.
Net cash provided by financing activities was $64.0 million, $7.6 million, and
$96.7 million for fiscal years 1998, 1999, and 2000, respectively. During fiscal
2000, the Company borrowed a net of $97.8 million primarily from its senior
secured revolving credit facility. These funds were used for purchase business
acquisitions, related non-compete payments, and capital expenditures as
discussed in cash flows from investing activities.
The Company had working capital of $414.1 million and $355.3 million as of March
31, 2000 and April 2, 1999, respectively. Accounts receivable, net of
allowances, were $284.4 million and $271.8 million at March 31, 2000 and April
2, 1999, respectively. The average number of days sales in accounts receivable
outstanding was approximately 55.8 and 55.2 days for the years ended March 31,
2000 and April 2, 1999, respectively. For the year ended March 31, 2000, the
Company's Physician Supply, Imaging, and Long-Term Care Businesses had days
sales in accounts receivable of approximately 53.0, 47.6, and 73.4 days,
respectively.
Inventories were $178.0 million and $153.6 million as of March 31, 2000 and
April 2, 1999, respectively. The Company had annualized inventory turnover of
8.0x and 8.2x times for the years ended March 31, 2000 and April 2, 1999. For
the year ended March 31, 2000, the Company's Physician Supply, Imaging, and
Long-Term Care Businesses had annualized inventory turnover of 7.5x, 8.4x, and
8.3x, respectively. Inventory financing historically has been achieved through
negotiating extended payment terms from suppliers.
The Company has historically been able to finance its liquidity needs for
expansion through lines of credit provided by banks and proceeds from the public
and private offering of stock and debt. In May 1994, the Company completed an
initial public offering of Common Stock resulting in proceeds of approximately
$15.8 million. In November 1995, the Company completed a secondary offering of
Common Stock. The Company used approximately $58.2 million and $26.9 million of
the total secondary offering net proceeds of $142.9 million to repay Company
debt and debt assumed through acquisitions in fiscal years 1996 and 1997,
respectively. Management used the remaining proceeds in connection with
acquisitions for the Imaging, Physician Supply, and International Businesses,
and general corporate purposes, including capital expenditures during fiscal
years 1997 and 1998.
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 deducting 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 cross-covenants to the Company's senior revolving
facility and 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.
31
On February 11, 1999, the Company entered into a $140.0 million senior revolving
credit facility with a syndicate of financial institutions with NationsBank,
N.A. as principal agent. Borrowings under the credit facility are available for
working capital, capital expenditures, and acquisitions, and are secured by the
common stock and assets of the Company and its subsidiaries. The credit facility
expires February 10, 2004 and borrowings bear interest at certain floating rates
selected by the Company at the time of borrowing. The credit facility contains
certain affirmative and negative covenants, the most restrictive of which
require maintenance of a maximum leverage ratio of 3.5 to 1.0, maintenance of
consolidated net worth of $337.0 million, and maintenance of a minimum fixed
charge coverage ratio of 2.0 to 1.0. In addition, the covenants limit additional
indebtedness and asset dispositions, require majority lender approval on
acquisitions with a total purchase price greater than $75.0 million, and
restrict payments of dividends.
On October 20, 1999, the Company amended its $140.0 million senior revolving
credit facility to allow for repurchases of up to $50.0 million of the Company's
common stock through October 31, 2000. In addition, the amendment modified the
consolidated net worth maintenance covenant to reduce the $337.0 million minimum
compliance level by any repurchases made by the Company of its common stock.
As of March 31, 2000, the Company was not in compliance with the following
covenants under the senior revolving credit facility: 1) consolidated fixed
charge coverage ratio, 2) consolidated leverage ratio, and 3) annual capital
expenditure limits. However, the Company obtained a waiver from the lending
group for the period ended March 31, 2000. Management believes it is probable
that the Company will meet these covenants in future periods, or that
appropriate waivers will be obtained. As such, the related debt has been
classified as non-current as of March 31, 2000.
As of March 31, 2000, the Company has not entered into any material working
capital commitments that require funding. The Company believes that the expected
cash flows from operations, available borrowing under the credit facility, and
capital markets are sufficient to meet the Company's anticipated future
requirements for working capital, capital expenditures, and acquisitions for the
foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1998, the Company did not hold any derivative financial or
commodity instruments. The Company is subject to interest rate risk and certain
foreign currency risk relating to its operations in Europe; however, the Company
does not consider its exposure in such areas to be material. The Company's
interest rate risk is related to its Senior Subordinated Notes, which bear
interest at a fixed rate of 8.5%, and borrowings under its Credit Facility,
which bear interest at variable rates, at the Company's option, at either the
lender's base rate plus 0.25% (9.25% at March 31, 2000) or the LIBOR rate plus
1.25% (7.47% on 90 day LIBOR at March 31, 2000).
Risk Factors Affecting Results of Operations
We face numerous risks related to our pending transaction.
On June 21, 2000, we announced that we had entered into an Agreement
and Plan of Merger dated June 21, 2000 with Fisher Scientific International,
Inc., pursuant to which PSS and Fisher will combine business operations and PSS
will become a wholly owned subsidiary of Fisher. The merger is subject to
various conditions, including approval of the shareholders of PSS and Fisher,
filings with and compliance with securities and antitrust laws, the financial
and operating performance of PSS and certain other matters. In particular, the
transaction is conditioned upon our meeting a minimum EBITDA threshold for our
quarter ended June 30, 2000, retaining customers and suppliers that are material
to our business and the successful rollout of our new technology systems. We
cannot assure you that the merger will occur in a timely manner, if at all. In
the event the merger is terminated under circumstances addressed in the merger
agreement, we will owe a significant fee to Fisher of $33.5 million. In
addition, the merger may adversely affect our relationships with our employees
and sales force, customers and suppliers. Our pursuit of strategic alternatives
and the merger have diverted the attention of our management and employees and
may continue to do so.
Our net sales and operating results may fluctuate quarterly and may be below
analysts' and investors' expectations in any particular quarter.
Our net sales and operating results may fluctuate quarterly as a result of many
factors, including:
32
o fluctuating demand for our products and services;
o the introduction of new products and services by us and our competitors;
o acquisitions or investments;
o changes in manufacturers' prices or pricing policies;
o changes in the level of operating expenses;
o changes in estimates used by management;
o product supply shortages;
o product recalls by manufacturers;
o inventory adjustments;
o changes in product mix; and
o general competitive and economic conditions.
In addition, a substantial portion of our net sales in each quarter that may be
impacted by the above factors result from orders recorded in such quarter and,
in particular, toward the end of such quarter. Accordingly, we believe that
period-to-period comparisons of our operating results should not be relied upon
as an indication of future performance. It is possible that in certain future
periods our operating results may be below analysts' and investors'
expectations. This could materially and adversely affect the trading price of
our common stock.
Pricing and customer credit quality pressures due to reduced spending budgets by
health care providers may impair our revenues, the collectibility of our
accounts receivable and our earnings.
The cost of a significant portion of medical care in the United States is funded
by government and private insurance programs, such as Medicare, Medicaid, and
corporate health insurance plans. In recent years, government-imposed limits on
reimbursement of hospitals and other health care providers have significantly
impacted spending budgets in certain markets within the medical-products
industry. In particular, recent changes in the Medicare program have limited
payments to providers in the long-term care industry, the principal customers of
our Gulf South subsidiary. For cost-reporting periods beginning on or after July
1, 1998, Medicare's prospective payment system was applied to the long-term care
industry. This prospective payment system will limit government payments to
long-term care providers to federally established cost levels. Prior to this
time, the long-term care facilities were reimbursed by the Medicare program
pursuant to a cost-based reimbursement system. This shift was designed to
encourage greater provider efficiency and to help stem the growth in
reimbursement relating to the care of long-term care patients. Under the
prospective payment system, the customers of our Gulf South subsidiary are now
receiving revenues that are substantially less than they received under
cost-based reimbursement. In addition, private third-party reimbursement plans
are also developing increasingly sophisticated methods of controlling health
care costs. Over 10 of our Gulf South customers, including several of our
largest customers, have declared bankruptcy due to the significant reductions in
their revenues. Therefore, particularly with respect to our Gulf South
customers, we cannot assure you that the purchase of our medical products will
not be limited or reduced or that we will be able to collect our receivables in
a timely manner, if at all. This may adversely affect our accounts receivable
and future sales, earnings and results of operations.
Our business is dependent upon sophisticated data processing systems which may
impair our business operations if they fail to operate properly or as we
anticipate.
The success of our business relies on our ability to (i) obtain, process,
analyze and manage data and (ii) maintain and upgrade our data processing
capabilities.
We rely on this capability because:
o we typically receive rebates from manufacturers when we sell certain
products for our Imaging Business and need sophisticated systems to track
and apply for such rebates;
o we must convert data and information systems after acquisitions;
o we must receive and process customer orders quickly;
o we must ship orders on a timely basis;
o we must manage the billing and collections, from over 120,000 customers;
o we must manage the purchasing and distribution of over 70,000 inventory
items from 101 distribution centers;
o we are processing approximately $500 million of our revenues through the
Internet.
33
Our business, financial conditions and results of operations may be materially
adversely affected if, among other things:
o Our data processing capabilities are interrupted or fail for any
extended length of time;
o we fail to upgrade our data services;
o our data processing system is unable to support our expanded business; or
o we lose or are unable to store data.
Our rate of revenue growth will be adversely affected if we are unable to make
future acquisitions.
If we are unable to make acquisitions, we may not meet our revenue growth
expectations and our business, financial condition, and results of operations
could be materially and adversely affected. While we are not currently a party
to any agreements or understandings for any material acquisitions, we expect to
continue to acquire both domestic and foreign companies as part of our growth
strategy. However, we may be unable to continue to identify suitable acquisition
candidates. We compete with other companies to acquire businesses that
distribute medical equipment and supplies to physicians, other alternate-site
providers, long-term care providers, home care providers, and hospitals as well
as other lines of business. We expect this competition to continue to increase,
making it more difficult to acquire suitable companies on favorable terms.
Our strategy for growth may not result in additional revenue or operating income
and may have an adverse effect on working capital and earnings.
A key component of our growth strategy is to increase sales to both existing and
new customers, including large chains, independent operators and provider
groups. We intend to accomplish this by:
o expanding our e-commerce initiatives and development;
o adding one or more new strategic distribution centers;
o expanding some existing distribution centers;
o hiring additional direct sales or other personnel; and
o increasing our national sales efforts.
We cannot assure you that these efforts will result in additional revenues or
operating income.
We also anticipate continuing to grow through the opening of start-up imaging
and long-term care service centers. We anticipate these start-ups to generally
incur operating losses for approximately 18 months. This expansion, therefore,
entails risks, including:
o an adverse effect on working capital and earnings during the expansion
period;
o the incurrence of significant indebtedness; and
o significant losses from unsuccessful start-ups.
As we continue to increase our sales to large chains and consolidating provider
groups, we may face competitive pricing pressures.
We are expanding our business with large chains and consolidating provider
groups, especially in the long-term care market. This may result in competitive
pricing pressures. Our gross margins on these large group chains are 300 to 600
basis points lower than average due to:
o additional negotiating leverage of large chains;
o vendor agreements containing volume discounts;
o customer volume specifications; and
o service specifications.
34
We depend heavily on our exclusive and semi-exclusive distributorship
agreements, the loss of any of which could reduce our revenues and earnings.
We distribute over 45,000 medical products manufactured by approximately 5,000
vendors. We rely on these vendors for the manufacture and supply of products.
During the 12-month period ended March 31, 2000, however, no vendor relationship
accounted for more than 10%, except for Eastman Kodak that accounted for less
than 22%, of PSS' inventory purchases.
One of our significant vendor contracts is with Abbott Laboratories. Abbott may
terminate the contract if we do not meet certain sales levels. We have, in the
past, renegotiated such sales levels. Our other exclusive and semi-exclusive
distribution agreements include agreements for certain products manufactured by:
o Abbott Laboratories, Inc.
o Biosound
o Candela
o Hologic, Inc.
o Philips Medical Systems
o Siemens
o Sonosite
o Trex Medical Corporation
Our ability to maintain good relations with these vendors affects our
profitability. Currently, PSS relies on vendors to provide:
o field sales representatives' technical and selling support;
o agreeable purchasing and delivery terms;
o sales performance incentives;
o financial support of sales and marketing programs; and
o promotional materials.
There can be no assurance that we will maintain good relations with our vendors.
Most of these vendors have change of control provisions in their contracts which
could be triggered by them if a pending transaction is approved.
Our Gulf South subsidiary depends on a limited number of large customers.
Consolidation among long-term care providers, including several national
hospital and drug wholesale distributors and health care manufacturers, may
result in a loss of large customers. Gulf South's business depends on a limited
number of large customers for a significant portion of its net sales. As is
customary in its industry, Gulf South does not have long-term contracts with its
customers and sells on a purchase order basis only. The loss of, or significant
declines in, the level of purchases by one or more of these large customers
would have a material adverse effect on our business and results of operations.
Gulf South has experienced failure to collect accounts receivable from its
largest customers, and continued adverse change in the financial condition of
any of these customers could have a material adverse effect upon our results of
operations or financial condition.
Acquisitions could adversely affect our financial condition, results of
operation, and liquidity.
We have grown and may continue to grow through the acquisition of
medical-products distributors. These acquisitions may expose us to the following
risks, among others:
o diversion of management's attention from the business of running PSS;
o the inability to integrate acquired companies' information systems into our
operations;
o the assumption of liabilities;
o amortization of goodwill and other intangible assets;
o entry into markets in which we have little or no direct prior experience;
o the potential loss of key employees of the acquired company;
o an inability to manage changing business conditions;
o an inability to implement and improve our central and reporting system;
o an adverse affect on our liquidity;
o dilution to our earnings per share before giving effect to certain expected
potential cost savings and synergies; and
o charges to earnings.
35
In addition, our systems, procedures, controls and existing space may not be
adequate to support continuing extensions of our operations. Our operating
results substantially depend on our ability to improve technical,
administrative, financial control, and reporting systems of acquired businesses.
If we cannot integrate acquired companies with our business, our profitability
may be adversely affected.
Even though we may acquire additional companies in the future, we may be unable
to successfully integrate the acquired business and realize anticipated
economic, operational and other benefits in a timely manner. Integration of an
acquired business is especially difficult when we acquire a business in a market
in which we have limited or no expertise, or with a corporate culture different
from ours. If we are unable to successfully integrate acquired businesses:
o we may incur substantial costs and delays;
o we may experience other operational, technical or financial problems;
o our management's attention and other resources may be diverted; and
o our relationships with our key clients and employees may be damaged.
Acquisitions may decrease our shareholders' percentage ownership in PSS and
require us to incur additional debt.
We may issue equity securities in future acquisitions that could be dilutive to
our shareholders. We also may incur additional debt and amortization expense
related to goodwill and other intangible assets in future acquisitions. This
additional debt and amortization expense may reduce significantly our
profitability and materially and adversely affect our business, financial
condition, and results of operations.
Our indebtedness may limit our ability to obtain additional financing in the
future and may limit our flexibility to react to industry or economic
conditions.
In October 1997, we issued $125.0 million of 8.5% Senior Subordinated Notes due
2007. The Notes are governed by an indenture between PSS, all of our domestic
subsidiaries and SunTrust Bank, Central Florida, as trustee. At March 31, 2000,
our consolidated long-term indebtedness was $125.0 million under these Notes.
For fiscal 2001, we are scheduled to pay approximately $10.7 million in
principal and interest for our Notes and capitalized leases. In addition, we
have a credit facility with a syndicate of lenders for an additional $140.0
million, of which $121.0 million is outstanding as of March 31, 2000. If we
default under any of our indebtedness, then we are deemed to be in default under
the terms of the indenture and the credit agreement.
As a result of this increased leverage, our principal and interest obligations
have increased significantly. The level of its indebtedness could:
o limit our ability to obtain additional financing in the future for working
capital;
o limit our ability to make capital expenditures;
o limit our acquisition activity;
o limit our flexibility in reacting to changes in the industry and
economic conditions in general; and
o adversely affect our liquidity because a substantial portion of cash flow
must be dedicated to debt service and will not be available for other
purposes.
We believe that our cash flow, together with available borrowings, is sufficient
to allow us to meet operating expenses and service our debt requirements in the
future. Our belief assumes, among other things, that we will successfully
implement our business strategy and that there will be no material adverse
developments in our business, liquidity, or capital requirements. However, if we
are unable to generate sufficient cash flow from operations to service our
indebtedness, we will be forced to adopt an alternative strategy that may
include the following options:
36
o reducing or delaying acquisitions and capital expenditures;
o selling assets;
o restructuring or refinancing our indebtedness; and
o seeking additional equity capital.
Our Indenture and Credit Facility may limit our ability to make acquisitions.
The financial covenants in our indenture and credit facility may restrict us
from making certain acquisitions for the following reasons, among others:
o we must maintain a consolidated fixed coverage ratio of 2.0 to 1.0 or
greater;
o we must maintain a consolidated leverage ratio of 3.5 to 1.0 or less; and
o we may only engage in businesses that we have previously engaged in or
certain other reasonably related businesses.
We may not meet our debt covenants.
As of March 31, 2000, we were not in compliance with capital expenditure limits,
the fixed change coverage ratio, and the leverage ratio under our credit
facility. We have obtained a waiver from our lending group for the period
ending March 31, 2000. We believe it is probable that we will meet
these covenants in future periods or that appropriate waivers will be obtained.
However, if we are not able to meet these covenants or obtain waivers, the
lending group could call for repayment of our debt. In addition, we would be in
violation of the Indenture. The combined defaults would place severe liquidity
pressure on the Company.
We face litigation and liability exposure for existing and potential claims.
PSS and certain of our current officers and directors are named as defendants in
a purported securities class action lawsuit entitled Jack Hirsch v. PSS World
Medical, Inc., et al., Civil Action No. 98-502-cv-J-21A. The action, which was
filed on or about May 28, 1998, is pending in the United States District Court
for the Middle District of Florida, Jacksonville Division. An amended complaint
was filed December 11, 1998. The plaintiff alleges, for himself and for a
purported class of similarly situated stockholders who allegedly purchased PSS'
stock between December 23, 1997 and May 8, 1998, that the defendants engaged in
violations of certain provisions of the Exchange Act, and Rule 10b-5 promulgated
thereunder. The allegations are based upon a decline in the PSS stock price
following announcement by PSS in May 1998 regarding the Gulf South merger which
resulted in earnings below analyst's expectations. The plaintiff seeks
indeterminate damages, including costs and expenses. We believe that the
allegations contained in the complaint are without merit and intend to defend
vigorously against the claims. However, there can be no assurance that this
litigation will be ultimately resolved on terms that are favorable to us.
Although we do not manufacture products, the distribution of medical supplies
and equipment entails inherent risks of product liability. We are a party to
various legal and administrative legal proceedings and claims arising in the
normal course of business. However, to date we have not experienced any
significant product liability claims and maintain product liability insurance
coverage.
We need to retain the services of senior management.
Our success depends largely on the efforts and abilities of our senior
management, particularly our Chief Executive Officer and Chief Financial
Officer. The loss of the services of one or more of such individuals may
adversely affect our business. Because of our decentralized operating structure,
we are also dependent upon the operations and sales managers for each of our
service centers.
We need to hire and retain qualified sales representatives and service
specialists to continue our sales growth.
In our experience, our ability to retain existing customers and attract new
customers is dependent upon:
o hiring and developing new sales representatives;
o adding, through acquisitions, established sales representatives whose
existing customers become customers of PSS;
o retaining those sales representatives; and
o hiring and retaining skilled service specialists in a tight market to
maintain radiology and imaging equipment for our Imaging Business.
37
An inability to adequately hire or retain sales representatives or service
specialists could limit our ability to expand our business and grow sales.
Due to relationships developed between PSS' sales representatives and their
customers, upon the departure of a sales representative, we face the risk of
losing the representative's customers. This is particularly a risk where the
representative goes to work as a sales representative for a competitor. We
generally require our sales representatives and service specialists to execute a
non-competition agreement as a condition of employment. We have not, however,
obtained these agreements from some of these employees. In addition, courts do
not always uphold the terms of non-competition agreements.
We may not be able to continue to compete successfully with other medical supply
companies.
The medical supply distribution market is very competitive. Our principal
competitors are the few full-line and full-service multi-market medical
distributors and direct manufacturers, most of which are national in scope. Many
of these national companies:
o have sales representatives competing directly with us;
o are substantially larger in size; and
o have substantially greater financial resources than we do.
We also compete with:
o local dealers;
o mail order firms.
Most local dealers are privately owned and operate within limited product lines.
Several of our mail order competitors distribute medical supplies on a national
or regional basis.
Continued consolidation within the health care industry may lead to increased
competition.
Consolidation within the health care industry has resulted in increased
competition by large national distributors and drug wholesalers. In response to
competitive pressures, we have lowered and may continue to lower selling prices
in order to maintain or increase our market share. These lower selling prices
have resulted and may continue to result in lower gross margins.
We could face additional competition because:
o many of our products can be readily obtained by competitors from various
suppliers;
o competitors could obtain exclusive rights to market a product to our
exclusion;
o national hospital, drug wholesale distributors and health care
manufacturers could begin focusing their efforts more directly on the
long-term care market;
o hospitals forming alliances with long-term care facilities to create
integrated health care networks may look to hospital distributors
and manufacturers to supply their long-term care affiliates;
o as provider networks are created through consolidation among physician
provider groups, long-term care facilities and other alternate site
providers, purchasing decisions may shift to people with whom we have no
selling relationship; and
o we are increasingly focusing on national accounts where the purchasing
decision may not be made by our traditional customers.
Therefore, we cannot assure you:
o that we will be able to maintain our customer relationships in
such circumstances;
o that such provider consolidation will not result in reduced operating
margins; or
o that we will not face increased competition and significant pricing
pressure in the future.
38
We face risks of managing and expanding operations in foreign countries.
Through our WorldMed International, Inc. subsidiary, we have acquired medical
supply distributors serving physicians in Belgium, France, Germany, and
Luxembourg and plan to increase our presence in European markets. As of March
31, 2000, we have directly invested approximately $13 million in our European
operations and have guaranteed approximately $10.8 million in bank debt. The
expansion efforts in Europe have slowed due to:
o internal competition for investment resources from our new imaging
and long-term care divisions;
o language barriers to effective communication of business prospects and
goals; and
o development of key personnel necessary for expansion.
As we expand internationally, we will need to hire, train and retain qualified
personnel in countries where language, cultural or regulatory impediments may
exist. We cannot assure you that vendors, physicians or other involved parties
in foreign markets will accept our services and business practices. The cost of
medical care in many European countries is funded by the government, which may
significantly impact spending budgets in certain markets. International revenues
are subject to inherent risks, including:
o political and economic instability;
o difficulties in staffing and managing foreign operations;
o difficulties in accounts receivable collection;
o fluctuating currency exchange rates;
o costs associated with localizing service offerings in foreign countries;
o unexpected changes in regulatory requirements;
o difficulties in the repatriation of earnings; and
o burdens of complying with a wide variety of foreign laws and labor
practices.
The continued development and growth of digital radiology equipment may
adversely affect profits from our imaging business.
Recently, certain manufacturers have developed digital radiology equipment that
does not rely on film and film products. Film and film products constitute a
substantial percentage of the products distributed by our Imaging Business. We
cannot assure you that the introduction and proliferation of digital radiology
or other technological changes will not result in a material adverse change in
the Imaging Business. While we anticipate that we will distribute new imaging
technology, we cannot assure you that we will obtain distribution agreements or
develop vendor relationships to distribute such new technology. In addition, we
cannot assure that we would be able to distribute any such new technology
profitably.
We maintain a significant investment in product inventory which exposes us to
risks of product obsolescence or price decreases.
In order to provide prompt and complete service to our customers, we maintain a
significant investment in product inventory at its warehouse locations. Although
we closely monitor inventory exposure through inventory control procedures
and policies, we cannot assure you that:
o such procedures and policies will continue to be effective; or
o unforeseen product development or price changes will not occur.
In addition, we may assume inventory of distributors we acquire. This inventory
may include product lines or operating assets not normally carried or used by
us. These product lines or assets may:
o be difficult to sell; and
o result in our writing off any such unsold inventory or unused assets in the
future.
We cannot assure you that such risks will not adversely affect our business or
results of operations.
39
The expansion of the two-tiered pricing structure may place us at a competitive
disadvantage.
As a result of the Non-Profit Act of 1944, the medical-products industry is
subject to a two-tier pricing structure. Under this structure, certain
institutions, originally limited to nonprofit hospitals, can obtain more
favorable prices for medical products than PSS. The two-tiered pricing structure
continues to expand as many large integrated health care providers and others
with significant purchasing power demand more favorable pricing terms. Although
we are seeking to obtain similar terms from our manufacturers, we cannot assure
you that we can obtain such terms. Such a pricing structure, should it persist,
may place us at a competitive disadvantage.
Our Articles of Incorporation, Bylaws, Rights Agreement and Florida law may
inhibit a takeover of PSS.
Our Articles of Incorporation and Bylaws and Florida law contain provisions that
may delay, deter or inhibit a future acquisition. This could occur even if our
shareholders are offered an attractive value for their shares or if a
substantial number or even a majority of our shareholders believe the takeover
is in their best interest. These provisions are intended to encourage any person
interested in acquiring us to negotiate with and obtain the approval of our
Board of Directors in connection with the transaction. Our merger agreement and
our proposed merger with Fisher have been exempted from these provisions.
However, the merger agreement prohibits us from soliciting higher offers, places
restrictions on our ability to respond to third party offers, and requires us to
pay a significant fee in the event of the termination of the agreement due to
another offer.
Provisions that could delay, deter or inhibit offers include the following:
o a staggered Board of Directors;
o the Affiliated Transaction Statute; and
o the Control-Share Acquisition Statute.
In addition, the rights of holders of our common stock will be subject to, and
may be adversely affected by, the rights of the holders of our preferred stock
that may be issued in the future and that may be senior to the rights of holders
of our common stock. On April 20, 1998, our Board of Directors approved a
Shareholder Protection Rights Agreement which provides for one preferred stock
purchase right in respect of each share of our common stock. These rights become
exercisable upon a person or group of affiliated persons acquiring 15% or more
of our then-outstanding common stock by all persons other than an existing 15%
shareholder. This Rights Agreement also could discourage bids for your shares of
common stock at a premium and could have a material adverse effect on the market
price of your shares.
Cautionary Notice Regarding Forward-Looking Statements
Some of the information in this document contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "project" and "continue" or similar words.
You should read these statements that contain these words carefully for the
following reasons:
o the statements discuss our future expectations;
o the statements contain projections of our future results of operations or
of our financial condition; and
o the statements state other "forward-looking" information.
We believe it is important to communicate our expectations to our investors.
There may be events in the future, however, that we are not accurately able to
predict or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this document, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of any of the events described in these risk factors and elsewhere in this
prospectus could have a material adverse effect on our business, financial
condition and results of operations. In such case, the trading price of our
common stock could decline and you may lose all or part of your investment.
40
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; 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.
41
Item 8. Financial Statements and Supplementary Data
INDEX TO the CONSOLIDATED FINANCIAL STATEMENTS
Page
--------
Financial Statements:
Report of Independent Certified Public Accountants.................................................. F-2
Consolidated Balance Sheets - March 31, 2000 and April 2, 1999 ..................................... F-3
Consolidated Statements of Income for the Years Ended March 31, 2000, April 2, 1999, and April 3,
1998............................................................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 2000, April 2, 1999,
and April 3, 1998................................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 2000, April 2, 1999 and
April 3, 1998 F-6
Notes to Consolidated Financial Statements.......................................................... F-7
Schedule II - Valuation and Qualifying Accounts for the Years Ended April 3, 1998, April 2, 1999,
and March 31, 2000............................................................................... F-41
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To PSS World Medical, Inc.:
We have audited the accompanying consolidated balance sheets of PSS World
Medical, Inc. (a Florida corporation) and subsidiaries as of March 31, 2000 and
April 2, 1999, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
2000. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PSS World Medical, Inc. and
subsidiaries as of March 31, 2000 and April 2, 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2000 in conformity with accounting principles generally accepted in
the United States.
As explained in Note 1 to the financial statements, effective April 3, 1999, the
Company changed certain of its accounting principles for revenue recognition as
a result of the adoption of Staff Accounting Bulletin No. 101, "Revenue
Recognition".
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
June 21, 2000
F-2
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and April 2, 1999
(Dollars in Thousands, Except Per Share Data)
ASSETS
2000 1999
--------- ---------
Current Assets:
Cash and cash equivalents......................................................... $ 60,414 $ 41,106
Marketable securities............................................................. 4,328 3
Accounts receivable, net.......................................................... 284,441 271,781
Inventories, net.................................................................. 178,038 153,626
Employee advances................................................................. 973 702
Prepaid expenses and other........................................................ 57,515 59,327
--------- ---------
Total current assets..................................................... 585,709 526,545
Property and equipment, net.......................................................... 65,783 48,167
Other Assets:
Intangibles, net.................................................................. 202,242 147,383
Other............................................................................. 19,683 21,286
--------- ---------
Total assets............................................................. $ 873,417 $ 743,381
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................. $ 124,448 $ 112,966
Accrued expenses.................................................................. 35,434 48,704
Current maturities of long-term debt and capital lease obligations................ 4,274 1,062
Other............................................................................. 7,482 8,536
--------- ---------
Total current liabilities................................................ 171,638 171,268
Long-term debt and capital lease obligations, net of current portion................. 254,959 152,442
Other................................................................................ 7,193 3,111
--------- ---------
Total liabilities........................................................ 433,790 326,821
--------- ---------
Commitments and contingencies (Notes 1, 2, 9, 14, 15, 16, 18, 19, and 20)
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued
and outstanding................................................................ -- --
Common stock, $.01 par value; 150,000,000 shares authorized, 71,077,236 and
70,796,024 shares issued and outstanding at March 31, 2000 and April 2, 1999, 711 708
respectively...................................................................
Additional paid-in capital........................................................ 349,186 349,460
Retained earnings................................................................. 90,951 70,211
Cumulative other comprehensive income............................................. (390) (1,177)
--------- ---------
440,458 419,202
Unearned ESOP shares.............................................................. (831) (2,642)
--------- ---------
Total shareholders' equity............................................... 439,627 416,560
--------- ---------
Total liabilities and shareholders' equity............................... $ 873,417 $ 743,381
========= =========
The accompanying notes are an integral part of these balance sheets.
F-3
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended March 31, 2000, April 2, 1999, and April 3, 1998
(Dollars in Thousands, Except Per Share Data)
2000 1999 1998
---------- ---------- ----------
Net sales......................................................... $1,793,536 $1,564,505 $1,381,786
Cost of goods sold................................................ 1,321,182 1,142,597 1,016,018
---------- ---------- ----------
Gross profit.......................................... 472,354 421,908 365,768
General and administrative expenses............................... 277,585 228,616 235,067
Selling expenses.................................................. 150,060 119,439 98,622
---------- ---------- ----------
Income from operations................................ 44,709 73,853 32,079
Other income (expense):
Interest expense............................................... (15,457) (11,522) (7,517)
Interest and investment income................................. 1,838 4,732 5,249
Other income................................................... 10,437 6,618 2,849
---------- ---------- ----------
(3,182) (172) 581
---------- ---------- ----------
Income before provision for income taxes and cumulative effect of
accounting change.............................................. 41,527 73,681 32,660
Provision for income taxes........................................ 19,343 29,940 17,361
Income before cumulative effect of accounting change ............ 22,184 43,741 15,299
Cumulative effect of accounting change (Note 1) .................. (1,444) -- --
---------- ---------- ----------
Net Income $ 20,740 $ 43,741 $ 15,299
========== ========== ==========
Earnings per share - Basic:
Income before cumulative effect of accounting change........... $ 0.31 $ 0.62 $ 0.22
Cumulative effect of accounting change ........................ $ (0.02) -- --
---------- ---------- ----------
Net Income..................................................... $ 0.29 $ 0.62 $ 0.22
========== ========== ==========
Earnings per share - Diluted:
Income before cumulative effect of accounting change........... $ 0.31 $ 0.61 $ 0.22
Cumulative effect of accounting change......................... $ (0.02) -- --
---------- ---------- ----------
Net Income..................................................... $ 0.29 $ 0.61 $ 0.22
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended March 31, 2000, April 2, 1999, and April 3, 1998
(Dollars in Thousands, Except Per Share Data)
Cumulative
Common Stock Additional Other Unearned
-------------------- Paid-In Retained Comprehensive ESOP
Shares Amount Capital Earnings Income Shares Totals
---------- -------- ---------- -------- ------------- -------- -------
Balance at March 28, 1997............... 68,632,102 $ 687 $323,909 $26,205 $ (93) $(4,999) $345,709
Net income........................... -- -- -- 15,299 -- -- 15,299
Comprehensive income:
Cumulative foreign currency
translation adjustment ........ -- -- -- -- (1,203) -- (1,203)
-------
Total comprehensive income........... 14,096
-------
Issuance of common stock............. 1,539,807 15 15,946 -- -- -- 15,961
Employee benefits and other.......... -- -- 2,132 -- -- 2,162 4,294
---------- -------- ---------- -------- ------------- -------- -------
Balance at April 3, 1998................ 70,171,909 702 341,987 41,504 (1,296) (2,837) 380,060
---------- -------- ---------- -------- ------------- -------- -------
Gulf South results of operations and
issuance of common stock,
January 1, 1998 to April 3, 1998
(Notes 1, 2, and 3)............... 202,685 2 2,594 (15,034) -- -- (12,438)
Balance at April 4, 1998................ 70,374,594 704 344,581 26,470 (1,296) (2,837) 367,622
Net income........................... -- -- -- 43,741 -- -- 43,741
Comprehensive income:
Cumulative foreign currency
translation adjustment ........ -- -- -- -- 119 -- 119
-------
Total comprehensive income........... 43,860
-------
Issuance of common stock............. 421,430 4 4,267 -- -- -- 4,271
Employee benefits and other.......... -- -- 612 -- -- 195 807
---------- -------- ---------- -------- ------------- -------- -------
Balance at April 2, 1999................ 70,796,024 708 349,460 70,211 (1,177) (2,642) 416,560
---------- -------- ---------- -------- ------------- -------- -------
Net income........................... -- -- -- 20,740 -- -- 20,740
Comprehensive income:
Cumulative foreign currency
translation adjustment ........ -- -- -- -- (939) -- (939)
Change in unrealized gain on
marketable security, net of -- -- -- -- 1,726 -- 1,726
tax ...................... -------
Total comprehensive income........... 21,527
-------
Issuance of common stock............. 281,212 3 98 -- -- -- 101
Employee benefits and other.......... -- -- (372) -- -- 1,811 1,439
---------- -------- ---------- -------- ------------- -------- -------
Balance at March 31, 2000............... 71,077,236 $711 $349,186 $90,951 $(390) $(831) $439,627
========== ======== ========== ======== ============= ======== =======
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 2000, April 2, 1999, and April 3, 1998
(Dollars in Thousands)
2000 1999 1998
-------- --------- ---------
Cash Flows From Operating Activities:
Net income............................................................... $20,740 $ 43,741 $ 15,299
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change................................ 1,444 -- --
Depreciation and amortization......................................... 20,288 19,498 10,691
Amortization of debt issuance costs................................... 782 886 170
Provision for doubtful accounts....................................... 15,812 5,181 5,707
Provision (benefit) for deferred income taxes......................... 11,878 10,901 (4,083)
Gain on sale of fixed assets.......................................... (871) (836) --
Deferred compensation expense......................................... 721 365 630
Unrealized loss on trading securities................................. -- 288 3
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Accounts receivable, net........................................... (23,041) (43,848) (16,339)
Inventories, net................................................... 5,597 1,275 (2,090)
Prepaid expenses and other current assets.......................... 8,656 (4,916) (10,464)
Other assets....................................................... (8,855) (2,265) (2,486)
Accounts payable, accrued expenses, and other liabilities.......... (36,180) (48,974) 30,898
-------- --------- ---------
Net cash provided by (used in) operating activities............. 16,971 (18,704) 27,936
-------- --------- ---------
Cash Flows From Investing Activities:
Purchases of marketable securities....................................... (1,500) (50,813) (318,166)
Proceeds from sales and maturities of marketable securities.............. -- 125,098 309,628
Proceeds from sale of property and equipment............................. 2,595 1,586 --
Capital expenditures..................................................... (27,182) (24,774) (10,519)
Purchases of businesses, net of cash acquired............................ (59,410) (75,453) (22,481)
Payments on noncompete agreements........................................ (8,825) (4,558) (6,431)
-------- --------- ---------
Net cash used in investing activities........................... (94,322) (28,914) (47,969)
-------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from public debt offering, net of debt issuance costs........... -- -- 119,459
Proceeds from borrowings................................................. 175,797 24,000 4,349
Repayments of borrowings................................................. (77,976) (20,337) (56,014)
Repayments on revolving line of credit................................... -- -- (5,000)
Principal payments under capital lease obligations....................... (325) (366) (306)
Proceeds from issuance of common stock................................... 101 4,174 2,721
Other.................................................................... (938) 119 (1,203)
-------- --------- ---------
Net cash provided by financing activities....................... 96,659 7,590 64,006
-------- --------- ---------
Gulf South decrease in cash and cash equivalents for the three months ended -- (349) --
April 3, 1999 -------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................ 19,308 (40,377) 43,973
Cash and cash equivalents, beginning of year................................ 41,106 81,483 37,510
-------- --------- ---------
Cash and cash equivalents, end of year...................................... $ 60,414 $ 41,106 $ 81,483
======== ========= =========
Supplemental Disclosures:
Cash paid for:
Interest.............................................................. $ 14,260 $ 11,026 $ 5,195
======== ========= =========
Income taxes.......................................................... $ 27,137 $ 18,192 $ 21,170
======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000, APRIL 2, 1999 AND APRIL 3, 1998
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and Nature of Business
Physician Sales & Service, Inc. was incorporated in 1983 in Jacksonville,
Florida. On March 26, 1998, the corporate name of Physician Sales & Service,
Inc. was changed to PSS World Medical, Inc. (the "Company" or "PSS").
The Company, through its Physician Sales & Service, Inc. division ("Physician
Supply Business") is a distributor of medical supplies, equipment and
pharmaceuticals to primary care and other office-based physicians in the United
States. As of March 31, 2000, the Company operated 51 service centers
distributing to over 100,000 physician office sites in all 50 states.
In November 1996, PSS established a new wholly-owned subsidiary, Diagnostic
Imaging, Inc. ("DI" or "Imaging Business"). DI is a distributor of medical
diagnostic imaging supplies, chemicals, equipment, and service to the acute and
alternate care markets in the United States. As of March 31, 2000, DI operated
34 imaging division service centers distributing to approximately 45,000
customer sites in 42 states.
In March 1996, PSS established two new wholly-owned subsidiaries, WorldMed
International, Inc. ("WorldMed Int'l") and WorldMed, Inc. These subsidiaries
were established to manage and develop PSS' European medical equipment and
supply distribution market. As of March 31, 2000, the European operation
included two service centers distributing to acute and alternate care sites in
Belgium, Germany, France and Luxembourg.
In March 1998, the Company entered the long-term care market for the
distribution of medical supplies and other products with its acquisition of Gulf
South Medical Supply, Inc. ("Gulf South" or "Long-Term Care Business"). As of
March 31, 2000, Gulf South, a wholly owned subsidiary of PSS, operated 14
long-term care distribution service centers serving over 14,000 long-term care
accounts in all 50 states.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries using the year-ends discussed below. All
intercompany accounts and transactions have been eliminated. Results of
operations of companies acquired in purchase business transactions are included
in the accompanying consolidated financial statements from the dates of
acquisition.
Fiscal Year
The Company's fiscal year ends on the Friday closest to March 31 of each year.
Prior to April 4, 1998, Gulf South's (which was acquired in a business
combination accounted for as a pooling-of-interest, refer to Note 2, Business
Acquisitions) year-end was December 31. The fiscal 1998 consolidated financial
statements combine the December 31, 1997 financial statements of Gulf South with
the April 3, 1998 financial statements of PSS. Effective April 4, 1998, Gulf
South's fiscal year-end was changed to conform to the Company's year-end. As
such, Gulf South's results of operations for the period January 1, 1998 to April
3, 1998 are not included in any of the periods presented in the accompanying
consolidated statements of income. Accordingly, Gulf South's results of
operations for the three months ended April 3, 1998 are reflected as an
adjustment to shareholders' equity of the Company as of April 4, 1998. The
Company's fiscal 1999 consolidated financial statements include the combined
results of operations for the period from April 4, 1998 to April 2, 1999, of
both PSS and Gulf South.
F-7
Fiscal years 2000, 1999, and 1998 consist of 52, 52, and 53 weeks, respectively.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, marketable securities, short-term trade receivables, and
accounts payable approximate their fair values due to the short-term nature of
these assets and liabilities. The fair value of the senior subordinated debt is
estimated using quoted market prices. The carrying value of the Company's senior
subordinated debt at March 31, 2000 and April 2, 1999 was $125,000 and the
market value was $114,675 and $120,925, respectively. The carrying value of the
Company's other long-term debt was $134,233 and $28,504, at March 31, 2000 and
April 2, 1999, respectively, which approximates fair value.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash held at banks, short-term
government obligations, commercial paper, and money market instruments. The
Company invests its excess cash in high-grade investments and, therefore, bears
minimal risk. These instruments have original maturity dates not exceeding three
months.
Marketable Securities
The Company holds investments classified as trading securities and
available-for-sale securities. Trading securities are reported at fair value,
with unrealized holding gains or losses reported in earnings, and
available-for-sale securities are reported at fair value, with unrealized gains
and losses excluded from earnings but reported in other comprehensive income,
net of the effect of income taxes, until sold. At the time of sale, any gains or
losses are recognized as a component of operating results. Gains and losses are
based on the specific identification method of determining cost.
Concentration of Credit Risk
The Company's trade accounts receivables are exposed to credit risk. Although
the majority of the market served by the Company is comprised of numerous
individual accounts, none of which is individually significant to the Company.
The Company's Gulf South subsidiary depends on a limited number of large
customers, and Gulf South's customers have been experiencing significant
financial difficulty since the advent of the Prospective Payment System ("PPS")
and their difficulties worsened in the fourth quarter of fiscal 2000.
Approximately 34% and 38% of Gulf South's revenues for the years ended March 31,
2000 and April 2, 1999, respectively, represented sales to its top five
customers. Receivables for these five customers represented 31.6% of Gulf
South's gross accounts receivable balance as of March 31, 2000, before reserves,
and 34.0% of Gulf South's net accounts receivable, after reserves. The Company
monitors the creditworthiness of its customers on an ongoing basis and provides
reserves for estimated bad debt losses and sales returns.
The Company had allowances for doubtful accounts of approximately $10,839 and
$6,918 as of March 31, 2000 and April 2, 1999, respectively, of which $7,524 and
$3,552, respectively, related to Gulf South. Provisions for doubtful accounts
were approximately $15,812, $5,181, and $5,707, for fiscal years ended 2000,
1999, and 1998, respectively, of which $11,193, $2,485, and $4,422,
respectively, related to Gulf South.
Inventories
Inventories are comprised principally of medical and related products and are
stated at the lower of cost (first-in, first-out) or market. Market is defined
as net realizable value. A companywide physical inventory observation is
performed semiannually. Any inventory that is impaired for any reason is
disposed of or written down to fair market value at this time. Management
reviews all branch inventory valuations and makes further adjustment if
necessary.
F-8
Slow moving inventory is tracked using a report that details items that have not
moved in the last 60, 90, or 120 days and an appropriate reserve is established.
Once slow moving inventory has been identified, the branches transfer inventory
to other branches with a market for that inventory. If management determines the
inventory is not saleable, the inventory is written off against the inventory
obsolescence reserve.
The Company allows the customers to return products under its "no hassle
customer guarantee," and customers are issued credit memos. The Company records
an allowance for estimated sales returns and allowances at the end of each
period. Sales returns and allowances are estimated based on past history.
Property and Equipment
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to 30 years. Leasehold
improvements are amortized over the lease terms or the estimated useful lives,
whichever is shorter. Gain or loss upon retirement or disposal of property and
equipment is recorded in other income in the accompanying consolidated
statements of income.
The Company evaluates the recoverability of long-lived assets not held for sale
by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are adjusted to their
fair values.
The DI division began implementing the JD Edwards OneWorld ERP System (the "JDE
Project") in fiscal 1998 and is nearly complete as of March 31, 2000. During
fiscal 1999, the Company began implementing the JDE Project at the PSS and GSMS
divisions. The Company capitalizes the following costs associated with
developing internal-use computer software: (i) external direct costs of
materials and services consumed in developing or obtaining internal-use computer
software; (ii) payroll and payroll-related costs for employees who are directly
associated with and who devote time to the JDE Project, to the extent of the
time spent directly on the project; and (iii) interest costs incurred while
developing internal-use computer software.
Intangibles
Noncompete agreements are amortized on a straight-line basis over the lives of
the agreements, which range from 3 to 15 years. The Company has classified as
goodwill the cost in excess of the fair value of net identifiable assets
purchased in business acquisitions that are accounted for as purchase
transactions. Goodwill is being amortized over 15 to 30 years using the
straight-line method.
The Company periodically evaluates intangible assets to determine if there is
impairment. Based on these evaluations, there was an adjustment to the carrying
value of certain intangible assets in fiscal year 1998 (refer to Note 4, Charges
Included in General and Administrative Expenses).
Self-Insurance Coverage
The Company has a self-funded program for employee & dependent health coverage.
This program includes an administrator, a large provider network and stop loss
reinsurance to cover individual claims in excess of $150 up to $2,000 per person
as well as receiving coverage on an aggregate basis. Claims that have been
incurred but not reported are recorded based on estimates of claims provided by
the third party administrator and are included in the accrued expenses in the
accompanying consolidated balance sheets.
Contingent Loss Accruals
In determining the accrual necessary for probable loss contingencies as defined
by Statement of Financial Accounting Standards ("SFAS") No. 5, Accounting for
Contingencies, the Company includes estimates for professional fees, such as
engineering, legal, accounting, and consulting, and other related costs to be
incurred, unless such fees and related costs are not probable of being incurred
or are not reasonably estimable.
F-9
Income Taxes
The Company uses the asset and liability method in accounting for income taxes.
Deferred income taxes result primarily from the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Shareholders' Equity
The Company realizes an income tax benefit from the exercise or early
disposition of certain stock options. This benefit results in a decrease in
current income taxes payable and a direct increase in additional paid-in capital
(refer to Note 10, Income Taxes).
Other Comprehensive Income
Cumulative other comprehensive income and total comprehensive income has been
separately disclosed in the accompanying consolidated statements of
shareholders' equity.
Revenue Recognition
Revenue from the sale of products and equipment with no installation and
training requirements, is recognized when products are shipped. Revenue from the
sale of equipment with installation and training requirements is recognized when
installation and training are complete. Revenue from service contracts are
recognized ratably over the term of the contract.
The Company earns incentive rebates from its vendors if certain performance
goals are achieved. Incentive rebate income is recognized in the accounting
period in which the Company meets the performance measure.
Foreign Currency Translation
Financial statements for the Company's subsidiaries outside the United States
are translated into U.S. dollars at year-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded in the other comprehensive income
component of shareholders' equity.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the intrinsic
value method. The Company adopted the disclosure only provisions of SFAS No.
123, Accounting for Stock-Based Compensation. In accordance with SFAS No. 123,
for footnote disclosure purposes only, the Company computes its earnings and
earnings per share on a pro forma basis as if the fair value method had been
applied.
Earnings Per Common Share
Basic and diluted earnings per common share are presented in accordance with
SFAS No. 128, Earnings Per Share. Basic earnings per common share is computed by
dividing net income by the weighted average number of shares outstanding.
Diluted earnings per common share includes the dilutive effect of stock options
(refer to Note 11, Earnings Per Share).
Statements of Cash Flows
The Company's noncash investing and financing activities were as follows:
F-10
2000 1999 1998
--------- ------- -------
Investing Activities:
Business acquisitions:
Fair value of assets acquired................$ 41,146 $ 56,815 $ 48,924
Liabilities assumed.......................... 41,604 39,930 32,684
Noncompetes issued........................... 8,300 3,950 7,574
Capital lease obligations incurred........... -- -- 325
Financing Activities:
Tax benefits related to stock option plans... 194 759 1,505
Reclassification
Certain amounts for prior years have been reclassified to conform to the current
year presentation.
Change in Accounting Principle
In December 1999, the Securities and Exchange Commission Staff ("SEC staff")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"),
which provides additional guidance in applying generally accepted accounting
principles for revenue recognition in consolidated financial statements. Areas
of SAB 101 relevant to the Company include the timing of recognizing (1)
contingent revenue and (2) revenue derived from equipment sales that involve
installation and training of the equipment occurring after shipment and transfer
of title.
The Company sells equipment which falls into three broad categories: (1)
equipment with no installation or training requirements, such as plug-and-play
units, (2) equipment with basic installation requirements, and (3) equipment
with complex installation and training requirements, such as large x-ray
equipment. With the exception of type (1) equipment, most installations include
a training component. Prior to the implementation of SAB 101, the Company's
revenue recognition policy for type (1) and type (2) equipment was to recognize
revenue at the time the customer took title of the product, generally at the
time of shipment. The Company previously considered the related installation and
training requirements to be perfunctory, as it had routinely met its
installation and training obligations shortly after the ship date. Prior to the
implementation of SAB 101, the Company's revenue recognition policy for type (3)
equipment was to recognize revenue at the date installation was complete, but
prior to the completion of training, as the Company considered the related
training to be perfunctory.
The Company's interpretation of the requirements of SAB 101 results in changes
to the Company's accounting policies for revenue recognition for equipment since
the installation and training requirements are no longer considered perfunctory
based on the customer's perspective. Revenue will be recognized for type (1)
equipment sales on the date of shipment. Revenue will be recognized for type (2)
and (3) equipment after the completion of installation and training.
The Company's pre- and post- SAB 101 equipment sales recognition policies are
illustrated below:
Point at which Company recognizes sale of equipment, by type
------------------------------------------------------------
Type (1) Type (2) Type (3)
----------------- ----------------- --------------------
Pre SAB 101 When shipped When shipped After completion of
installation
Under SAB 101 When shipped After completion After completion of
of installation installation and
and training training
The Company also participates in a variety of incentive rebate programs with its
vendors in which the Company receives rebates once certain volume thresholds
have been met. Prior to the adoption of SAB 101, the Company's incentive rebate
recognition policy was to accrue for the estimated amount of rebate income
earned during the period, using current financial information, historical
experience, and projected results of the specific rebate program. Under SAB 101,
no rebate income will be recognized until the period in which the performance
measures are achieved.
F-11
As permitted, the Company has decided to early adopt SAB 101 for the fiscal year
ended March 31, 2000. The Company has changed its method of accounting for
equipment sales and contingent rebate income effective April 3, 1999. The
cumulative effect of this accounting change reduced net income for the year
ended March 31, 2000 by $1.4 million ($2.4 pre-tax). The cumulative after tax
effect on both the basic and diluted earnings per share was a reduction of
$0.02. The effect of SAB 101, before the cumulative effect, did not have a
material impact on fiscal 2000, and would not have been material to fiscal 1999
or 1998. The quarterly information for fiscal 2000, presented in Note 17, have
been presented as if the Company adopted SAB 101 with a cumulative catch up
effective April 3, 1999.
Pending Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement 133," which
delays the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company plans to adopt the provisions of this statement in the
first quarter of fiscal year 2002. The Company expects the impact of adopting
SFAS No. 133 will be immaterial.
2. BUSINESS ACQUISITIONS
On March 26, 1998, the Company completed its merger with Gulf South. The Company
issued 28,810,747 shares of its common stock for all of the outstanding common
stock of Gulf South, which was valued at $662.6 million at the time of merger.
Each share of Gulf South common stock was exchanged for 1.75 shares of PSS
common stock. In addition, outstanding Gulf South stock options were converted
at the same exchange factor into stock options to purchase 2,206,461 shares of
PSS common stock. This merger constituted a tax-free reorganization and has been
accounted for as a pooling of interests.
On September 23, 1997, the Company acquired S&W in a merger pursuant to which
the Company issued 1,737,458 shares of common stock to the former shareholders
of S&W in exchange for all of the outstanding shares of capital stock of S&W
valued at $26.0 million at the time of the merger. The merger constituted a
tax-free reorganization and has been accounted for as a pooling of interests.
Other Pooled Entities
The Company merged with certain other medical supply and equipment distributors
and imaging supply and equipment distributors in stock mergers accounted for
under the pooling-of-interests method of accounting. Due to the aggregate impact
of these individually immaterial pooling-of-interest transactions on the
Company's prior period financial statements, the consolidated financial
statements have been retroactively restated to include the pooling-of-interest
transactions as if the companies had operated as one entity since inception, as
shown below. The number of companies acquired and the number of shares of common
stock issued are as follows:
1999 1998
------- -------
Number of acquisitions.................... 2 4
Number of shares of common stock issued... 608,000 490,000
The results of operations for the acquired companies through their respective
acquisition dates and the combined amounts presented in the consolidated
financial statements follow:
F-12
Fiscal Year End April 2, 1999
-----------------------------------
Other
Pooled
Entities PSS Combined
-------- ---------- ----------
Net sales.................................. $51,643 $1,512,862 $1,564,505
Gross profit............................... 4,914 416,994 421,908
Net income................................. (1,098) 44,839 43,741
Other changes in shareholders' equity...... 70 (11,828) (11,758)
Fiscal Year Ended April 3, 1998
--------------------------------------------------------
Other
Pooled
Gulf South S&W Entities PSS Combined
---------- ------- -------- -------- ---------
Net sales................................ $287,582 $38,003 $92,722 $963,479 $1,381,786
Gross profit............................. 73,685 8,756 14,598 268,729 365,768
Net income............................... 9,861 (2,095) 581 6,952 15,299
Other changes in shareholders' equity.... 753 2,790 (243) 15,752 19,052
Purchase Acquisitions
During fiscal 2000, the Company acquired certain assets and assumed certain
liabilities of 6 medical supply and equipment distributors, 12 imaging supply
and equipment distributors, and 2 long-term health care distributors. In
addition, the Company acquired the common stock of 4 imaging supply and
equipment distributors. A summary of the details of the transactions follow:
Fiscal Year
---------------------------------------
2000 1999 1998
---------- ---------- ----------
Number of acquisitions................. 24 25 13
Issuance of shares of common stock..... -- -- 933,000
Total consideration.................... $ 101,014 $ 115,183 $ 35,739
Cash paid, net of cash acquired........ 59,410 75,453 22,481
Goodwill recorded...................... 59,868 58,368 33,745
Noncompete payments.................... 7,235 3,950 2,982
The operations of the acquired companies have been included in the Company's
results of operations subsequent to the dates of acquisition. Supplemental
unaudited pro forma information, assuming these acquisitions had been made at
the beginning of the year in which the acquisition was made, and assuming
the acquisitions were made at the beginning of the immediately preceding year,
is included below. The unaudited pro forma selected financial data does not
purport to represent what the Company's results of operation would actually have
been had the transactions in fact occurred as of an earlier date or project the
results for any future date or period.
Fiscal Year
---------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenues............................. $1,869,138 $1,847,921 $1,589,261
Net Income........................... 22,397 49,180 19,078
Earnings per share:
Basic.............................. $0.32 $0.70 $0.27
Diluted............................ $0.31 $0.69 $0.27
These acquisitions were accounted for under the purchase method of accounting,
and accordingly, the assets of the acquired companies have been recorded at
their estimated fair values at the dates of the acquisitions. The value of the
common stock issued in connection with these purchases is generally determined
based on an average market price of the shares over a ten-day period before a
definitive agreement is signed and the proposed transaction is announced. The
excess of the purchase price over the estimated fair value of the net
identifiable assets acquired has been recorded as goodwill and is amortized over
15 to 30 years.
F-13
The accompanying consolidated financial statements reflect the preliminary
allocation of the purchase price of the purchase acquisitions consummated in
fiscal 2000. The allocation of the purchase price, performed using values and
estimates available as of the date of the financial statements, has not been
finalized due to certain pre-acquisition contingencies identified by the Company
and the nature of the estimates required in the establishment of the Company's
merger integration plans. Accordingly, goodwill associated with these
acquisitions may increase or decrease in fiscal 2001.
Merger costs and expenses
During fiscal 2000 and 1999, the Company recorded approximately $595 and $545,
respectively, of merger integration costs and expenses directly to goodwill as
incurred as these costs were contemplated at the time of acquisition. In
addition, during these fiscal years, the Company recorded approximately $489 and
$493, respectively, of merger costs and expenses related to other acquisitions
directly to goodwill for costs that were in excess of the original integration
plan accrual estimated by management. Such merger costs and expenses are
recorded directly to goodwill only if it is within one year from the date of the
acquisition and such expenses were contemplated at the time of the acquisition.
If merger costs and expenses are incurred subsequent to one year from the date
of the acquisition, or were not contemplated at the time of the acquisition,
such expenses are recorded in general and administrative expenses.
Reversal of excess accrued merger costs and expenses
During fiscal 2000 and 1999, the Company reversed approximately $767 and $1,343,
respectively, of certain accrued merger costs and expenses that management
determined to be unnecessary due to changes in integration plans or estimates.
Management evaluates integration plans at each period end and determines if
revisions to the accruals are appropriate. Such revisions to the original
estimates are recorded directly to goodwill.
Deferred tax assets of acquired companies
During fiscal 1999, the Company reduced goodwill by $2,644, to reflect a true-up
of the deferred tax assets and liabilities per the financial statements and the
tax return, as a result of additional information received on the deductibility
of certain pre-acquisition expenditures.
As a result of the above adjustments goodwill was increased by $317 during
fiscal 2000 and reduced by $2,949 during fiscal 1999, excluding the original
set-up of the plan. There were no such adjustments in fiscal 1998.
In addition, the terms of certain of the Company's recent acquisition agreements
provide for additional consideration to be paid if the acquired entity's results
of operations exceed certain targeted levels. Targeted levels are generally set
above the historical experience of the acquired entity at the time of
acquisition. Such additional consideration is to be paid in cash or with shares
of the Company's common stock and is recorded when earned as additional purchase
price. The maximum amount of remaining contingent consideration is approximately
$13.5 million (payable through fiscal 2001) and no earn-out payments have been
made prior to March 31, 2000.
3. GULF SOUTH'S RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 3, 1998
As discussed in Note 1, Background and Summary of Significant Accounting
Policies, due to the Company's consolidation method and the differing year-ends
of PSS and Gulf South, Gulf South's results of operations for the three months
ended April 3, 1998 are not reflected in the accompanying consolidated
statements of income for any periods presented. Rather, the results of
operations have been recorded as an adjustment to shareholders' equity during
the first quarter of fiscal 1999. Therefore, the results of Gulf South's
operations for the period January 1, 1998 to April 3, 1998 are summarized below
for additional disclosure.
F-14
Three Months
Ended
April 3, 1998
-------------
Net sales.................................................... $ 87,018
Cost of goods sold........................................... 73,108
-------------
Gross profit........................................ 13,910
General and administrative expenses.......................... 31,721
Selling expenses............................................. 2,939
-------------
Loss from operations................................ (20,750)
Other income, net............................................ 321
-------------
Loss before benefit for income taxes......................... (20,429)
Benefit for income taxes..................................... 5,395
-------------
Net loss..................................................... $ (15,034)
=============
During the three months ended April 3, 1998, Gulf South recorded $24,825 of
charges related to the disposition of reconciling items, merger and
restructuring costs and expenses, goodwill impairment charge, and other
operating charges. These charges are included in cost of goods sold and general
and administrative expenses above. The following table summarizes the components
of the $24,825 in charges.
Three Months
Ended
April 3, 1998
-------------
Cost of goods sold:
Reconciling items................................................ $ 5,590
Increase allowance for obsolete inventory........................ 1,889
-----------
Total charges included in costs of goods sold................. 7,479
-----------
General and administrative expenses:
Direct transaction costs related to the merger................... 5,656
Restructuring costs and expenses................................. 4,281
Legal fees and settlements....................................... 2,700
Operational tax charge........................................... 2,772
Goodwill impairment charge....................................... 1,664
Other............................................................ 273
-----------
Total charges included in general & administrative expenses... 17,346
-----------
Total charges.............................................. $ 24,825
===========
Cost of Goods Sold:
Reconciling Items
During the quarter ending April 3, 1998, a $5.6 million charge was recorded in
general and administrative expenses. Through a review of accounting records,
management believes this charge is appropriately related to cost of goods sold.
Increase Allowance for Obsolete Inventory
The charge relates directly to a change of plans, uses, and disposition efforts
which new Gulf South management had as compared to prior management. This
decision to significantly alter Gulf South's inventory retention and buying
policies, and, therefore, to dispose of the related inventories, resulted in a
change in the ultimate valuation of the impacted inventories. This charge was
recognized in the period in which management made the decision to dispose of the
affected inventory, which was Gulf South's quarter ended April 3, 1998.
General and Administrative Expenses:
Direct Transaction Costs Related to the Merger
Direct transaction costs primarily consist of professional fees, such as
investment banking, legal, and accounting, for services rendered through the
date of the merger. As of April 2, 1999, all direct transaction costs were paid.
Due to subsequent negotiations and agreements between the Company and its
service provider, actual costs paid were less than costs originally billed and
recorded. As a result, approximately $777 of costs were reversed against general
and administrative expenses during the quarter ended September 30, 1998.
F-15
Restructuring Costs and Expenses
In order to improve customer service, reduce costs, and improve productivity and
asset utilization, the Company decided to realign and consolidate its operations
with Gulf South. The restructuring costs and expenses, which directly relate to
the merger with PSS, were recorded during the three months ended April 3, 1998.
During this time period, management approved and committed to a plan to
integrate and restructure the business of Gulf South.
The Company recorded restructuring costs and expenses for costs for lease
terminations, severance and benefits to terminate employees, facility closure,
and other costs to complete the consolidation of the operations. The following
table summarizes the components of the restructuring charge.
Involuntary employee termination costs.......................... $ 1,879
Lease termination costs......................................... 977
Branch shutdown costs........................................... 885
Other exit costs................................................ 540
----------
$ 4,281
----------
Refer to Note 5, Accrued Merger and Restructuring Costs and Expenses, and Note
17, Quarterly Results of Operations, for a more detailed discussion regarding
accrued restructuring costs and expenses.
Legal Fees and Settlements
Gulf South recorded a $2,000 accrual for legal fees specifically related to
class action lawsuits, which Gulf South, the Company, and certain present and
former directors and officers were named as defendants. These lawsuits are
further discussed in Note 18, Commitments and Contingencies. In addition, Gulf
South recorded $700 in charges related to a customer supply agreement.
Operational Tax Charge
Gulf South recorded an operational tax charge of $9,492, of which $2,772 was
recorded in the quarter ended April 3, 1998, for state and local, sales and use,
and property taxes that are normally charged directly to the customer at no cost
to the Company. Penalties and interest are included in the above charge as Gulf
South did not timely remit payments to tax authorities. The Company reviewed all
available information, including tax exemption notices received, and recorded
charges to expense during the period in which the tax noncompliance issues
arose. See Note 4, Charges Included in General and Administrative Expenses, for
a more detailed discussion related to this issue.
Goodwill Impairment Charge
The $1,664 goodwill impairment charge relates primarily to a prior Gulf South
acquisition. During the quarter ended April 3, 1998, a dispute with the acquired
company's prior owners and management resulted in the loss of key employees and
all operational information related to the acquired customer base. This
ultimately affected Gulf South's ability to conduct business related to this
acquisition, and impacted Gulf South's ability to recover the value assigned to
the goodwill asset.
4. CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES
In addition to typical general and administrative expenses, this line includes
charges related to merger activity, restructuring activity, and other special
items. The following table summarizes charges included in general and
administrative expenses in the accompanying consolidated statements of income:
F-16
2000 1999 1998
--------- --------- --------
Merger costs and expenses............................................ $ 1,700 $ 4,371 $ 14,066
Restructuring costs and expenses..................................... 13,245 4,922 3,691
Information systems accelerated depreciation......................... -- 5,379 --
Goodwill impairment charges.......................................... 517 -- 5,807
Gulf South operational tax charge and professional fee accrual....... (1,221) -- 5,986
Other charges........................................................ -- 1,010 2,457
--------- --------- --------
Total charges........................................................ $ 14,241 $ 15,682 $ 32,007
========= ========= ========
Merger Costs and Expenses
The Company's policy is to accrue merger costs and expenses at the commitment
date of an integration plan if certain criteria under EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity ("EITF 94-3") or 95-14, Recognition of Liabilities in Anticipation of a
Business Combination ("EITF 95-14"), are met. Merger costs and expenses recorded
at the commitment date primarily include charges for direct transaction costs,
involuntary employee termination costs, branch shut-down costs, lease
termination costs, and other exit costs.
If the criteria described in EITF 94-3 or EITF 95-14 are not met, the Company
records merger costs and expenses as incurred. Merger costs expensed as incurred
include the following: (1) costs to pack and move inventory from one facility to
another or within a facility in a consolidation of facilities, (2) relocation
costs paid to employees in relation to an acquisition accounted for under the
pooling-of-interests method of accounting, (3) systems or training costs to
convert the acquired companies to the current existing information system, and
(4) training costs related to conforming the acquired companies operational
policies to that of the Company's operational policies. In addition, amounts
incurred in excess of the original amount accrued at the commitment date are
expensed as incurred.
Merger costs and expenses for fiscal 2000 include $2,300 of charges for merger
costs expensed as incurred. In addition, during fiscal 2000, the Company
reversed approximately $1,602 of merger costs and expenses into income, of which
$1,437 related to accrued lease termination costs.
Effective February 1, 2000, the Board of Directors approved and adopted the PSS
World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical, Inc.
Corporate Office Employee Retention Bonus Plan (collectively the "Retention
Plans"). As part of the Company's strategic alternatives process (see Note 20,
Subsequent Event), management put these plans in place to retain certain
officers and key employees during the transition period. The total costs related
to these plans is approximately $10,110 of which $1,002, $4,805, $2,872, and
$1,431 will be expensed in fiscal 2000, 2001, 2002, and 2003, respectively.
Merger costs and expenses for fiscal 1999 include $2,818 of charges recorded at
the commitment date of an integration plan adopted by management and $2,481 of
charges for merger costs expensed as incurred. In addition, during fiscal 1999,
the Company reversed approximately $928 of merger costs and expenses into
income, of which approximately $777 related to direct transaction costs (refer
to Note 3, Gulf South's Results of Operations for the Three Months Ended April
3, 1998).
Merger costs and expenses for fiscal 1998 include $4,055 of charges recorded at
the commitment date of an integration plan adopted by management and $10,011 of
charges for merger costs expensed as incurred. The merger costs expensed as
incurred primarily relate to direct transaction costs related to the merger with
Gulf South.
Restructuring Costs and Expenses
Fiscal 2000 activity
During the quarter ended September 30, 1999, management approved and adopted a
formal plan to restructure certain operations of Gulf South ("Plan C"), an
additional component to the previously established Plans A and B. This
restructuring plan identified five additional distribution centers and the Gulf
South corporate facility as redundant or inadequate for future operations. As a
result, these locations were closed and made permanently idle. Accordingly, the
Company recorded restructuring costs and expenses of $4,967 at the commitment
date of the restructuring plan adopted by management. Such costs include branch
shutdown costs, lease termination costs, involuntary employee termination costs
of $494, $2,915, and $1,558, respectively. Refer to Note 5, Accrued Merger and
Restructuring Costs and Expenses, for further discussion regarding the
restructuring plan.
F-17
Restructuring costs and expenses for the twelve months ended March 31, 2000 also
included $9,213 of charges that were expensed as incurred and primarily relate
to other exit costs. Other exit costs include costs to pack and move inventory,
costs to set up new facilities, employee relocation costs, and other related
facility closure costs. In addition, the company reversed $1,341 of
restructuring costs into income, which related to over-accrual for lease
termination costs, and involuntary employee termination costs.
During the three months ended March 31, 2000, management approved and adopted a
formal plan to restructure the Imaging Business' sales and service organization
and the shut down of two facilities ("Plan D"). Accordingly, the Company
recorded restructuring costs and expenses of $318 at the commitment date of the
restructuring plan adopted by management. Refer to Note 5, Accrued Merger and
Restructuring Costs and Expenses, for further discussion regarding the
restructuring plan. Restructuring costs and expenses for the three months ended
March 31, 2000 also included $88 of charges that were expensed as incurred and
primarily relate to other exit costs. Other exit costs include costs to pack and
move inventory, costs to set up new facilities, employee relocation costs, and
other related facility closure costs.
Fiscal 1999 activity
During the quarter ended June 30, 1998, management approved and adopted Plan B,
an additional Gulf South component to the 1998 restructuring plan or Plan A.
This restructuring plan identified two additional distribution centers and two
corporate offices to be merged with existing facilities and identified three
executives to be involuntarily terminated. Accordingly, the Company recorded
restructuring costs and expenses of $1,503 at the commitment date of the
restructuring plan adopted by management. Such costs include branch shutdown
costs, lease termination costs, involuntary employee termination costs of $281,
$570, and $652, respectively.
The remaining $3,419 of restructuring costs recorded during fiscal 1999
represent charges expensed as incurred. Such costs include charges for training
costs related to conforming the acquired companies operational policies to that
of the Company's operational policies, direct transaction costs, involuntary
employee termination costs, and other exit costs of $1,138, $227, $300, and
$1,754, respectively. Other exit costs include costs to pack and move inventory,
costs to set up new facilities, employee relocation costs, and other related
facility closure costs.
Fiscal 1998 activity
During fiscal 1998, due to the impact of the Gulf South merger, the Company
recorded restructuring costs and expenses of $3,691 related to the PSS and DI
divisions (Plan A). See Note 3, Gulf South's Results of Operations for the Three
Months Ended April 3, 1998, which discusses the charges recorded by the Gulf
South division. Refer to Note 5, Accrued Merger and Restructuring Costs and
Expenses, for a further discussion regarding the restructuring plan.
Information Systems Accelerated Depreciation
In connection with the Gulf South merger during fiscal 1998, management
evaluated the adequacy of the combined companies' information systems. The
Company concluded that its existing information systems were not compatible with
those of Gulf South's and not adequate to support the future internal growth of
the combined companies and expected growth resulting from future acquisitions.
Pursuant to SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of ("SFAS No. 121"), the Company evaluated
the recoverability of the information system assets. Based on the Company's
analysis, impairment did not exist at the division level; therefore, management
reviewed the depreciation estimates in accordance with Accounting Principles
Board ("APB") No. 20, Accounting Changes.
Effective April 4, 1998, the estimated useful lives of the PSS, DI, and GSMS
division information systems were revised to 12 to 15 months, which was the
original estimate of when the new systems implementation would be completed. The
$5,379 charge represents the incremental fiscal 1999 impact on depreciation
expense resulting from management's decision to replace its information systems.
F-18
Goodwill Impairment Charges
During fiscal 2000, the Imaging Business closed their Metro New York facility.
The closure of this facility triggered an asset impairment as determined under
SFAS No. 121. As a result, goodwill of $517 was written off during fiscal 2000.
During fiscal 1998, the Company determined that goodwill related to three
foreign (World Med Int'l) acquired companies and one domestic (PSS division)
acquired company, was not recoverable. As such, the goodwill of $5,807 related
to the four entities was written-off during fiscal 1998.
Gulf South Operational Tax Charge and Professional Fee Accrual
The Company, in connection with the filing of its fiscal 1998 financial
statements, restated for certain operational tax compliance issues in the
financial statements of Gulf South for the years ended December 31, 1997, 1996,
and 1995. As such, Gulf South recorded operational charges of $3,067, $1,998,
and $1,656 during fiscal 1998, 1997, and 1996, respectively, primarily related
to state and local, sales and use, and property taxes that are normally charged
directly to the customer at no cost to the Company. In addition, as explained in
Note 3, Gulf South's Results of Operations for Three Months Ended April 3, 1998,
$2,772 of such charges were recorded by Gulf South during the quarter ended
April 3, 1998. Interest is included in the above charges as Gulf South did not
timely remit payments to tax authorities. The Company reviewed all available
information, including tax exemption notices received, and recorded charges to
expense during the period in which the tax noncompliance issues arose. During
fiscal 2000, the Company performed an analysis of the estimated exposure based
on the most recent available information and reversed $1,221 of the previously
recorded operating tax charge reserve.
In addition, professional fees estimated to be incurred to resolve the tax
issues of $2,919 for fiscal 1998 were recorded in the accompanying consolidated
statements of income for the year ended April 3, 1998.
Other Charges
During fiscal 1999, the Company incurred approximately $1,010 of costs related
to acquisitions not consummated.
Other charges recorded in fiscal 1998 relate to the ESOP cost of an acquired
company. 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, Employers Accounting for Employee Stock
Ownership Plans. 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 $2,457 of related expenses
were recognized in fiscal 1998.
5. ACCRUED MERGER AND RESTRUCTURING COSTS AND EXPENSES
Summary of Accrued Merger Costs and Expenses
In connection with the consummation of business combinations, management often
develops formal plans to exit certain activities, involuntarily terminate
employees, and relocate employees of the acquired companies. Management's plans
to exit an activity often include identification of duplicate facilities for
closure and identification of facilities for consolidation into other
facilities.
Generally, completion of the integration plans will occur within one year from
the date in which the plans were formalized and adopted by management. However,
intervening events occurring prior to completion of the plan, such as subsequent
acquisitions or system conversion issues, can significantly impact a plan that
had been previously established. Such intervening events may cause modifications
to the plans and are accounted for on a prospective basis. At the end of each
quarter, management reevaluates its integration plans and adjusts previous
estimates.
F-19
As part of the integration plans, certain costs are recognized at the date in
which the plan is formalized and adopted by management (commitment date). These
costs are generally related to employee terminations and relocation, lease
terminations, and branch shutdown. In addition, there are certain costs that do
not meet the criteria for accrual at the commitment date and are expensed as the
plan is implemented (refer to Note 4, Charges Included in General and
Administrative Expenses). Involuntary employee termination costs are employee
severance costs and termination benefits. Lease termination costs are lease
cancellation fees and forfeited deposits. Branch shutdown costs include costs
related to facility closure costs. Employee relocation costs are moving costs of
employees of an acquired company in transactions accounted for under the
purchase method of accounting.
Accrued merger costs and expenses, classified as accrued expenses in the
accompanying consolidated balance sheets, were $1,089 and $4,084, at March 31,
2000 and April 2, 1999, respectively. The discussion and rollforward of the
accrued merger costs and expenses below summarize the significant and
nonsignificant integration plans adopted by management for business combinations
accounted for under the purchase method of accounting and pooling-of-interests
method of accounting. Integration plans are considered to be significant if the
charge recorded to establish the accrual is in excess of 5% of consolidated
pretax income.
Significant Pooling-of-Interests Business Combination Plan
The Company formalized and adopted an integration plan in December 1997 to
integrate the operations of S&W with the Imaging Business. The following accrued
merger costs and expenses were recognized in the accompanying consolidated
statements of operations at the commitment date. A summary of the merger
activity related to the S&W merger is as follows:
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
----------- ----------- --------- --------
Balance at April 3, 1998.......................... $ 156 $ 540 $ 461 $ 1,157
Adjustments ................................... -- -- -- --
Additions...................................... -- -- -- --
Utilized....................................... (2) -- (350) (352)
----------- ----------- --------- --------
Balance at April 2, 1999.......................... 154 540 111 805
Adjustments ................................... (113) (300) -- (413)
Additions...................................... -- -- -- --
Utilized....................................... (41) (138) (111) (290)
----------- ----------- --------- --------
Balance at March 31, 2000......................... $ -- $ 102 $ -- $ 102
=========== =========== ========= ========
As of December 31, 1999, all of the employees have been terminated and all of
the seven identified distribution facilities had been shut down. During the
three months ended December 31, 1999, management determined that all costs
related to the merger plan had been incurred except for lease termination costs
for one location that will be paid through fiscal 2002. Therefore, an adjustment
of $413 was recorded to reverse the over-accrual of involuntary employee
termination costs and lease termination costs. Refer to Note 4, Charges Included
in General and Administrative Expenses.
Nonsignificant Poolings-of-Interests Business Combination Plans
The following accrued merger costs and expenses were recognized in the
accompanying consolidated statements of operations at the date in which the
integration plan was formalized and adopted by management. A summary of the
merger activity related to eight nonsignificant pooling-of-interests business
combinations completed during fiscal 1998 through 2000, respectively, is as
follows:
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
----------- ----------- --------- --------
Balance at April 3, 1998.......................... $ 165 $ 253 $ 518 $ 936
Adjustments ................................... (144) 11 311 178
Additions...................................... 74 1,868 376 2,318
Utilized....................................... (21) (248) (969) (1,238)
----------- ----------- --------- --------
Balance at April 2, 1999.......................... 74 1,884 236 2,194
Adjustments ................................... (52) (1,113) (24) (1,189)
Additions...................................... -- -- -- --
Utilized....................................... (22) (226) (212) (460)
----------- ----------- --------- --------
Balance at March 31, 2000......................... $ -- $ 545 $ -- $ 545
=========== =========== ========= ========
F-20
The Imaging Business acquired Tristar Imaging Systems, Inc. in October 1998, and
management formalized and adopted an integration plan in late fiscal 1999 to
integrate the operations of the acquired company. Management determined that all
costs related to the merger plan had been incurred except for lease termination
costs of $545 for which payment will extend through fiscal 2007. Therefore an
adjustment of $1,189 was made to reverse the over accrual of certain costs
accrued for under the plan, the majority related to lease termination costs.
Significant Purchase Business Combination Plan
The Company formalized and adopted an integration plan in September 1997 to
integrate the operations of General X-Ray, Inc. ("GXI") with the Imaging
Business. The following accrued merger costs and expenses were recognized and
additional goodwill was recorded at the commitment date. A summary of the GXI
merger accruals is as follows (in thousands):
Involuntary
Employee Lease Branch
Relocation Termination Termination Shutdown
Costs Costs Costs Costs Total
---------- ----------- ----------- --------- ---------
Balance at April 3, 1998............ $ 162 $ 197 $ 1,090 $ 785 $ 2,234
Adjustments ..................... (125) (85) (883) (32) (1,125)
Additions........................ -- -- -- -- --
Utilized......................... (37) (112) (207) (753) (1,109)
---------- ----------- ----------- --------- ---------
Balance at April 2, 1999............ $ -- $ -- $ -- $ -- $ --
========== =========== =========== ========= =========
The Company identified nine distribution facilities to be closed and all
operations would be ceased due to duplicative functions. Relocation costs were
recorded related to the transfer of approximately 15 GXI employees. Involuntary
employee termination costs are costs for 19 employees, including severance and
benefits, who represent duplicative functions as service and operations leaders,
customer service representatives, and accounting personnel at locations where
facilities would be combined. As of April 2, 1999, all employees have been
terminated and relocated, and the plan has been completed.
Certain intervening events occurred that modified the execution of the GXI
integration plan. Due to growth from a subsequent acquisition and improvement in
the operating results for a distribution facility previously identified to be
closed, certain merger accruals were not utilized. Therefore, an adjustment was
recorded during the second quarter of fiscal 1999 to reverse $1,125 of excessive
accruals against goodwill.
Nonsignificant Purchase Business Combination Plans
The following accrued merger costs and expenses were recognized and additional
goodwill was recorded at the date in which the integration plans were formalized
and adopted by management. A summary of the merger activity related to six
nonsignificant purchase business combinations during fiscal 1998 through 2000 is
as follows:
F-21
Involuntary
Employee Employee Lease Branch
Relocation Termination Termination Shutdown
Costs Costs Costs costs Total
----------- ----------- ----------- ---------- ------------
Balance at April 3, 1998.................. $ -- $ -- $ -- $ -- $ --
Additions from Gulf South subsidiary.... -- 102 100 250 452
----------- ----------- ----------- ---------- ------------
Balance at April 4, 1998.................. -- 102 100 250 452
Adjustments............................ -- (102) (55) (135) (292)
Additions.............................. 155 556 423 496 1,630
Utilized............................... (38) (11) (58) (598) (705)
----------- ----------- ----------- ---------- ------------
Balance at April 2, 1999.................. 117 545 410 13 1,085
Adjustments............................ (86) (434) (145) (9) (674)
Additions.............................. -- 131 690 225 1,046
Utilized............................... (31) (186) (569) (229) (1,015)
----------- ----------- ----------- ---------- ------------
Balance at March 31, 2000................. $ -- $ 56 $ 386 $ -- $ 442
=========== =========== =========== ========== ============
The Imaging Business acquired South Jersey X-Ray, Inc. in October 1998, and
management formalized and adopted an integration plan during the three months
ended June 30, 1999 to integrate the operations of the acquired company.
Approximately $328 of the $442 accrued merger costs and expenses at March 31,
2000 relate to this integration plan. As of December 31, 1999, all locations
have been shut down and all employees were terminated as a result of the plan.
However, lease termination payments will extend through fiscal 2004. The
remaining accrual of $114 relates to multiple merger plans that are immaterial.
During fiscal 2000, management determined that actual merger costs to be
incurred were less than management's estimate recorded to establish the accrued
merger costs and expenses. Therefore, an adjustment to reduce goodwill of $674
was recorded to eliminate the excessive accruals.
Summary of Accrued Restructuring Costs and Expenses
Primarily as a result of the impact of the Gulf South merger, in order to
improve customer service, reduce costs, and improve productivity and asset
utilization, the Company decided to realign and consolidate its operations.
Accordingly, the Company began implementing a restructuring plan during the
fourth quarter of fiscal 1998 which impacted all divisions ("Plan A").
Subsequently, the Company adopted a second restructuring plan during the first
quarter of fiscal 1999 related to the Gulf South division ("Plan B") to further
consolidate its operations.
The Company recorded a total accrual of $7,972 related to Plan A. Approximately
$3,691 of the $7,972 total restructuring charge was related to the PSS and DI
divisions and was recorded in the accompanying consolidated statement of
operations for fiscal 1998. The additions from Gulf South represent
restructuring costs and expenses of $4,281 recorded by Gulf South during the
unconsolidated period January 1 to April 3, 1998. No amounts were utilized
during this period. This charge is not included in the accompanying consolidated
statements of operations; rather it is included in the retained earnings
adjustment recorded on April 4, 1998. Refer to Note 1, Background and Summary of
Accounting Policies, for a discussion regarding the different year-ends of Gulf
South and the Company.
During fiscal 1999, the Company established an additional accrual of $1,503
related to Plan B. During the second and fourth quarters of fiscal 2000, the
Company established accruals of $4,968 and $319 for Plan C and Plan D,
respectively.
Accrued restructuring costs and expenses, classified as accrued expenses in the
accompanying consolidated balance sheets, were $1,607 and $3,818 million, at
March 31, 2000 and April 2, 1999, respectively. A summary of the restructuring
plan activity is as follows:
F-22
Involuntary
Employee Lease Branch Other
Termination Termination Shutdown Exit
Costs Costs Costs costs Total
----------- ----------- ----------- ---------- ------------
Balance at April 3, 1998..................... $ 1,570 $ 1,389 $ 627 $ 105 $ 3,691
Additions from Gulf South subsidiary...... 1,880 406 1,455 540 4,281
----------- ----------- ----------- ---------- ------------
Balance at April 4, 1998..................... 3,450 1,795 2,082 645 7,972
Additions................................. 652 570 281 -- 1,503
Utilized.................................. (2,500) (1,045) (1,467) (645) (5,657)
----------- ----------- ----------- ---------- ------------
Balance at April 2, 1999..................... 1,602 1,320 896 -- 3,818
Adjustments............................... (1,107) (436) (467) -- (2,010)
Additions................................. 3,233 1,559 494 -- 5,286
Utilized.................................. (3,352) (1,586) (549) -- (5,487)
----------- ----------- ----------- ---------- ------------
Balance at March 31, 2000.................... $ 376 $ 857 $ 374 $ -- $ 1,607
=========== =========== =========== ========== ============
Plan A
As of December 31, 1999, all employees were terminated as a result of the plan
and the related severance payments were made in the fourth quarter of fiscal
2000. As of December 31, 1999, all of the locations were merged into existing
locations.
Plan B
As of December 31, 1999, all of the six locations had been shut down. As of
September 30, 1999, all employees were terminated as a result of the plan and
the related severance payments were made in the fourth quarter of fiscal 2000.
Plan C
During the second quarter of fiscal 2000, management evaluated the Company's
overall cost structure and implemented cost reductions in order to meet internal
profitability targets. In addition, management decided to improve its
distribution model and relocate the corporate office for the GSMS division to
Jacksonville, Florida where the corporate offices for the DI and PSS divisions
exist. The Company began implementing the restructuring plan during the second
quarter of fiscal 2000, which impacted all divisions ("Plan C"). The total
number of employees to be terminated was 272. All employees have been terminated
at March 31, 2000. Accrued restructuring costs and expenses related to Plan C
were $1,208 at March 31, 2000, of which $668 relates to lease terminations, $166
to involuntary employee terminations, and $374 to branch shut down costs.
Plan D
During the second quarter of fiscal 2000, the Imaging Business' management made
a discretionary decision to change its business strategy and the way it operates
to improve future operations. These changes include restructuring the Imaging
Business sales force, terminating approximately 50 service engineers, and
closure of two distribution centers. The total number of employees to be
terminated are 87, of which 30 employees have been terminated at March 31, 2000.
Accrued restructuring costs and expenses related to this plan were $210 at March
31, 2000, all relating to involuntary employee terminations.
During fiscal 2000, management determined that all costs associated with
restructuring Plans A and B had been incurred with the exception of $189 of
lease termination costs. Therefore an adjustment of $1,692 was recorded to
reverse the over accrual of lease termination, involuntary employee termination,
and branch shutdown costs related to Plans A and B. Management also determined
that Plan C was over accrued and recorded an adjustment of $318 to reverse the
over accrual of lease termination and involuntary employee termination costs
related to Plan C. As of March 31, 2000, the Company had accrued $1,208 and $210
for restructuring Plans C and D, respectively.
F-23
6. MARKETABLE SECURITIES
Increase
(Decrease) in
Trading Securities Fair Value Fair Value
------------ -----------
March 31, 2000: $ -- $ 3
============ ===========
April 2, 1999: (573) 3
============ ===========
Unrealized
Available-for-Sale Securities Cost Gain Fair Value
----------- ------------ -----------
March 31, 2000 $ 1,500 $ 2,825 $ 4,325
============ =========== ===========
The Company holds investments classified as trading securities and
available-for-sale securities. Trading securities are to be reported at their
fair value and unrealized holding gains or losses are reported in earnings.
Available-for-sale securities are reported at fair value, with unrealized gains
and losses excluded from earnings but reported in equity and other comprehensive
income (net of the effect of income taxes) until they are sold. At the time of
the sales, any gains or losses are recognized as a component of operating
results. Gains and losses are based on the specific identification method of
determining cost.
7. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
2000 1999
---------- ----------
Land.............................................. $ 1,184 $ 1,996
Building 2,547 4,186
Equipment......................................... 76,304 62,430
Furniture, fixtures, and leasehold improvements... 23,695 12,233
---------- ----------
103,730 80,845
Accumulated depreciation.......................... (37,947) (32,678)
---------- ----------
$ 65,783 $ 48,167
========== ==========
Equipment includes equipment acquired under capital leases with a cost of $476
and $488 and related accumulated depreciation of $368 and $233 at March 31, 2000
and April 2, 1999, respectively. Depreciation expense, included in general and
administrative expenses in the accompanying consolidated statements of income,
aggregated approximately $9,446, $12,209, and $5,629 for fiscal 2000, 1999, and
1998, respectively.
8. INTANGIBLES
Intangibles, stated at cost, consist of the following:
2000 1999
---------- ----------
Goodwill $ 189,608 $ 134,196
Noncompete agreements and other................... 37,998 27,257
---------- ----------
227,606 161,453
Accumulated amortization.......................... (25,364) (14,070)
---------- ----------
$ 202,242 $ 147,383
========== ==========
F-24
Future minimum payments required under noncompete agreements at March 31, 2000
are as follows:
Fiscal Year:
2001.......................................................... $ 1,489
2002.......................................................... 823
2003.......................................................... 273
2004.......................................................... 64
2005.......................................................... 43
Thereafter.................................................... 214
---------
$ 2,906
=========
Amortization expense, included in general and administrative expenses in the
accompanying consolidated statements of income, aggregated approximately
$10,842, $7,289, and $5,062 for fiscal 2000, 1999, and 1998, respectively.
9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
March 31, 2000 April 2, 1999
-------------- -------------
Senior subordinated notes....................... $ 125,000 $ 125,000
Senior revolving credit......................... 121,000 24,000
Capital lease obligations....................... 171 496
Long-term debt of acquired companies............ 125 26
Notes Payable to owners of acquired companies... 2,093 70
Other notes .................................... 10,844 3,912
259,233 153,504
Less current maturities......................... (4,274) (1,062)
-------------- -------------
$ 254,959 $ 152,442
============== =============
Senior Subordinated Notes
During October 1997, the Company issued 8.5% unsecured senior subordinated notes
due in 2007 (the "Notes") in the amount of $125.0 million. Interest on the Notes
accrues from the date of original issuance and is payable semi-annually on April
1 and October 1 of each year, commencing on April 1, 1998, at a rate of 8.5% per
annum. The Notes are subject to certain covenants, including cross covenants
with the Company's senior revolving credit facility, restrictions on
indebtedness, investments, payments of dividends, purchases of treasury stock,
and sales of assets and maintaining a fixed charge coverage ratio of 2.0 to 1.0.
Senior Revolving Credit
The Company entered into a $140.0 million senior revolving credit facility with
a syndicate of financial institutions with Bank of America, N.A. as principal
agent in February 1999. Borrowings under the credit facility are available for
working capital, capital expenditures, and acquisitions and are secured by the
common stock of the subsidiaries and assets of the Company and its subsidiaries.
The credit facility expires February 10, 2004 and borrowings bear interest at
variable rates, at the Company's option, at either the lender's base rate or the
LIBOR rate plus a variable spread based upon the Company's leverage ratio. At
March 31, 2000, the weighted average interest rates under these borrowing
options were 9.25% and 7.3%, respectively. The amount available under the credit
facility at March 31, 2000 was $17.0 million, net of a $2 million stand-by
letter of credit.
On October 20, 1999, the Company amended its $140.0 million senior revolving
credit facility to allow for repurchases of up to $50.0 million of the Company's
common stock through October 31, 2000. In addition, the amendment modified the
consolidated net worth maintenance covenant to reduce the $337.0 million minimum
compliance level by any repurchases made by the Company of its common stock.
F-25
The credit facility contains certain affirmative and negative covenants, the
most restrictive of which require maintenance of a maximum leverage ratio of 3.5
to 1.0, maintenance of consolidated net worth of $337.0 million, and maintenance
of a minimum fixed charge coverage ratio of 2.0 to 1.0. In addition, the
covenants limit additional indebtedness and asset dispositions, require majority
lender approval on acquisitions with a total purchase price greater than
$75,000, and restrict payments of dividends.
As of March 31, 2000, the Company was not in compliance with the following
covenants under the senior revolving credit facility: 1) consolidated fixed
charge coverage ratio, 2) consolidated leverage ratio, and 3) annual capital
expenditure limits. However, the Company obtained a waiver from these covenants
from the lending group for the period ended March 31, 2000. Management believes
it is probable that the Company will meet these covenants in future periods,
or that appropriate waivers will be obtained. As such, the related debt has been
classified as non-current as of March 31, 2000.
Capital Lease Obligations
As of March 31, 2000, future minimum payments, by fiscal year and in the
aggregate, required under capital leases are approximately as follows:
Fiscal Year:
2001.............................................................. $ 99
2002.............................................................. 64
2003.............................................................. 32
---------
Net minimum lease payments........................................... 195
Less amount representing interest.................................... (24)
---------
Present value of net minimum lease payments under capital leases..... 171
Less amounts due in one year......................................... (83)
---------
Amounts due after one year............................... $ 88
=========
Notes Payable to Owners of Acquired Companies
Notes payable to owners of acquired companies consists of holdback agreements or
notes payable that are paid to the previous owners after certain contingencies
are met, such as collection of all acquired accounts receivable and the sale of
acquired inventory. These notes payable are due within one year of the
acquisition.
Other Notes
At March 31, 2000, other notes consist of various debt maintained by WorldMed
Int'l, including a working capital line of credit, a mortgage on facilities in
Leuven, Belgium, and debt to acquire certain international business service
centers. Interest rates on the related notes range from 4.9% to 6.2%,
respectively.
As of March 31, 2000, future minimum payments of long-term debt, excluding
capital lease obligations, are approximately as follows:
Fiscal Year:
2001................................................ $ 4,191
2002................................................ 1,613
2003................................................ 1,556
2004................................................ 122,438
2005................................................ 1,085
Thereafter.......................................... 128,179
-----------
Total...................................... $ 259,062
===========
10. INCOME TAXES
The provisions for income taxes are detailed below:
F-26
2000 1999 1998
--------- --------- ----------
Current tax provision:
Federal.......................................................... $ 6,410 $ 16,253 $ 17,928
State............................................................ 1,055 2,786 3,516
--------- --------- ----------
Total current........................................... 7,465 19,039 21,444
--------- --------- ----------
Deferred tax provision (benefit):
Federal.......................................................... 10,140 9,306 (3,486)
State............................................................ 1,738 1,595 (597)
--------- --------- ----------
Total deferred.......................................... 11,878 10,901 (4,083)
--------- --------- ----------
Total income tax provision.............................. $ 19,343 $ 29,940 $ 17,361
========= ========= ==========
The difference between income tax computed at the federal statutory rate and the
actual tax provision is shown below:
2000 1999 1998
--------- --------- ----------
Income before provision for taxes and cumulative effect of
accounting change................................................ $ 41,527 $ 73,681 $ 32,660
========= ========= ==========
Tax provision at the 35% statutory rate............................. 14,534 25,788 11,431
--------- --------- ----------
Increase (decrease) in taxes:
State income tax, net of federal benefit......................... 1,847 2,847 1,886
Effect of foreign subsidiary..................................... 574 310 2,179
Merger costs and expenses........................................ 153 (250) 1,958
Goodwill amortization............................................ 1,103 969 512
Meals and entertainment.......................................... 438 454 207
Nontaxable interest income....................................... (80) (374) (688)
Income of S corporations......................................... -- 68 (287)
Officer life insurance........................................... 478 (3) 151
Other, net....................................................... 296 131 12
--------- --------- ----------
Total increase in taxes................................. 4,809 4,152 5,930
--------- --------- ----------
Total income tax provision.............................. $ 19,343 $ 29,940 $ 17,361
========= ========= ==========
Effective tax rate.................................................. 46.6% 40.6% 53.2%
========= ========= ==========
Deferred income taxes for fiscal 2000 and 1999 reflect the impact of temporary
differences between the financial statement and tax bases of assets and
liabilities. The tax effect of temporary differences which create deferred tax
assets and liabilities at March 31, 2000 and April 2, 1999 are detailed below:
2000 1999
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts and sales returns............................. $ 6,117 $ 5,277
Merger, restructuring and other nonrecurring costs and expenses............... 2,574 4,402
Accrued expenses.............................................................. 2,276 2,046
Net operating loss carryforwards.............................................. 1,156 3,380
Operational tax reserve....................................................... 3,332 3,983
Inventory uniform cost capitalization......................................... 1,934 1,536
Reserve for inventory obsolescence............................................ 1,208 1,273
Accrued professional fees..................................................... 949 1,014
Excess of book depreciation and amortization over tax depreciation and 1,030 581
amortization...............................................................
Deferred compensation......................................................... 2,724 826
Other ..................................................................... 428 1,282
---------- ----------
Gross deferred tax assets............................................ $ 23,728 $ 25,600
---------- ----------
Deferred tax liabilities:
Available for sale marketable security........................................ (1,099) --
Software development.......................................................... (6,820) (107)
---------- ----------
Gross deferred tax liabilities....................................... (7,919) (107)
---------- ----------
Net deferred tax assets.......................................................... $ 15,809 $ 25,493
========== ==========
As of March 31, 2000, net current deferred tax assets, net non-current deferred
tax assets, and net deferred tax liabilities of $16,461, $3,463, and $4,115 are
included in prepaid expenses, other assets, and other long-term liabilities,
respectively, in the accompanying balance sheets. As of April 2, 1999, net
deferred tax assets of $19,909 and $5,584 are included in prepaid expenses and
other assets, respectively, in the accompanying balance sheets.
The income tax benefits related to the exercise or early disposition of certain
stock options and stock contribution to the ESOP reduce taxes currently payable
and are credited directly to additional paid-in capital. Such amounts were $194,
$759, and $1,505 for fiscal 2000, 1999, and 1998, respectively.
F-27
At March 31, 2000, the Company had net operating loss carryforwards for income
tax purposes arising from mergers of approximately $2,972 which expire from 2001
to 2020. The utilization of the net operating loss carryforwards is subject to
limitation in certain years.
All deferred tax assets as of March 31, 2000 and April 2, 1999 are considered to
be realizable due to the projected future taxable income. Therefore, no
valuation allowance has been recorded as of March 31, 2000 and April 2, 1999.
11. EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, the calculation of basic
net earnings per common share and diluted earnings per common share is presented
below (share amounts in thousands, except per share data):
2000 1999 1998
--------- --------- ---------
Net income (loss)................................................... $ 20,740 $ 43,741 $ 15,299
========= ========= =========
Earnings per share:
Basic............................................................ $0.29 $0.62 $0.22
========= ========= =========
Diluted.......................................................... $0.29 $0.61 $0.22
========= ========= =========
Weighted average shares outstanding:
Common shares 70,966 70,548 69,575
Assumed exercise of stock options................................ 219 850 970
--------- --------- ---------
Diluted shares outstanding....................................... 71,185 71,398 70,545
========= ========= =========
12. RELATED-PARTY TRANSACTION
During fiscal 1998, the Company loaned its Chairman of the Board and Chief
Executive Officer $3,000 to consolidate debt incurred in relation to certain
real estate activities, as well as to provide the cash needed to pay-off
personal debt. During fiscal 2000, the principal amount of the loan increased
approximately $249. The loan is unsecured, bears interest at the applicable
federal rate for long-term obligations (6.25% and 5.74% at March 31, 2000 and
April 2, 1999, respectively), and is due September 2007. No principal payments
are required and interest payments are due at least annually. The note terms
provide for forgiveness of the debt in the event of a change in control. The
outstanding principal, included in other assets in the accompanying consolidated
balance sheets, at March 31, 2000 and April 2, 1999 was approximately $2,985 and
$2,736, respectively. Accrued interest was approximately $151 and $146 at March
31, 2000 and April 2, 1999, respectively. Interest income, included in interest
and investment income in the accompanying consolidated statements of income for
fiscal 2000 and 1999 was approximately $168 and $165, respectively. Principal
payments for fiscal 2000 and 1999 were approximately $0 and $564, respectively.
Interest payments for fiscal 2000 and 1999 were approximately $163 and $65,
respectively.
13. STOCK-BASED COMPENSATION PLANS
Broad-Based Employee Stock Plan
Under the Company's Broad-Based Employee Stock Plan, 800,000 shares of the
Company's common stock are reserved for sale to nonofficer employees. Grants
under this plan are in the form of nonqualified stock options or restricted
stock. Options may be granted at prices not less than the fair market value of
the common stock on the date such option is granted and are exercisable five
years from the date of grant. Any option may be exercisable no later than ten
years from the date of grant. According to Rule 144, unregistered stock options
must be held for a minimum of two years subsequent to the date of exercise prior
to selling the common stock.
Information regarding this plan is summarized below (share amounts in
thousands):
F-28
Weighted
Average
Shares Price
--------- ----------
Balance, April 3, 1998............................. -- $ --
Granted......................................... 453 9.73
Exercised....................................... -- --
Forfeited....................................... -- --
--------- ----------
Balance, April 2, 1999............................. 453 $ 9.73
Granted......................................... 40 8.69
Exercised....................................... -- --
Forfeited....................................... (33) 9.03
--------- ----------
Balance, March 31, 2000............................ 460 $ 9.35
========= ==========
The weighted-average per share fair value of options granted was $3.92 and $4.36
in fiscal 2000 and 1999, respectively. As of March 31, 2000, the range of
exercise prices was $8.69 to $10.66 and the weighted-average remaining
contractual life of outstanding options was 5.7 years. Approximately 340,000
shares of common stock are available for issuance under the plan.
1999 Long-Term Incentive Plan
On June 21, 1999, the Company adopted the 1999 Long-Term Incentive Plan (the
"1999 LTIP"). Under the 1999 LTIP, 2,270,000 shares of the Company's Common
Stock are reserved for issuance to employees, officers and directors. The
Compensation Committee of the Board of Directors has discretion to make grants
under this plan in the form of incentive stock options, nonqualified stock
options, stock appreciation rights, performance units, restricted stock awards,
dividend equivalents, restricted stock, or other stock-based awards.
Information regarding this plan is summarized below (share amounts in
thousands):
Weighted
Average
Shares Price
--------- ----------
Balance, April 2, 1999............................. -- $ --
Granted......................................... 575 9.00
Exercised....................................... -- --
Forfeited....................................... -- --
--------- ----------
Balance, March 31, 2000............................ 575 $ 9.00
========= ==========
The weighted-average per share fair value of options granted was $4.31 in fiscal
2000. As of March 31, 2000, the range of exercise prices was $8.69 to $10.66 and
the weighted-average remaining contractual life of outstanding options was 9.4
years. Approximately 1,695,000 shares of common stock are available for issuance
under the plan.
Incentive Stock Option Plan
Under the Company's qualified 1986 Incentive Stock Option Plan, 6,570,000 shares
of the Company's common stock are reserved for sale to officers and key
employees. Options may be granted at prices not less than fair market value at
the date of grant and are exercisable during periods of up to five years from
that date. The exercisability of the options is not subject to future
performance.
Information regarding this plan is summarized below (share amounts in
thousands):
F-29
Weighted
Average
Shares Price
--------- ----------
Balance, March 28, 1997........................... 364 $ 3.05
Granted........................................ -- --
Exercised...................................... (248) 2.77
Forfeited...................................... (3) 2.10
--------- ----------
Balance, April 3, 1998............................ 113 3.67
Granted........................................ -- --
Exercised...................................... (110) 3.67
Forfeited...................................... (3) 3.67
--------- ----------
Balance, April 2, 1999............................ -- $ --
========= ==========
All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. As of March 31, 2000, there
were no remaining outstanding options. This plan has expired and will require
shareholder vote to renew this plan and issue any of the approximate 1,180,502
shares of common stock that remain in the plan.
Long-Term Stock Plan
In March 1994, the Company adopted the 1994 Long-Term Stock Plan under which the
Compensation Committee of the Board of Directors has discretion to grant
nonqualified stock options and restricted stock to any employee of the Company.
A total of 2,190,000 shares of the Company's common stock have been reserved for
issuance under this plan. The exercise price of options granted under this plan
may not be less than the fair market value of the Company's common stock on the
date of grant.
Information regarding the stock option component of this plan is summarized
below (share amounts in thousands):
Weighted
Average
Shares Price
--------- ----------
Balance, March 28, 1997............................ 802 $ 16.52
Granted......................................... 898 14.53
Exercised....................................... (112) 13.20
Forfeited....................................... (43) 14.89
--------- ----------
Balance, April 3, 1998............................. 1,545 16.19
Granted......................................... 476 13.27
Exercised....................................... (66) 13.76
Forfeited....................................... (5) 16.78
--------- ----------
Balance, April 2, 1999............................. 1,950 14.80
Granted......................................... -- --
Exercised....................................... -- --
Forfeited....................................... -- --
--------- ----------
Balance, March 31, 2000............................ 1,950 $ 14.80
========= ==========
All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. The weighted-average per
share fair value of options granted was $6.84 and $5.60 in fiscal 1999 and 1998,
respectively. As of March 31, 2000, the range of exercise prices was $5.29 to
$28.86 and the weighted-average remaining contractual life of outstanding
options was 6.1 years. As of March 31, 2000, there were no remaining shares
available for grant under this plan, and the Company does not intend to issue
any more options under this plan.
1994 Long-Term Incentive Plan
In March 1994, the Company adopted the 1994 Long-Term Incentive Plan which
provides officers with performance awards, consisting of cash or registered
shares of common stock, or a combination thereof, based primarily upon the
Company's total shareholder return as ranked against the companies comprising
the NASDAQ Composite Index over a three-year period. The maximum payable under
this plan to an eligible employee, whether in the form of cash or common stock,
may not exceed $1 million per fiscal year.
F-30
The plan also provides for nonqualified stock options or restricted stock to be
granted at the full discretion of the Compensation Committee. The exercise price
of options granted under this plan may not be less than the fair market value of
the Company's common stock on the date of grant, and accordingly, no
compensation expense is recorded on the date the stock options are granted. The
aggregate number of shares of common stock, including shares reserved for
issuance pursuant to the exercise of options, which may be granted or issued may
not exceed 730,000 shares.
No cash or restricted stock was issued during fiscal 2000, 1999, and 1998.
Information regarding the stock option component of the plan is summarized below
(share amounts in thousands):
Weighted
Average
Shares Price
--------- ----------
Balance, March 28, 1997............................. 321 $16.78
Granted.......................................... 97 16.92
Exercised........................................ -- --
Forfeited........................................ -- --
--------- ----------
Balance, April 3, 1998.............................. 418 15.90
Granted.......................................... -- --
Exercised........................................ -- --
Forfeited........................................ -- --
--------- ----------
Balance, April 2, 1999.............................. 418 14.83
Granted.......................................... -- --
Exercised........................................ -- --
Forfeited........................................ -- --
--------- ----------
Balance, March 31, 2000............................. 418 $14.83
========= ==========
All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. The weighted-average per
share fair value of options granted was $5.72 and $11.08 in fiscal 1998 and
1997, respectively. As of March 31, 2000, the range of exercise prices was
$14.75 to $14.88 and the weighted-average remaining contractual life of
outstanding options was 5.9 years. As of March 31, 2000, there were
approximately 7,000 shares available for grant under this plan.
Directors' Stock Plan
In March 1994, the Company adopted the Directors' Stock Plan under which
non-employee directors receive an annual grant of an option to purchase shares
of the Company's common stock. During fiscal 1999, the Plan was amended to
increase the number of option grants from 1,500 to 3,000 and to increase the
number of shares available for grant. A total of 400,000 shares of the Company's
common stock have been reserved for issuance under this plan. The exercise
price of options granted under this plan may not be less than the fair market
value of the Company's common stock on the date of grant.
Information regarding the stock option component of this plan is summarized
below (share amounts in thousands):
F-31
Weighted
Average
Shares Price
--------- ----------
Balance, March 28, 1997............................... 74 $13.44
Granted............................................ 50 14.75
Exercised.......................................... -- --
Forfeited.......................................... -- --
--------- ----------
Balance, April 3, 1998................................ 124 15.70
Granted............................................ 135 13.71
Exercised.......................................... (6) 5.48
Forfeited.......................................... (1) 5.48
--------- ----------
Balance, April 2, 1999................................ 252 13.69
Granted............................................ 72 9.17
Exercised.......................................... (4) 5.48
Forfeited.......................................... -- --
--------- ----------
Balance, March 31, 2000............................... 320 $12.78
========= ==========
All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. The weighted-average per
share fair value of options granted was $5.25, $7.37, and $5.72 in fiscal years
2000, 1999, and 1998, respectively. As of March 31, 2000, the range of exercise
prices was $5.48 to $15.81 and the weighted-average remaining contractual life
of outstanding options was 7.8 years. At March 31, 2000, approximately 62,000
shares were available for grant under this plan.
Gulf South's Stock Option Plans
Under Gulf South's Stock Option Plans of 1997 and 1992, 850,000 and 1,300,000
shares, respectively, of common stock have been reserved for grant to key
management personnel and to members of the former Board of Directors. The
options granted have ten-year terms with vesting periods of either three or five
years from either the date of grant or the first employment anniversary date. At
March 31, 2000, approximately 851,000 and 1,191,000 shares were available for
grant under the 1997 and 1992 plans, respectively. However, shareholder approval
must be received for any of the remaining shares to be issued under this plan.
A summary of the Gulf South's stock option activity and related information is
as follows (share amounts in thousands):
Weighted
Average
Shares Price
--------- ----------
Balance, December 31, 1997........................... 1,635 $10.39
Granted........................................... 788 19.89
Exercised......................................... (203) 13.02
Forfeited......................................... (13) 12.07
--------- ----------
Balance, April 3, 1998............................... 2,207 13.55
Granted........................................... -- --
Exercised......................................... (239) 11.46
Forfeited......................................... (24) 17.07
--------- ----------
Balance, April 2, 1999............................... 1,944 13.77
Granted........................................... -- --
Exercised......................................... (220) 10.52
Forfeited......................................... (950) 15.32
--------- ----------
Balance, March 31, 2000.............................. 774 $12.77
========= ==========
All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. The weighted-average fair
values of options granted during calendar year 1997 was $5.83. As of March 31,
2000, the range of exercise prices for the 1992 plan was $4.57 to $28.00 and the
weighted-average remaining contractual life of outstanding options was 6.0
years. As of March 31, 2000, the range of exercise prices for the 1997 plan was
$4.71 to $19.71 and the weighted-average remaining contractual life of
outstanding options plan was 7.5 years.
F-32
The Company granted warrants for 787,500 shares of its common stock on January
2, 1997 at an exercise price of $14.80 in connection with the purchase of
Gateway. All of the warrants were exercisable upon the date of grant and expire
January 2, 2002.
Unregistered Stock Options
During fiscal 1999, the Company issued approximately 255,000 unregistered stock
options to non-officer employees. During fiscal 2000, 90,000 of these options
were cancelled leaving 165,000 outstanding as of March 31, 2000. The exercise
price of options granted was $13.00, which was equal to the fair market value of
the Company's common stock on the date of grant.
Fair Value of Stock Options
Under SFAS No. 123, pro forma information regarding net income and earnings per
share has been determined as if the Company had accounted for its employee stock
options under the fair value method. The fair value of stock options granted has
been estimated using a Black-Scholes option pricing model.
The fair value of PSS' stock options (Broad-Based Employee Stock Plan, Incentive
Stock Option Plan, Long-Term Stock Plan, Long-Term Incentive Plan, and
Directors' Stock Plan) granted during fiscal 2000, 1999, and 1998 have been
estimated based on the following weighted average assumptions: risk-free
interest rates ranging from 5.75% to 6.6%, expected option life ranging from 2.5
to 7.5 years; expected volatility of 60.0%, 56.0%, and 55.0%, respectively; and
no expected dividend yield. Using these assumptions, the estimated fair values
of options granted for fiscal 2000, 1999, and 1998 were approximately $2,842,
$9,091, and $4,814, respectively, and such amounts would be included in
compensation expense.
The fair value of Gulf South's stock options granted during fiscal 1998 have
been estimated based on the following weighted average assumptions: risk-free
interest rates of 6.0%, expected option life of three years; expected volatility
of 65.2%, and no expected dividend yield. Using these assumptions, the estimated
fair values of options granted for fiscal 1998 were approximately $1,568, and
such amounts would be included in compensation expense.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Pro forma net income and net income per share for the fiscal years ended 2000,
1999, and 1998, assuming the Company had accounted for the plans under the fair
value approach, are as follows (in thousands, except per share data):
2000 1999 1998
-------- -------- --------
Net income:
As reported.......................... $ 20,740 $ 43,741 $ 15,299
Pro forma............................ 19,035 38,287 11,470
Earnings per share:
As reported:
Basic............................. $0.29 $0.62 $0.22
Diluted........................... $0.29 $0.61 $0.22
Pro forma:
Basic............................. $0.27 $0.54 $0.16
Diluted........................... $0.27 $0.54 $0.16
Because the fair value method of accounting has not been applied to options
granted prior to March 31, 1996, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
F-33
14. EMPLOYEE BENEFIT PLANS
The Company sponsors an employee stock ownership plan ("PSS ESOP") available to
all employees with at least one year of service. Employees can invest their
contributions in various mutual funds as well as the common stock of the
Company. Employer contributions are invested in the common stock of the Company.
A company acquired in fiscal 1999 sponsored a leveraged employee stock ownership
plan ("Tristar ESOP"). The Tristar ESOP was merged into the PSS ESOP effective
August 6, 1999 and the note payable to a third party was replaced with financing
from the holding company. As a result of the merger, the PSS ESOP became a
leveraged ESOP. In addition, subsequent to the merger, a supplemental matching
contribution is made to all employees who elect to have their salary deferrals
invested in the common stock of the Company. The supplemental match for fiscal
2000 was $234. The Company accounts for the PSS ESOP in accordance with SOP
93-6. Accordingly, the shares pledged as collateral are reported as unearned
ESOP shares in the balance sheet. As shares are released from collateral, the
Company reports compensation expense equal to the then current market price of
the shares, and the shares become outstanding for the earnings-per-share (EPS)
computation.
The PSS ESOP owned approximately 1,606,000 and 2,123,000 shares of the Company's
common stock at March 31, 2000 and 1999, respectively. Company contributions to
the plan, excluding the supplemental match, were approximately $1,417, $123, and
$134 for fiscal 2000, 1999, and 1998, respectively, and are made at the
discretion of the Company.
The following presents the PSS ESOP share activity:
2000 1999 1998
----------- ---------- ----------
Allocated shares...................................... 89,496 76,972 25,934
Shares released for allocation........................ 28,201 12,524 51,038
Shares committed to be released....................... 65,657 -- --
Unreleased shares..................................... 46,374 140,232 152,756
----------- ---------- ----------
Total ESOP shares......................... 229,728 229,728 229,728
----------- ---------- ----------
Fair value of unreleased shares....................... $ 314 $ 1,224 $ 3,437
=========== ========== ==========
Approximately 29,600 shares of common stock are held in escrow. The escrow
shares will be settled in fiscal 2001. Approximately $690, $221, and $824, of
related expense was recognized in fiscal 2000, 1999, and 1998, respectively.
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.
The S&W ESOP shares were as follows:
1998
-----------
Allocated shares .................................... 398,727
Shares released for allocation........................ 162,769
Unreleased shares..................................... --
-----------
Total ESOP shares......................... 561,496
-----------
Fair value of unreleased shares....................... $ --
===========
During fiscal 1998, the Company released the remaining shares to the S&W ESOP
participants, and it is management's intention to terminate this plan.
Accordingly, approximately $2.5 million of related expense was recognized in
fiscal 1998.
The Company also has an employee stock purchase plan available to employees with
at least one year of service. The plan allows eligible employees to purchase
company stock over-the-counter through payroll deductions.
F-34
PSS Deferred Compensation Program
The Company offers a deferred compensation program (the "Program") to qualified
executives, management, and salespeople. The program, which is an unfunded plan,
includes a deferred compensation plan and a stock option program. The Company
has purchased life insurance as a means to finance the benefits that become
payable under the plan.
Under the deferred compensation plan, participants can elect to defer up to 100%
of their total compensation. The Company will make a matching contribution of up
to 10% to 15% of the participant's deferral. The match contribution ranges from
25% to 125% of the participant's deferral. Participants are guaranteed to earn
interest, their deferral amount and the Company match at a rate declared
annually by the Board of Directors (5.13% for the plan years ended March 31,
2000 and 1999, respectively). The interest rate shall never be less than the
90-day U.S. Treasury Bill rate.
Under the stock option plan, participants are granted stock options to purchase
common stock of the Company. The number of stock options granted is a function
of the participant's annual deferral amount plus the Company match. The grant
price of the option is determined annually to reflect an exercise price which
allows the annual deferral amount to be supplemented by the growth of the PSS
stock in excess of the declared interest rate projected to compound for four
years. Thus, the option price is not less than the fair market value of the
common stock on the date such option is granted.
Participant contributions are always 100% vested. The Company match and the
stock options vest as follows:
# of Years in the plan Vesting %
Less than 4 years 0%
4 years 20%
5 years 40%
6 years 60%
7 years 80%
8 years 100%
Death or disability 100%
After the options are 100% vested, participants can exercise up to 25% of vested
options in any calendar year.
At age 60, or age 55 with 10 years of participation in the Program, the
retirement benefit is distributed to participants in five equal annual
installments. The retirement benefit is distributed in a lump sum upon death and
over five years upon disability. In the event of termination of employment, 100%
of the participant's vested balance will be distributed in five equal
installments.
During fiscal 2000 and 1999, the Company matched approximately $864 and $638,
respectively, of employee deferrals. At March 31, 2000 and April 2, 1999,
approximately $4,696 and $2,497, respectively, is recorded in other long-term
assets in the accompanying consolidated balance sheets. In addition, $5,561 and
$2,490, respectively, of deferred compensation is included in other long-term
liabilities in the accompanying consolidated balance sheets.
15. OPERATING LEASE COMMITMENTS
The Company leases various facilities and equipment under operating leases which
expire at various dates through 2009. Certain lease commitments provide that the
Company pay taxes, insurance, and maintenance expenses related to the leased
assets.
Rent expense approximated $26,949, $19,905, and $19,019 for fiscal 2000, 1999,
and 1998, respectively. As of March 31, 2000, future minimum payments, by fiscal
year and in the aggregate, required under noncancelable operating leases are as
follows:
F-35
Fiscal Year:
2001.............................................. $ 20,595
2002.............................................. 18,596
2003.............................................. 12,588
2004.............................................. 7,779
2005.............................................. 4,031
Thereafter........................................ 3,658
----------
Total.................................... $ 67,247
==========
16. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, Disclosure About Segments of an Enterprise
and Related Information, which establishes the way public companies report
information about segments. SFAS No. 131 requires segment reporting in interim
periods and disclosures regarding products and services, geographic areas, and
major customers.
The Company's reportable segments are strategic businesses that offer different
products and services to different segments of the health care industry, and are
based upon how management regularly evaluates the Company. These segments are
managed separately because of different customers and products. See Note 1,
Background and Summary of Significant Accounting Policies, for descriptive
information about the Company's business segments. International business and
other follow the accounting policies of the segments described in the summary of
significant accounting policies. The Company primarily evaluates the operating
performance of its segments based on net sales and income from operations.
The following table presents financial information about the Company's business
segments (in thousands):
2000 1999 1998
----------- ----------- -----------
NET SALES:
Physician Supply Business $ 705,818 $ 677,353 $ 662,543
Imaging Business 700,798 524,823 409,660
Long-Term Care Business 362,559 342,405 287,582
Other (a) 24,361 19,924 22,001
----------- ----------- -----------
Total net sales $1,793,536 $1,564,505 $1,381,786
=========== =========== ===========
CHARGES INCLUDED IN GENERAL & ADMINISTRATIVE EXPENSE:
Physician Supply Business $ 1,768 $ 3,358 $ 14,964
Imaging Business 5,769 7,981 9,576
Long-Term Care Business 4,660 3,008 3,232
Other (a) 2,044 1,335 4,235
----------- ----------- -----------
Total charges included in general &
administrative expenses: $ 14,241 $ 15,682 $ 32,007
=========== =========== ===========
INCOME FROM OPERATIONS:
Physician Supply Business $ 32,681 $ 42,727 $ 16,871
Imaging Business 20,297 16,305 6,486
Long-Term Care Business (4,990) 17,186 14,032
Other (a) (3,279) (2,365) (5,310)
----------- ----------- -----------
Total income from operations $ 44,709 $ 73,853 $ 32,079
=========== =========== ===========
DEPRECIATION:
Physician Supply Business $ 4,393 $ 6,844 $ 3,287
Imaging Business 3,127 3,614 1,010
Long-Term Care Business 1,698 1,429 934
Other (a) 228 322 398
----------- ----------- -----------
Total depreciation $ 9,446 $ 12,209 $ 5,629
=========== =========== ===========
AMORTIZATION OF INTANGIBLE AND OTHER ASSETS:
Physician Supply Business $ 1,932 $ 2,067 $ 2,274
Imaging Business 6,327 3,460 1,545
Long-Term Care Business 2,223 1,762 1,243
Other (a) 1,142 886 170
----------- ----------- -----------
Total amortization of intangible assets $ 11,624 $ 8,175 $ 5,232
=========== =========== ===========
F-36
2000 1999 1998
----------- ----------- -----------
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business $ 1,241 $ 1,627 $ 605
Imaging Business 3,378 846 539
Long-Term Care Business 11,193 2,485 4,422
Other (a) -- 223 141
----------- ----------- -----------
Total provision for doubtful accounts $ 15,812 $ 5,181 $ 5,707
=========== =========== ===========
CAPITAL EXPENDITURES:
Physician Supply Business $ 13,031 $ 15,149 $ 4,468
Imaging Business 6,838 6,735 4,565
Long-Term Care Business 4,631 2,890 1,659
Other (a) 2,682 -- (173)
----------- ----------- -----------
Total capital expenditures $ 27,182 $ 24,774 $ 10,519
=========== =========== ===========
ASSETS:
Physician Supply Business $ 243,020 $ 236,452 $ 320,216
Imaging Business 346,073 277,250 158,698
Long-Term Care Business 182,024 174,868 191,789
Other (a) 102,300 54,811 16,034
----------- ----------- -----------
Total assets $ 873,417 $ 743,381 $ 686,737
=========== =========== ===========
(a) Other includes the holding company and the international subsidiaries.
17. Quarterly Results of Operations (Unaudited)
The following table presents summarized unaudited quarterly results of
operations for the Company for fiscal years 1999 and 2000. The Company believes
all necessary adjustments have been included in the amounts stated below to
present fairly the following selected information when read in conjunction with
the consolidated financial statements of the Company. Future quarterly operating
results may fluctuate depending on a number of factors, including the timing of
acquisitions of service centers, the timing of the opening of start-up service
centers, and changes in customer's buying patterns of supplies, diagnostic
equipment and pharmaceuticals. Results of operations for any particular quarter
are not necessarily indicative of results of operations for a full year or any
other quarter.
The results of operations for quarter ended March 31, 2000 differ significantly
from the quarters ended June 30, September 30, and December 31, 1999 primarily
as a result of the following. First, the long-term care business in general has
faced significant financial pressure due to PPS, resulting in bankruptcy
of certain long-term care providers. During the fourth quarter, several
of GSMS' largest customers resolved or disclosed their plans for
unsecured creditors, including the Company, at terms unfavorable to the
Company. As a result, GSMS has i) recorded bad debt charges of approximately
$9.5 million during the quarter ended March 31, 2000, ii) renegotiated
contracts with customers that decreased both sales prices and gross profit,
iii) restructured facilities to more efficiently distribute products, and
iv) renegotiated product costs with vendors to mitigate the impact on gross
profit resulting from customer negotiations. Overall, this has reduced the
profitability of the long-term care business. Second, the Company's two
most significant equipment suppliers had manufacturing product recalls and
production issues that materially disrupted availability of products
and therefore, impacted net sales.
In addition, as discussed in Note 1, during the fourth quarter the Company
adopted SAB 101, effective April 3, 1999. The impact of this accounting
change on fiscal 2000 is shown below.
F-37
Fiscal Year 1999 Fiscal Year 2000
---------------------------------------- ----------------------------------------
(In Thousands, Except Per Share Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Data) -------- --------- --------- -------- -------- --------- --------- --------
As Previously Reported
Net sales...................... $367,562 $387,366 $399,547 $410,030 $436,719 $452,240 $462,093 $443,433
Gross profit................... 97,198 104,901 109,685 110,124 115,271 122,852 124,052 112,027
Income (loss) before provision
for income taxes and
cumulative effect of
accounting change........... 8,868 13,307 13,822 7,744 20,898 24,663 20,811 (23,014)
Income (loss) before
cumulative effect of
accounting change........... -- -- -- -- 12,310 14,789 11,926 (15,720)
Cumulative effect of
accounting change........... -- -- -- -- -- -- -- --
Net income (loss).............. 8,868 13,307 13,822 7,744 12,310 14,789 11,926 (15,720)
Earnings per share - Basic:
Income (loss) before
cumulative effect of $0.13 $0.19 $0.20 $0.11 $0.17 $0.21 $0.17 $(0.22)
accounting change........
Net income (loss)........... $0.13 $0.19 $0.20 $0.11 $0.17 $0.21 $0.17 $(0.22)
Earnings per share - Diluted:
Income (loss) before
cumulative effect of $0.12 $0.19 $0.19 $0.11 $0.17 $0.21 $0.17 $(0.22)
accounting change........
Net income $0.12 $0.19 $0.19 $0.11 $0.17 $0.21 $0.17 $(0.22)
Fiscal Year 2000
----------------------------------------
(In Thousands, Except Per Share Q1 Q2 Q3 Q4
Data) ----------------------------------------
Adjustments
Net sales................................................................... $ 282 $(1,239) $ 8 $ --
Gross profit................................................................ (1,036) (788) (24) --
Loss before provision
for income taxes and
cumulative effect of
accounting change........................................................ (1,020) (801) (10) --
Loss before
cumulative effect of
accounting change........................................................ (625) (490) (6) --
Cumulative effect of
accounting change........................................................ (1,444) -- -- --
Net loss.................................................................... (2,069) (490) (6) --
Earnings per share - Basic:
Loss before
cumulative effect of
accounting change..................................................... $(0.01) $(0.01) -- --
Net loss ................................................................ $(0.03) $(0.01) -- --
Earnings per share - Diluted:
Loss before
cumulative effect of
accounting change..................................................... $(0.01) $(0.01) -- --
Net income .............................................................. $(0.03) $(0.01) -- --
Fiscal Year 2000
----------------------------------------
(In Thousands, Except Per Share Q1 Q2 Q3 Q4
Data) ----------------------------------------
Final Adjusted (to reflect SAB 101)
Net sales.................................................................. $437,001 $451,001 $462,101 $443,433
Gross profit............................................................... 114,235 122,064 124,028 112,027
Income (loss) before provision
for income taxes and
cumulative effeect of
accounting change....................................................... 19,878 23,862 20,801 (23,014)
Income (loss) before
cumulative effect of
accounting change....................................................... 11,685 14,299 11,920 (15,720)
Cumulative effect of
accounting change....................................................... (1,444) -- -- --
Net income (loss).......................................................... 10,241 14,299 11,920 (15,720)
Earnings per share - Basic:
Income (loss) before
cumulative effect of
accounting change.................................................... $0.16 $0.20 $0.17 $(0.22)
Net income (loss)....................................................... $0.14 $0.20 $0.17 $(0.22)
Earnings per share - Diluted:
Income (loss) before
cumulative effect of
accounting change.................................................... $0.16 $0.20 $0.17 $(0.22)
Net income.............................................................. $0.14 $0.20 $0.17 $(0.22)
18. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain executive officers which
provide that in the event of their termination or resignation, under certain
conditions, the Company may be required to continue salary payments and provide
insurance for a period ranging from 12 to 36 months for the Chief Executive
Officer and from 3 to 12 months for other executives and to repurchase a portion
or all of the shares of common stock held by the executives upon their demand at
the fair market value at the time of repurchase. The period of salary and
insurance continuation and the level of stock repurchases are based on the
conditions of the termination or resignation.
F-38
During fiscal 2000, the Board of Directors approved and adopted the PSS World
Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical, Inc.
Corporate Office Employee Retention Bonus Plan. Refer to Note 4, Charges
included in General and Administrative Expenses for further discussion.
During the second quarter of fiscal year 2000, the Company received
approximately $6.5 million relating to a favorable medical x-ray film antitrust
settlement claim. The amount is classified as other income in the accompanying
consolidated statement of income.
PSS and certain of its current officers and directors were named as defendants
in a purported securities class action lawsuit filed on or about May 28, 1998.
The allegations are based upon a decline in the PSS stock price following
announcements by PSS in May 1998 regarding the Gulf South merger, which resulted
in earnings below analyst's expectations. The Company believes that the
allegations contained in the complaints are without merit and intends to defend
vigorously against the claims. However, the lawsuits are in early stages, and
there can be no assurances that this litigation will ultimately be resolved on
terms that are favorable to the Company.
Although the Company does not manufacture products, the distribution of medical
supplies and equipment entails inherent risks of product liability. The Company
has not experienced any significant product liability claims and maintains
product liability insurance coverage. In addition, the Company is party to
various legal and administrative proceedings and claims arising in the normal
course of business. While any litigation contains an element of uncertainty,
management believes that the outcome of any proceedings or claims which are
pending or known to be threatened will not have a material adverse effect on the
Company's consolidated financial position, liquidity, or results of operations.
On September 30, 1999, DI entered into a three year distributorship agreement
with an imaging supply vendor. The agreement stipulates that, among other
things, in the event of termination of the agreement due to a change in control
of DI, the Company will pay liquidated damages to the vendor in the amount of
the lesser of $6 million or $250,000 times the number of months remaining under
the agreement.
19. ABBOTT LABORATORIES DISTRIBUTION AGREEMENT
On March 27, 1995, the Company signed a Distribution Agreement with Abbott
Laboratories providing for the exclusive distribution of certain Abbott
diagnostic products. The Abbott Agreement, effective April 1, 1995, has a
five-year term, although it may be terminated earlier if the Company fails to
meet certain performance objectives. Simultaneous with the closing of the Abbott
Agreement, Abbott purchased 825,000 unregistered, restricted shares of PSS
common stock. A three-year irrevocable proxy to the PSS Board of Directors and a
perpetual stand still agreement were provided by Abbott in the Stock Purchase
Agreement.
The original 5 year agreement provides for an annual one year evergreen
provision. Since neither Abbott nor the Company notified the other of a
termination, the agreement extended for another year. The Company and Abbott are
negotiating a new 5 year agreement and have agreed to operating terms and
objectives for the evergreen year 6.
20. SUBSEQUENT EVENT
The Company entered into an Agreement and Plan of Merger dated June 21, 2000
with Fisher Scientific International, Inc. ("Fisher"), pursuant to which PSS and
Fisher will combine business operations and PSS will become a wholly owned
subsidiary of Fisher. The merger is subject to various conditions, including
approval of the shareholders of PSS and Fisher, filings with and compliance with
securities and antitrust laws, the financial and operating performance of PSS
and certain other matters.
F-39
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED APRIL 3, 1998, April 2, 1999 AND march 31, 2000
(Dollars in Thousands)
Additions
---------------------------
Balance Provision
at Charged Transfers Balance
Valuation Allowance for Beginning to From at End of
Accounts Receivable of Period Expense Acquisitions Write-offs Period
- -------------------------------------- --------- ---------- ------------- ---------- ----------
Year ended April 3, 1998 8,300 5,707 449 3,619 10,837
Gulf South January 1, 1998 to April 3,
1998 activity 10,837 731(a) -- 1,578 9,990
Year ended April 2, 1999 9,990 5,181 332 8,585 6,918
Year ended March 31, 2000 6,918 15,812 -- 11,891 10,839
Additions
---------------------------
Balance Provision
at Charged Transfers Balance
Valuation Allowance for Beginning to From at End of
Inventory Obsolescence of Period Expense Acquisitions Write-offs Period
- -------------------------------------- --------- ---------- ------------- ---------- ----------
Year ended April 3, 1998 4,476 1,421 1,203 2,531 4,569
Gulf South January 1, 1998 to April 3,
1998 activity 4,569 1,818(a) -- 160 6,227
Year ended April 2, 1999 6,227 801 1,019 5,136 2,911
Year ended March 31, 2000 2,911 499 -- 141 3,269
Charged
Balance To
at General Balance
Gulf South Operational Beginning & Admin. at End of
Tax Charge Reserve of Period Expense Utilizations Period
- -------------------------------------- --------- ---------- ------------- ----------
Year ended April 3, 1998 3,654 3,067 -- 6,721
Gulf South January 1, 1998 to April 3,
1998 activity 6,721 2,771(a) -- 9,492
Year ended April 2, 1999 9,492 -- 1,646 7,846
Year ended March 31, 2000 7,846 (1,221)(b) 496 6,129
(a) Amount represents activity recorded by Gulf South during the
quarter ended April 3, 1998, and therefore is not reflected in any
of the consolidated statements of operations presented. See Notes
1 and 3 for further discussion of the impact of the change in Gulf
South's year-end.
(b) The Gulf South operational tax charge reserve was evaluated by the
Company and a portion was reversed in the third quarter of fiscal
2000.
F-40
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
We filed a current report on Form 8-K dated May 31, 2000, which was amended on
June 9, 2000, which describes the Company's replacement of Ernst & Young LLP
with Arthur Andersen LLP as the auditors of its significant subsidiary, Gulf
South Medical Supply, Inc.
42
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's Definitive Proxy Statement to be
filed by July 31, 2000 for its fiscal year 2000 Annual Meeting of Shareholders
under the caption "Directors and Executive Officers of the Registrant."
Item 11. Executive Compensation
Incorporated by reference from the Company's Definitive Proxy Statement to be
filed by July 31, 2000 for its fiscal year 2000 Annual Meeting of Shareholders
under the caption "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners
Incorporated by reference from the Company's Definitive Proxy Statement to be
filed by July 31, 2000 for its fiscal year 2000 Annual Meeting of Shareholders
under the caption "Beneficial Ownership of Certain Stockholders" and "Stock
Ownership of Directors and Officers."
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the Company's Definitive Proxy Statement to be
filed by July 31, 2000 for its fiscal year 2000 Annual Meeting of Shareholders
under the caption "Certain Relationships and Related Transactions."
43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Registration Statement:
1. Consolidated Financial Statements
Refer to Item 8 "Financial Statements and Supplementary Data" for a listing of
the Consolidated Financial Statements included therein.
2. Supplementary Data
Refer to Item 8 "Financial Statements and Supplementary Data" for a listing of
the Supplementary Data included therein.
Exhibit
Number Description
- ----------- ----------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation dated March 15,
1994, as amended.(12)
3.2 Amended and Restated Bylaws dated March 15, 1994.(1)
4.1 Form of Indenture, dated as of October 7, 1997, by and among the
Company, the Subsidiary Guarantors named therein, and SunTrust
Bank, Central Florida, National Association, as Trustee.(2)
4.2 Registration Rights Agreement, dated as of October 7, 1997, by
and among the Company, the Subsidiary Guarantors named therein,
BT Alex. Brown Incorporated, Salomon Brothers Inc. and
NationsBanc Montgomery Securities, Inc.(2)
4.3 Form of 81/2% Senior Subordinated Note due 2007, including Form
of Guarantee (Private Notes).(2)
4.4 Form of 81/2% Senior Subordinated Note due 2007, including Form
of Guarantee (Exchange Notes).(2)
4.5 Shareholder Protection Rights Agreement, dated as of April 20,
1998, between PSS World Medical, Inc. and Continental Stock
Transfer & Trust Company, as Rights Agent.(11)
10.1 Registration Rights Agreement between the Company and Tullis-
Dickerson Capital Focus, LP, dated as of March 16, 1994.(3)
10.2 Employment Agreement for Patrick C. Kelly.(14)
10.2a Amendment to Employment Agreement for Patrick C. Kelly
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)
44
Exhibit
Number Description
- ----------- ----------------------------------------------------------------
10.8 Amended and Restated 1994 Long-Term Incentive Plan.(7)
10.9 Amended and Restated 1994 Long-Term Stock Plan.(7)
10.10 1994 Employee Stock Purchase Plan.(4)
10.11 1994 Amended Incentive Stock Option Plan.(3)
10.13 Distributorship Agreement between Abbott Laboratories and
Physician Sales & Service, Inc.(Portions omitted as confidential
--Separately filed with Commission).(5)
10.14 Stock Purchase Agreement between Abbott Laboratories and
Physician Sales & Service, Inc.(5)
10.15 Amendment to Employee Stock Ownership Plan.(7)
10.15a Amendment and Restatement of the Physician Sales and Service,
Inc. Employee Stock Ownership and Savings Plan.(8)
10.15b First Amendment to the Physician Sales and Service, Inc.
Employee Stock Ownership and Savings Plan.(7)
10.16 Third Amended and Restated Agreement and Plan of Merger By
and Among Taylor Medical, Inc. and Physician Sales & Service,
Inc.(including exhibits thereto).(6)
10.17 Agreement and Plan of Merger by and Among Physician Sales &
Service, Inc., PSS Merger Corp. and Treadway Enterprises,
Inc.(8)
10.18 Amended and Restated Agreement and Plan of Merger, dated as of
August 22, 1997, among the Company, Diagnostic Imaging, Inc.,
PSS Merger Corp. and S&W X-ray, Inc.(9)
10.19 Agreement and Plan of Merger dated December 14, 1997 by and
among the Company, PSS Merger Corp. and Gulf South Medical
Supply, Inc.(10)
10.20 Credit Agreement dated as of February 11, 1999 among the
Company, the several lenders from time to time hereto and
NationsBank, N.A., as Agent and Issuing Lender.(14)
10.21 First Amendment dates as of October 20, 1999 to the Credit
Agreement dates as of February 11, 1999 among the Company, the
several lenders from time to time hereto and NationsBank, N.A.
as Agent and Issuing Lender.
23.1 Consent of Independent Certified Public Accountants
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.
45
(13) Incorporated by Reference to the Company's Annual Report on Form 10-K
for the fiscal year ended April 3, 1998.
(14) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed February 23, 1999.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 2000.
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Jacksonville, State
of Florida, on June 22, 2000.
PSS WORLD MEDICAL, INC.
By: /s/ Patrick C. Kelly
--------------------------------
Patrick C. Kelly,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ------------ ------- -------
/s/ Patrick C. Kelly Chairman of the Board of Directors, Chief Executive
------------------------- Officer, and Director (Principal Executive Officer) June 22, 2000
Patrick C. Kelly
/s/ David A. Smith Executive Vice President, Chief Financial Officer,
------------------------- and Director (Principal Financial and Accounting June 22, 2000
David A. Smith Officer)
------------------------- Director June 22, 2000
Hugh M. Brown
------------------------- Director June 22, 2000
Clark A. Johnson
/s/ Melvin L. Heckman
------------------------- Director June 22, 2000
Melvin L. Heckman
/s/ Delores Kesler
------------------------- Director June 22, 2000
Delores Kesler
/s/ Charles R. Scott
------------------------- Director June 22, 2000
Charles R. Scott
------------------------- Director June 22, 2000
Donna Williamson
47
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation by reference of our report dated June 21, 2000 included in this
Form 10-K into the Company's previously filed Registration Statement File Nos.
33-80657, 33-90464, 333-15043, 333-15107, 333-64185, 33-85004, 33-97756,
33-99046, 33-97754, 333-30427, and 333-64187.
ARTHUR ANDERSEN LLP
Jacksonville, Florida
June 21, 2000
48