-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NfJsGehashPOJ5oxFJvhMX+S+kQWfrKQYJS6oY8iJ4LVQvpiUuFUZ8e0ZCUh6Apk KpGiS0cejVcpLyHTT0Qb2w== 0000920527-00-000007.txt : 20000526 0000920527-00-000007.hdr.sgml : 20000526 ACCESSION NUMBER: 0000920527-00-000007 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990402 FILED AS OF DATE: 20000525 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSS WORLD MEDICAL INC CENTRAL INDEX KEY: 0000920527 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 593500595 STATE OF INCORPORATION: FL FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-23832 FILM NUMBER: 643987 BUSINESS ADDRESS: STREET 1: 4345 SOUTHPOINT BLVD STREET 2: STE 250 CITY: JACKSONVILLE STATE: FL ZIP: 32216 BUSINESS PHONE: 9043323000 MAIL ADDRESS: STREET 1: 4345 SOUTHPOINT BLVD CITY: JACKSONVILLE STATE: FL ZIP: 32216 FORMER COMPANY: FORMER CONFORMED NAME: PHYSICIAN SALES & SERVICE INC /FL/ DATE OF NAME CHANGE: 19940318 10-K/A 1 RESTATED FORM 10-K PSS WORLD MEDICAL, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended April 2, 1999 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 $625,074,653 as of July 12, 1999. 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 July 12, 1999, a total of 70,858,533 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 1999 Annual Meeting of Stockholders of the Registrant which was filed with the Securities and Exchange Commission on August 2, 1999. EXPLANATORY NOTE This Amendment No. 3 (this "Amendment") on Form 10-K/A is being filed in order to amend the Company's Annual Report on Form 10/K for the year ended April 2, 1999 filed with the Securities and Exchange Commission (the "Commission") on July 16, 1999 (as amended pursuant to the Form 10-K/A filed on July 22, 1999 and the Form 10-K/A filed on October 28, 1999). This Amendment is filed for the purpose of amending and restating Items 6, 7 and 8 of this filing. The Company acquired Gulf South Medical Supply, Inc. ("Gulf South") on March 27, 1998. After the merger, the Company recorded approximately $32.2 million of charges in Gulf South's results of operations for the three months ended April 3, 1998 relating to the merger, restructuring the business, and conforming the accounting policies of the businesses. However, the Company continued to review historical records as it operated the acquired business and determined that approximately $7.4 million of the $32.2 million in charges belonged in Gulf South's results of operations for the 12 months ended December 31, 1996 and 1997. Therefore, the historical consolidated financial statements of the Company have been restated. No portions of the Company's Annual Report on Form 10-K/A other than Items 6, 7 and 8 are amended by this Amendment. 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 availability of sufficient capital to finance the Company's business plans on terms satisfactory to the Company; competitive factors; the ability of the Company to adequately defend or reach a settlement of outstanding litigations and investigations involving the Company or its management; changes in labor, equipment and capital costs; changes in regulations affecting the Company's business; future acquisitions or strategic partnerships; general business and economic conditions; successful implementation of the Company's Year 2000 compliance plan; and other factors described from time to time in the Company's reports filed with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. Item 6. Selected Financial Data The following selected financial data of the Company for fiscal years 1995 through 1999 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 ------------------------------------------------------------------ 1995 1996 1997 1998 1999 -------- --------- ---------- ----------- ----------- (Restated) (Restated) (Dollars in Thousands, Except Per Share Data) Income Statement Data: Net sales $564,136 $719,214 $1,166,286 $1,381,786 $1,564,505 Gross profit 156,344 194,711 286,183 365,768 421,908 Selling and G&A expenses 135,320 159,578 269,136 333,689 348,055 Net income 7,465 10,706 13,259 15,299 43,741 ======== ======== ========== ========== ========== Earnings per share: Basic N/A $0.17 $0.20 $0.22 $0.62 Diluted $0.12 $0.16 $0.20 $0.22 $0.61 ======== ======== ========== ========== ========== Weighted average shares outstanding (h) Basic N/A 55,813 66,207 69,575 70,548 Diluted 47,979 57,360 66,957 70,545 71,398 ======== ======== ========== ========== ========== Balance Sheet Data: Working capital $ 88,011 $211,835 $ 267,754 $376,239 $355,277 Total assets 189,866 351,553 510,376 686,737 743,381 Long-term liabilities 39,927 10,622 8,459 138,178 155,553 Total equity 79,114 242,091 350,397 380,060 416,560
3
Fiscal Year Ended ---------------------------------------- 1997 1998 1999 ------------ ---------- ---------- (Restated) (Restated) (Dollars in thousands, except per share data) Other Financial Data: Income before provision for income taxes $ 19,883 $32,660 $ 73,681 Plus: Interest Expense 3,471 7,517 11,522 -------- -------- --------- EBIT (a) 23,354 40,177 85,203 Plus: Depreciation and amortization 6,473 10,861 20,384 -------- -------- --------- EBITDA (b) 29,827 51,038 105,587 Unusual Charges Included in Continuing Operations (i) 17,950 32,007 10,303 Cash Paid For Unusual Charges Included in Continuing Operations (22,906) (24,476) (29,134) -------- -------- --------- Adjusted EBITDA (c) 24,871 58,569 86,756 EBITDA Coverage (d) 8.6x 6.8x 9.2x EBITDA Margin (e) 2.6% 3.7% 6.8% Adjusted EBITDA Coverage (f) 7.2x 7.8x 7.5x Adjusted EBITDA Margin (g) 2.1% 4.2% 5.5% Cash (used in) provided by operating activities $(10,802) $27,936 $ (18,704) Cash used in investing activities (74,843) (47,969) (28,914) Cash provided by financing activities 56,427 65,209 7,471
(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) Adjusted to give effect to a three-for-one stock split in fiscal year 1996. (i) Fiscal 1999 excludes $5,379 of information systems accelerated depreciation. 4 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Restated) 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. The historical consolidated financial statements for fiscal years 1997 and 1998 of the Company have been restated to record operating charges previously included in Gulf South's results of operations for the period January 1, 1998 to April 3, 1998. Refer to the notes to the consolidated financial statements (Note 22, Restatements) for a further discussion regarding the restatements. All dollar amounts presented below are in thousands, except per share data. Company Overview 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 111 service centers to customers in all 50 states and three European countries. Since its inception in 1983, the Company has become a leader in three of the market segments it serves with a focused, market specific approach to customer service, a consultative sales force, strategic acquisitions, strong arrangements with product manufacturers, innovative systems, and a unique culture of performance. The Company, through its Physician Sales & Service division, is the leading distributor of medical supplies, equipment, and pharmaceuticals to office-based physicians in the United States based on revenues, number and quality of sales representatives, number of service centers, and exclusively distributed products. Physician Sales & Service currently operates 56 medical supply distribution service centers with approximately 730 sales representatives ("Physician Supply Business") serving over 100,000 physician offices (representing approximately 50% of all physician offices) in all 50 states. The Physician Supply Business' primary market is the approximately 400,000 physicians who practice medicine in approximately 200,000 office sites throughout the United States. The Company, through its wholly owned subsidiary Diagnostic Imaging, Inc. ("DI"), is the leading distributor of medical diagnostic imaging supplies, chemicals, equipment, and service to the acute care and alternate-care markets in the United States based on revenues, number of service specialists, number of distribution centers, and number of sales representatives. DI currently operates 37 imaging distribution service centers with approximately 750 service specialists and 190 sales representatives ("Imaging Business") serving over 10,000 customer sites in 41 states. The Imaging Business' primary market is the approximately 10,000 hospitals and other alternate-site imaging companies operating approximately 40,000 office sites throughout the United States. Through its wholly owned subsidiary Gulf South Medical Supply, Inc. ("GSMS"), the Company has become a leading national distributor of medical supplies and related products to the long-term care industry in the United States based on revenues, number of sales representatives, and number of service centers. GSMS currently operates 15 distribution service centers with approximately 160 sales representatives ("Long-Term Care Business") serving over 14,000 long-term care facilities in all 50 states. The Long-Term Care Business' primary market is comprised of a large number of independent operators, small to mid-sized local and regional chains, and several national chains representing over 10,000 long-term care companies. In addition to its operations in the United States, the Company, through its wholly owned subsidiary WorldMed International, Inc. ("WorldMed"), operates three European service centers ("International Business") distributing medical products to the physician office and hospital markets in Belgium, France, Germany, Luxembourg, and the Netherlands. 5 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 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. The Company has rationalized its service center locations with the closure of nine Long-Term Care Business centers, three Physician Supply Business centers, and seven Imaging Business centers during fiscal 1999 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 49, 33, 4, and 4 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. In 1994, the Company implemented its Instant Customer Order Network ("ICONsm"), an ordering and customer data system, with all its Physician Supply Business sales representatives. ICONsm has increased time available to sales representatives for selling, decreased operating expenses, and increased the Company's ability to provide same-day delivery. During fiscal year 1997, the Physician Supply Business developed and test marketed CustomerLink, an Internet-based system for inventory management and purchasing. Since then, the Company has been very active in developing ancillary systems that improve efficiencies throughout its operations (see Information Systems discussion). The Company has also developed Internet-based solutions for each of its businesses. The Company believes its physician customers will be very late adopters of both e-commerce and the Internet. However, $80,000 a day of Internet sales are currently being processed by the Long-Term Care Business with approximately 40% of all that business sales processing through e-commerce. The Imaging Business is currently implementing Internet access for its customers. The Company will continue to pursue the development of sophisticated systems that improve operational efficiency, reduces fixed and variable costs of its infrastructure, improves access to the Company by its customers, and reduces 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 1999. 6 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 semiexclusive marketing arrangements for certain products with Abbott, Candela, Critikon, Hologic, Inc, Leisegang, Philips Medical Systems, Siemens AG, Sonosight, 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. 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 110 as of April 2, 1999, including 56 Physician Supply Business service centers, 37 Imaging Business service centers, 14 Long-Term Care Business Service centers and 3 International Business service centers. In order of priority, the Company's growth has been accomplished 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) opening start-up service centers. 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 (4) ---------------------------------------- 1995 1996 1997 1998 1999 Total Company: ---- ---- ---- ---- ---- Sales representatives............523 813 924 957 1,118 Service Specialists..............104 112 223 390 727 Service centers (1).............. 70 90 103 111 110 States served.................... 50 50 50 50 50 Physician Supply Business: Sales representatives............455 692 720 703 731 Service centers (1).............. 54 64 61 61 56 States served.................... 48 50 50 50 50 Imaging Business (2): Sales representatives............ 26 30 73 116 194 Service specialists..............104 112 223 390 727 Service centers.................. 7 8 21 25 37 States served.................... 9 9 16 27 41 Long-Term Care Business: Sales representatives............ 42 91 107 110 170 Service centers (3).............. 9 18 19 22 14 States served.................... 50 50 50 50 50 7 Fiscal Year Ended (4) --------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- International Business: Sales representatives............ -- -- 24 28 23 Service centers.................. -- -- 2 3 3 Countries served................. -- -- 5 5 5 (1) Excludes Taylor service centers prior to their acquisition. (2) All Imaging Business data for periods prior to November 1996 reflect pre-merger financial data of companies acquired through pooling-of- interests transactions. (3) All Long-Term Care Business data prior to fiscal 1999 is presented based on a calendar year end. (4) Excludes pre-acquisition data of companies acquired by PSS World Medical, Inc. unless otherwise noted. ACQUISITION PROGRAM The Company views the acquisition of medical products 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 56 at the end of fiscal 1999. The Imaging Business and International Business began with acquisitions in fiscal year 1997 and have grown primarily through acquisitions to 37 and three 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 in fiscal year 1999. Since fiscal year 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) ---------------------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- Number of acquisitions..................... 9 11 10 15 26 Prior year revenues for acquired companies (2) $37,600 $167,600 $241,700 $498,942 $294,428
(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. 8 OPERATING HIGHLIGHTS The following table sets forth information regarding the Company's net sales by business for the periods indicated (in millions): Fiscal Year Ended ------------------------------------- 1997 1998 1999 -------- --------- -------- Net Sales Physician Supply Business....... $ 610.4 $ 662.5 $ 677.4 Imaging Business................ 362.5 409.7 524.8 Long-Term Care Business......... 177.7 287.6 342.4 International Business.......... 15.7 22.0 19.9 -------- -------- -------- Total company.......... $1,166.3 $1,381.8 $1,564.5 ======== ======== ======== Fiscal Year Ended ------------------------------------ 1997 1998 1999 ------- ------- ------- Percentage of Net Sales Physician Supply Business............ 52.3% 48.0% 43.3% Imaging Business..................... 31.1 29.7 33.5 Long-Term Care Business.............. 15.2 20.8 21.9 International Business............... 1.4 1.5 1.3 ------- ------- ------- Total company...............100.0% 100.0% 100.0% ======= ======= ======= Fiscal Year Ended ----------------------------------- 1997 1998 1999 ---------- ---------- ------- (Restated) (Restated) Gross Margin Trends Total Company 24.5% 26.5% 27.0% Fiscal Year Ended ------------------------------------ 1997 1998 1999 ---------- ---------- ------- (Restated) (Restated) Income From Operations Physician Supply Business............$ 3.4 $16.9 $42.7 Imaging Business..................... 4.0 6.5 16.3 Long-Term Care Business.............. 9.1 14.0 17.2 International Business............... 0.5 (5.3) (2.3) -------- --------- ------- Total company............... $17.0 $32.1 $73.9 ======== ========= ======= The following table sets forth certain operating trends of the Company for the periods indicated: 9 Fiscal Year Ended ---------------------- 1998 1999 --------- -------- (Restated) Operating Trends: Average Days Sales Outstanding................ 50.7 55.2 Average Inventory Turnover.................... 8.8x 8.2x Accounts receivable, net of allowances, were $207.8 million and $271.8 million at April 3, 1998 and April 2, 1999, respectively. Inventories were $125.5 million and $153.6 million and as of April 3, 1998 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 ------------------------- 1998 1999 ---------- ---------- (Restated) Liquidity Trends: Cash and Investments..................... $163.0 $ 41.1 Working Capital.......................... 376.2 355.3 RESULTS OF OPERATIONS The table below sets forth for each of the fiscal years 1997 through 1999 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 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. 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. Fiscal Year Ended ------------------------------- 1997 1998 1999 ---------- ---------- ------ (Restated) (Restated) Income Statement Data Net sales............................. 100.0% 100.0% 100.0% Gross profit ......................... 24.5 26.5 27.0 General and administrative expenses... 16.5 16.7 14.4 Selling expenses...................... 6.6 7.4 7.9 Operating income...................... 1.5 2.3 4.7 Net income............................ 1.1 1.1 2.8 Fiscal Year Ended April 2, 1999 Versus Fiscal Year Ended April 3, 1998(Restated) 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 10 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 Prospective Pay System ("PPS") for reimbursement of Medicare patients in long-term care facilities. The Company does not expect this trend to continue unless long-term care facility customers are financially impaired or reorganized due to the impact of the new PPS reimbursement requirements. 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. The Company expects this trend to continue in the Long-Term Care Business. The Company added a net addition of approximately 50 sales representatives in fiscal 1999 to develop sales to independent and regional customers to offset the impact of decreased margins in its chain customer sales. General and Administrative Expenses. General and administrative expenses for fiscal year 1999 totaled $224.7 million, a decrease of $6.6 million, or 2.9%, from the fiscal year 1998 total of $231.3 million. General and administrative expenses as a percentage of net sales, decreased to 14.4% for fiscal year 1999 from 16.7% 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 merger activity, restructuring costs and expenses, and other special items as discussed below, (ii) the continued leveraging of fixed costs of mature service center operations, (iii) the elimination of below average performance centers during fiscal 1999, and (iv) the increased contribution by the Imaging Business which operates at lower general and administrative expenses as a percentage of sales. 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: 1999 1998 ------ ------- Merger costs and expenses.....................................$4,371 $14,066 Restructuring costs and expenses.............................. 4,922 3,691 Information systems accelerated depreciation.................. 5,379 -- Goodwill impairment charges................................... -- 5,807 Gulf South operational tax charge and professional fee accrual -- 5,986 Other charges................................................. 1,010 2,457 ------ ------- Total charges............................................$15,682 $32,007 ====== ======= 11 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 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 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. 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. During the quarter ended June 30, 1998, management approved and adopted an additional Gulf South component to its formal plan to restructure the Company. This restructuring plan identified two additional distribution centers and two corporate offices to be merged with existing facilities and identified three executives to be involuntarily terminated. Accordingly, the Company recorded restructuring costs and expenses of $1,503 at the commitment date of the restructuring plan adopted by management. Such costs include branch shutdown costs, lease termination costs, involuntary employee termination costs of $281, $570, and $652, respectively. The remaining $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. 12 Information Systems Accelerated Depreciation In connection with the Gulf South merger during fiscal 1998, management evaluated the adequacy of the combined companies' information systems. The Company concluded that its existing information systems were not compatible with those of Gulf South's and not adequate to support the future internal growth of the combined companies and expected growth resulting from future acquisitions. Pursuant to SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company evaluated the recoverability of the information system assets. Based on the Company's analysis, impairment did not exist at the division level; therefore, management reviewed the depreciation estimates in accordance with Accounting Principles Board ("APB") No. 20, Accounting Changes. Effective April 4, 1998, the estimated useful lives of the PSS, DI, and GSMS division information systems were revised to 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. Goodwill Impairment Charges During fiscal 1998, the Company determined that goodwill related to three foreign (World Med) 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 $5,986, $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. 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. These professional fees were previously recorded by Gulf South in the period from January 1, 1998 to April 3, 1998 and, therefore, reflected as an adjustment to shareholders' equity on April 4, 1998 (refer to Note 1, Background and Summary of Significant Accounting Policies). However, the Company's fiscal 1998 historical consolidated financial statements have been restated to recognize the professional fees at the Holding Company in fiscal 1998, rather than at the Gulf South divisional level. Other Charges During fiscal 1999, the Company incurred approximately $1,010 of costs related to acquisitions not consummated. The other charges recorded in fiscal 1998 and 1997 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 13 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. The Company did not incur any related costs during fiscal 1999. Selling Expenses. Selling expenses for fiscal year 1999 totaled $123.3 million, an increase of $20.9 million, or 20.4%, over the fiscal year 1998 total of $102.4 million. Selling expense as a percentage of net sales was approximately 7.9% and 7.4% 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 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. 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 (restated) 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 14 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 ------------- -------------- (Restated) (Restated) (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 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 costs 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. Management believes these charges are either direct transaction costs or of a nonrecurring or unusual nature and are not indicative of the future results of Gulf South. Management's discussion and analysis addresses the comparative quarters and nature of these unusual charges. 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 is 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. Historically, management has raised the gross profit percentage of acquired companies by reducing purchase costs as a result of increased purchase volume. 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 15 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 in general and administrative expenses. 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 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 $777 of costs were reversed against general and administrative expenses during the quarter ended September 30, 1998. Restructuring Costs and Expenses. In order to improve customer service, reduce costs, and improve productivity and asset utilization, the Company decided to realign and consolidate its operations with Gulf South. The restructuring costs and expenses, which directly relate to the merger with PSS World Medical, Inc., were recorded 16 during the three months ended April 3, 1998. During this time period, management approved and committed to a plan to integrate and restructure the business of Gulf South. The Company recorded restructuring costs and expenses for lease terminations costs, severance and benefits to terminate employees, facility closure, and other costs to complete the consolidation of the operations. The following table summarizes the components of the restructuring charge. Lease termination costs.......................$ 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 19, 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 unusual 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 Gulf South 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 17 in net income is primarily attributable to the factors discussed in Gross Profit and Charges Included in General and Administrative Expenses above. Fiscal Year Ended April 3,1998 Versus Fiscal Year Ended March 28,1997 (restated) Net Sales. Net sales for fiscal year 1998 totaled $1.38 billion, an increase of $215.5 million, or 18.5%, over the fiscal year 1997 total of $1.17 billion. The increase in net sales was attributable to: (i) net sales from the acquisitions of the companies during fiscal year 1998 and 1997, 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 the Abbott Agreement. Net sales contributed from acquisitions completed in fiscal 1998 totaled approximately $4.7 million and $56.6 million for the Physician Supply and Imaging Businesses, respectively. Gross Profit. Gross profit for fiscal year 1998 totaled $365.8 million, an increase of $79.6 million, or 27.8%, over the fiscal year 1997 total of $286.2 million. The increase in gross profit dollars is primarily attributable to the sales growth described above. Gross profit as a percentage of net sales was 26.5% and 24.5% for fiscal years 1998 and 1997, respectively. General and Administrative Expenses. General and administrative expenses for fiscal year 1998 totaled $231.3 million, an increase of $38.7 million, or 20.1%, over the fiscal year 1997 total of $192.6 million. General and administrative expenses as a percentage of net sales was 16.7% and 16.5% for fiscal years 1998 and 1997, respectively. 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: 1998 1997 ------- ------- Merger costs and expenses.......................................$13,986 $14,506 Restructuring costs and expenses................................ 3,691 -- Goodwill impairment charges..................................... 5,807 -- Gulf South operational tax charge and professional fee accrual.. 5,986 1,998 Other charges................................................... 2,457 1,446 ------- ------- Total charges...................................................$31,927 $17,950 ======= ======= 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. 18 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 $9,931 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. Merger costs and expenses for fiscal 1997 include $6,287 of charges recorded at the commitment date of an integration plan adopted by management and $8,219 for merger costs expensed as incurred. Refer to Note 5, Accrued Merger and Restructuring Costs and Expenses. Restructuring Costs and Expenses 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. 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. Goodwill Impairment Charges During fiscal 1998, the Company determined that goodwill related to three foreign (World Med) 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 $5,986, $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. 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. These professional fees were previously recorded by Gulf South in the period from January 1, 1998 to April 3, 1998 and, therefore, reflected as an adjustment to shareholders' equity on April 4, 1998 (refer to Note 1, Background and Summary of Significant Accounting Policies). However, the Company's fiscal 1998 historical consolidated financial statements have been previously restated to recognize the professional fees at the Holding Company in fiscal 1998, rather than at the Gulf South divisional level. Other Charges The other charges recorded in 1998 and 1997 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 and $1,446 of related expenses were recognized in fiscal 1998 and 1997, respectively. 19 Selling Expenses. Selling expenses for fiscal year 1998 totaled $102.4 million, an increase of $25.9 million, or 33.9%, over the fiscal year 1997 total of $76.5 million. Selling expense as a percentage of net sales was approximately 7.4% and 6.6% for fiscal years 1998 and 1997, respectively. The Company utilizes a variable commission plan, which pays commissions based on gross profit as a percentage of net sales. Operating Income. Operating income for fiscal year 1998 totaled $32.1 million, an increase of $15.1 million, or 88.8%, over the fiscal year 1997 total of $17.0 million. As a percentage of net sales, operating income for fiscal year 1998 increased to 2.3% from 1.5% for fiscal year 1997. Interest Expense. Interest expense for fiscal year 1998 totaled $7.5 million, an increase of $4.0 million, or 114.3%, over the fiscal year 1997 total of $3.5 million. The increase in interest expense reflects interest on the $125.0 million 8.5% senior subordinated debt that was outstanding the last five months of fiscal 1998. Interest and Investment Income. Interest and investment income for fiscal year 1998 totaled $5.2 million, an increase of $1.0 million, or 23.8%, over the fiscal year 1997 total of $4.2 million. Other Income. Other income for fiscal year 1998 totaled $2.8 million, an increase of $0.7 million, or 33.3%, over the fiscal 1997 total of $2.1 million. Provision for Income Taxes. Provision for income taxes for fiscal year 1998 totaled $17.4 million, an increase of $10.8 million, or 163.6%, over the fiscal year 1997 total of $6.6 million. This increase primarily resulted from the impact of factors discussed above. The effective income tax rate was 53.2% in fiscal year 1998 versus 33.3% in fiscal 1997. The effective tax rate was higher in 1998 and is generally higher than the Company's statutory rate due to the nondeductible nature of certain merger related costs and the effect of the Company's foreign subsidiary, both of which increased in 1998. Net Income. Net income for fiscal year 1998 totaled $15.3 million, an increase of $2.0 million, or 15.0%, over the fiscal year 1997 total of $13.3 million. As a percentage of net sales, net income remained constant at 1.1% for fiscal year 1998 and 1997. Liquidity And Capital Resources As the Company's business grows, its cash and working capital requirements will also continue to increase as a result of the need to finance acquisitions and anticipated growth of the Company's operations. This growth will be funded through a combination of cash flow from operations, revolving credit borrowings and proceeds from any future public offerings. Net cash (used in) provided by operating activities was $(10.8) million, $27.9 million, and $(18.7) million, in fiscal years 1997, 1998, and 1999, respectively. The decrease in fiscal 1999 operating cash flow over prior years was primarily attributable to: (i) $29.1 million cash paid for merger and restructuring accruals established in the current and prior years, (ii) accounts receivable and inventory growth in the Imaging division, (iii) approximately $10 million of accounts payable funding in excess of normal operations, and (iv) working capital requirements of the best practices and distribution upgrades at Gulf South. These amounts were offset by continued leveraging of fixed operating costs. Net cash used in investing activities was $74.8 million, $48.0 million, and $28.9 million, in fiscal years 1997, 1998, and 1999, respectively. These funds were primarily utilized to finance the acquisition of new service centers and capital expenditures including the use of the net proceeds from sales and maturities of marketable securities. The increase in capital expenditures in fiscal year 1999 is primarily attributable to new computer systems being implemented across all the Company's divisions. Net cash provided by financing activities was $56.4 million, $65.2 million, and $7.5 million for fiscal years 1997, 1998, and 1999, respectively. Fiscal 1997 cash provided by Gulf South Medical Supply's net proceeds from a public offering of approximately $91.5 million of its common stock was partially offset by the use of cash to pay off debt 20 assumed through fiscal 1997 acquisitions. Fiscal 1998 cash provided by the issuance of the $125.0 million senior subordinated notes was partially offset by cash used to retire debt of acquired companies. The Company had working capital of $355.3 million and $376.2 million as of April 2, 1999 and April 3, 1998, respectively. Accounts receivable, net of allowances, were $271.8 million and $207.8 million at April 2, 1999 and April 3, 1998, respectively. The average number of days sales in accounts receivable outstanding was approximately 55.2 and 50.7 days for the years ended April 2, 1999 and April 3, 1998, respectively. For the year ended April 2, 1999, the Company's Physician Supply, Imaging, and Long-Term Care Businesses had days sales in accounts receivable of approximately 55.0, 47.4, and 64.2 days, respectively. Inventories were $153.6 million and $125.5 million as of April 2, 1999 and April 3, 1998, respectively. The Company had annualized inventory turnover of 8.2x and 8.8x times for the years ended April 2, 1999 and April 3, 1998. For the year ended April 2, 1999, the Company's Physician Supply, Imaging, and Long-Term Care Businesses had annualized inventory turnover of 8.3x, 8.8x, and 7.6x, 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 deduction for offering costs. The Private Notes are unconditionally guaranteed on a senior subordinated basis by all of the Company's domestic subsidiaries. On February 10, 1998, the Company closed its offer to exchange the Private Notes for senior subordinated notes (the "Notes") of the Company with substantially identical terms to the Private Notes (except that the Notes do not contain terms with respect to transfer restrictions). Interest on the Notes accrues from the date of original issuance and is payable semiannually on April 1 and October 1 of each year, commencing on April 1, 1998, at a rate of 8.5% per annum. The semiannual payments of approximately $5.3 million will be funded by the operating cash flow of the Company. No other principal payments on the Notes are required over the next five years. The Notes contain certain restrictive covenants that, among other things, limit the Company's ability to incur additional indebtedness. Provided, however, that no event of default exist, additional indebtedness may be incurred if the Company maintains a consolidated fixed charge coverage ratio, after giving effect to such additional indebtedness, of greater than 2.0 to 1.0. On February 11, 1999, the Company entered into a $140.0 million senior revolving credit facility with a syndicate of financial institutions with NationsBank, N.A. as principal agent. Borrowings under the credit facility are available for working capital, capital expenditures, and acquisitions, and are secured by the common stock and assets of the Company and its subsidiaries. The credit facility expires February 10, 2004 and borrowings bear interest at certain floating rates selected by the Company at the time of borrowing. The credit facility contains certain affirmative and negative covenants, the most restrictive of which require maintenance of a maximum leverage ratio of 3.5 to 1.0, maintenance of consolidated net worth of $337.0 million, and maintenance of a minimum fixed charge coverage ratio of 2.0 to 1.0. In addition, the covenants limit additional indebtedness and asset dispositions, require majority lender approval on acquisitions with a total purchase price greater than $75.0 million, and restrict payments of dividends. The Company was not in compliance with its covenants at April 2, 1999, due to failure to meet certain timely filing requirements and exceeding capital expenditures limitations by $2.2 million in the quarter ended April 2, 1999. However, a limited waiver was obtained by the Company from the lending group. As of April 2, 1999, the Company has not entered into any material working capital commitments that require funding. The Company believes that the expected cash flows from operations, available borrowing under the credit 21 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 (7.75% at April 2, 1999) or the LIBOR rate plus 1.125% (6.19% at April 2, 1999). YEAR 2000 READINESS DISCLOSURE The following disclosure is a "Year 2000 Readiness Disclosure" within the context of the Year 2000 Information and Readiness Disclosure Act to the extent allowed by that Act. Year 2000 Problem Many computer programs and hardware with embedded technology use only two digits to identify a year in a date field within a program (e.g., "98" or "02"). These programs or hardware may fail to distinguish dates in the "2000s" from dates in the "1900s" due to the two digit date fields. If uncorrected, such programs and hardware with date sensitive operations may malfunction or fail to operate after 1999 (and possibly before the year 2000 in some instances). Company's Year 2000 Program and Systems The Company has developed, and is implementing, a Year 2000 program to address both information technology ("IT") and non-IT systems. The Company's business applications reside on a group of mini computers, servers and personal computers. The Company also uses laptop computers that serve as sales force and service technician automation tools. The Company's IT systems include computer and data network hardware, internally developed software, and software purchased or licensed from external vendors. The Company's non-IT systems include equipment which uses date-sensitive embedded technology. Principal non-IT systems include telecommunications and warehouse equipment. The Company initiated a Year 2000 compliance program during May 1998, and the progress of this program has been communicated regularly to the Audit Committee of the Company's Board of Directors. The Company's approach to address the Year 2000 compliance program includes the following phases: inventory, assessment, planning, remediation, testing, and implementation, third party risk management, and business continuity planning. Company's State of Year 2000 Readiness The Company believes that its existing systems are substantially Year 2000 compliant, except that the Company lacks sufficient information to determine the Year 2000 status of recently acquired companies. The recently acquired companies are scheduled to be converted to Company's substantially compliant systems before the end of September 1999. The Company substantially completed inventory, assessment, and plans for remediation of its critical IT systems during the quarter ended December 1998. Remediation and testing of these critical systems included upgrading, replacing, or modifying non-compliant components, and was substantially completed during the quarter ended March 1999. Implementation of these remediation efforts is now substantially complete, and has been substantially complete since the quarter ended June 1999. As a precaution against possible errors or omissions to our remediation efforts, ongoing testing of all systems, critical and non-critical is targeted to continue through the end of September 1999. Additional remediation will occur as licensors offer remedies to Year 2000 issues or in the event undetected system non-compliance issues are uncovered. 22 As stated above, recent acquisitions of companies by the Imaging Business have added to our remediation efforts. The Company does not fully know the state of Year 2000 readiness of the acquired companies. As a result, seven acquired service centers are targeted to be integrated into the imaging division's distribution IT system as branches prior to the end of September 1999. Currently, the Imaging Business has 30 of 37 service centers and its corporate location systems converted to its new system, which the Company believes is Year 2000 compliant. The progress of these integrations will be closely monitored, the Year 2000 readiness of these branches will be assessed, and contingency plans will be modified accordingly. The Company is also in the process of completing an inventory and assessment of its non-critical IT and all non-IT systems. Remediation efforts of non-critical systems include the development and implementation of ICONWeb, a new enhanced version of the Physician Supply Business sales force automation software, and the remediation of the Accuscan software that Gulf South provides its customers to monitor and order inventory. The new ICONWeb software, which includes enhanced functionality, is currently being piloted and is targeted for complete implementation prior to the end of November 1999. Remediated software has been implemented at approximately 90% of the customers currently using Accuscan. The remaining customers are targeted for implementation prior to the end of September 1999. The Company estimates that it will complete inventories, assessments, planning, remediation, and testing of all other non-critical IT and all non-IT systems by the end of September 1999. Costs for Company's Year 2000 Program The total costs of addressing the Company's Year 2000 readiness issues are not expected to be material to the Company's financial condition or results of operations. Since initiation of its program in calendar year 1998, the Company has expensed approximately $0.5 million on a worldwide basis in costs on a pretax basis to address its Year 2000 readiness issues. These expenditures include information system replacement and embedded technology upgrade costs of $0.3 million, supplier and customer compliance costs of $0.1 million and all other costs of $0.1 million. The Company currently estimates that the total of such costs for addressing its internal Year 2000 readiness, on a worldwide basis, will approximate $1.7 million in the aggregate on a pretax basis. These costs are being expensed as they are incurred, except for purchases of computer hardware and other equipment, which are capitalized as property and equipment and depreciated over the equipment's estimated useful lives in accordance with the Company's normal accounting policies. All costs are being funded through operating cash flows. No projects material to the financial condition, or results of operations of the Company have been deferred or delayed as a result of the Year 2000 program. A large part of the Year 2000 effort has been accomplished through the redeployment of existing resources. The cost of such redeployment or of internal management time has not been specifically quantified. As reported previously, concurrent with the Year 2000 modifications and upgrades to existing systems, the Company is currently replacing a majority of its internal information systems hardware and software with new systems ("New Systems") that the Company believes are Year 2000 compliant. The aforementioned amounts specifically exclude the costs associated with the implementations, but not the testing of these "New Systems" which are being installed primarily to integrate operations and achieve additional information technology functionality. Both internal and external resources are being used to identify, correct and test the Company's systems for Year 2000 compliance. A Year 2000 program manager has been assigned to coordinate the Company's Year 2000 compliance program at all of the Company's divisions. To assist the Company in meeting its Year 2000 responsibilities, the Company has contracted with external consultants specializing in Year 2000 readiness assessments. The goal of these consultants was to assist the Company in evaluating the Year 2000 programs, processes and progress of its U.S. divisions, and to help identify any remaining areas of effort advisable. The Company's original cost estimates for testing, third party Year 2000 risks, and contingency planning were revised as a result of the consultant's independent assessment of the scope of the Company's program. These consultants will be engaged through the end of calendar year 1999. The Company's Year 2000 efforts will be assessed and reported to executive management as part of this ongoing engagement. In addition, the Company has engaged its attorneys and other outside consultants to assist or examine selected critical areas. The Company has consulted insurance professionals and is exploring possible mitigation of Year 2000 risks through purchasing insurance. Budgeted costs for these ongoing engagements are estimated at $0.8 million and are included in the total costs estimates above. With respect to non-IT system issues, the Company is unable to estimate its remediation costs since it does not have available information upon which to measure the cost of Year 2000 compliance in this area. While the total costs to become Year 2000 compliant in the non-IT system area are not known at this time, management does not believe 23 that such costs will have a material adverse effect on the business, financial position, or results of operations of the Company. Third Party Year 2000 Risks The Company could be adversely affected if critical manufacturers, suppliers, customers, banks, payers, utilities, transportation companies, or other business partners fail to properly remediate their systems to achieve Year 2000 compliance. As planned, the Company has initiated communications, which include soliciting written responses to questionnaires, inquiries and follow-up meetings, with critical manufacturers, suppliers, customers and other business partners to determine the extent to which any Year 2000 issues affecting such third parties would affect the Company. Such communications are ongoing and are expected to continue through the end of calendar year 1999, with action plans developed and implemented as necessary. The Company has established a plan for ongoing monitoring of critical manufacturers, suppliers, customers, and other business partners during calendar year 1999. However, many critical manufacturers, suppliers, customers and other business partners have as yet, either declined to provide the requested assurances or have limited the scope of assurances to which they are willing to commit. Naturally, most third parties are unwilling to guarantee that they will achieve Year 2000 compliance. The Company is subject to risk should Government or private payers (including insurers) fail to become Year 2000 compliant and, therefore, be unable to make full or timely reimbursement to the Company's customers. For example, if the Federal government were unable to make payments under the Medicaid or Medicare programs due to Year 2000 failures, the Company's customers that derive a significant portion of their revenues from these government programs could be adversely affected. Such a situation could have a material adverse affect on the Company's cash flows, financial position, or results of operations by reducing the ability of customers to pay for products purchased from the Company. Since the Company's Year 2000 plan is dependent in part upon these suppliers, customers and other key third parties being Year 2000 compliant, there can be no assurance that the Company's efforts to assess third parties' Year 2000 readiness will be able to prevent a material adverse effect on the Company's business, financial position, or results of operations in future periods should a significant number of third parties experience business disruptions as a result of their lack of Year 2000 compliance. Additionally, third party failures to adequately address the Year 2000 issue could significantly disrupt the Company's operations and possibly lead to litigation against the Company. The costs and expenses associated with any such failure or litigation, or with any disruptions in the economy in general as a result of the Year 2000, are not presently estimable but could have a material adverse effect on the Company's business and results of operations. Other Year 2000 Risks and Contingency Planing Management of the Company believes that its Year 2000 compliance program will be effective in avoiding significant adverse consequences due to Year 2000 problems with its systems. The Company has, however, begun mitigating identified risks, and is developing contingency plans to address situations that may arise where the Company's systems or third party systems experience Year 2000 problems. As part of this effort, the Company has been assessing the viability of its entire supply chain and is developing contingency plans to provide alternatives in the event Year 2000 related issues arise. Current contingency alternatives center on human resource issues, substitute sources of utilities, inventory management, and the development of a rapid response capability and a monitoring process for critical communications during the transition into the Year 2000. The Company is developing and executing employee awareness plans to assist with the implementation of the Company's Year 2000 efforts. The Company is alerting customers of their need to address Year 2000 problems, specifically their need to address risks associated with non-compliant IT and non-IT equipment that they may have been or are relying on. If the Company were to experience significant Year 2000 problems due to a failure in its systems or a third party's systems, the Company would revert to interim manual methods of conducting business. In developing contingency plans, the Company will be prioritizing its systems and affected operations, and developing emergency measures to address potential systems failures that could significantly affect the Company's business operations. Likewise, the Company's contingency plans will address Year 2000 risks associated with Year 2000 potential failures experienced by third parties. Additionally, the Company is in the process of updating its information technology disaster recovery plan to include Year 2000 contingencies that may arise. Risks to achieving Year 2000 compliance include the availability of resources, the Company's ability to discover and correct potential Year 2000 problems which could have a serious impact on specific systems, equipment or 24 facilities, and the ability of the Company's significant vendors, payers and customers to make their systems Year 2000 compliant. Even with contingency plans in place, there can be no assurance that Company will avoid experiencing problems relating to Year 2000 problems. All statements contained herein that are not historical facts, including, but not limited to, statements regarding anticipated growth in revenue, gross margins and earnings, statements regarding the Company's current business strategy, the Company's projected sources and uses of cash, and the Company's plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause results to differ materially are the following: the availability of sufficient capital to finance the Company's business plans on terms satisfactory to the Company; competitive factors; the ability of the Company to adequately defend or reach a settlement of outstanding litigations and investigations involving the Company or its management; changes in labor, equipment and capital costs; changes in regulations affecting the Company's business; future acquisitions or strategic partnerships; general business and economic conditions; successful implementation of the Company's Year 2000 compliance plan; and other factors described from time to time in the Company's reports filed with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. 25 Item 8. Financial Statements and Supplementary Data INDEX TO the CONSOLIDATED FINANCIAL STATEMENTS
Page Financial Statements: Report of Independent Certified Public Accountants--PSS World Medical, Inc.......................... F-2 Consolidated Balance Sheets--April 2, 1999 and April 3, 1998 (Restated)............................. F-3 Consolidated Statements of Income for the Years Ended April 2, 1999, April 3, 1998 (Restated), and March 28, 1997 (Restated).................................................................... F-4 Consolidated Statements of Shareholders' Equity for the Years Ended April 2, 1999, April 3, 1998 (Restated), and March 28, 1997 (Restated).................................................... F-5 Consolidated Statements of Cash Flows for the Years Ended April 2, 1999, April 3, 1998 (Restated), and March 28, 1997 (Restated)................................................................ F-6 Notes to Consolidated Financial Statements (Restated)........................................... F-7 Schedule II--Valuation and Qualifying Accounts for the Years Ended March 28, 1997, April 3, 1998 (Restated) and April 2, 1999 (Restated)...................................................... F-44
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of PSS World Medical, Inc.: We have audited the accompanying consolidated balance sheets (restated) of PSS World Medical, Inc. (a Florida corporation) and subsidiaries as of April 2, 1999 and April 3, 1998, and the related consolidated statements of income (restated), shareholders' equity (restated), and cash flows (restated) for each of the three years in the period ended April 2, 1999. These financial statements and the schedule (restated) 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 generally accepted auditing standards 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, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of PSS World Medical, Inc. and subsidiaries as of April 2, 1999 and April 3, 1998, and the results of their operations and their cash flows for each of the three years in the period ended April 2, 1999 in conformity with generally accepted accounting principles. As explained in Notes 17 and 21 to the financial statements, the Company has restated certain of its previous financial statements and has given retroactive effect to recording $7.4 million of pretax charges in the results of operations for Gulf South Medical Supply, Inc., a subsidiary of PSS World Medical, Inc., for the 12 months ended December 31, 1997 and 1996. These charges, which were previously recorded in Gulf South Medical Supply, Inc.'s results of operations for the three months ended April 3, 1998, primarily relate to a provision for doubtful accounts, an allowance for obsolete inventory, legal expenses, and an inventory write-off. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule (restated) 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 the audits of the basic financial statements and, in our opinion, based on our audits, 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 May 24, 2000 F-2 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS April 2, 1999 and April 3, 1998 (Dollars in Thousands, Except Share Data) ASSETS
1999 1998 --------- ---------- (Restated) Current Assets: Cash and cash equivalents......................................................... $ 41,106 $ 81,483 Marketable securities............................................................. 3 81,550 Accounts receivable, net.......................................................... 271,781 207,795 Inventories, net.................................................................. 153,626 125,453 Employee advances................................................................. 702 442 Prepaid expenses and other........................................................ 59,327 48,015 --------- --------- Total current assets..................................................... 526,545 544,738 Property and equipment, net.......................................................... 48,167 31,473 Other Assets: Intangibles, net.................................................................. 147,383 91,909 Other............................................................................. 21,286 18,617 --------- --------- Total assets............................................................. $ 743,381 $ 686,737 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.................................................................. $ 112,966 $ 109,790 Accrued expenses.................................................................. 48,704 48,081 Current maturities of long-term debt and capital lease obligations................ 1,062 3,570 Other............................................................................. 8,536 7,058 --------- --------- Total current liabilities................................................ 171,268 168,499 Long-term debt and capital lease obligations, net of current portion................. 152,442 134,057 Other................................................................................ 3,111 4,121 --------- --------- Total liabilities........................................................ 326,821 306,677 Commitments and contingencies (Notes 1, 2, 8, 9, 16, 19, and 21) --------- --------- Shareholders' Equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued and outstanding................................................................ -- -- Common stock, $.01 par value; 150,000,000 shares authorized, 70,796,024 and 70,171,909 shares issued and outstanding at April 2, 1999 and April 3, 1998, 708 702 respectively................................................................... Additional paid-in capital........................................................ 349,460 341,987 Retained earnings................................................................. 70,211 41,504 Cumulative other comprehensive income............................................. (1,177) (1,296) --------- --------- 419,202 382,897 Unearned ESOP shares.............................................................. (2,642) (2,837) --------- --------- Total shareholders' equity............................................... 416,560 380,060 --------- --------- Total liabilities and shareholders' equity............................... $743,381 $686,737 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended April 2, 1999, April 3, 1998, and March 28, 1997 (Dollars in Thousands, Except Per Share Data)
1999 1998 1997 ----------- ----------- ---------- (Restated) (Restated) Net sales......................................................... $1,564,505 $1,381,786 $1,166,286 Cost of goods sold................................................ 1,142,597 1,016,018 880,103 ----------- ----------- ---------- Gross profit.......................................... 421,908 365,768 286,183 General and administrative expenses............................... 224,733 231,336 192,643 Selling expenses.................................................. 123,322 102,353 76,493 ----------- ----------- ---------- Income from operations................................ 73,853 32,079 17,047 Other income (expense): Interest expense............................................... (11,522) (7,517) (3,471) Interest and investment income................................. 4,732 5,249 4,245 Other income................................................... 6,618 2,849 2,062 ----------- ----------- ---------- (172) 581 2,836 ----------- ----------- ---------- Income before provision for income taxes.......................... 73,681 32,660 19,883 Provision for income taxes........................................ 29,940 17,361 6,624 ----------- ----------- ---------- Net income $ 43,741 $ 15,299 $ 13,259 =========== =========== ========== Earnings per share: Basic.......................................................... $0.62 $0.22 $0.20 =========== =========== ========== Diluted........................................................ $0.61 $0.22 $0.20 =========== =========== ==========
The accompanying notes are an integral part of these consolidated statements. F-4 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended April 2, 1999, April 3, 1998 (Restated), and March 28, 1997 (Restated) (Dollars in Thousands, Except Share Data)
Cumulative Common Stock Additional Other Unearned ---------------------- Paid-In Retained Comprehensive ESOP Shares Amount Capital Earnings Income Shares Totals ---------- --------- --------- -------- ------------- -------- -------- Balance at March 29, 1996............... 64,051,168 $641 $222,068 $14,046 $ -- $(2,378) $234,377 Comprehensive income: Net income........................... -- -- -- 13,259 -- -- 13,259 Cumulative foreign currency translation adjustment............ -- -- -- -- (93) -- (93) Total comprehensive income........... 13,166 Issuance of common stock............. 4,580,934 46 98,359 -- -- (4,034) 94,371 Employee benefits and other.......... -- -- 3,482 (1,100) -- 1,413 3,795 ---------- --------- --------- --------- -------------- ---------- ---------- Balance at March 28, 1997............... 68,632,102 687 323,909 26,205 (93) (4,999) 345,709 ---------- --------- --------- --------- -------------- ---------- ---------- Comprehensive income: Net income........................... -- -- -- 15,299 -- -- 15,299 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 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 ---------- --------- --------- --------- -------------- ---------- ---------- Comprehensive income: Net income........................... -- -- -- 43,741 -- -- 43,741 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 ============ ========= ========== ========== ============== ========== ==========
The accompanying notes are an integral part of these consolidated statements. F-5 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended April 2, 1999, April 3, 1998 (Restated), and March 28, 1997 (Restated) (Dollars in Thousands)
1999 1998 1997 ---------- ---------- ---------- (Restated) (Restated) Cash Flows From Operating Activities: Net income............................................................... $ 43,741 $ 15,299 $ 13,259 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization......................................... 20,384 10,861 6,473 Provision for doubtful accounts....................................... 5,181 5,707 6,380 Provision (benefit) for deferred income taxes......................... 10,901 (4,083) (7,332) Merger and other nonrecurring costs and expenses...................... 4,873 22,340 4,879 (Gain) on sale of fixed assets........................................ (836) -- -- Deferred compensation expense......................................... 365 630 -- Unrealized loss (gain) on marketable securities....................... 288 3 (457) Changes in operating assets and liabilities, net of effects from business acquisitions: Accounts receivable, net........................................... (43,848) (16,339) (14,818) Inventories, net................................................... 1,275 (2,090) (1,714) Prepaid expenses and other assets.................................. (4,916) (10,464) (7,247) Other assets....................................................... (2,265) (2,486) (4,784) Accounts payable, accrued expenses, and other liabilities.......... (53,847) 8,558 (5,441) ----------- ---------- ---------- Net cash (used in) provided by operating activities............. (18,704) 27,936 (10,802) ----------- ---------- ---------- Cash Flows From Investing Activities: Purchases of marketable securities....................................... (50,813) (318,166) (256,824) Proceeds from sales and maturities of marketable securities.............. 125,098 309,628 205,117 Proceeds from sale of property and equipment............................. 1,586 -- -- Capital expenditures..................................................... (24,774) (10,519) (7,171) Purchases of businesses, net of cash acquired............................ (75,453) (22,481) (11,985) Payments on noncompete agreements........................................ (4,558) (6,431) (3,980) ----------- ---------- ---------- Net cash used in investing activities........................... (28,914) (47,969) (74,843) ----------- ---------- ---------- Cash Flows From Financing Activities: Proceeds from public debt offering, net of debt issuance costs........... -- 119,459 -- Proceeds from borrowings................................................. 24,000 4,349 6,131 Repayments of borrowings................................................. (20,337) (56,014) (42,180) Repayments on revolving line of credit................................... -- (5,000) -- Principal payments under capital lease obligations....................... (366) (306) (795) Proceeds from issuance of common stock................................... 4,174 2,721 94,371 Distributions to former S corporation shareholders....................... -- -- (1,100) ----------- ---------- ---------- Net cash provided by financing activities....................... 7,471 65,209 56,427 ----------- ---------- ---------- Foreign currency translation adjustment..................................... 119 (1,203) (93) ----------- ---------- ---------- Gulf South decrease in cash and cash equivalents for the three months ended (349) -- -- April 3, 1999 ----------- ---------- ---------- Net (decrease) increase in cash and cash equivalents........................ (40,377) 43,973 (29,311) Cash and cash equivalents, beginning of year................................ 81,483 37,510 66,821 ----------- ---------- ---------- Cash and cash equivalents, end of year...................................... $ 41,106 $ 81,483 $ 37,510 =========== ========== ========== Supplemental Disclosures: Cash paid for: Interest.............................................................. $ 11,026 $ 5,195 $ 1,237 =========== ========== ========== Income taxes.......................................................... $ 18,192 $ 21,170 $ 10,000 =========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. F-6 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) april 2, 1999, APRIL 3, 1998, and MARCH 28, 1997 (Dollars in Thousands, Except 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 April 2, 1999, the Company operated 56 service centers distributing to over 100,000 physician office sites in all 50 states. In November 1996, PSS established a new 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 April 2, 1999, DI operated 37 imaging division service centers distributing to approximately 15,000 medical imaging sites in 41 states. In March 1996, PSS established two new 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 April 2, 1999, the European operation included three service centers distributing to acute and alternate care sites in Belgium, Germany, France, Holland, 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 April 2, 1999, Gulf South, a wholly owned subsidiary of PSS, operated 14 long-term care distribution service centers serving over 14,000 long-term care facilities in all 50 states. Basis of Presentation The accompanying consolidated financial statements give retroactive effect to the mergers (the "Mergers") with X-Ray of Georgia ("X-Ray Georgia"), S&W X-Ray, Inc. ("S&W"), Gulf South, and various immaterial businesses acquired during fiscal 1999, 1998, and 1997 (the "Pooled Entities"). These transactions were accounted for under the pooling-of-interests method of accounting, and accordingly, the accompanying consolidated financial statements have been retroactively restated as if PSS, X-Ray Georgia, S&W, Gulf South, and the Pooled Entities had operated as one entity since inception. 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. F-7 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 year-end was December 31. 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 years 1999, 1998, and 1997, consist of 52, 53, and 52 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 April 2, 1999 and April 3, 1998 was $125,000 and the market value was $120,925 and $128,413, respectively. The carrying value of the Company's other long-term debt was $27,442 and $9,057, at April 2, 1999 and April 3, 1998, 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 classifies its marketable securities either as trading securities or held-to-maturity and carries such securities at fair market value or amortized cost, respectively. Marketable securities include obligations of states and political subdivisions, preferred stock, corporate debt securities, and other equity securities, generally with an original maturity greater than three months. Changes in net unrealized gains and losses on trading securities are included in interest and investment income in the accompanying consolidated statements of income. 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, the Company's subsidiary Gulf South depends on a limited number of large customers. Approximately 38% and 37% of Gulf South's revenues for the years ended April 2, 1999 and December 1997, respectively, represented sales to its top five customers. The Company monitors the creditworthiness of its F-8 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 $6,918 and $10,837 as of April 2, 1999 and April 3, 1998, respectively. Provisions for doubtful accounts were approximately $5,181, $5,707, and $6,380, for fiscal years ended 1999, 1998, and 1997, respectively. 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. 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 salable, 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 thirty 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. 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, including any contingent consideration paid. 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 maintains a minimum premium program for employee health and dental costs. This plan includes coverage for stop loss based on maximum individual costs of $125 per claimant and approximately $3 per year, per participant for all plan participants, in the aggregate. 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. F-9 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. 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 Gulf South completed a public offering in June 1996 pursuant to which Gulf South received net proceeds of approximately $91,500 from the sale of 3,890,733 shares of its common stock. A portion of the net proceeds from the offering were used to repay the outstanding balance under Gulf South's revolving credit facility, with the remaining balance used for general corporate purposes, including the subsequent acquisitions. 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). During fiscal year 1998, the Company committed to release the remaining shares to the S&W ESOP participants. Approximately $2.5 million of related expense was recognized during fiscal year 1998 (refer to Note 15, Employee Benefit Plans). Other Comprehensive Income During 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income, which requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The Company adopted this statement in fiscal 1999. Cumulative other comprehensive income has been separately disclosed in the accompanying consolidated statements of shareholders'equity. Revenue Recognition Substantially all revenues are recorded when products are shipped or services are provided to customers. Revenues from service contracts are recognized in earnings over the respective term of the contract. 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. F-10 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 12, Earnings Per Share). Statements of Cash Flows The Company's noncash investing and financing activities were as follows: 1999 1998 1997 -------- -------- ------- Business acquisitions: Fair value of assets acquired............$56,815 $48,924 $37,148 Liabilities assumed...................... 39,930 32,684 39,258 Notes payable issued..................... -- -- 25,321 Noncompetes issued....................... 3,950 7,574 4,300 Tax benefits related to stock option plans.. 759 1,505 3,449 Capital lease obligations incurred.......... -- 325 -- Reclassification Certain amounts for prior years have been reclassified to conform to the current year presentation. Recent Accounting Pronouncements The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information during fiscal 1999. This statement establishes standards for the reporting of information about operating segments in annual and interim financial statements and requires restatement of prior year information. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in deciding how to allocate resources and in assessing performance. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information, as presented in Note 17, Segment Information. The Company will adopt AICPA Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities, during fiscal 2000. This SOP requires that costs of start-up and organization activities previously capitalized be expensed and reported as a cumulative effect of a change in accounting principle and requires that such costs subsequent to adoption be expensed as incurred. Management does not anticipate that the new SOP will have a material impact on future results of operations. During fiscal 1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. This statement revises employers' disclosures about pension and other postretirement benefit plans. The Company adopted this statement in fiscal 1999. There was no change in the measurement or recognition of the Company's benefit plans. During 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for the Company's fiscal year 2002. The Company is in the process of evaluating the disclosure requirements under this standard. F-11 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; therefore, the historical financial statements of the Company have been restated as discussed in Note 1, Background and Summary of Significant Accounting Policy. 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, and accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of S&W for all periods prior to the merger. On December 20, 1996, the Company acquired X-Ray Georgia in a merger pursuant to which the Company issued 593,672 shares of common stock to the former shareholders of X-Ray Georgia in exchange for all of the outstanding shares of capital stock of X-Ray Georgia valued at $11.0 million at the time of the merger. The merger constituted a tax-free reorganization and has been accounted for as a pooling of interests, and accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of X-Ray Georgia for all periods prior to the merger. 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. Fiscal Year ---------------------------------- 1999 1998 1997 ------- ------- --------- Number of acquisitions.................. 2 4 4 Number of shares of common stock issued. 608,000 490,000 1,737,000 The results of operations for the acquired companies through their respective acquisition dates and the combined amounts presented in the consolidated financial statements follow: Fiscal Year Ended 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) F-12
Fiscal Year Ended April 3, 1998 -------------------------------------------------------------------------------------- Gulf South As Impact of Other Originally Restatement Gulf South Pooled Published (See Note 22) Restated S&W Entities PSS Combined ---------- ----------- ---------- --------- ---------- --------- ----------- Net sales............ $287,582 $ -- $287,582 $38,003 $92,722 $963,479 $1,381,786 Gross profit......... 74,353 (668) 73,685 8,756 14,598 268,729 365,768 Net income........... 12,114 (2,253) 9,861 (2,095) 581 6,952 15,299 Other changes in shareholders'equity 753 -- 753 2,790 (243) 15,752 19,052
Fiscal Year Ended March 28, 1997 ------------------------------------------------------------------------------------- Gulf South As Impact of Other Originally Restatement Gulf South X-Ray of Pooled Published (See Note 22) Restated Georgia S&W Entities PSS Combined ----------- ------------ ---------- -------- ------- -------- -------- ---------- Net sales............ $177,710 $ -- $177,710 $33,182 $72,034 $225,522 $657,838 $1,166,286 Gross profit......... 48,052 (1,290) 46,762 5,784 16,782 34,531 182,324 286,183 Net income........... 9,072 (2,264) 6,808 938 54 2,024 3,435 13,259 Other changes in shareholders' 93,651 -- 93,651 (1,100) 1,321 1,427 2,774 98,073 equity
Purchase Acquisitions During fiscal 1999, the Company acquired certain assets and assumed certain liabilities of 3 medical supply and equipment distributors, 15 imaging supply and equipment distributors, and 4 long-term health care distributors. In addition, the Company acquired the common stock of 2 imaging supply and equipment distributors. A summary of the details of the transactions follow: Fiscal Year ---------------------------------- 1999 1998 1997 -------- -------- -------- Number of acquisitions.............. 25 13 9 Issuance of shares of common stock.. -- 933,000 3,000 Total consideration.................$115,183 $35,739 $36,613 Cash paid, net of cash acquired..... 75,453 22,481 11,985 Issuance of note payable............ -- -- 25,321 Goodwill recorded................... 58,368 33,745 40,625 Noncompete payments................. 3,950 2,982 220 The operations of the acquired companies have been included in the Company's results of operations subsequent to the dates of acquisition. Supplemental pro forma information, assuming these acquisitions had been made at the beginning of the year, is not provided, as the results would not be materially different from the Company's reported results of operations. These acquisitions were accounted for under the purchase method of accounting, and accordingly, the assets of the acquired companies have been recorded at their estimated fair values at the dates of the acquisitions. The 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 assets acquired has been recorded as goodwill and is amortized over 15 to 30 years. The accompanying consolidated financial statements reflect the preliminary allocation of the purchase price. The allocation of the purchase price, performed using values and estimates available as of the date of the financial statements, has not been finalized due to certain pre-acquisition contingencies identified by the F-13 Company and the nature of the estimates required in the establishment of the Company's merger integration plans. Accordingly, goodwill associated with these acquisitions may increase or decrease in fiscal 2000. In addition, the terms of certain of the Company's recent acquisition agreements provide for additional consideration to be paid if the acquired entity's results of operations exceed certain targeted levels. Targeted levels are generally set above the historical experience of the acquired entity at the time of acquisition. Such additional consideration is to be paid in cash or with shares of the Company's common stock and is recorded when earned as additional purchase price. The maximum amount of remaining contingent consideration is approximately $7.8 million (payable through fiscal 2001). The first potential earn-out payment is effective in fiscal 2000. The following table summarizes the adjustments recorded against goodwill during fiscal 1999. There were no such adjustments in fiscal 1998. April 2, 1999 -------------- Merger costs and expenses .............................. $ 1,038 Reversal of excess accrued merger costs and expenses.... (1,343) Deferred tax assets of acquired companies............... (2,644) -------------- $(2,949) Merger costs and expenses During fiscal 1999, the Company recorded approximately $545 of merger integration costs and expenses directly to goodwill as incurred as these costs were contemplated at the time of acquisition. In addition, the Company recorded approximately $493 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 1999, the Company reversed approximately $1,343 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 made directly to goodwill. Deferred tax assets of acquired companies This adjustment represents 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. 3. GULF SOUTH'S RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 3, 1998 (RESTATED) 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. Certain F-14 adjustments have been made to the results of Gulf South's operations as compared to the amounts disclosed in the Company's previous filing. These adjustments are includeD in the discussion in Note 22, Restatements. Three Months Ended April 3, 1998 ------------- (Restated) 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 $24,825 in charges. Three Months Ended April 3, 1998 ------------- (Restated) Cost of goods sold: Reconciling items................................................$ 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. F-15 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. 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 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 18, 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 19, 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, and Note 22, Restatements, for more detailed discussion related to this issue. F-16 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:
1999 1998 1997 -------- ------- ------- Merger costs and expenses............................................ $ 4,371 $14,066 $14,506 Restructuring costs and expenses..................................... 4,922 3,691 -- Information systems accelerated depreciation......................... 5,379 -- -- Goodwill impairment charges.......................................... -- 5,807 -- Gulf South operational tax charge and professional fee accrual....... -- 5,986 1,998 Other charges........................................................ 1,010 2,457 1,446 ------- ------- ------- Total charges........................................................ $15,682 $32,007 $17,950 ======= ======= =======
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 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. F-17 Merger costs and expenses for fiscal 1997 include $6,287 of charges recorded at the commitment date of an integration plan adopted by management and $8,219 for merger costs expensed as incurred. Refer to Note 5, Accrued Merger and Restructuring Costs and Expenses. Restructuring Costs and Expenses 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. 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. During the quarter ended June 30, 1998, management approved and adopted an additional Gulf South component to its formal plan to restructure the Company. This restructuring plan identified two additional distribution centers and two corporate offices to be merged with existing facilities and identified three executives to be involuntarily terminated. Accordingly, the Company recorded restructuring costs and expenses of $1,503 at the commitment date of the restructuring plan adopted by management. Such costs include branch shutdown costs, lease termination costs, involuntary employee termination costs of $281, $570, and $652, respectively. The remaining $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. Information Systems Accelerated Depreciation In connection with the Gulf South merger during fiscal 1998, management evaluated the adequacy of the combined companies' information systems. The Company concluded that its existing information systems were not compatible with those of Gulf South's and not adequate to support the future internal growth of the combined companies and expected growth resulting from future acquisitions. Pursuant to SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company evaluated the recoverability of the information system assets. Based on the Company's analysis, impairment did not exist at the division level; therefore, management reviewed the depreciation estimates in accordance with Accounting Principles Board ("APB") No. 20, Accounting Changes. Effective April 4, 1998, the estimated useful lives of the PSS, DI, and GSMS division information systems were revised to 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. Goodwill Impairment Charges 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 F-18 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. In addition, professional fees estimated to be incurred of $2,919 to resolve the tax issues 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. The other charges recorded in fiscal 1998 and 1997 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 and $1,446 of related expenses were recognized in fiscal 1998 and 1997, respectively. 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. 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 $4,084 and $4,327, at April 2, 1999 and April 3, 1998, respectively. The discussion and rollforward of F-19 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 March 28, 1997........................ $ -- $ -- $ -- $ -- Additions..................................... 160 540 873 1,573 Utilized...................................... (4) -- (412) (416) ------------ ----------- ----------- --------- 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 ============ =========== =========== =========
Involuntary employee termination costs are costs for seven employees, including severance and benefits, who represent duplicative functions in the accounting, purchasing, human resource, and computer support departments at locations where facilities were combined into existing facilities. As of April 2, 1999, one employee has been terminated and the remaining six employees are estimated to be terminated by the end of second quarter of fiscal 2000. Management identified seven distribution facilities to be closed in which all operations would be ceased due to duplicative functions, six of which had been shut down by April 2, 1999, with the final location estimated to be shut down in the second quarter of fiscal 2000. Included in branch shutdown costs are costs related to contractual obligations that existed prior to the merger date but will provide no ongoing value to the Company. During fiscal 1999, information system programming delays occurred that were not anticipated at the time the integration plan was finalized and adopted by management. As a result, the information system conversion dates for all locations were delayed. The accruals for involuntary employee termination and branch shutdown costs have not been paid in full as of April 2, 1999 because the information system conversion must be completed prior to consolidating distribution facilities. The lease termination costs will be paid through fiscal 2002. Nonsignificant Poolings-of-Interests Business Combination Plans The following accrued merger costs and expenses were recognized in the accompanying consolidated statements of operations at the date in which the integration plan was formalized and adopted by management. A summary of the merger activity related to eight nonsignificant pooling-of-interests business combinations completed during fiscal 1997 through 1999, respectively, is as follows: F-20
Involuntary Employee Lease Branch Termination Termination Shutdown Costs Costs Costs Total -------- --------- --------- -------- Balance at March 28, 1997........................ $ 2 $ 436 $ 1,544 $ 1,982 Additions..................................... 164 150 1,247 1,561 Utilized...................................... (1) (333) (2,273) (2,607) -------- --------- --------- -------- 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 ======== ========= ========= ========
Actual involuntary employee termination costs were less than management's estimate and lease termination and branch shutdown costs were greater than management's estimate recorded to establish the accrued merger costs and expenses. Therefore, adjustments were made to the accruals to reflect the changes in estimated costs and expenses in the accompanying statement of operations for the year ended April 2, 1999. Refer to Note 4, Charges Included in General and Administrative Expenses. The Imaging Business acquired Tristar Imaging Systems, Inc. in October 1998, and management formalized and adopted an integration plan in April 1999 to integrate the operations of the acquired company. Approximately $2,064 of the $2,194 accrued merger costs and expenses at April 2, 1999 relate to this integration plan. Management anticipates this integration plan will be completed during fiscal 2000; however, lease termination payments will extend through fiscal 2007. Significant Purchase Business Combination Plan The Company formalized and adopted an integration plan in September 1997 to integrate the operations of General X-Ray, Inc. ("GXI") with the Imaging Business. The following accrued merger costs and expenses were recognized and additional goodwill was recorded at the commitment date. A summary of the GXI merger accruals is as follows (in thousands):
Involuntary Employee Lease Branch Relocation Termination Termination Shutdown Costs Costs Costs Costs Total ---------- ----------- ----------- --------- --------- Balance at March 28, 1997.......... $ -- $ -- $ -- $ -- $ -- Additions....................... 225 205 1,150 920 2,500 Utilized........................ (63) (8) (60) (135) (266) --------- ---------- ----------- --------- --------- 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. F-21 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 and 1999 is as follows:
Involuntary Employee Employee Lease Branch Relocation Termination Termination Shutdown Costs Costs Costs Costs Total ---------- ----------- ----------- --------- --------- Balance at March 28, 1997................ $ -- $ -- $ -- $ -- $ -- Additions............................. -- -- -- -- -- Utilized.............................. -- -- -- -- -- ---------- ----------- ----------- --------- --------- 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 ========== =========== =========== ========= =========
The additions from the Gulf South subsidiary represents the additions of the accrued merger costs and expenses recorded by Gulf South during the unconsolidated period January 1 to April 3, 1998. No amounts were utilized during this period. Refer to Note 1, Background and Summary of Significant Accounting Policies, for a discussion regarding the different year-ends of Gulf South and the Company. During the fourth quarter of fiscal 1999, 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 $292 was recorded to eliminate the excessive accruals. The Imaging Business acquired Gilbert X-Ray, Inc. in September 1998 and management formalized and adopted two separate integration plans in fiscal 1999 to integrate the operations of the acquired company. Approximately $964 of the $1,085 accrued merger costs and expenses at April 2, 1999 relate to these integration plans. Management anticipates these integration plans will be completed during fiscal 2000; however, lease termination payments will extend through fiscal 2003. Summary of Accrued Restructuring Costs and Expenses Primarily as a result of the impact of the Gulf South merger, in order to improve customer service, reduce costs, and improve productivity and asset utilization, the Company decided to realign and consolidate its operations. Accordingly, the Company began implementing a restructuring plan during the fourth quarter of fiscal 1998 which impacted all divisions ("Plan A"). Subsequently, the Company adopted a second restructuring plan during the first quarter of fiscal 1999 related to the Gulf South division ("Plan B") to further consolidate its operations. The Company recorded a total accrual of $7,971 related to Plan A. Approximately $3,691 of the $7,971 total restructuring charge was related to the PSS and DI divisions and was recorded in the accompanying F-22 consolidated statement of operations for the fiscal 1998. The additions from the 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 the first quarter of fiscal 1999, the Company established an additional accrual of $1,503 related to Plan B. Accrued restructuring costs and expenses, classified as accrued expenses in the accompanying consolidated balance sheets, were $3,818 million and $3,691 million, at April 2, 1999 and April 3, 1998, respectively. A summary of the restructuring plan activity is as follows:
Involuntary Employee Lease Branch Other Termination Termination Shutdown Exit Costs Costs Costs Costs Total ----------- ----------- --------- -------- -------- Balance at March 28, 1997................... $ -- $ -- $ -- $ -- $ -- Additions................................ 1,570 1,389 627 105 3,691 Utilized................................. -- -- -- -- -- ----------- ----------- --------- -------- -------- 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 =========== =========== ========= ======== ========
Plan A Restructuring Plan A impacted all divisions, and involved merging 18 locations into existing locations and eliminating overlapping regional operations and management functions. The plan also included the termination of approximately 270 employees from operations, administration, and management. As of April 2, 1999, 231 employees were terminated as a result of the plan. Management anticipates terminating the remaining 39 employees by the end of the fourth quarter of fiscal 2000. Furthermore, branch shutdown costs include the costs to implement Best Practice Warehousing at the Gulf South division in order to provide efficient, consistent, standard service to Gulf South customers similar to the Company's established standards. Best Practice Warehousing involves removal of all products, tearing down racking, rebuilding racking, and relocating bins and products within the warehouse to achieve greater efficiencies in order filling. The amount of costs was estimated based upon the size of the warehouse. Plan B Restructuring Plan B related only to the Gulf South division, and involved merging six additional locations into existing locations. At April 2, 1999, two of the six locations had been shut down and the remaining four locations are scheduled to be shut down in fiscal 2000. As a result of the consolidation of the duplicate facilities, lease termination costs will be incurred through fiscal 2000. The plan also included the termination of three employees from operations and management. As of April 2, 1999, all employees were terminated as a result of the plan, with the related severance payments to be made in fiscal 2000. F-23 6. MARKETABLE SECURITIES At April 3, 1998, the Company held investments in marketable securities that were classified as either trading or held-to-maturity, depending on the security and management's intent. Securities classified as trading at April 3, 1998 consisted of obligations of states and political subdivisions, preferred stock, and other equity securities. The investments are carried at their fair values based upon the quoted market prices, with changes in unrealized gains or losses included in interest and investment income. At April 3, 1998, securities classified as trading consisted of the following: Changes in Fair Unrealized Value Gain (Loss) -------- ----------- April 2, 1999: Other equity securities...........................$ 3 $ (573) ======== =========== April 3, 1998: Obligations of states and political subdivisions..$ 11,000 $ -- Preferred stock................................... 25,000 (3) Other equity securities........................... 576 -- -------- ----------- $36,576 $ (3) ======== =========== Securities classified as held-to-maturity consist of corporate debt securities for which the Company has the positive intent and ability to hold to maturity. Held-to-maturity securities are stated at cost with corresponding premiums or discounts amortized over the life of the investment to interest income. All commercial paper is due within one year and are classified as current in the accompanying consolidated balance sheets. The fair value of commercial paper was $44,974, which is based on quoted market prices and approximates amortized cost at April 3, 1998. 7. PROPERTY AND EQUIPMENT Property and equipment, stated at cost, are summarized as follows: 1999 1998 -------- --------- Land............................................. $ 1,996 $ 838 Building 4,186 3,268 Equipment........................................ 62,430 40,627 Furniture, fixtures, and leasehold improvements.. 12,233 8,487 -------- --------- 80,845 53,220 Accumulated depreciation......................... (32,678) (21,747) -------- --------- $48,167 $31,473 ======== ========= Equipment includes equipment acquired under capital leases with a cost of $488 and $434 and related accumulated depreciation of $233 and $171 at April 2, 1999 and April 3, 1998, respectively. Depreciation expense, included in general and administrative expenses in the accompanying consolidated statements of income, aggregated approximately $12,209, $5,629, and $3,856 for fiscal 1999, 1998, and 1997, respectively. F-24 8. INTANGIBLES Intangibles, stated at cost, consist of the following: 1999 1998 -------- ------- Goodwill $134,196 $78,656 Noncompete agreements and other........ 27,257 22,295 -------- ------- 161,453 100,951 Accumulated amortization............... (14,070) (9,042) -------- ------- $147,383 $91,909 ======== ======= Future minimum payments required under noncompete agreements at April 2, 1999 are as follows: Fiscal Year: 2000............................................. $2,421 2001............................................. 1,074 2002............................................. 713 2003............................................. 292 2004............................................. 74 Thereafter....................................... 340 ------ $4,914 ====== Amortization expense, included in general and administrative expenses in the accompanying consolidated statements of income, aggregated approximately $7,289, $5,062, and $2,617 for fiscal 1999, 1998, and 1997, respectively. 9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations consist of the following: April 2, 1999 April 3, 1998 ------------- ------------- Senior subordinated notes.............. $125,000 $125,000 Senior revolving credit................ 24,000 -- Capital lease obligations.............. 496 532 Long-term debt of acquired companies... 96 7,675 Other notes 3,912 4,420 ------------- ------------- 153,504 137,627 Less current maturities................ (1,062) (3,570) ------------- ------------- $152,442 $134,057 ============= ============= Senior Subordinated Notes During October 1997, the Company issued 8.5% unsecured senior subordinated notes due in 2007 (the "Notes") in the amount of $125,000. Interest on the Notes accrues from their 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 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. F-25 Senior Revolving Credit The Company entered into a $140,000 senior revolving credit facility with a syndicate of financial institutions with NationsBank, 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 1.125%. The interest rates at April 2, 1999 were 7.75% and 6.19%, respectively. The amount outstanding under the credit facility at April 2, 1999 was $24,000. The credit facility contains certain affirmative and negative covenants, the most restrictive of which require maintenance of a maximum leverage ratio of 3.5 to 1, maintenance of consolidated net worth of $337.0 million, and maintenance of a minimum fixed charge coverage ratio of 2.0 to 1. In addition, the covenants limit additional indebtedness and asset dispositions, require majority lender approval on acquisitions with a total purchase price greater than $75,000, and restrict payments of dividends. The Company was not in compliance with its covenants at April 2, 1999, due to failure to meet certain timely filing requirements. However, a limited waiver was obtained by the Company from the lending group. Capital Lease Obligations As of April 2, 1999, future minimum payments, by fiscal year and in the aggregate, required under capital leases are approximately as follows: Fiscal Year: 2000...........................................................$ 361 2001........................................................... 98 2002........................................................... 64 2003........................................................... 38 ------- Net minimum lease payments........................................ 561 Less amount representing interest................................. (65) ------- Present value of net minimum lease payments under capital leases.. 496 Less amounts due in one year...................................... (321) ------- Amounts due after one year............................$ 175 ======= Long-Term Debt of Acquired Companies Approximately $5,150 of long-term debt of acquired companies outstanding at April 3, 1998 relates to the Other Pooled Entities. Refer to Note 1, Background and Summary of Significant Accounting Policies, for a further discussion regarding the Other Pooled Entities. All debt has been repaid subsequent to the date of merger. Other Notes At April 2, 1999, other notes consist of various debt maintained by WorldMed Int'l, including a working capital line of credit, a mortgage on facilities in Leuven, Belgium, and debt to acquire certain international business service centers. Interest rates on the related notes range from 4.9% to 6.15%, respectively. F-26 As of April 2, 1999, future minimum payments of long-term debt, excluding capital lease obligations, are approximately as follows: Fiscal Year: 2000.............................................$ 741 2001............................................. 645 2002............................................. 645 2003............................................. 645 2004............................................. 24,645 Thereafter....................................... 125,687 ----------- Total...................................$ 153,008 =========== 10. INCOME TAXES The provisions for income taxes are detailed below: 1999 1998 1997 Current tax provision: ------- ------- ------- Federal............................. $16,253 $17,928 $11,441 State............................... 2,786 3,516 2,515 ------- ------- ------- Total current.............. 19,039 21,444 13,956 ------- ------- ------- Deferred tax provision (benefit): Federal............................. 9,306 (3,486) (6,259) State............................... 1,595 (597) (1,073) ------- ------- ------- Total deferred............. 10,901 (4,083) (7,332) ------- ------- ------- Total income tax provision. $29,940 $17,361 $ 6,624 ======= ======= ======= The difference between income tax computed at the federal statutory rate and the actual tax provision is shown below:
1999 1998 1997 ---------- ---------- -------- (Restated) (Restated) Income before provision for taxes.................................. $73,681 $32,660 $19,883 ========== ========== ======== Tax provision at the 35% statutory rate............................ $25,788 $11,431 $ 6,959 ---------- ---------- -------- Increase (decrease) in taxes: State income tax, net of federal benefit........................ 2,847 1,886 766 Effect of foreign subsidiary.................................... 310 2,179 (174) Merger costs and expenses....................................... (250) 1,958 721 Goodwill amortization........................................... 969 512 15 Meals and entertainment......................................... 454 207 180 Nontaxable interest income...................................... (374) (688) (1,102) Change in valuation allowance for deferred taxes................ -- -- (900) Income of S corporations........................................ 68 (287) (750) Other, net...................................................... 128 163 909 ---------- ---------- -------- Total increase (decrease) in taxes..................... 4,152 5,930 (335) ---------- ---------- -------- Total income tax provision............................. $29,940 $17,361 $ 6,624 ========== ========== ======== Effective tax rate................................................. 40.6% 53.2% 33.3% ========== ========== ========
F-27 Deferred income taxes for fiscal 1999 and 1998 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 April 2, 1999 and April 3, 1998 are detailed below:
1999 1998 -------- -------- (Restated) Deferred tax assets: Allowance for doubtful accounts and sales returns............................ $ 5,398 $ 5,393 Merger, restructuring and other nonrecurring costs and expenses.............. 4,406 5,886 Accrued expenses............................................................. 4,276 2,574 Net operating loss carryforwards............................................. 3,380 1,228 Operational tax reserve...................................................... 2,980 2,614 Inventory uniform cost capitalization........................................ 1,536 1,640 Reserve for inventory obsolescence........................................... 1,272 1,226 Accrued professional fees.................................................... 1,014 1,135 Goodwill impairment charges.................................................. 551 627 Excess book depreciation and amortization over tax depreciation and amortization.............................................................. -- 214 Other........................................................................ 1,075 479 -------- --------- Gross deferred tax assets........................................... 25,888 23,016 -------- --------- Deferred tax liabilities: Excess of tax depreciation and amortization over book depreciation and amortization.............................................................. (288) -- Other........................................................................ (107) (223) -------- --------- Gross deferred tax liabilities...................................... (395) (223) -------- --------- Net deferred tax assets......................................................... $25,493 $22,793 ======== =========
The income tax benefit related to the exercise or early disposition of certain stock options reduces taxes currently payable and is credited directly to additional paid-in capital. Such amounts were $759, $1,505, and $3,449 for fiscal 1999, 1998, and 1997, respectively. At April 2, 1999, the Company had net operating loss carryforwards for income tax purposes arising from mergers of approximately $8,688 which expire from 2000 to 2019. The utilization of the net operating loss carryforwards is subject to limitation in certain years. All deferred tax assets as of April 2, 1999 and April 3, 1998 are considered to be realizable due to the projected future taxable income. Therefore, no valuation allowance has been recorded as of April 2, 1999 and April 3, 1998. F-28 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): 1999 1998 1997 -------- --------- -------- (Restated) (Restated) Net income (loss)..................... $43,741 $15,299 $13,259 ======== ========= ======== Earnings per share: Basic.............................. $0.62 $0.22 $0.20 ======== ========= ======== Diluted............................ $0.61 $0.22 $0.20 ======== ========= ======== Weighted average shares outstanding: Common shares...................... 70,548 69,575 66,207 Assumed exercise of stock options.. 850 970 750 -------- --------- -------- Diluted shares outstanding......... 71,398 70,545 66,957 ======== ========= ======== 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 1999, the principal amount of the loan increased approximately $585. The loan is unsecured, bears interest at the applicable federal rate for long-term obligations (5.74% and 6.55% at April 2, 1999 and April 3, 1998, respectively), and is due September 2007. The outstanding principal, included in other assets in the accompanying consolidated balance sheets, at April 2, 1999 and April 3, 1998 was approximately $2,736 and $2,715, respectively. Accrued interest was approximately $146 and $45 at April 2, 1999 and April 3, 1998, respectively. Interest income, included in interest and investment income in the accompanying consolidated statements of income for fiscal 1999 and 1998 was approximately $165 and $103, respectively. Principal payments for fiscal 1999 and 1998, were approximately $564 and $285, respectively. Interest payments for fiscal 1999 and 1998, were approximately $65 and $58, respectively. 13. STOCK-BASED COMPENSATION PLANS 1999 Broad-Based Employee Stock Plan Under the Company's 1999 Broad-Based Employee Stock Plan, 500,000 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. F-29 Information regarding this plan is summarized below (share amounts in thousands): Weighted Average Shares Price -------- --------- Balance, April 3, 1998..................... -- $ -- Granted................................. 453 9.73 Exercised............................... -- -- Forfeited............................... -- -- -------- --------- Balance, April 2, 1999..................... 453 $9.73 ======== ========= As of April 2, 1999, the range of exercise prices and the weighted-average remaining contractual life of outstanding options was $8.97 to $10.66 and 6.25 years, respectively, and approximately 47,160 shares of common stock are available for issuance under the plan. The weighted-average per share fair value of options granted was $4.36 in fiscal 1999. 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): Weighted Average Shares Price -------- -------- Balance, March 29, 1996...................... 722 $2.94 Granted................................... -- -- Exercised................................. (346) 2.83 Forfeited................................. (12) 3.28 -------- -------- 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 April 2, 1999, 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 remains 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 F-30 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 29, 1996..................... 615 $14.17 Granted.................................. 217 23.90 Exercised................................ (27) 13.35 Forfeited................................ (3) 5.79 -------- -------- 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 ======== ======== 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, $5.60, and $11.08 in fiscal 1999, 1998, and 1997, respectively. As of April 2, 1999, the range of exercise prices and the weighted-average remaining contractual life of outstanding options were $5.29 to $28.86 and 6.37 years, respectively. As of April 2, 1999, 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. 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. 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 1999. During fiscal 1998, the Company has accrued approximately $407 related to awards granted under this plan and approximately $832 of cash payments were made. F-31 Information regarding the stock option component of the plan is summarized below (share amounts in thousands): Weighted Average Shares Price -------- -------- Balance, March 29, 1996................... 319 $14.88 Granted................................ 68 23.94 Exercised.............................. (61) 14.88 Forfeited.............................. (5) 23.94 -------- -------- 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 ======== ======== 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 April 2, 1999, the range of exercise prices and the weighted-average remaining contractual life of outstanding options were $14.75 to $14.88, and 6.86 years, respectively. As of April 2, 1999, there were approximately 6,800 shares available for grant under this plan. Directors' Stock Plan In March 1994, the Company adopted the Directors' Stock Plan under which nonemployee 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. F-32 Information regarding the stock option component of this plan is summarized below (share amounts in thousands): Weighted Average Shares Price -------- -------- Balance, March 29, 1996............... 45 $10.12 Granted............................ 32 23.94 Exercised.......................... (3) 5.48 Forfeited.......................... -- -- -------- -------- 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 ======== ======== 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 $7.37, $5.72, and $13.22 in fiscal years 1999, 1998, and 1997, respectively. As of April 2, 1999, the range of exercise prices and the weighted-average remaining contractual life of outstanding options were $5.48 to $15.81 and 8.35 years, respectively. At April 2, 1999, approximately 135,000 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 April 2, 1999, approximately 301,000 and 791,000 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): F-33 Weighted Average Shares Price -------- -------- Balance, January 1, 1996.................... 976 $ 4.57 Granted.................................. 355 16.53 Exercised................................ (216) 2.68 Forfeited................................ (20) 9.57 -------- -------- Balance, December 31, 1996.................. 1,095 8.57 Granted.................................. 833 11.89 Exercised................................ (144) 2.90 Forfeited................................ (149) 13.38 -------- -------- 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 ======== ======== 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 and 1996 were $5.83 and $5.94, respectively. As of April 2, 1999, the range of exercise prices and the weighted-average remaining contractual life of outstanding options for the 1997 plan were $4.71 to $21.69 and 8.54 years, respectively. As of April 2, 1999, the range of exercise prices and the weighted-average remaining contractual life of outstanding options for the 1992 plan were $0.012 to $28.00 and 6.3 years, respectively. 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 255,747 unregistered stock options to nonofficer employees. 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. F-34 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 (1999 Broad-Based Employee Stock Plan, Incentive Stock Option Plan, Long-Term Stock Plan, Long-Term Incentive Plan, and Directors' Stock Plan) granted during fiscal 1999, 1998, and 1997 have been estimated based on the following weighted average assumptions: risk-free interest rates ranging from 5.1% to 6.8%, expected option life ranging from 2.5 to 7 years; expected volatility of 56.0%, 55.0%, and 55.0%, respectively; and no expected dividend yield. Using these assumptions, the estimated fair values of options granted for fiscal 1999, 1998, and 1997 were approximately $9,091, $4,814, and $2,897, respectively, and such amounts would be included in compensation expense. The fair value of Gulf South's stock options granted during fiscal 1998 and 1997, have been estimated based on the following weighted average assumptions: risk-free interest rates of 6.0%, and 6.5%, respectively; expected option life of three years; expected volatility of 65.2%, and 41.8%, respectively; and no expected dividend yield. Using these assumptions, the estimated fair values of options granted for fiscal 1998 and 1997 were approximately $1,568, and $633, respectively, 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 1999, 1998, and 1997, assuming the Company had accounted for the plans under the fair value approach, are as follows (in thousands, except per share data): 1999 1998 1997 -------- -------- -------- Net income: (Restated) (Restated) As reported................ $43,741 $15,299 $13,259 Pro forma.................. 38,287 11,470 11,141 Earnings per share: As reported: Basic................... $0.62 $0.22 $0.20 Diluted................. 0.61 0.22 0.20 Pro forma: Basic................... 0.54 0.16 0.17 Diluted................. 0.54 0.16 0.17 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. 14. EMPLOYEE BENEFIT PLANS The Company has an employee stock ownership plan ("ESOP") available to all employees with at least one year of service. Effective January 1, 1996, the Company amended the plan to allow participants to direct the investment of a portion of their plan balances. Prior to this change, the trustees directed the investment of the participants' balances. As of plan years ended March 31, 1999 and April 3, 1998, the ESOP owns approximately 2,123,000 and 1,999,000 shares of the Company's common stock, respectively. Company contributions to the plan were approximately $108, $134, and $160 for fiscal 1999, 1998, and 1997, respectively, and are made at the discretion of the Company. F-35 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. A company acquired in fiscal 1999 sponsored a leveraged employee stock ownership plan ("Tristar ESOP"). 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 Tristar ESOP shares were as follows:
April 2, 1999 April 3, 1998 March 28, 1997 ------------- ------------- -------------- Allocated shares...................................... 76,972 25,934 -- Shares released for allocation........................ 12,524 51,038 25,934 Unreleased shares..................................... 169,840 182,364 233,402 ------------- ------------- -------------- Total ESOP shares......................... 259,336 259,336 259,336 ------------- ------------- -------------- Fair value of unreleased shares....................... $ 1,523 $ 5,835 $ 3,371 ============= ============= ==============
Approximately $221, $824, and $469, of related expense was recognized in fiscal 1999, 1998, and 1997, 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: April 3, 1998 March 28, 1997 ------------- -------------- Allocated shares..................... 398,727 278,490 Shares released for allocation....... 162,769 120,237 Unreleased shares.................... -- 162,769 ------------- -------------- Total ESOP shares........ 561,496 561,496 ------------- -------------- Fair value of unreleased shares...... $ -- $1,512,495 ============= ============== 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. PSS EDP Program Effective July 1, 1997, the Company adopted the PSS EDP Program ("EDP"), which is available to executives, management, and salespeople. This plan has two components: a deferred compensation plan and a stock option program. EDP is an unfunded plan. The Company has purchased life insurance as a means to finance the benefits that become payable under the plan. F-36 Under the deferred compensation plan, participants can elect to defer up to 10% of their total compensation. The Company will match up to a range of 125.0% to 10%, 5% of the first 10% of income deferred by executives, management, and salespeople. The Company match for fiscal 1999 was $638. Participants are guaranteed to earn interest on the amount deferred and the Company match at a rate declared annually by the Board of Directors (5.13% for the plan years ended March 31, 1999 and 1998, 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 function of 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 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 EDP, the retirement benefit is distributed to participants in five equal installments. The retirement benefit is distributed in a lump sum upon death and over five years upon disability. During fiscal 1999, the Company matched approximately $638 of employee deferrals. At April 2, 1999 and April 3, 1998, approximately $2,497 and $526, respectively, is recorded in other long-term assets in the accompanying consolidated balance sheets. In addition, $2,490 and $611, 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 2005. Certain lease commitments provide that the Company pay taxes, insurance, and maintenance expenses related to the leased assets. Rent expense approximated $19,905, $19,019, and $8,083 for fiscal 1999, 1998, and 1997, respectively. As of April 2, 1999, future minimum payments, by fiscal year and in the aggregate, required under noncancelable operating leases are as follows: F-37 Fiscal Year: 2000..................................... $19,998 2001..................................... 15,966 2002..................................... 12,849 2003..................................... 7,908 2004..................................... 5,014 Thereafter............................... 2,935 -------- Total........................... $64,670 ======== 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):
April 2, 1999 April 3, 1998 March 28, 1997 ------------- ------------- -------------- (Restated) (Restated) NET SALES: Physician Supply Business $ 677,353 $ 662,543 $ 610,358 Imaging Business 524,823 409,660 362,511 Long-Term Care Business 342,405 287,582 177,710 Other (a) 19,924 22,001 15,707 ------------- ------------- -------------- Total net sales $1,564,505 $1,381,786 $1,166,286 ============= ============= ============== INCOME FROM OPERATIONS: Physician Supply Business $ 42,727 $ 16,871 $ 3,358 Imaging Business 16,305 6,486 4,048 Long-Term Care Business 17,186 14,032 9,143 Other (a) (2,365) (5,310) 498 ------------- ------------- -------------- Total income from operations $ 73,853 $ 32,079 $ 17,047 ============= ============= ============== DEPRECIATION: Physician Supply Business $ 6,844 $ 3,287 $ 3,309 Imaging Business 3,614 1,010 172 Long-Term Care Business 1,429 934 375 Other (a) 322 398 -- ------------- ------------- -------------- Total depreciation $ 12,209 $ 5,629 $ 3,856 ============= ============= ============== AMORTIZATION OF INTANGIBLE ASSETS AND OTHER ASSETS: Physician Supply Business $ 2,953 $ 2,444 $ 2,380 Imaging Business 3,460 1,545 121 Long-Term Care Business 1,762 1,243 116 ------------- ------------- -------------- Total amortization of intangible assets $ 8,175 $ 5,232 $ 2,617 ============= ============= ============== F-38 April 2, 1999 April 3, 1998 March 28, 1997 ------------- ------------- -------------- (Restated) (Restated) PROVISION FOR DOUBTFUL ACCOUNTS: Physician Supply Business $ 1,627 $ 605 $ 2,463 Imaging Business 846 539 578 Long-Term Care Business 2,485 4,422 3,339 Other (a) 223 141 -- ------------- ------------- -------------- Total provision for doubtful accounts $ 5,181 $ 5,707 $ 6,380 ============= ============= ============== CAPITAL EXPENDITURES: Physician Supply Business $ 15,149 $ 4,468 $ 5,635 Imaging Business 6,735 4,565 419 Long-Term Care Business 2,890 1,659 1,117 Other (a) -- (173) -- ------------- ------------- -------------- Total capital expenditures $ 24,774 $ 10,519 $ 7,171 ============= ============= ============== ASSETS: Physician Supply Business $ 236,452 $ 320,216 Imaging Business 277,250 158,698 Long-Term Care Business 174,868 191,789 Other (a) 54,811 16,034 ------------- ------------- Total assets $ 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 1998 and 1999. 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.
As Restated Fiscal Year 1998 Fiscal Year 1999 ---------------------------------------- ---------------------------------------- (In Thousands, Except Per Share Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Data) -------- -------- -------- --------- -------- -------- -------- -------- Net sales...................... $315,313 $344,242 $353,642 $368,589 $367,562 $387,366 $399,547 $410,030 Gross profit................... 80,974 90,353 94,110 100,331 97,198 104,901 109,685 110,124 General and administrative 46,790 54,209 53,307 77,030 54,523 52,310 53,913 63,987 expenses.................... Net income (loss).............. 7,056 7,138 8,669 (7,564) 8,868 13,307 13,822 7,744 Basic earnings (loss) per share $0.10 $0.10 $0.12 $(0.11) $0.13 $0.19 $0.20 $0.11 Diluted earnings (loss) per $0.10 $0.10 $0.12 $(0.11) $0.12 $0.19 $0.19 $0.11 share Adjustments Fiscal Year 1998 Fiscal Year 1999 ---------------------------------------- ---------------------------------------- (In Thousands, Except Per Share Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Data) -------- -------- -------- --------- -------- -------- -------- -------- Net sales...................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Gross profit................... (167) (167) (167) (167) 0 0 0 0 General and administrative 699 (68) (69) 2,459 0 0 0 0 expenses.................... Net income (loss).............. (528) (60) (61) (1,604) (0) (0) (0) (0) Basic earnings (loss) per share $(0.01) $(0.00) $(0.00) $(0.02) $(0.00) $(0.00) $(0.00) $(0.00) Diluted earnings (loss) per $(0.01) $(0.00) $(0.00) $(0.02) $(0.00) $(0.00) $(0.00) $(0.00) share F-39 As Previously Reported Fiscal Year 1998 Fiscal Year 1999 ---------------------------------------- ---------------------------------------- (In Thousands, Except Per Share Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Data) -------- -------- -------- --------- -------- -------- -------- -------- Net sales...................... $315,313 $344,242 $353,642 $368,589 $367,562 $387,366 $399,547 $410,030 Gross profit................... 81,141 90,520 94,277 100,498 97,198 104,901 109,685 110,124 General and administrative 46,091 54,277 53,376 74,571 54,523 52,310 53,913 63,987 expenses.................... Net income (loss).............. 7,584 7,198 8,730 (5,960) 8,868 13,307 13,822 7,744 Basic earnings (loss) per share $0.11 $0.10 $0.12 $(0.08) $0.13 $0.19 $0.20 $0.11 Diluted earnings (loss) per $0.11 $0.10 $0.12 $(0.08) $0.12 $0.19 $0.19 $0.11 share
Refer to Note 22, Restatements, for a further discussion of the adjustments presented above. 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. A series of related, putative class actions were filed against PSS and two officers beginning on or about March 22, 1999. The allegations are based on PSS' announcement that the SEC is reviewing its financial reports for certain prior periods and that PSS would likely be required to retroactively restate its financial statements to reflect the pre-acquisition operating results of certain merger transactions that were accounted for under the pooling-of-interest accounting method. These actions were consolidated and subsequently dismissed without prejudice. PSS and certain 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. 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. F-40 20. SUBSEQUENT EVENTS Subsequent to year-end, the Company acquired certain assets, including accounts receivable, inventories, and equipment of the following medical supplies and equipment distributors accounted for under the purchase method of accounting. 2000 ------- Number of acquisitions............. 20 Total consideration................ $93,782 Cash paid.......................... 52,285 Goodwill recorded.................. 53,114 Noncompete payments................ 7,235 Contingent consideration of approximately $5.7 million is not included in total consideration above. Subsequent to year-end, cuts in Medicare reimbursement resulting from the Balance Budget Act Amendment of 1997 coupled with Medicare implementation of a prospective payment system ("PPS") have adversely affected the long-term care industry. The industry in general has faced significant financial pressure due to PPS, resulting in bankruptcy of certain long-term care providers. As a result, GSMS has i) recorded bad debt charges of approximately $10.7 million (unaudited) for the year 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 profitability of the long-term care business. 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. On January 24, 2000, the Company announced that its physician and imaging businesses experienced product delivery problems with two equipment suppliers. Further, on January 26, 2000, the Company announced that it hired Donaldson, Lufkin and Jenrette to assist the Company with strategic alternatives to maximize shareholder value. 21. RESTATEMENTS The Company acquired Gulf South Medical Supply, Inc. ("Gulf South") on March 27, 1998. After the merger, the Company recorded approximately $32.2 million of charges in Gulf South's results of operations for the three months ended April 3, 1998 relating to the merger, restructuring the business, and conforming the accounting policies of the businesses. However, the Company continued to review historical records as it operated the acquired business and determined that approximately $7.4 million of the $32.2 million in charges belonged in Gulf South's results of operations for the 12 months ended December 31, 1996 and 1997. Therefore, the historical consolidated financial statements of the Company have been restated. The effect of the restatements is as follows:
Gulf South Medical Supply - Three Months Ended April 3, 1998 -------------------------------------------------------------------------- Allowance Allowance As for for Cost of Previously Obsolete Inventory Doubtful Legal Goods As Reported Inventory Write-off Accounts Expenses Sold Restated ---------- ---------- --------- ---------- --------- ---------- --------- Net sales $87,018 $ -- $ -- $ -- $ -- $ -- $87,018 Gross profit 17,816 1,473 211 -- -- (5,590) 13,910 General and administrative expenses 43,020 -- -- (4,832) (877) (5,590) 31,721 Net loss (19,550) 899 129 2,952 536 -- (15,034)
F-41
Fiscal Year Ended April 3, 1998 -------------------------------------------------------------------------- Allowance Allowance As for for Cost of Previously Obsolete Inventory Doubtful Legal Goods As Reported Inventory Write-off Accounts Expenses Sold Restated ---------- ---------- --------- ---------- --------- ---------- --------- Net sales $1,381,786 $ -- $ -- $ -- $ -- $ -- $1,381,786 Gross profit 366,436 (183) (211) -- -- (274) 365,768 General and administrative expenses 228,315 -- -- 2,418 877 (274) 231,336 Net income 17,552 (111) (129) (1,477) (536) -- 15,299 Earnings per share: Basic $0.25 $(0.00) $(0.00) $(0.02) $(0.01) $0.00 $0.22 Diluted 0.25 (0.00) $(0.00) (0.02) (0.01) 0.00 0.22
Fiscal Year Ended March 28, 1997 ------------------------------------------------ Allowance Allowance As for for Previously Obsolete Doubtful As Reported Inventory Accounts Restated ----------- --------- --------- ---------- Net sales $1,166,286 $ -- $ -- $1,166,286 Gross profit 287,473 (1,290) -- 286,183 General and administrative expenses 190,228 -- 2,415 192,643 Net income 15,523 (788) (1,476) 13,259 Earnings per share: Basic $0.23 $(0.01) $(0.02) $0.20 Diluted 0.23 (0.01) (0.02) 0.20 Allowance for Obsolete Inventory Gulf South's results of operations for the period January 1, 1998 to April 3, 1998 included an allowance for obsolete inventory charge of $1,473. Through subsequent review of accounting records, management believes the allowance for obsolete inventory charge relates to prior fiscal periods. The Company has reversed the $1,473 charge included in Gulf South's January 1, 1998 to April 3, 1998 period and recorded charges of $183 and $1,290 in Gulf South's 12 months ended December 31, 1997 and 1996, respectively. Inventory Write-off Gulf South's results of operations for the period January 1, 1998 to April 3, 1998 included a $211 charge to write-off inventory to fair value. Through subsequent review of accounting records, management believes the write-off relates to a prior fiscal period. The Company has reversed the $211 charge included in Gulf South's January 1, 1998 to April 3, 1998 period and recorded a charge of $211 in Gulf South's 12 months ended December 31, 1997. Allowance for Doubtful Accounts Gulf South's results of operations for the period January 1, 1998 to April 3, 1998 included an allowance for doubtful accounts charge of $4,833. Through subsequent review of accounting records, management believes the allowance for doubtful accounts charge relates to prior fiscal periods. The Company has reversed the $4,833 charge included in Gulf South's January 1, 1998 to April 3, 1998 period and recorded charges of $2,418 and $2,415 in Gulf South's 12 months ended December 31, 1997 and 1996, respectively. Legal Expenses Gulf South's results of operations for the period January 1, 1998 to April 3, 1998 included a $877 charge related to a customer supply agreement. Through subsequent review of accounting records, management believes the charge relates to a prior fiscal period. The Company has reversed the $877 F-42 charge included in Gulf South's January 1, 1998 to April 3, 1998 period and recorded a charge of $877 in Gulf South's 12 months ended December 31, 1997. Cost of Goods Sold During the quarter ending April 3, 1998, a $5,590 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. Reclassification of Expenses to Costs of Goods Sold The Company reclassified $274 from general and administrative expenses to costs of goods sold during Gulf South's 12 months ended December 31, 1996. Benefit for Income Taxes Due to the accounting changes discussed above, and changes in the deductible treatment of certain other items, the benefit for income taxes has been adjusted as compared to the unaudited amounts previously published. F-43 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED MARCH 28, 1997 (RESTATED), APRIL 3, 1998 (RESTATED), AND APRIL 2, 1999 (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 March 28, 1997 $ 4,035 $6,380 $ 881 $ 2,996 $ 8,300 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 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 March 28, 1997 $ 775 $2,494 $1,938 $ 731 $4,476 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 Charged To Balance General at & Balance Gulf South Operational Beginning Admin. at End of Tax Charge Reserve of Period Expense Utilizations Period - ------------------------------------- ---------- ---------- ------------- ---------- Year ended March 28, 1997 $1,656 $1,998 $ -- $3,654 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
(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. F-44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 25, 2000. PSS WORLD MEDICAL, INC. By: /s/ David A. Smith ----------------------------------------- David A. Smith Executive Vice President, Chief Financial Officer, and Secretary F-45 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 May 24, 2000 included in this Form 10-K/A 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 May 24, 2000 F-46 EX-27 2 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K/A FOR THE YEAR ENDED APRIL 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000920527 PSS WORLD MEDICAL, INC. 1,000 12-MOS Apr-02-1999 Apr-04-1998 Apr-02-1999 41,106 3 278,699 6,918 153,626 526,545 80,845 32,678 743,381 171,268 152,442 0 0 708 415,852 743,381 1,564,505 1,564,505 1,142,597 1,142,597 348,055 5,181 11,522 73,681 29,940 43,741 0 0 0 43,741 0.62 0.61
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