-----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, RmWy3zh3OcgUYjjPePY3MiWmjXIOu9tTZLvfo14KllSenEC6ambnQzIdtM+1N7bF ZQZj036MJ2vqBwnaRQ1SSw== 0000920527-01-500006.txt : 20010628 0000920527-01-500006.hdr.sgml : 20010628 ACCESSION NUMBER: 0000920527-01-500006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20010330 FILED AS OF DATE: 20010627 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: 592280364 STATE OF INCORPORATION: FL FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23832 FILM NUMBER: 1669078 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 STREET 2: STE 250 CITY: JACKSONVILLE STATE: FL ZIP: 32216 FORMER COMPANY: FORMER CONFORMED NAME: PHYSICIAN SALES & SERVICE INC /FL/ DATE OF NAME CHANGE: 19940318 EX-10 1 exhibit10_14.txt 10.14, EMPLOYMENT AGREEMENT, JOHN SASEN, SR. Exhibit 10.14 Employment AGREEMENT This EMPLOYMENT Agreement (this "Agreement") is made and entered into this 1st day of April, 1998 by and between PSS World Medical, Inc., a Florida corporation (hereinafter, the "Company" which term shall include the Company's other subsidiaries, affiliates and successors), and John F. Sasen, Sr., (hereinafter, "Executive"). BACKGROUND The Company desires to engage Executive in Executive capacities set forth herein, in accordance with the terms and conditions of this Agreement. Executive is willing to serve as such in accordance with the terms and conditions of this Agreement. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Effective Date. This Agreement is effective as of April 1, 1998 (the "Effective Date"). 2. Employment. Executive is hereby employed on the Effective Date as the Executive Vice President & Chief Marketing Officer of the Company. Executive's responsibilities under this Agreement shall be in accordance with the policies and objectives established by the President or the Board of Directors of the Company and shall be consistent with the responsibilities of similarly situated executives of comparable companies in similar lines of business. 3. Employment Period. Unless earlier terminated herein in accordance with Section 7 hereof, Executive's employment shall be for a three-year term (the "Employment Period"), beginning on the Effective Date. The Employment Period shall, without further action by Executive or the Company, be extended by an additional one-year period on each anniversary of the Effective Date; provided, however, that either party may, by notice to the other, cause the Employment Period to cease to extend automatically. Upon such notice, the Employment Period shall terminate upon the expiration of the then-current term, including any prior extensions. 4. Extent of Service. During the Employment Period, and excluding any periods of vacation and sick leave to which Executive is entitled, Executive agrees to devote his business time, attention, skill and efforts exclusively to the faithful performance of his duties hereunder; provided, however, that it shall not be a violation of this Agreement for Executive to (i) devote reasonable periods of time to charitable and community activities and, with the approval of the Company, industry or professional activities, and/or (ii) manage personal business interests and investments, so long as such activities do not materially interfere with the performance of Executive's responsibilities under this Agreement. 5. Compensation and Benefits. (a) Base Salary. During the Employment Period, the Company will pay to Executive a base salary as previously agreed ("Base Salary"), less normal withholdings, payable in equal monthly or more frequent installments as are customary under the Company's payroll practices from time to time. The Compensation Committee of the Board of Directors of the Company shall review Executive's Base Salary annually and in its sole discretion, subject to approval of the Board of Directors of the Company, may increase Executive's Base Salary from year to year. The annual review of Executive's salary by the Board will consider, among other things, Executive's own performance and the Company's performance. (b) Incentive, Savings and Retirement Plans. During the Employment Period, Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to peer executives of the Company and its affiliated companies ("Peer Executives"), and on the same basis as such Peer Executives. (c) Welfare Benefit Plans. During the Employment Period, Executive and Executive's family shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to Peer Executives. (d) Expenses. During the Employment Period, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Executive in accordance with the policies, practices and procedures of the Company and its affiliated companies to the extent applicable generally to Peer Executives. (e) Fringe Benefits. During the Employment Period, Executive shall be entitled to fringe benefits in accordance with the plans, practices, programs and policies of the Company and its affiliated companies in effect for Peer Executives. 6. Change of Control. Subject to the last sentence of this Section 6, for the purpose of this Agreement, a "Change of Control" shall mean. (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (ii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 6; or (b) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of the combined voting power of the then outstanding voting securities of such corporation resulting from such Business Combination except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. Notwithstanding the above definition, a Change of Control will not be deemed to have occurred for purposes of this Agreement if, immediately after the event that otherwise would constitute a Change of Control, Patrick Kelly and at least a majority of the 12 next most highly compensated officers of the Company and its subsidiaries (as measured immediately prior to such transaction) remain employed by the Company for at least one year or mutually agree to new employment contacts, the resulting or surviving company, or its or their subsidiaries. 7. Termination of Employment. (a) Death, Retirement or Disability. Executive's employment shall terminate automatically upon Executive's death or Retirement during the Employment Period. For purposes of this Agreement, "Retirement" shall mean normal retirement as defined in the Company's then-current retirement plan, or there is no such retirement plan, "Retirement" shall mean voluntary termination after age 65 with ten years of service. If the Company determines in good faith that the Disability of Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to Executive written notice in accordance with Section 15(f) of this Agreement of its intention to terminate Executive's employment. In such event, Executive's employment with the Company shall terminate effective on the 30th day after receipt of such written notice by Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, Executive shall not have returned to full-time performance of Executive's duties. For purposes of this Agreement, "Disability" shall mean a mental or physical disability as determined by the Board of Directors of the Company in accordance with standards and procedures similar to those under the Company's employee long-term disability plan, if any. At any time that the Company does not maintain such a long-term disability plan, Disability shall mean the inability of Executive, as determined by the Board, to perform the essential functions of his regular duties and responsibilities (with or without reasonable accommodation) due to a medically determinable physical or mental illness which has lasted (or can reasonably be expected to last) for a period of six consecutive months. (b) Termination by the Company. The Company may terminate Executive's employment during the Employment Period with or without Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of Executive to perform substantially Executive's duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness, and specifically excluding any failure by Executive, after reasonable efforts, to meet performance expectations), after a written demand for substantial performance is delivered to Executive by the President or the Board of Directors of the Company which specifically identifies the manner in which such Board or the President believes that Executive has not substantially performed Executive's duties, or (ii) the willful engaging by Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company, or (iii) Executive engages in any misconduct involving moral turpitude whether occurring in the performance of his duties or otherwise. For purposes of this provision, no act or failure to act, on the part of Executive, shall be considered "willful" unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. The cessation of employment of Executive shall not be deemed to be for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board of the Company at a meeting of such Board called and held for such purpose (after reasonable notice is provided to Executive and Executive is given an opportunity, together with counsel, to be heard before such Board), finding that, in the good faith opinion of such Board, Executive is guilty of the conduct described in subparagraph (i), (ii) or (iii) above, and specifying the particulars thereof in detail. (c) Termination by Executive. Executive's employment may be terminated by Executive for Good Reason or no reason. For purposes of this Agreement, "Good Reason" shall mean: (i) without the written consent of Executive, the assignment to Executive of any duties materially inconsistent with Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as in effect on the Effective Date, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (ii) a reduction by the Company in Executive's Base Salary and benefits as in effect on the Effective Date or as the same may be increased from time to time, unless a similar reduction is made in salary and benefits of Peer Executives, or the failure by the Company to increase Executive's Base Salary each year during the Employment Period by an amount which at least equals, on a percentage basis, the mean average percentage increase in base salary for Peer Executives, unless such failure to increase is based on nonarbitrary criteria applied to Executive and Peer Executives; (iii) after the occurrence of a Change of Control, the Company's requiring Executive to be based at any office or location other than in the greater Jacksonville, Florida metropolitan area or the Company's requiring Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any failure by the Company to comply with and satisfy Section 14(b) of this Agreement; or (v) any termination by Executive for any reason or no reason during the 30-day period beginning on the first anniversary of a Change of Control. (d) Notice of Termination. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 15(f) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if Executive's employment is terminated by the Company for Cause, or by Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies Executive of such termination and (iii) if Executive's employment is terminated by reason of death, Retirement or Disability, the Date of Termination shall be the date of death or Retirement of Executive or the Disability Effective Date, as the case may be. 8. Obligations of the Company upon Termination. (a) Termination by Executive for Good Reason; Termination by the Company Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate Executive's employment other than for Cause, death or Disability, or Executive shall terminate employment for Good Reason within a period of 30 days after the occurrence of the event giving rise to Good Reason, then in consideration of Executive's services rendered prior to such termination and as reasonable compensation for his compliance with the Restrictive Covenants in Section 13 hereof: (i) the Company shall pay to Executive in a lump sum in cash within 30 days after the Date of Termination or, with respect to the prorata bonus described in clause A(2) below, within 30 days after the determination of the bonus amount, the aggregate of the following amounts: A. the sum of (1) Executive's Base Salary through the Date of Termination to the extent not theretofore paid, (2) if the Date of Termination occurs after or in connection with the occurrence of a Change of Control, the product of (x) Executive's annual bonus that would have been payable with respect to the fiscal year in which the Date of Termination occurs (determined at the end of such year based on actual performance results through the end of such year) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, and (3) any compensation previously deferred by Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to one times Executive's annual Base Salary in effect as of the Date of Termination (the "Severance Payment"); provided, however, that if the Date of Termination occurs after or in connection with the occurrence of a Change of Control, the Severance Payment shall be the amount equal to two times Executive's annual Base Salary in effect as of the Date of Termination; and (ii) for one year after Executive's Date of Termination (or two years in the event that the Date of Termination occurs after or in connection with the occurrence of a Change of Control), or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to Executive and/or Executive's family at least equal to those which would have been provided to them in accordance with the welfare plans, programs, practices and policies described in Section 5(c) of this Agreement if Executive's employment had not been terminated or, if more favorable to Executive, as in effect generally at any time thereafter with respect to Peer Executives and their families, provided, however, that if Executive becomes re-employed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility ("Welfare Benefits"); and (iii) the Company shall, within 30 days of receipt of reasonably documented invoices therefor, reimburse Executive's actual cost (not to exceed $30,000) for outplacement expenses incurred within one year after the Date of Termination; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to Executive any other amounts or benefits required to be paid or provided or which Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If Executive's employment is terminated by reason of Executive's death during the Employment Period, this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations (excluding the pro-rata bonus described in clause 2 of Section 8(a)(i)(A)), the timely payment or provision of Other Benefits, and a lump sum amount equal to two (2) months' salary, based on Executive's Base Salary in effect as of the date of death. Accrued Obligations shall be paid to Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 8(b) shall include, without limitation, and Executive's estate and/or beneficiaries shall be entitled to receive, benefits under such plans, programs, practices and policies relating to death benefits, if any, as applicable generally to Peer Executives and their beneficiaries, and on the same basis as Peer Executives and their beneficiaries. (c) Disability. If Executive's employment is terminated by reason of Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations (excluding the pro-rata bonus described in clause 2 of Section 8(a)(i)(A)) and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 8(c) shall include, without limitation, and Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits under such plans, programs, practices and policies relating to disability, if any, as applicable generally to Peer Executives and their beneficiaries, and on the same basis as Peer Executives and their beneficiaries. (d) Retirement. If Executive's employment is terminated by reason of Executive's Retirement during the Employment Period, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations (excluding the pro-rata bonus described in clause 2 of Section 8(a)(i)(A)) and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 8(d) shall include, without limitation, and Executive shall be entitled after the Date of Termination to receive, retirement and other benefits under such plans, programs, practices and policies relating to retirement, if any, as applicable generally to Peer Executives and their beneficiaries, and on the same basis as Peer Executives and their beneficiaries. (e) Cause or Voluntary Termination without Good Reason. If Executive's employment shall be terminated for Cause during the Employment Period, or if Executive voluntarily terminates employment during the Employment Period without Good Reason, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations (excluding the pro-rata bonus described in clause 2 of Section 8(a)(i)(A)), the continuation of Welfare Benefits for a period of 30 days after the Date of Termination, payment of a lump sum amount equal to 30 days' salary, based on Executive's Base Salary in effect as of the Date of Termination. 9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which Executive may qualify, nor, subject to Section 15(d), shall anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 10. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any benefit, payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then: Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 10(a), if it shall be determined that Executive is entitled to a Gross-Up Payment, but that Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the "Reduced Amount") such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. The Executive may select the Payments to be limited or reduced. (b) Subject to the provisions of Section 10(c), all determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's regular independent accounting firm at the expense of the Company or, at the election and expense of Executive, another nationally recognized independent accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations. Any determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 10(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. (c) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section 10(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 10(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of Section 10(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). 11. Costs of Enforcement. In any action taken in good faith relating to the enforcement of this Agreement or any provision herein after the occurrence of a Change of Control, Executive shall be entitled to be paid any and all costs and expenses incurred by him in enforcing or establishing his rights thereunder, including, without limitation, reasonable attorneys' fees, whether suit be brought or not, and whether or not incurred in trial, bankruptcy or appellate proceedings. In all other circumstances, each party in any such action shall pay his or its own such costs and expenses. 12. Representations and Warranties. Executive hereby represents and warrants to the Company that Executive is not a party to, or otherwise subject to, any covenant not to compete (other than as contained herein) with any person or entity, and Executive's execution of this Agreement and performance of his obligations hereunder will not violate the terms or conditions of any contract or obligation, written or oral, between Executive and any other person or entity. 13. Restrictions on Conduct of Executive. ------------------------------------ (a) General. Executive and the Company understand and agree that the purpose of the provisions of this Section 13 is to protect legitimate business interests of the Company, as more fully described below, and is not intended to eliminate Executive's post-employment competition with the Company per se, nor is it intended to impair or infringe upon Executive's right to work, earn a living, or acquire and possess property from the fruits of his labor. Executive hereby acknowledges that the post-employment restrictions set forth in this Section 13 are reasonable and that they do not, and will not, unduly impair his ability to earn a living after the termination of this Agreement. Therefore, subject to the limitations of reasonableness imposed by law upon the restrictions set forth herein, Executive shall be subject to the restrictions set forth in this Section 13. (b) Definitions. The following capitalized terms used in this Section 13 shall have the meanings assigned to them below, which definitions shall apply to both the singular and the plural forms of such terms: "Competitive Services" means any services provided by Company at the Determination Date, including, but not limited to the marketing, sale and distribution of medical supplies, equipment and pharmaceuticals to primary care and other office-based physicians; the marketing, sale and distribution of medical diagnostic imaging supplies, chemicals, equipment and service to the acute care and alternate care market; and the provisions of special group purchasing contract pricing and periodic cost analyses to help manage the supply needs of individual physicians or practices. "Confidential Information" means any confidential or proprietary information possessed by the Company or its affiliated entities or relating to its or their business, including without limitation, any confidential "know-how", customer lists, details of client or consultant contracts, current and anticipated customer requirements, pricing policies price lists, market studies, business plans, operational methods, marketing plans or strategies, product development techniques or plans, computer software programs (including object code and source code), data and documentation, data base technologies, systems, structures and architectures, inventions and ideas, past, current and planned research and development, compilations, devices, methods, techniques, processes, financial information and data, business acquisition plans, new personnel acquisition plans and any other information that would constitute a Trade Secret (as defined herein). "Determination Date" means the date of termination of Executive's employment with the Company for any reason whatsoever or any earlier date (during the Employment Period) of an alleged breach of the Restrictive Covenants by Executive. "Person" means any individual or any corporation, partnership, joint venture, association or other entity or enterprise. "Principal or Representative" means a principal, owner, partner, shareholder, joint venturer, investor, member, trustee, director, officer, manager, employee, agent, representative or consultant. "Protected Clients" means any Person to whom the Company provided services or submitted a written proposal therefor, within eighteen (18) months prior to the Determination Date. "Protected Employees" means employees of the Company who were employed by the Company at any time within six (6) months prior to the Determination Date. "Restricted Period" means the term of Executive's employment hereunder and a period extending until eighteen (18) months from the Date of Termination; provided, however that such period shall be extended by any length of time during which Executive is in breach of the Restricted Covenants. "Restrictive Covenants" means the restrictive covenants contained in Section 13(c) hereof. "Trade Secret" means any item of Confidential Information that constitutes a "trade secret(s)" under the common law or statutory law of the State of Florida. (c) Restrictive Covenants. (i) Restriction on Disclosure and Use of Confidential Information. Executive understands nd agrees that the Confidential Information constitutes a valuable asset of the Company and its affiliated entities, and may not be converted to Executive's own use. Accordingly, Executive hereby agrees that Executive shall not, directly or indirectly, at any time during the Restricted Period reveal, divulge, or disclose to any Person not expressly authorized by the Company any Confidential Information, and Executive shall not, directly or indirectly, at any time during the Restricted Period use or make use of any Confidential Information in connection with any business activity other than that of the Company; provided, however, in the event the Confidential Information constitutes a Trade Secret, the Restricted Period referred to above shall be five (5) years. Notwithstanding the above, this covenant shall expire (except with respect to Trade Secrets) upon the occurrence of a Change of Control. (ii) Nonsolicitation of Protected Employees. Executive understands and agrees that the relationship between the Company and each of its Protected Employees constitutes a valuable asset of the Company and may not be converted to Executive's own use. Accordingly, Executive hereby agrees that during the Restricted Period Executive shall not directly or indirectly on Executive's own behalf or as a Principal or Representative of any Person or otherwise solicit or induce any Protected Employee to terminate his or her employment relationship with the Company or to enter into any relationship of employment, agency or independent contractorship with any other Person. Notwithstanding the above, this covenant shall expire upon the occurrence of a Change of Control. (iii) Restriction on Relationships with Protected Clients. Executive understands and agrees that the relationship between the Company and each of its Protected Clients constitutes a valuable asset of the Company and may not be converted to Executive's own use. Accordingly, Executive hereby agrees that during the Restricted Period Executive shall not, without the prior written consent of the Company, become a Principal or Representative of a Protected Client or otherwise provide services to a Protected Client as a consultant or independent contractor. Notwithstanding the above, this covenant shall expire upon the occurrence of a Change of Control. (iv) Noncompetition with the Company. During the Restricted Period Executive, unless acting in accordance with the Company's prior written consent, will not directly provide any Competitive Services to, and will not, directly or indirectly, (i) own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or (ii) be connected as a Principal or Representative or otherwise with, or (iii) permit Executive's name to be used by or in connection with, any Person engaged in providing Competitive Services to any Person conducting business activities within the territory in which the Company is or was engaged in the provision of the Competitive Services on the Determination Date; provided, however, that the provisions of this Agreement shall not be deemed to prohibit the ownership by Executive of any securities of the Company or its affiliated entities or not more than five percent (5%) of any class of securities of any corporation having a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended. Notwithstanding the above, this covenant shall expire upon the occurrence of a Change of Control. (d) Exceptions from Disclosure Restrictions. Anything herein to the contrary notwithstanding, Executive shall not be restricted from disclosing or using Confidential Information that: (a) is or becomes generally available to the public other than as a result of an unauthorized disclosure by Executive or his agent; (b) becomes available to Executive in a manner that is not in contravention of applicable law from a source (other than the Company or its affiliated entities or one of its or their officers, employees, agents or representatives) that is not bound by a confidential relationship with the Company or its affiliated entities or by a confidentiality or other similar agreement; (c) was known to Executive on a non-confidential basis and not in contravention of applicable law or a confidentiality or other similar agreement before its disclosure to Executive by the Company or its affiliated entities or one of its or their officers, employees, agents or representatives; or (d) is required to be disclosed by law, court order or other legal process; provided, however, that in the event disclosure is required by law, Executive shall provide the Company with prompt notice of such requirement so that the Company may seek an appropriate protective order prior to any such required disclosure by Executive. (e) Enforcement of Restrictive Covenants. (i) Rights and Remedies Upon Breach. In the event Executive breaches, or threatens to commit a breach of, any of the provisions of the Restrictive Covenants, the Company shall have the following rights and remedies, which shall be independent of any others and severally enforceable, and shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity: A. the right and remedy to enjoin, preliminarily and permanently, Executive from violating or threatening to violate the Restrictive Covenants and to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company; and B. the right and remedy to require Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any transactions constituting a breach of the Restrictive Covenants. (ii) Severability of Covenants. Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in time and scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, are invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. 14. Assignment and Successors. (a) Executive. This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. (b) The Company. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company will require any successor to all or substantially all of the business and/or assets of the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "the Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 15. Miscellaneous. (a) Waiver. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by the party making the waiver. (b) Severability. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which shall remain in full force and effect. (c) Other Agents. Nothing in this Agreement is to be interpreted as limiting the Company from employing other personnel on such terms and conditions as may be satisfactory to it. (d) Entire Agreement. Except as provided herein, this Agreement contains the entire agreement between the Company and Executive with respect to the subject matter hereof, and it supersedes and invalidates any previous agreements or contracts between them which relate to the subject matter hereof, including without limitation that certain Contract of Employment, dated as of May 30, 1992 by and between Executive and the Company. No representations, inducements, promises or agreements, oral or otherwise, which are not embodied herein shall be of any force or effect. (e) Governing Law. Except to the extent preempted by federal law, and without regard to conflict of laws principles, the laws of the State of Florida shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. (f) Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered or three days after mailing if mailed, first class, certified mail, postage prepaid: To Company: PSS World Medical, Inc. 4345 Southpoint Boulevard Jacksonville, Florida 32216 Facsimile No. (904) 332-3209 Attention: President To Executive: John F. Sasen Any party may change the address to which notices, requests, demands and other communications shall be delivered or mailed by giving notice thereof to the other party in the same manner provided herein. (g) Amendments and Modifications. This Agreement may be amended or modified only by a writing signed by both parties hereto, which makes specific reference to this Agreement; provided, however, that if, in the opinion of the Corporation's accountants, any provision of this Agreement would preclude the use of "pooling of interest" accounting treatment for a Change of Control transaction that (1) would otherwise qualify for such accounting treatment, and (2) is contingent upon qualifying for such accounting treatment, then Executive and the Company agree to negotiate in good faith to amend this Agreement so that it will not preclude the use of "pooling of interest" accounting treatment for such Change of Control transaction. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Employment Agreement as of the date first above written. PSS WORLD MEDICAL, INC. By: /s/ Patrick Kelly --------------------------- Patrick Kelly Chairman of the Board EXECUTIVE: /s/ John F. Sasen, Sr. ------------------------------ John F. Sasen, Sr. EX-10 2 exhibit1014_a.txt 10.14A Exhibit 10.14a AMENDMENT TO EMPLOYMENT AGREEMENT with JOHN F. SASEN, SR. This AMENDMENT (the "Amendment"), effective as of April 17, 2000, by and between PSS World Medical, Inc., a Florida corporation (the "Company"), and John F. Sase, Jr. ("Executive"), amends that certain Employment Agreement, dated as of the date indicated below, by and between the Company and Executive, as heretofore amended (the "Employment Agreement"). In consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: 1. Section 3 of the Employment Agreement is hereby amended by adding the following sentence at the end thereof: "Notwithstanding the foregoing, if a Change of Control occurs the Employment Period shall be automatically extended through the later of (i) the third anniversary of the Change of Control, or (ii) the normal expiration of the then-current term, including any prior extensions." 2. Section 6 of the Employment Agreement is hereby amended by deleting in its entirety the definition of Change of Control and substituting therefor the following: A "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (ii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this definition; or (b) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of the combined voting power of the then outstanding voting securities of such corporation resulting from such Business Combination except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) If Executive's employment responsibilities are primarily with Diagnostic Imaging, Inc., a disposition by the Company of a majority of the stock or substantially all of the assets of Diagnostic Imaging, Inc.; provided, however, that if Executive is offered and accepts a position with the Company or another subsidiary or division of the Company immediately following such disposition of Diagnostic Imaging, Inc., then a Change of Control shall not be deemed to have occurred by virtue of this subsection (d); or (e) If Executive's employment responsibilities are primarily with Gulf South Medical Supply, Inc., a disposition by the Company of a majority of the stock or substantially all of the assets of Gulf South Medical Supply, Inc.; provided, however, that if Executive is offered and accepts a position with the Company or another subsidiary or division of the Company immediately following such disposition of Gulf South Medical Supply, Inc., then a Change of Control shall not be deemed to have occurred by virtue of this subsection (e); or (f) If Executive's employment responsibilities are primarily with the Physician Sales & Service division of the Company, a disposition by the Company of substantially all of the assets of such division; provided, however, that if Executive is offered and accepts a position with the Company or another subsidiary or division of the Company immediately following such disposition of the Physician Sales & Service division, then a Change of Control shall not be deemed to have occurred by virtue of this subsection (f). 3. Notwithstanding the foregoing, if, in the opinion of the Company's accountants, the foregoing amendments (or any portion thereof) would preclude the use of "pooling of interest" accounting treatment for a Change of Control transaction that (a) would otherwise qualify for such accounting treatment, and (b) is contingent upon qualifying for such accounting treatment, then such amendments (to the extent so determined to preclude such pooling of interests accounting treatment) will not be effective and the terms of the Employment Agreement will remain in effect as if such amendments (or portion thereof) had not been proposed. 4. As amended hereby, the Employment Agreement, as heretofore amended, shall be and remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. PSS WORLD MEDICAL, INC. By: /s/ Patrick C. Kelly -------------------------------- Patrick C. Kelly Chairman of the Board and CEO By: /s/ David A. Smith -------------------------------- David A. Smith Executive Vice President and CFO EXECUTIVE /s/ John F. Sasen, Sr. ------------------------------ John F. Sasen, Sr. Date of original Employment Agreement: April 1998 EX-21 3 exhibit21_1.txt EXHIBIT 21.1 Exhibit 21.1
List of Subsidiaries of PSS World Medical, Inc. ----------------------------------------------- [Names under which Subsidiary Name of Domestic Subsidiary State of Formation conducts business] - -------------------------------------- --------------------------- --------------------------------------- Diagnostic Imaging, Inc. Florida Diagnostic Imaging; X-Ray of Georgia; Chesapeake X-Ray Gulf South Medical Supply, Inc. Delaware Physician Sales & Service, Inc. Florida Physician Sales & Service Limited Florida Partnership PSS Delaware, Inc. Delaware PSS Holding, Inc. Florida PSS Service, Inc. Florida ThriftyMed, Inc. Florida WorldMed, Inc. Delaware WorldMed International, Inc. Delaware DXR Imaging, Inc. California The Gilbert X-Ray Company of Texas Texas DI Service Group, Inc. Florida Names under which Subsidiary Name of Foreign Subsidiary* Jurisdiction of Formation conducts business - -------------------------------------- --------------------------- --------------------------------------- WorldMed, N.V. Belgium Columbus b.v. Netherlands Franz GmbH Germany * The Company sold its European operations as of May 2001.
10-K 4 fiscal2001_form10k.txt PSS WORLD MEDICAL, INC. FISCAL 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended March 30, 2001 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 $370,101,000 as of June 25, 2001. In the determination of this amount, affiliates include all of the Company's officers, directors and persons known to the Company to be beneficial owners of more than five percent of the Company's Common Stock. This amount should not be deemed conclusive for any other purpose. As of June 25, 2001, a total of 71,068,943 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 2001 Annual Meeting of Stockholders of the Registrant which will be filed with the Securities and Exchange Commission not later than 120 days after March 30, 2001. -1- TABLE OF CONTENTS
Page ITEM Information Regarding Forward-Looking Statements 3 Part I 1. Business..................................................................................... 4 2. Properties................................................................................... 23 3. Legal Proceedings............................................................................ 25 4. Submission of Matters to a Vote of Security Holders.......................................... 25 Part II 5. Market for the Registrant's Common Shares and Related Shareholder Matters.................... 26 6. Selected Financial Data...................................................................... 27 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 29 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 41 8. Financial Statements and Supplementary Data.................................................. F-1 Part III 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure......... 42 10. Directors and Executive Officers of the Registrant........................................... 42 11. Executive Compensation....................................................................... 42 12. Security Ownership of Certain Beneficial Owners and Management............................... 42 13. Certain Relationships and Related Transactions............................................... 42 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 43 Signatures................................................................................... 45
-2- PART I CAUTIONARY STATEMENTS Forward Looking Statements This Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements regarding the Company's and its subsidiaries' (including subsidiaries that are limited liability companies and limited partnerships) expected future financial position, results of operations, cash flows, funds from operations, dividends and dividend plans, financing plans, business strategy, budgets, projected costs, capital expenditures, competitive positions, growth opportunities, plans and objectives of management for future operations and statements that include words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "may," "could," and other similar expressions are forward-looking statements. Such forward-looking statements are inherently uncertain, and stockholders must recognize that actual results may differ from the Company's expectations. Actual future results and trends for the Company may differ materially depending on a variety of factors discussed in this Form 10-K and elsewhere in the Company's filings with the Securities and Exchange Commission (the "Commission"). Factors that may affect the plans or results of the Company include, without limitation, those listed in this document under the heading "Risk Factors," and (a) the ability of the Company to successfully implement its business plan; (b) the availability of sufficient capital to finance the Company's business plans on terms satisfactory to the Company; (c) competitive factors; (d) the ability of the Company to adequately defend or reach a settlement of outstanding litigations and investigations involving the Company or its management; (d) changes in labor, equipment and capital costs; (e) changes in regulations affecting the Company's business; (f) future acquisitions or strategic partnerships; and (g) general business and economic conditions. Many of these factors are outside the control of the Company and its management. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. The Company undertakes no duty to update such forward-looking statements. -3- Item 1. Business GENERAL PSS World Medical, Inc., a Florida Corporation (the "Company", "PSS World Medical", 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 99 service centers to customers in all 50 states. Since its inception in 1983, the Company, through strategic acquisitions and internal growth, has become a leader in three market segments it serves. The Company's strategic advantages include a focused and differentiated approach to customer service, a consultative sales force, unique arrangements with product manufacturers, innovative systems, and a culture of performance. The Company's Physician Sales & Service division is a leading distributor of medical supplies, equipment and pharmaceuticals to office-based physicians in the United States based on revenues, number of physician-office customers, number and quality of sales representatives, and exclusively distributed products. Physician Sales & Service currently operates 49 medical supply distribution service centers with approximately 719 sales representatives ("Physician Supply Business") serving physician offices in all 50 states. The Physician Supply Business' primary market is office-based physicians throughout the United States. The Company's subsidiary Diagnostic Imaging, Inc. ("DI") is a 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, and number of sales representatives. DI currently operates 34 imaging distribution service centers with approximately 850 service specialists and 210 sales representatives ("Imaging Business") serving customer sites in 42 states. The Imaging Business' primary markets are acute-care hospitals, imaging centers, and private practice physicians, veterinarians and chiropractors. The Company's subsidiary Gulf South Medical Supply, Inc. ("GSMS" or "Gulf South") is a leading national distributor of medical supplies and related products to the long-term care industry in the United States based on revenues and number of sales representatives. GSMS currently operates 14 distribution service centers with approximately 119 sales representatives ("Long-Term Care Business") serving long-term care accounts in all 50 states. The Long-Term Care Business' primary market is comprised of a large number of independent operators, small to mid-sized local and regional chains, and several national chains. As of March 30, 2001, the Company's subsidiary WorldMed International, Inc. ("WorldMed") operated two European service centers ("International Business") distributing medical products to the physician office and hospital markets in Belgium and Germany. Subsequent to the fiscal year-end, the Company sold its European operations. COMPANY STRATEGY The Company's objective is to be the leading distributor and marketer of medical products and services to select niche medical markets in the United States, measured by customer satisfaction and organizational profitability. During fiscal years 1997 to 2000, the Company grew rapidly through mergers and acquisitions. During the most recent two fiscal quarters, the Company has focused on stabilizing growth and maximizing its core strengths. The key components of the Company's strategy to achieve its objectives are to continue to: Expand Sales and Operating Margins. The Company continues to pursue several initiatives to enhance its sales and gross margins. The Company's objective in the next 24 to 36 months is to convert its sales force from a demonstration to an application force with customer tailored solutions. The Company is focusing its efforts on higher-margin products and accounts, penetration of existing and former customer accounts, and on sales of diagnostic equipment, often on an exclusive or semi-exclusive basis, that involve ongoing sales of higher-margin reagents and/or higher margin service contracts. Examples of recent sales and gross margin initiatives include the following: -4- o SRx rollout in the Physician Supply Business. SRx is an automated marketing program tailored to physician specialties, combining disease states, pharmaceutical therapeutics, diagnostic tests, and reimbursement. This program provides our Physician Business sales representatives with the opportunity to partner with physicians to increase their revenues and profits while improving patient care. We have also found the program to be a successful "reach" strategy as evidenced by the signing of over 3,000 new customers. Additionally, successful use of the SRx program by our salesforce has initially produced 14-15% growth in revenues and gross profit dollars in our selected Family Practice pilot group. o Long-Term Care Business ANSWERS Program. ANSWERS is the Long-Term Care business best-practice marketing program, which aligns the best practices of nursing homes with the most efficient distribution activities, producing savings for both customers and distributors. The ANSWERS program was rolled-out in April at Gulf South's national sales meeting. In addition to reducing distribution cost by encouraging more efficient buying patterns, ANSWERS provides real opportunities for category-leading branded product vendors to increase volumes and for customers to purchase top products at reduced pricing. These market-leading branded products promote the best quality patient care, resulting in improved outcomes at a faster pace, thus helping customers improve profitability. o Reorganization of Imaging Business into Strategic Business Units. The Imaging Business has completed the reorganization of its sales force into six distinct business units focusing on Commodities, Women's Health, Surgical, Imaging, Technical Service, and Telesales. The six strategic business units are designed to leverage the Imaging Business' core competencies, align capabilities and resources, implement new sales initiatives with lower selling costs, and increase focus on higher margin business. With respect to operating margins, the Company's objectives are to redesign for greater efficiency all areas of the business that do not interface with the customer or negatively impact customer satisfaction. The Company will seek to leverage infrastructure as well as develop new capabilities and core competencies. Examples of recent initiatives include: o Supply Chain Management. The Company is systematically reinventing its supply chain with leading edge technology while better leveraging existing Enterprise Resource Planning ("ERP") systems. This initiative improves identification of demand signals that will offer our vendor partners the ability to better plan production schedules and reduce finished goods. The program is designed to provide the Company with greater scale in the ordering process, resulting in lower administrative costs associated with centralized purchasing and elimination of rebates, as well as shared savings with vendors due to greater order efficiency. The Company's goal is to reduce supply chain costs by $20 million in the next 24-36 months. o Centralized Sourcing. In combination with supply chain initiatives, the Company established a centralized sourcing unit in April. Centralized negotiating and purchasing of indirect spend, defined as non-inventory and salary costs, is expected to reduce costs with minimal operations impact on the Company and its subsidiaries. The Company has identified $150 to $200 million of indirect spend with a goal of saving $10 million in the next 24-36 months. o Optimized Distribution Model with Customer Satisfaction a Top Priority. The Company has engaged a third party consultant to assist it in developing the Company's long-range strategic plan, including distribution rationalization. As an integral part of this process, the Company has begun surveying and interviewing thousands of customers from all three business segments to ensure that the Company continues to meet and exceed their expectations while optimizing our distribution model. Progress is expected to be made gradually over the next 24 to 36 months. -5- o Utilize Sophisticated Information Systems. The Company has aggressively improved its technology base with the role out of its myPSS.com, myDIonline.com, and GSOnline. The Company believes these sites are the most robust sites in operation for their customers and serve as a platform for supply chain initiatives that leverage the Company's ERP systems. These systems will serve the Company's objective to increase revenues and customers while leveraging infrastructure and reducing operating costs. 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 services. The Company currently stocks over 56,000 medical products in its Physician Supply Business, over 8,000 imaging products in its Imaging Business, and over 20,000 medical products in its Long-Term Care Business. The Company also seeks to establish exclusive distribution and marketing arrangements for selected products. In the United States, PSS currently has exclusive or semi-exclusive marketing arrangements for certain products with Abbott Laboratories, Biosound, Candela Corporation, Philips Medical Systems, Roche, Siemens AG, 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. INDUSTRY According to industry estimates, the United States medical supply and equipment segment of the health care industry represents approximately a $43 billion market comprised of distribution of medical products to hospitals, home health care agencies, imaging centers, physician offices, dental offices, and long-term care facilities. The Company's primary focus is the distribution of medical products to physician offices, providers of imaging services, and long-term care facilities. Approximately 60% of products in this market come through the distributor channel, representing an approximately $25 billion market potential for the Company. Revenues of the medical products distribution industry are estimated to be growing as a result of a growing and aging population, increased health care awareness, proliferation of medical technology and testing, and expanding third-party insurance coverage. In addition, the physician market continues to benefit from the shift of procedures and diagnostic testing from hospitals to alternate sites, particularly physician offices, despite a migration of significantly lower hospital medical product pricing into the physician office market. Also as the cosmetic surgery and elective market continues to grow, physicians are increasingly performing more procedures in-office. The health care industry is subject to extensive government regulation, licensure, and operating procedures. National health care reform has been the subject of a number of legislative initiatives by Congress. Additionally, government and private insurance programs fund the cost of a significant portion of medical care in the United States. In recent years, government-imposed limits on reimbursement of hospitals, long-term care facilities, and other health care providers have affected spending budgets in certain markets within the medical products industry. In 1997, the Balanced Budget Act passed by Congress made radical changes to reimbursements for nursing homes and home care providers. The industry has struggled with these changes and the ability of providers, distributors and manufacturers to adapt to the changes is not yet determined. These changes also affect some distributors who directly bill the government for these providers. The industry estimates that approximately 11% of Long-Term Care facilities have filed for bankruptcy protection. Over 100 of the Company's customers filed for bankruptcy in the last two years. Over the past few years, the health care industry has undergone significant consolidation. Physician provider groups, long-term care facilities, and other alternate-site providers, along with hospitals, continue to consolidate, creating new and larger customers. However, the majority of the market serviced by the Company remains small customers, with no single customer exceeding 10% of the consolidated Company's revenues. However, the Long-Term Care Business depends on a limited number of large customers for a significant portion of its net sales, and approximately 35% of Long-Term Care Business' revenues for the twelve months ended March 30, 2001 -6- represented sales to its top five customers. One of these top five customers is currently in Chapter 11 bankruptcy reorganization, and sales to this customer represents approximately 9% of Long-Term Care Business revenues, and less than 2% of the Company's consolidated sales, for the year ended March 30, 2001. Growth in the Long-Term Care Business, as well as consolidation of the health care industry, may increase the Company's dependence on large customers. SALES, SERVICE, DISTRIBUTION The Company has built its relationships largely through its strong customer service and sales force. The sales force must complete extensive training before meeting with customers in order to provide a more value-added consultative sales approach that focuses on fulfilling the needs of the customer. PHYSICIAN SUPPLY BUSINESS The Physician Supply Business currently maintains a highly decentralized distribution network of 49 service centers operating approximately 530 delivery vans servicing customers throughout the United States. This distribution network, along with the Company's customer internet site, myPSS.com, and its sales force automation tool "ICONWebSM", has enabled the Physician Supply Business to provide customer specific services with local market variations. With its 719 sales representatives, the Physician Supply Business distributes medical supplies and equipment to physicians in over 100,000 office sites nationally. Generally, each sales representative is responsible for calling on approximately 125 physician offices, with a minimum goal of visiting each office once every one to two weeks. IMAGING BUSINESS The Imaging Business operates as a local market national distributor providing over 8,000 types of medical imaging supplies, chemicals, and equipment to the acute-care and alternate-care markets. Since its inception in November 1996, DI has successfully integrated 46 acquisitions with a common ERP system to construct a nationwide distribution and service channel with 30 full service branches, 4 service centers, 210 sales representatives and 850 service specialists reaching over 24,000 customer sites in 42 states. Each full service branch is capable of providing a broad array of imaging products including consumables, imaging equipment, and equipment service. The Company uses it own fleet of delivery vehicles to provide scheduled point-of-use and just-in-time deliveries tailored to the unique service and maintenance needs of imaging customers. LONG-TERM CARE BUSINESS The Long-Term Care Business currently operates 14 full-service regional distribution centers. Coupled with a team of approximately 119 sales representatives and GSOnline, the Company's automated customer Internet platform, the Long-Term Care Business is able to provide consistent and reliable service to customers ranging from independent nursing homes to large national chains, as well as providers of home health care and subacute, rehabilitation, and transitional care. Currently, the Long-Term Care Business provides service to approximately 14,000 long-term care accounts nationally and offers a product line consisting of over 20,000 products. In addition to distribution of medical and related products, the Company's Long-Term Care Business provides customers with support services developed to meet their needs. These services include: (i) incentives and discounts to align best practice purchasing activities with efficient distribution activities, (ii) usage reports designed to help customers manage supply requirements, prepare forecasts and track multifacility purchases; (iii) inventory control processes that enable the customer to order products on a -7- just-in-time basis and monitor patient's utilization of products for Medicaid and Medicare reimbursement; and (iv) customized services including customized invoices, bar code labels, and customized order guides. INTERNATIONAL BUSINESS As of March 30, 2001, the International Business operated two European service centers located in Belgium and Germany, employing approximately 20 sales representatives and 90 total employees. Subsequent to fiscal year-end, the Company sold its European operations. PRODUCTS The Company is required to carry a significant investment in inventory to meet the rapid delivery requirements of its customers. During the year ended March 30, 2001, one imaging business vendor accounted for more than 10% of the Company's consolidated inventory purchases. The Company's ability to maintain good relations with its vendors will affect the profitability of the business. Physician Supply Business The Physician Supply Business distributes medical over 56,000 types of products consisting of medical supplies, diagnostic equipment, and pharmaceuticals. The following is a discussion of the types of medical products offered by the Physician Supply Business. Medical Supplies. The Physician Supply Business sells a broad range of medical supplies, including various types and sizes of paper goods, needles and syringes, gauze and wound dressings, surgical instruments, sutures, latex gloves, orthopedic soft goods and casting products, wood tongue blades and applicators, sterilization and intravenous solutions, specimen containers, diagnostic equipment reagents, and diagnostic rapid test kits for pregnancy, strep, mononucleosis, chlamydia, and H-Pylori. Medical Equipment. The Physician Supply Business equipment lines include blood chemistry analyzers, automated cell and differential counters, immunoassay analyzers, bone densitometers, exam tables and furniture, electrocardiograph monitors and defibrillators, cardiac stress systems, cardiac and OB/GYN ultrasound, holter monitors, flexible sigmoidoscopy scopes, hyfracators, laser and endoscopy surgical units, autoclaves, spirometers, pulse oximeters, tympanometers, and microscopes. Demand for diagnostic equipment has been increasing, reflecting in part, technological advances that enable increasingly sophisticated diagnostic tests to be performed in the physician's office. Sales of diagnostic equipment, while generally lower in gross margin than supplies, normally entail the ongoing reordering of disposable diagnostic reagents that generally yield higher margins. Pharmaceuticals. The Company's pharmaceutical sales include vaccines, injectables, and ointments. IMAGING BUSINESS The Imaging Business distributes a broad range of approximately 8,000 consumable SKU's and 25 various equipment product lines. In addition, the Company employs approximately 850 service specialists who provide equipment maintenance and repair. -8- Imaging Supplies. Imaging supplies are primarily the supplies and accessories used each time a diagnostic image such as a chest x-ray, CT or mammogram is created. The Company's product portfolio includes x-ray film, processing chemicals, contrast agents, barium, filing and mailing products, film viewing devices, darkroom products, protective materials, and other miscellaneous imaging accessories. Imaging Equipment. The Imaging Business equipment lines include processors, wet and dry laser cameras, automated film handling equipment, radiographic equipment, radiographic and fluoroscopic equipment ("R&F"), digital R&F, electrophysiology equipment, mammography systems, bone densitometry, C-Arms, digital upgrades, computed tomography scanners ("CT"), cardiac cath labs, vascular labs, magnetic resonance imaging ("MRI") equipment, picture archiving and communication systems ("PACS"), computed radiography equipment, and urology systems. Imaging Service Specialists. Through approximately 850 service specialists, the Imaging Business currently provides on-site preventive maintenance, emergency service, and parts for all of the above-mentioned imaging equipment sold. LONG-TERM CARE BUSINESS The Long-Term Care Business offers over 20,000 medical and related products consisting largely of name brand items including medical supplies, incontinent supplies, personal care items, enteral feeding supplies, medical instruments, and respiratory and ostomy supplies. Medical Supplies. Medical supplies consist of wound care supplies, needles and syringes, gauze, sutures, various types of exam gloves, urological supplies, and blood and urine testing supplies and test kits. Incontinent Supplies and Personal Care Items. These items include adult diapers and underpads, as well as soaps and shampoos, personal hygiene items, various paper products and bedside utensils. Enteral Feeding Supplies. Enteral feeding supplies include nutritional supplements, pump sets, and intravenous tubing and solutions. Other. Other items offered by the Company include medical instruments, oxygen supplies, trach and suction supplies, and over-the-counter pharmaceuticals. INTERNATIONAL BUSINESS The International Business distributed medical supplies, equipment and pharmaceuticals similar to those provided by the Physician Supply Business through two service centers to acute and alternate care sites in Belgium and Germany. Subsequent to year-end, the Company sold its European operations. RECRUITMENT AND DEVELOPMENT The Company believes its sales force and leaders are its most valuable assets. Accordingly, the Company invests significant resources in recruiting, training and developing these associates. Over the past ten years, the Company has refined its recruitment practices and development procedures for its businesses. The Company's comprehensive program includes the following: Recruitment. The Company has developed a recruitment program to help provide it with a source of mobile and committed sales representatives. The Company believes that it is a leader in its industry in recruiting sales representatives on college and university campuses. The Company's recruiters use state-of-the-art marketing materials to attract candidates who demonstrate superior sales aptitude. -9- Initial Development. Each sales trainee is initially introduced to the Company through an on-line Orientation Program. The program is a self-paced, web-based program which educates the new trainee on the business of each division, the officers of the Company, and the expectations of the trainee. Under the supervision of local leaders and regional specialists, training consists of a combination of self-study, individual instruction and interaction with customers and regional specialists. Such training includes 16 one-week courses providing instruction on products, procedures, and selling skills. During this development program, the trainee attends the Center for Career Development for additional training. The Company believes that the level of its expenditures in developing new sales representatives and its ability to place new sales representatives quickly in a new region is unique within the industry. The new sales graduate is placed on a salary-to-commission conversion program. Operations Management. The Company's development program for its operations leadership trainees consists of approximately 12 months of intensive training and development. After recruitment, the operations management trainee is transferred to several service centers and is given various and gradually increasing levels of responsibility. Technical Service Specialists. The Imaging Business has implemented an intensive service training schedule in which the vast majority of its 850 service specialists will be participating in some manner in the upcoming fiscal year. The Company recently constructed its own state-of-the-art 5,000 square foot Diagnostic Imaging training center where it provides classes on all aspects of the imaging business including film handling equipment, basic x-ray, basic imaging, and mammography equipment. The curriculum also includes the Kodak ImageWatch training. The training center will soon be expanding into 8,000 additional square feet. During fiscal 2001, the Company trained over 150 service specialists in the Center for Career Development classes on customer skills and communications. In addition, a large number of service specialists will attend classes provided by various equipment manufacturers. Continued Sales Development. The Company recently developed an advanced sales development program for experienced successful sales representatives designed to improve effectiveness, performance, and extend the value proposition provided to the customer. This new class is an extension of several programs in place to train experienced sales representatives on new technology and new products. The Company also provides several programs to continue development of its sales and leadership organization. The programs provided by the Center for Career Development include a leadership program for senior sales representatives, a general leaders program for first-year leaders that emphasizes creativity and innovation, and a senior leadership development program. Continued Operations Development. The Company has begun to develop programs for customer service, warehouse, driver, purchasing and other field operation staff for job specific expertise needed in the areas of regulatory compliance, sexual harassment, equal opportunity and other human resource topics. The Company is migrating more of its training and education programs online. On March 30, 2001, the Company had 1,068 sales representatives, 850 imaging service specialists, and approximately 4,800 total associates. The Company considers its employee relations to be good. -10- INFORMATION SYSTEMS PSS WORLD MEDICAL, INC. Web Base eCommerce Digital Marketplace Application Development The Company launched two new sites in fiscal 2001. myPSS.com was launched in December of 2000, followed by myDIonline.com in late March of 2001. The sites feature full product catalogs for each division, as well as real-time inventory availability, account and billing information, and multi-site purchasing control tools. The sites are the result of over 18 months of research and development. These new sites round out PSS World Medical's eBusiness offerings complimenting the GSOnline site, which has been in place for over 3 years in the Gulf South division. Supply Chain Application Development In the past year, PSS World Medical has purchased supply chain applications from i2 Technologies. These modules are currently being implemented within the Businesses in fiscal 2002. Strategic ERP Systems Development PSS World Medical has successfully completed its JD Edwards system conversion within the Imaging Business. The Physician Supply Business completed its JD Edwards One World rollout to seven branches in the Southern Region this past year. The remaining branches in the Southern Region as well as other regions are being targeted for conversion in fiscal 2002 and 2003. The Company is integrating its supply chain solution with the JD Edwards OneWorld system, which may delay the rollout but is expected to facilitate a shorter completion date. PHYSICIAN SUPPLY BUSINESS Sales Force Automation / Internet Automation ICONwebSM is a sales force automation tool that allows the Physician Supply Business sales representatives to access critical customer information and place orders from any location using a standard laptop computer system. ICONwebSM provides the sales representatives with customer pricing, contracts, backorders, inventory levels, account status and instant ordering. ICONwebSM has increased time available for selling, decreased operating expenses in the service centers, and enhanced the Company's ability to provide same-day delivery to customers. ICONwebSM accounts for over 60% of the Physician Supply Business' orders that are processed on a monthly basis. The system has allowed the Physician Supply Business to cut its internal customer service staff in half over the past seven years and processes approximately $450 million of annualized revenue through the Internet. IMAGING BUSINESS ERP Systems The Imaging Business completed the JD Edwards World ERP system rollout that was started in October of 1997. The Imaging Business maintains this centralized system with rollover capability to an offsite facility in the event the current system is unavailable. The current system runs on the AS/400 model 740 using several software packages. JD Edwards supports the core business functions such as accounts payable, accounts receivable, -11- general ledger, and distribution. MDSI supports the service component of the business, and there are several add-in components such as RF-Smart (warehouse-management), and Quadrant (faxing from the AS400). LONG-TERM CARE BUSINESS ERP Systems Gulf South maintains a centralized computing environment that allows for real time data updates and access by remote branch locations via a wide area network. The Gulf South distribution system was designed and developed in-house, specifically for the medical supply distribution industry. This distribution system is connected to the PSS World Medical general ledger and accounts payable system. Once the new PSS distribution system is implemented at all Physician Supply Business branches, the existing Gulf South distribution system will be replaced by the JD Edwards OneWorld system. eCommerce / Digital Marketplace Development Gulf South has developed an Internet based sales force automation application ("RepNet") and a customer on-line ordering application (GSOnline). RepNet provides the Gulf South sales force with immediate access to customer account data and historical purchasing activity, product and inventory data, and remote sales quotes and sales order entry capabilities. This system has greatly improved the amount of information available to the mobile sales force and increased the level of service provided to customers. GSOnline is an Internet based order entry and historical reporting application developed specifically for the Gulf South customer. Through GSOnline, a customer can access their specific account pricing and product formularies, inquire on product availability, place and view order status, and perform history reporting. Customer Systems In addition, Gulf South offers its customers Accuscan, a barcode based inventory control and ancillary billing software package designed specifically for the long-term care and home health industries. Accuscan allows a customer to maintain a real time inventory count and order products on a just-in-time basis, as well as a method to monitor patients' utilization of products. The effectiveness of Internet access to improve efficiencies of distribution in the health care industry is being tested and developed by current and new participants of the health care industry. Approximately $480,000 a day of long-term care sales are currently being processed through GSOnline by the Long-Term Care Business with approximately 34% of all of its sales processed through e-Commerce. PURCHASING AND VENDOR RELATIONSHIPS The Company has initiated a new sourcing department to provide centralized procurement of indirect products such as office and warehouse supplies, travel and entertainment, delivery vehicles, insurance and other non-inventory. The Company expects significant savings from the consolidation and leveraging of its indirect product purchasing. The Company seeks to purchase the medical supplies and equipment it distributes at the lowest possible price through volume discounts, rebates and product line consolidation. The Company's materials management group negotiates all of its contract terms with vendors. Today, individual orders are placed by the Company's purchasing agents located at the Company's service centers, who are responsible for purchasing and maintaining the inventory. Supplies and equipment are delivered directly from vendors to the service centers. The Company is currently centralizing and automating purchasing at its Imaging division. The Company aggressively pursues the opportunity to market and sell medical equipment and supplies on an exclusive basis. Manufacturers of medical diagnostic equipment and supplies typically offer distribution rights only -12- to a selected group of distributors and are increasingly seeking to reduce the number of distributors selling their products to end users in an effort to reduce the cost associated with marketing and field support. The Company has been successful in assisting manufacturers in their development and marketing plans and in obtaining the exclusive right to sell certain products. The Company believes that its ability to capture such distribution rights represents a significant barrier to the entry of competitors. Vendor relationships are an integral part of the Company's businesses. Marketing and sales support, performance incentives, product literature, samples, demonstration units, training, marketing intelligence, distributor discounts and rebates, and new products are strategic to the Company's future success. In the Imaging Business, prices of consumable imaging products, primarily film and film related products, are influenced significantly by manufacturers through distributor discounts and rebates. These distributor/manufacturer relationships affect the profitability of the Company's Imaging Business. Additionally, the development of new technology may change the manner in which diagnostic imaging services are provided. In the event of such technological changes, the Company's ability to obtain distribution agreements or develop vendor relationships to distribute such new technology will impact the Company's operations. COMPETITION The Company operates in a highly competitive environment. The Company's principal competitors are the few multimarket medical distributors that are full-line, full-service medical supply companies, most of which are national in scope, and manufacturers that sell their products both to distributors and/or directly to users, including office-based physicians and hospitals. The national, multi-market medical distributors and manufacturers have sales representatives competing directly with the Company, are substantially larger in size, and have substantially greater financial resources than the Company. There are also numerous local dealers and mail order firms that distribute medical supplies and equipment within the same market as the Company. Most local dealers are privately owned and operate with limited product lines. There are several mail order firms that distribute medical supplies on a national or regional basis. REGULATORY MATTERS General Federal, state, and local governments extensively regulate the provision of medical devices and over-the-counter pharmaceutical products, as well as the distribution of prescription pharmaceutical products. Applicable Federal and state statutes and regulations require the Company to meet various standards relating to, among other things, licensure, personnel, maintenance of proper records, equipment and quality assurance programs. The Company believes it substantially complies with applicable Federal and state laws. However, if a state or the Federal government finds that the Company has not complied with these laws, then the Company could be required to change its way of operating, and this could have a negative impact on the Company. The Company believes that the health care services industry will continue to be subject to extensive regulation at the Federal, state, and local levels. The Company cannot predict the scope and effect of future regulation and enforcement on its business and cannot predict whether health care reform will require the Company to change its operations or whether such reform will have a negative impact on the Company. The Food, Drug and Cosmetic Act, Prescription Drug Marketing Act, Safe Medical Devices Act, Controlled Substances Act and State Regulation The Company's business is subject to regulation under the Federal Food, Drug, and Cosmetic Act, the Prescription Drug Marketing Act of 1987, the Safe Medical Devices Act of 1990, the Controlled Substances Act, and state laws applicable to the manufacture and distribution of medical devices and -13- over-the-counter pharmaceutical products, as well as the distribution of prescription pharmaceutical products. In addition, the Company is subject to regulations issued by the Food and Drug Administration, the Drug Enforcement Administration and comparable state agencies. The Federal Food, Drug, and Cosmetic Act generally regulates the manufacture of drug and medical devices shipped in interstate commerce, including such matters as labeling, packaging, storage and handling of such products. The Prescription Drug Marketing Act of 1987, which amended the Federal Food, Drug and Cosmetic Act, establishes certain requirements applicable to the wholesale distribution of prescription drugs, including the requirement that wholesale drug distributors be registered with the Secretary of Health and Human Services or be licensed in each state in which they conduct business in accordance with federally established guidelines on storage, handling, and records maintenance. The Safe Medical Devices Act of 1990 imposes certain reporting requirements on distributors in the event of an incident involving serious illness, injury or death caused by a medical device. Under the Controlled Substances Act, the Company, as a distributor of controlled substances, is required to obtain annually a registration from the United States Attorney General in accordance with specified rules and regulations and is subject to inspection by the Drug Enforcement Administration acting on behalf of the United States Attorney General. The Company is also required to maintain licenses and permits for the distribution of pharmaceutical products and medical devices under the laws of the states in which it operates. The Anti-Kickback Statute Under Medicare, Medicaid, and other government-funded health care programs such as the CHAMPUS program, Federal and state governments enforce a Federal law called the Anti-Kickback Statute. The Anti-Kickback Statute prohibits any person from offering or paying any type of benefit to another person in exchange for the referral of items or services covered by Medicare, Medicaid or other federally-subsidized program. Remuneration prohibited by the Anti-Kickback Statute includes the payment or transfer of anything of value. Many states also have similar anti-kickback statutes. The Anti-Kickback Statute is a broad law, and courts have not been consistent in their interpretations of it. Courts have stated that, under certain circumstances, the Anti-Kickback Statute is violated when just one purpose, as opposed to the primary purpose, of a payment is to induce referrals. To clarify what acts or arrangements will not be subject to prosecution by the Department of Justice, the Department of Health and Human Services ("DHHS") adopted a set of safe harbor regulations and has proposed additional safe harbor regulations. DHHS continues to publish clarifications to these safe harbors. If an arrangement does not meet all of the requirements of a safe harbor, it does not mean that the arrangement is necessarily illegal or will be prosecuted under the Anti-Kickback Statute. An arrangement must meet a number of specific requirements in order to enjoy the benefits of the applicable safe harbor. Meeting the requirements of a safe harbor will protect an arrangement from enforcement action by the government. The Company seeks to satisfy as many safe harbor requirements as possible when it is structuring its business arrangements. The types of arrangements covered by safe harbors that are not subject to enforcement actions by the government include, but are not limited to, certain investments in companies whose stock is traded on a national exchange, certain small company investments in which physician ownership is limited, rental of space, rental of equipment, personal services contracts, management contracts, sales of physician practices, physician referral services, warranties, discounts, payments to employees, and group purchasing organizations. Despite the Company's efforts to meet safe harbor requirements whenever possible and otherwise comply with the Anti-Kickback Statute, a government agency might take a position contrary to the interpretations made by the Company or may require the Company to change its practices. If an agency were to take such a position, it could adversely affect the Company. The Health Insurance Portability and Accountability Act of 1996 In an effort to combat health care fraud, Congress included several anti-fraud measures in the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). Among other things, HIPAA broadened the scope of certain fraud and abuse laws, extended criminal penalties for Medicare and Medicaid fraud to other Federal health care programs, and expanded the authority of the Office of Inspector General to exclude persons and -14- entities from participating in the Medicare and Medicaid programs. HIPAA also extended the Medicare and Medicaid civil monetary penalty provisions to other Federal health care programs, increased the amounts of civil monetary penalties, and established a criminal health care fraud statute. Federal health care offenses under HIPAA include health care fraud and making false statements relating to health care matters. Under HIPAA, among other things, any person or entity that knowingly and willfully defrauds or attempts to defraud a health care benefit program is subject to a fine, imprisonment, or both. Also under HIPAA, any person or entity which knowingly and willfully falsifies, conceals or covers up a material fact or makes any materially false or fraudulent statements in connection with the delivery of or payment for health care services by a health care benefit plan is subject to a fine, imprisonment, or both. The Company seeks to satisfy HIPAA when it is structuring its business arrangements. However, a government agency might take a position contrary to the interpretations made by the Company or may require the Company to change its practices. If an agency were to take such a position, it could adversely affect the Company. Other Laws The Company is also subject to various Federal, state and local laws, regulations and recommendations, both in the United States and abroad, relating to safe working conditions and the use and disposal of hazardous or potentially hazardous substances. The Company's environmental policies mandate compliance with all applicable regulatory requirements concerning environmental quality and contemplate, among other things, appropriate capital expenditures for environmental protection. In addition, U.S. and international import and export laws and regulations require that the Company abide by certain standards relating to the importation and exportation of finished goods, raw materials and supplies. The Company was also subject to regulation in the European countries where its International Business markets its products. Many of the laws and regulations applicable in such countries are similar to those described above. The national health or social security organizations of certain countries require the products distributed by the Company to be qualified before they can be marketed in those countries. Health Care Legislation Federal, state and foreign laws and regulations regarding the sale and distribution of medical supplies, equipment and devices by the Company are subject to change. The Company cannot predict what impact, if any, such changes might have on its business. Any new legislation or regulations, or new interpretations of existing statutes and regulations, governing the manner in which the Company provides services could have a material impact on the Company and could adversely affect its profitability. The laws and regulations described above apply not only to the Company, but also to the manufacturers that supply the products distributed by the Company as well as the Company's customers. For instance, medical product and device manufacturers are subject under the Food, Drug, and Cosmetic Act to design and manufacturing standards imposed, as well as registration and reporting requirements regarding their facilities and products. Failure of a manufacturer to comply with these requirements could result in recalls, seizures, manufacturing suspensions or other interruptions in the production, supply and sale of its products. Such interruptions may result in a material adverse impact on the Company's business. In addition, the Company's physician and other health care customers are subject to significant Federal and state regulation. There can be no assurance that -15- such interruptions in medical product supplies or changing regulations governing health care providers will not have a material adverse impact on the Company's business. RISK FACTORS Our net sales and operating results may fluctuate quarterly and may be below analysts' and investors' expectations in any particular quarter. Our net sales and operating results may fluctuate quarterly as a result of many factors, including: o fluctuating demand for our products and services; o the introduction of new products and services by us and our competitors; o acquisitions or investments; o changes in manufacturers' prices or pricing policies; o changes in the level of operating expenses; o changes in estimates used by management; o product supply shortages; o product recalls by manufacturers; o inventory adjustments; o changes in product mix; o general competitive and economic conditions; and o change in accounting principles. In addition, a substantial portion of our net sales in each quarter that may be impacted by the above factors result from orders recorded in such quarter and, in particular, toward the end of such quarter. Accordingly, we believe that period-to-period comparisons of our operating results should not be relied upon as an indication of future performance. It is possible that in certain future periods our operating results may be below analysts' and investors' expectations. This could materially and adversely affect the trading price of our common stock. As discussed in Note 17, Quarterly Results of Operations (Unaudited), to the accompanying consolidated financial statements, the Company recently restated its previously issued consolidated financial statements for the June 30, September 30, and December 29, 2000 fiscal quarters. While the Company does not believe it will be required to make any additional restatements, it cannot provide an assurances that this is not the case. Pricing and customer credit quality pressures due to reduced spending budgets by health care providers may impair our revenues, the collectibility of our accounts receivable and our earnings. The cost of a significant portion of medical care in the United States is funded by government and private insurance programs, such as Medicare, Medicaid, and corporate health insurance plans. In recent years, government-imposed limits on reimbursement of hospitals and other health care providers have significantly impacted spending budgets in certain markets within the medical-products industry. In particular, recent changes in the Medicare program have limited payments to providers in the long-term care industry, the principal customers of our Gulf South subsidiary. For cost-reporting periods beginning on or after July 1, 1998, Medicare's prospective payment system was applied to the long-term care industry. This prospective payment system limits government payments to long-term care providers to federally established cost levels. Prior to this time, the long-term care facilities were reimbursed by the Medicare program pursuant to a cost-based reimbursement system. This shift was designed to encourage greater provider efficiency and to help stem the growth in reimbursement relating to the care of long-term care patients. Under the prospective payment system, the customers of our Gulf South subsidiary are now receiving revenues that are substantially less than they received under cost-based reimbursement. In addition, private third-party reimbursement plans are also developing increasingly sophisticated methods of controlling health care costs. Over 10 of our Gulf South customers, including several of our largest customers, have declared bankruptcy due to the significant reductions in their revenues. Therefore, particularly with respect to our Gulf South customers, we cannot assure you that the purchase of our medical products will not be limited or reduced or that we will be able to collect our receivables in a timely manner, if at all. This may adversely affect our accounts receivable and future sales, earnings and results of operations. -16- Our business is dependent upon sophisticated data processing systems which may impair our business operations if they fail to operate properly or as we anticipate. The success of our business relies on our ability to (i) obtain, process, analyze and manage data and (ii) maintain and upgrade our data processing capabilities. We rely on this capability because: o we typically receive rebates from manufacturers when we sell certain products for our Businesses and need sophisticated systems to track and apply for such rebates; o we must convert data and information systems after acquisitions; o we must receive and process customer orders quickly; o we must ship orders on a timely basis; o we must manage the billing and collections, for over 120,000 customers; o we must manage the purchasing and distribution of over 70,000 inventory items from 99 distribution centers; o we are processing approximately $500 million of our revenues through the Internet. Our business, financial conditions and results of operations may be materially adversely affected if, among other things: o our data processing capabilities are interrupted or fail for any extended length of time; o we fail to upgrade our data services; o our data processing system is unable to support our expanded business; or o we lose or are unable to store data. Our strategy for growth may not result in additional revenue or operating income and may have an adverse effect on working capital and earnings. A key component of our growth strategy is to increase sales to both existing and new customers, including large chains, independent operators and provider groups. We intend to accomplish this by: o expanding our e-commerce initiatives and development; o developing focused marketing and distribution programs; o hiring additional direct sales or other personnel; and o increasing our national sales efforts. We cannot assure you that these efforts will result in additional revenues or operating income. As we continue to increase our sales to large chains and consolidating provider groups, we may face competitive pricing pressures. We are expanding our business with large chains and consolidating provider groups, especially in the long-term care market. This may result in competitive pricing pressures. Our gross margins on these large group chains are 300 to 600 basis points lower than average due to: o additional negotiating leverage of large chains; o vendor agreements containing volume discounts; o customer volume specifications; and o service specifications. -17- We depend heavily on our exclusive and semi-exclusive distributorship agreements, the loss of any of which could reduce our revenues and earnings. We distribute over 45,000 medical products manufactured by approximately 5,000 vendors. We rely on these vendors for the manufacture and supply of products. During the 12-month period ended March 30, 2001, however, no vendor relationship accounted for more than 10% of purchases, except for Eastman Kodak, which accounted for approximately less than 15% of the Company's consolidated inventory purchases. One of our significant vendor contracts is with Abbott Laboratories. Abbott may terminate the contract if we do not meet certain sales levels. We have, in the past, renegotiated such sales levels. Our ability to maintain good relations with vendors affects our profitability. Currently, PSS relies on vendors to provide: o field sales representatives' technical and selling support; o agreeable purchasing and delivery terms; o sales performance incentives; o financial support of sales and marketing programs; and o promotional materials. There can be no assurance that we will maintain good relations with our vendors. Our Gulf South subsidiary depends on a limited number of large customers. Consolidation among long-term care providers, including several national hospital and drug wholesale distributors and health care manufacturers, may result in a loss of large customers. Gulf South's business depends on a limited number of large customers for a significant portion of its net sales. As is customary in its industry, Gulf South does not have long-term contracts with its customers and sells on a purchase order basis only. The loss of, or significant declines in, the level of purchases by one or more of these large customers would have a material adverse effect on our business and results of operations. Gulf South has experienced failure to collect accounts receivable from its largest customers, and continued adverse change in the financial condition of any of these customers could have a material adverse effect upon our results of operations or financial condition. If we cannot integrate acquired companies with our business, our profitability may be adversely affected. Even though we may acquire additional companies in the future, we may be unable to successfully integrate the acquired business and realize anticipated economic, operational and other benefits in a timely manner. Integration of an acquired business is especially difficult when we acquire a business in a market in which we have limited or no expertise, or with a corporate culture different from ours. If we are unable to successfully integrate acquired businesses: o we may incur substantial costs and delays; o we may experience other operational, technical or financial problems; o our management's attention and other resources may be diverted; and o our relationships with our key clients and employees may be damaged. Acquisitions may decrease our shareholders' percentage ownership in PSS and require us to incur additional debt. We may issue equity securities in future acquisitions that could be dilutive to our shareholders. We also may incur additional debt and amortization expense related to goodwill and other intangible assets in future acquisitions. This additional debt and amortization expense may reduce significantly our profitability and materially and adversely affect our business, financial condition, and results of operations. -18- Our indebtedness may limit our ability to obtain additional financing in the future and may limit our flexibility to react to industry or economic conditions. In October 1997, we issued $125.0 million of 8.5% Senior Subordinated Notes (the "Notes") due 2007. The Notes are governed by an indenture between PSS, all of our domestic subsidiaries and SunTrust Bank, Central Florida, as trustee. At March 30, 2001, our consolidated long-term indebtedness was $125.0 million under these Notes. For fiscal 2002, we are scheduled to pay approximately $10.7 million in principal and interest for our Notes and capitalized leases. In addition, we have a Credit Facility with a syndicate of lenders for an additional $120.0 million, of which $65.0 million is outstanding as of March 30, 2001. If we default under any of our indebtedness, then we are deemed to be in default under the terms of the indenture and the credit agreement. The level of our indebtedness could: o limit our ability to obtain additional financing in the future for working capital; o limit our ability to make capital expenditures; o limit our acquisition activity; o limit our flexibility in reacting to changes in the industry and economic conditions in general; and o adversely affect our liquidity because a substantial portion of cash flow must be dedicated to debt service and will not be available for other purposes. We believe that our cash flow, together with available borrowings, is sufficient to allow us to meet operating expenses and service our debt requirements in the future. Our belief assumes, among other things, that we will successfully implement our business strategy and that there will be no material adverse developments in our business, liquidity, or capital requirements. However, if we are unable to generate sufficient cash flow from operations to service our indebtedness, we will be forced to adopt an alternative strategy that may include the following options: o reducing or delaying acquisitions and capital expenditures; o selling assets; o restructuring or refinancing our indebtedness; and o seeking additional equity capital. We may not meet our debt covenants. As of March 30, 2001 we were not in compliance with certain covenants under the Amended Credit Agreement. On May 24, 2001, the Company paid all outstanding amounts and obligations due under the Amended Credit Agreement. We face litigation and liability exposure for existing and potential claims. The Company, through its Gulf South Medical Supply subsidiary, Physician Sales & Service subsidiary and/or predecessor companies, has been named as one of many defendants in latex glove product liability claims in various Federal and state courts. The defendants are primarily distributors of certain brands of latex gloves. Currently, state litigation exists in New Hampshire, Illinois, Massachusetts and California, while Federal and/or Federal multi-district litigation is present in Washington, Georgia, Indiana, New Hampshire, Pennsylvania and Ohio. Defense costs are currently allocated by agreement between a consortium of insurers on a pro rata basis for each case depending upon policy years and alleged years of exposure. All of the insurance carriers are defending subject to a reservation of rights. Ultimately, the manufacturers from which the gloves were purchased may assume the defense and liability obligations. The Company intends to vigorously defend the proceeding. The Company has disputed the calculation of a supplemental premium charged by CIGNA upon the termination by the Company of the health insurance program administered by CIGNA. Subject to the execution of a definitive settlement agreement, the Company has agreed in principle to settle the dispute for $2.85 million and has reserved such amount in an escrow account. -19- The Company and certain of its current officers and directors are named as defendants in a purported securities class action lawsuit entitled Jack Hirsch v. PSS World Medical, Inc., et al., Civil Action No. 3:98-cv-502-J-21TEM. The action, which was filed on or about May 28, 1998, is pending in the United States District Court for the Middle District of Florida, Jacksonville Division. An amended complaint was filed on December 11, 1998. The plaintiff alleges, for himself and for a purported class of similarly situated stockholders who allegedly purchased the Company's stock between December 23, 1997 and May 8, 1998, that the defendants engaged in violations of certain provisions of the Exchange Act, and Rule 10b-5 promulgated thereunder. The allegations are based upon a decline in the Company's stock price following announcement by the Company in May 1998 regarding the Gulf South Merger which resulted in earnings below analyst's expectations. The plaintiff seeks indeterminate damages, including costs and expenses. The Company filed a motion to dismiss the first amended complaint on January 25, 1999. The court granted that motion without prejudice by order dated February 9, 2000. Plaintiffs filed their second amended complaint on March 15, 2000. The Company filed a motion to dismiss the second amended complaint on May 1, 2000, which is pending. The Company believes that the allegations contained in the complaint are without merit and intends to defend vigorously against the claims. There can be no assurance that this litigation will be ultimately 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 maintains product liability insurance coverage. The Company is also a party to various legal and administrative legal proceedings and claims arising in the normal course of business. While any litigation contains an element of uncertainty, management, after consultation with outside legal counsel, believes that, other than as discussed above, the outcome of any proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations. We need to retain the services of senior management. Our success depends largely on the efforts and abilities of our senior management, particularly our President. The loss of the services of one or more of such individuals may adversely affect our business. Because of our decentralized operating structure, we are also dependent upon the operations and sales managers for each of our service centers, and other key corporate officers. We need to hire and retain qualified sales representatives and service specialists to continue our sales growth. In our experience, our ability to retain existing customers and attract new customers is dependent upon: o hiring and developing new sales representatives; o adding, through acquisitions, established sales representatives whose existing customers become customers of PSS; o retaining those sales representatives; and o hiring and retaining skilled service specialists in a tight market to maintain radiology and imaging equipment for our Imaging Business. An inability to adequately hire or retain sales representatives or service specialists could limit our ability to expand our business and grow sales. Due to relationships developed between PSS' sales representatives and their customers, upon the departure of a sales representative, we face the risk of losing the representative's customers. This is particularly a risk where the representative goes to work as a sales representative for a competitor. We generally require our sales representatives and service specialists to execute a non-competition agreement as a condition of employment. We have not, however, obtained these agreements from some of these employees. In addition, courts do not always uphold the terms of non-competition agreements. -20- We may not be able to continue to compete successfully with other medical supply companies. The medical supply distribution market is very competitive. Our principal competitors are the few full-line and full-service multi-market medical distributors and direct manufacturers, most of which are national in scope. Many of these national companies: o have sales representatives competing directly with us; o are substantially larger in size; and o have substantially greater financial resources than we do. We also compete with: o local dealers; o mail order firms. Most local dealers are privately owned and operate within limited product lines. Several of our mail order competitors distribute medical supplies on a national or regional basis. Continued consolidation within the health care industry may lead to increased competition. Consolidation within the health care industry has resulted in increased competition by large national distributors and drug wholesalers. In response to competitive pressures, we have lowered and may continue to lower selling prices in order to maintain or increase our market share. These lower selling prices have resulted and may continue to result in lower gross margins. We could face additional competition because: o many of our products can be readily obtained by competitors from various suppliers; o competitors could obtain exclusive rights to market a product to our exclusion; o national hospital, drug wholesale distributors and health care manufacturers could begin focusing their efforts more directly on the long-term care market; o hospitals forming alliances with long-term care facilities to create integrated health care networks may look to hospital distributors and manufacturers to supply their long-term care affiliates; o as provider networks are created through consolidation among physician provider groups, long-term care facilities and other alternate site providers, purchasing decisions may shift to people with whom we have no selling relationship; and o we are increasingly focusing on national accounts where the purchasing decision may not be made by our traditional customers. Therefore, we cannot assure you: o that we will be able to maintain our customer relationships in such circumstances; o that such provider consolidation will not result in reduced operating margins; or o that we will not face increased competition and significant pricing pressure in the future. The continued development and growth of digital radiology equipment may adversely affect profits from our Imaging Business. Recently, certain manufacturers have developed digital radiology equipment that does not rely on film and film products. Film and film products constitute a substantial percentage of the products distributed by our Imaging Business. We cannot assure you that the introduction and proliferation of digital radiology or other technological changes will not result in a material adverse change in the Imaging Business. While we anticipate that we will distribute new imaging technology, we cannot assure you that we will obtain distribution agreements or -21- develop vendor relationships to distribute such new technology. In addition, we cannot assure that we would be able to distribute any such new technology profitably. We maintain a significant investment in product inventory which exposes us to risks of product obsolescence or price decreases. In order to provide prompt and complete service to our customers, we maintain a significant investment in product inventory at our warehouse locations. Although we closely monitor inventory exposure through inventory control procedures and policies, we cannot assure you that: o such procedures and policies will to be effective; or o unforeseen product development or price changes will not occur. In addition, we may assume inventory of distributors we acquire. This inventory may include product lines or operating assets not normally carried or used by us. These product lines or assets may: o be difficult to sell; and o result in our writing off any such unsold inventory or unused assets in the future. We cannot assure you that such risks will not adversely affect our business or results of operations. The expansion of the two-tiered pricing structure may place us at a competitive disadvantage. As a result of the Non-Profit Act of 1944, the medical-products industry is subject to a two-tier pricing structure. Under this structure, certain institutions, originally limited to non-profit hospitals, can obtain more favorable prices for medical products than PSS. The two-tiered pricing structure continues to expand as many large integrated health care providers and others with significant purchasing power demand more favorable pricing terms. Although we are seeking to obtain similar terms from our manufacturers, we cannot assure you that we can obtain such terms. Such a pricing structure, should it persist, may place us at a competitive disadvantage. Our Articles of Incorporation, Bylaws, Rights Agreement and Florida law may inhibit a takeover of PSS. Our Articles of Incorporation and Bylaws and Florida law contain provisions that may delay, deter or inhibit a future acquisition. This could occur even if our shareholders are offered an attractive value for their shares or if a substantial number or even a majority of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of our Board of Directors in connection with the transaction. Provisions that could delay, deter or inhibit offers include the following: o a staggered Board of Directors; o the Affiliated Transaction Statute; and o the Control-Share Acquisition Statute. In addition, the rights of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of our preferred stock that may be issued in the future and that may be senior to the rights of holders of our common stock. On April 20, 1998, our Board of Directors approved a Shareholder Protection Rights Agreement which provides for one preferred stock purchase right in respect of each share of our common stock. These rights become exercisable upon a person or group of affiliated persons acquiring 15% or more of our then-outstanding common stock by all persons other than an existing 15% shareholder. This Rights Agreement also could discourage bids for your shares of common stock at a premium and could have a material adverse effect on the market price of your shares. -22- Item 2. Properties At March 30, 2001, the Company maintained 99 service centers providing service to 50 states throughout the United States, as well as Belgium and Germany. All locations are leased by the Company with the exception of the Imaging Business service centers located in Syracuse, New York, and Dallas, Texas, as well as the International Business service center located in Leuven, Belgium, which was sold in May 2001. The following table identifies the locations of the Company's service centers and the areas that they serve. PHYSICIAN SUPPLY BUSINESS
Service Center Location States Serviced Service Center Location States Serviced ------------------------ ---------------------- ------------------------ --------------------- Atlanta, GA AL, GA Memphis, TN AR, MO, MS, TN Baltimore, MD MD, PA, VA Minneapolis, MN MN, ND, SD, WI Birmingham, AL AL, MS New Orleans, LA AL, FL, LA, MS Charlotte, NC NC, SC, TN, VA Norfolk, VA NC, VA Chattanooga, TN AL, GA, TN Omaha, NE IA, NE, KS, Chicago, IL IA, IL, IN, MI, WI Orlando, FL FL Cincinnati, OH IN, IL, KY, OH, WV Phoenix, AZ AZ, NV Cleveland, OH IN, MI, NH, OH, VA, WA Pittsburgh, PA MD, NY, OH, PA, WV Columbia, SC GA, SC Portland, OR CA, OR, WA Dallas, TX AR, LA, OK, TX Raleigh, NC NC, SC, VA Deerfield Beach, FL FL Richmond, VA VA Denver, CO CO, NM, WY Roanoke, VA KY, VA, WV Honolulu, HI HI, Guam, Saipan, Rochester, NY NY, PA American Samoa, Western Samoa Houston, TX LA, TX Salt Lake City, UT ID, MT, NV, UT, WY Jackson, MS MS, LA San Antonio, TX TX Jacksonville, FL FL, GA, SC San Diego, CA AZ, CA Kansas City, KS MO San Francisco, CA CA, NV Knoxville, TN KY, NC,IL, TN, VA Seattle, WA AK, WA Lafayette, LA AL, GA, LA, TN, TX St. Louis, MO AR, IL, MO Little Rock, AR AR, MO, TX St. Petersburg, FL FL Long Island, NY NY Tallahassee, FL AL, FL, GA Los Angeles, CA (North) CA Tulsa, OK AR, KS, MD, OK Los Angeles, CA (South) CA Union, NJ DE, MD, NJ, NY, PA Louisville, KY IN, IL, KY, OH Wareham, MA CT, MA, ME, NH, RI, VT Lubbock, TX AZ, CO, NM, OK, TX
-23- IMAGING BUSINESS
Service Center Location States Serviced Service Center Location States Serviced ------------------------ ---------------------- ------------------------ --------------------- Albany, NY CT, MA, NJ, NY, VT, Lynnwood, WA AK, ID, MT, OR, WA Albuquerque, NM AZ, CO, NM, TX Machesney Park, IL IA, IL, WI Atlanta, GA GA, SC Memphis, TN AR, MS, TN Apopka, FL AL, FL, GA, NC, SC, VA Miro Loma, CA AZ, CA, NV Birmingham, AL AL, FL, MS New Orleans, LA AL, FL, LA, MS, TN Charlotte, NC NC, SC Phoenix, AZ (2) AZ Clinton Township, MI MI, OH Pompano Beach, FL FL Columbia, SC SC, NC Raleigh, NC NC Dallas, TX AR, LA, OK, TX Roanoke, VA NC, TN, VA, WV Del City, OK KS, OK Rochester, NY OH, NY, PA Delran, NJ MD, NJ, NY, PA, VA, Salt Lake City, UT ID, NV, UT, WY Fresno, CA CA San Antonio, TX TX Houston, TX TX San Leandro, CA CA, NV, OR, WA Indianapolis, IN IN, KY Schofield, WI IA, MI, MN, WI Jacksonville, FL FL, GA St. Louis, MO IL, KY, MO Knoxville, TN GA, KY, TN Syracuse, NY NY, PA Las Vegas, NV NV, UT Tampa, FL FL LONG-TERM CARE BUSINESS Service Center Location States Serviced Service Center Location States Serviced ------------------------ ---------------------- ------------------------ --------------------- Atlanta, GA AL, GA, SC, TN Madison, WI IA, MD, MN, NE, WI Columbus, OH IN, OH, PA, WV Manchester, NH ME, NH, RI Dallas, TX KS, LA, NM, OK, TX Orlando, FL FL, GA Denver, CO CO, WY Omaha, NE IA, KS, MO, NE, ND, SD Harrisburg, PA NJ, NY, OH, PA, VA, WV Raleigh, NC NC, SC, VA, WV Jackson, MS AL, LA, MS, TN Sacramento, CA CA, OR, WA Los Angeles, CA CA, NV San Antonio, TX LA, NM, TX INTERNATIONAL BUSINESS (a) Service Center Location States Serviced Service Center Location States Serviced - ------------------------ ---------------------- ------------------------ --------------------- Leuven, Belgium Belgium Dulmen, Germany Germany
(a) The Company sold its European operations subsequent to year-end. In the aggregate, the Company's service centers consist of approximately 3 million square feet, of which all is leased, with the exception of the Imaging Business locations in Syracuse, New York, and Dallas, Texas, as well as the International Business location in Leuven, Belgium. The lease agreements have expiration dates ranging from May 10, 2001 to December 31, 2006. The Company's service centers range in size from approximately 1,000 square feet to 90,500 square feet. The corporate offices of PSS consist of approximately 91,000 square feet of leased office space located at 4345 Southpoint Boulevard, Jacksonville, Florida 32216. The lease for this office space expires in March 2007. As of March 30, 2001, the Company's facilities provided adequate space for the Company's operations. Throughout the Company's history of growth, the Company has been able to secure required facilities to meet its operating requirements. -24- Item 3. Legal Proceedings The Company, through its Gulf South Medical Supply subsidiary, Physician Sales & Service subsidiary and/or predecessor companies, has been named as one of many defendants in latex glove product liability claims in various Federal and state courts. The defendants are primarily distributors of certain brands of latex gloves. Currently, state litigation exists in New Hampshire, Illinois, Massachusetts and California, while Federal and/or Federal multi-district litigation is present in Washington, Georgia, Indiana, New Hampshire, Pennsylvania and Ohio. Defense costs are currently allocated by agreement between a consortium of insurers on a pro rata basis for each case depending upon policy years and alleged years of exposure. All of the insurance carriers are defending subject to a reservation of rights. Ultimately, the manufacturers from which the gloves were purchased may assume the defense and liability obligations. The Company intends to vigorously defend the proceeding. The Company has disputed the calculation of a supplemental premium charged by CIGNA upon the termination by the Company of the health insurance program administered by CIGNA. Subject to the execution of a definitive settlement agreement, the Company has agreed in principle to settle the dispute for $2.85 million and has reserved such amount in an escrow account. The Company and certain of its current officers and directors are named as defendants in a purported securities class action lawsuit entitled Jack Hirsch v. PSS World Medical, Inc., et al., Civil Action No. 3:98-cv-502-J-21TEM. The action, which was filed on or about May 28, 1998, is pending in the United States District Court for the Middle District of Florida, Jacksonville Division. An amended complaint was filed on December 11, 1998. The plaintiff alleges, for himself and for a purported class of similarly situated stockholders who allegedly purchased the Company's stock between December 23, 1997 and May 8, 1998, that the defendants engaged in violations of certain provisions of the Exchange Act, and Rule 10b-5 promulgated thereunder. The allegations are based upon a decline in the Company's stock price following announcement by the Company in May 1998 regarding the Gulf South Merger which resulted in earnings below analyst's expectations. The plaintiff seeks indeterminate damages, including costs and expenses. The Company filed a motion to dismiss the first amended complaint on January 25, 1999. The court granted that motion without prejudice by order dated February 9, 2000. Plaintiffs filed their second amended complaint on March 15, 2000. The Company filed a motion to dismiss the second amended complaint on May 1, 2000, which is pending. The Company believes that the allegations contained in the complaint are without merit and intends to defend vigorously against the claims. There can be no assurance that this litigation will be ultimately 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 maintains product liability insurance coverage. The Company is also a party to various legal and administrative legal proceedings and claims arising in the normal course of business. While any litigation contains an element of uncertainty, management, after consultation with outside legal counsel, believes that, other than as discussed above, the outcome of any proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None. -25- PART II Item 5. Market for the Registrant's Common Shares and Related Shareholder Matters Shares of PSS World Medical, Inc.'s Common Stock are quoted on the NASDAQ National Market under the ticker symbol "PSSI." The following table reflects the range of the NASDAQ reported high and low closing sale prices of the Company's Common Stock during the periods indicated: Quarter Ended High Low ------------------------------------------------ ------ ----- July 2, 1999.................................... 12.75 8.78 October 3, 1999................................. 11.94 8.41 December 31, 1999............................... 11.38 6.53 March 31, 2000.................................. 10.88 6.22 June 30, 2000................................... 10.31 6.25 September 30, 2000.............................. 7.16 3.63 December 29, 2000............................... 5.00 2.41 March 30, 2001.................................. 5.56 3.88 As of March 30, 2001, there were 1,463 holders of record and approximately 14,000 beneficial holders of the Company's Common Stock. Since inception, the Company has neither declared nor paid cash dividends on the Common Stock. The Company expects that earnings will be retained for the growth and development of the Company's business. Accordingly, the Company does not anticipate that any dividends will be declared on the Common Stock for the foreseeable future. Shareholder Rights Plan. In April 1998, the Board of Directors of the Company adopted a shareholder rights plan in which a dividend of one preferred stock purchase right was declared for each outstanding share of common stock of the Company. Each right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company, at an exercise price of $115 per one one-thousandth of a share, subject to adjustment. The rights are not currently exercisable but will become exercisable 10 business days after the Company announces that a person or group has acquired, or has commenced a tender or exchange offer for, 15 percent or more of the Company's common stock. Subsequent to the acquisition of 15 percent or more of the Company's common stock, the Company may exchange each of the rights for a share of common stock. The Company may also amend the shareholder rights plan prior to the acquisition by a shareholder of 15 percent or more of the Company's common stock. The rights under the plan expire on April 20, 2008, unless earlier exchanged or terminated. The rights have certain anti-takeover effects and could cause substantial dilution to a person or group that attempts to acquire the Company in certain circumstances, though they should not interfere with any merger or other business combination approved by the Board of Directors. -26- Item 6. Selected Financial Data The following selected financial data of the Company for fiscal years 1997 through 2001 have been derived from the Company's consolidated financial statements, which give retroactive effect to the mergers accounted for as pooling of interests.
Fiscal Year Ended ------------------------------------------------------------------------ 1997 1998 1999 2000 2001 ----------- ---------- ---------- ---------- ----------- (Dollars in Thousands, Except Per Share Data) Income Statement Data: Net sales $1,167,076 $1,382,722 $1,567,167 $1,803,990 $1,814,805 Gross profit 276,308 354,314 402,022 448,812 416,415 G&A and selling expenses 259,261 322,235 328,169 404,103 429,389 International Business exit charge -- -- -- -- 14,917 Income (loss) before cumulative effect of accounting change 13,259 15,299 43,741 22,184 (36,061) Cumulative effect of accounting change -- -- -- (1,444) -- Net income (loss) 13,259 15,299 43,741 20,740 (36,061) Basic earnings per share: Income (loss) before accounting change $0.20 $0.22 $0.62 $0.31 $(0.51) Net income (loss) $0.20 $0.22 $0.62 $0.29 $(0.51) Diluted earnings per share: Income (loss) before accounting change $0.20 $0.22 $0.61 $0.31 $(0.51) Net income (loss) $0.20 $0.22 $0.61 $0.29 $(0.51) Weighted average shares outstanding: Basic 66,207 69,575 70,548 70,966 71,187 Diluted 66,957 70,545 71,398 71,185 71,309 Balance Sheet Data: Working capital $ 267,754 $ 376,239 $ 355,277 $ 414,071 $ 316,291 Total assets 510,376 686,737 743,381 873,417 772,634 Long-term liabilities 8,459 138,178 155,553 262,152 197,253 Total equity 350,397 380,060 416,560 439,627 404,302
-27-
Fiscal Year Ended ------------------------------------- 1999 2000 2001 --------- --------- ---------- (Dollars in thousands, except per share Data) Other Financial Data: Income (loss) from operations $73,853 $44,709 $(27,891) Plus: Other Income 6,618 10,437 1,689 Plus: Depreciation and amortization 19,498 20,288 24,970 --------- --------- ---------- EBITDA (a) $99,969 $75,434 $ (1,232) --------- --------- ---------- Interest expense $11,522 $15,457 $20,394 Interest coverage (b) 8.7x 4.9x N/A EBITDA Margin (c) 6.4% 4.2% N/A Cash (used in) provided by operating activities $(18,704) $16,971 $69,860 Cash used in investing activities (28,914) (94,322) (27,375) Cash provided by (used in) financing activities 7,590 96,659 (68,525)
Refer to the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of cash flows from operating, investing and financing activities. (a) EBITDA represents income (loss) from operations, plus other income, plus depreciation and amortization, and excludes net interest expense and provision for income taxes. 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. (b) Interest coverage represents the Ratio of EBITDA to interest expense. (c) EBITDA margin represents the ratio of EBITDA to net sales. -28- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the consolidated financial condition and consolidated results of operations of PSS should be read in conjunction with the more detailed information contained in the consolidated financial statements and notes thereto included elsewhere in this Form 10-K. All dollar amounts presented below are in millions, except per share data, unless otherwise noted. COMPANY GROWTH During fiscal years 1997 through 2000, the Company had grown rapidly through mergers and acquisitions, same-center growth, and new-center development. During the most recent two fiscal quarters, the Company has focused on stabilizing this growth. The number of Company service centers has grown from two at the end of fiscal year 1984 to 99 as of March 30, 2001, including 49 Physician Supply Business service centers, 34 Imaging Business service centers, 14 Long-Term Care Business Service centers and 2 International Business service centers. In order of priority, the Company's growth has been accomplished primarily through: (i) acquiring local and regional Imaging Business medical products distributors; (ii) acquiring local and regional Physician Supply Business medical-products distributors; (iii) acquiring Gulf South Medical Supply, Inc. thereby forming the basis of the Company's Long-Term Care Business; (iv) increasing sales from existing service centers; and (v) increasing sales of diagnostic equipment. The following table depicts the number of service centers, sales and service representatives, and states served by the Company for the fiscal years indicated. See Item 2.--Properties for a list of the Company's service centers.
Fiscal Year Ended (1) ------------------------------------------- 1997 1998 1999 2000 2001 ------ ----- ----- ------ ----- Total Company: Sales representatives....................................... 924 957 1,118 1,122 1,068 Service specialists......................................... 223 390 727 900 850 Service centers............................................. 103 111 110 101 99 States served............................................... 50 50 50 50 50 Physician Supply Business: Sales representatives....................................... 720 703 731 735 719 Service centers............................................. 61 61 56 51 49 States served............................................... 50 50 50 50 50 Imaging Business: Sales representatives....................................... 73 116 194 230 210 Service specialists......................................... 223 390 727 900 850 Service centers............................................. 21 25 37 34 34 States served............................................... 16 27 41 42 42 Long-Term Care Business: Sales representatives....................................... 107 110 170 131 119 Service centers............................................. 19 22 14 14 14 States served............................................... 50 50 50 50 50 International Business: Sales representatives....................................... 24 28 23 26 20 Service centers............................................. 2 3 3 2 2 Countries served............................................ 5 5 5 4 2
(1) Excludes pre-acquisition data of companies acquired by PSS World Medical, Inc. ACQUISITION PROGRAM The Physician Supply Business has grown from one service center located in Jacksonville, Florida, in 1983 to 49 at the end of fiscal 2001. The Imaging Business began with acquisitions in fiscal year 1997 and has grown primarily -29- through acquisitions to 34 service centers to date. The Long-Term Care Business was developed through the acquisition of Gulf South Medical Supply, Inc. in March 1998 and has acquired seven long-term care companies during fiscal years 1999 and 2001. 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) -------------------------------------------------------------- 1997 1998 1999 2000 2001 -------- -------- -------- -------- --------- Number of acquisitions...................... 10 15 27 24 1 Prior year revenues for acquired companies (2) $241,700 $498,942 $294,428 $173,664 $4,650
(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. For the next 12 to 18 months, the Company is focusing primarily on the operations of its existing operations. OPERATING HIGHLIGHTS The following tables set forth information regarding the Company's net sales by business.
Fiscal Year Ended -------------------------------------- 1999 2000 2001 --------- --------- --------- Net Sales Physician Supply Business................................... $ 677.4 $ 708.7 $ 689.4 Imaging Business............................................ 526.4 704.3 737.9 Long-Term Care Business..................................... 343.5 366.6 367.6 International Business...................................... 19.9 24.4 19.9 --------- --------- --------- Total Company...................................... $1,567.2 $ 1,804.0 $ 1,814.8 ========= ========= =========
Fiscal Year Ended -------------------------------------- 1999 2000 2001 --------- --------- --------- Percentage of Net Sales Physician Supply Business................................... 43.2% 39.3% 38.0% Imaging Business............................................ 33.6 39.0 40.7 Long-Term Care Business..................................... 21.9 20.3 20.2 International Business...................................... 1.3 1.4 1.1 --------- --------- --------- Total Company...................................... 100.0% 100.0% 100.0% ========= ========= =========
Fiscal Year Ended -------------------------------------- 1999 2000 2001 --------- --------- --------- Gross Profit Trends Total Company 25.7% 24.9% 22.9%
-30-
Fiscal Year Ended -------------------------------------- 1999 2000 2001 --------- --------- --------- Income (Loss) From Operations Physician Supply Business................................... $ 42.7 $ 32.7 $17.3 Imaging Business............................................ 16.3 20.3 (1.4) Long-Term Care Business..................................... 17.2 (5.0) (15.5) International Business...................................... (2.3) (3.3) (28.3) --------- --------- --------- Total company...................................... $ 73.9 $ 44.7 $(27.9) ========= ========= =========
Fiscal Year Ended ----------------------- 2000 2001 --------- --------- Operating Trends: Average Days Sales Outstanding.................... 55.5 51.7 Average Inventory Turnover........................ 8.2x 8.4x Accounts receivable, net of allowances, were $284.4 million and $236.8 million at March 31, 2000 and March 30, 2001, respectively. Inventories were $178.0 million and $154.7 million as of March 31, 2000 and March 30, 2001, respectively. The following table sets forth certain liquidity trends of the Company for the periods presented (in millions): Fiscal Year Ended ----------------------- 2000 2001 -------- --------- Liquidity Trends: Cash and Investments............................. $ 64.7 $ 34.7 Working Capital.................................. 414.1 316.3 RESULTS OF OPERATIONS The table below sets forth for each of the fiscal years 1999 through 2001, certain financial information as a percentage of net sales. The following financial information includes the pre-acquisition financial information of companies acquired in transactions accounted for as poolings of interests.
Fiscal Year Ended ------------------------------ 1999 2000 2001 ------ ------ ------ Income Statement Data Net sales........................................................... 100.0% 100.0% 100.0% Gross profit....................................................... 25.7 24.9 22.9 General and administrative expenses................................. 14.7 16.0 17.3 Selling expenses.................................................... 6.2 6.5 6.3 Operating income.................................................... 4.7 2.5 (1.5) Net income ........................................................ 2.8 1.1 (2.0)
FISCAL YEAR ENDED MARCH 30, 2001 VERSUS FISCAL YEAR ENDED MARCH 31, 2000 Net Sales. Net sales for fiscal 2001 totaled $1.81 billion, an increase of $10.8 million, or 0.6%, over the fiscal 2000 total of $1.80 billion. During the third and fourth quarter of fiscal 2000, two of the Company's most -31- significant suppliers had manufacturing product recalls and production issues that materially disrupted availability of products to the Physician Supply and Imaging Businesses. Although the Company has been successful in implementing strategies to convert and replace manufacturer recalled products in its Physician Supply Business, and replace with new products the revenues interrupted by supplier backorders in the Imaging Business, it has not fully recovered to historical run rates. On a comparative basis, the Imaging Business reported an increase in net sales during fiscal 2001 primarily due to the full year impact of revenues associated with acquisitions completed in fiscal 2000. In addition, the Long-Term Care Business has continued to maintain revenues while tightening credit policies. Gross Profit. Gross profit for fiscal 2001 totaled $416.4 million, a decrease of $32.4 million, or 7.2%, over the fiscal 2000 gross profit of $448.8 million. The gross profit decrease over the prior fiscal year was primarily attributable to i) the increased mix of lower margin products that replaced higher margin products impacted by product recalls and vendor supply interruptions in the Physician Supply and Imaging Businesses, ii) increased fixed service costs resulting from Imaging Business acquisitions during fiscal 2000, and iii) continued margin pressures in the Long-Term Care Business as a result of its large chain customers renegotiating prices due to changes in the way such customers are reimbursed by the government. In addition, during fiscal 2001, the Physician Supply and Imaging Businesses recorded inventory write-downs of approximately $4.1 million and $1.7 million, respectively, for inventory the Company has discontinued selling due to the end of certain manufacturer relationships and changes in policy related to the amortization of demonstration equipment held in inventory. As a result of an analysis of the Company's accounts receivable records during the fourth quarter of fiscal 2001, the Company recorded adjustments to reduce sales and accounts receivable by $1.6 million, $1.9 million, and $0.5 million during the first, second, and third quarters of fiscal 2001, respectively. In addition, in connection with the Company's year end physical inventory procedures, the Company identified a $3.8 million adjustment to cost of goods sold and vendor liabilities, which applies to the second quarter of fiscal 2001. In connection with the restatements discussed above, the Company's independent auditors, Arthur Andersen, advised the Company in writing that they noted certain matters involving internal controls that they considered to be material weaknesses. These matters involved inventory, accounts payable, sales, and accounts receivable procedures. In order to remedy this situation, the Company has implemented or is in the process of implementing the corrective policies and procedures recommended by Arthur Andersen as well as additional policies and procedures identified by management. During fiscal 2001, the Company continued to experience margin pressures in the Long-Term Care Business resulting from large chain customers renegotiating prices due to the implementation of the Prospective Pay System ("PPS"). The Company expects this trend to continue in the Long-Term Care Business. General and Administrative Expenses. General and administrative expenses for fiscal 2001 totaled $314.2 million, an increase of $26.5 million, or 9.2%, from the fiscal 2000 total of $287.7 million. General and administrative expenses as a percentage of net sales, increased to 17.3% for fiscal 2001 from 16.0% for fiscal 2000. In addition to typical general and administrative expenses, this caption includes charges related to merger activity, restructuring activity, and other special items. The following table summarizes charges included as a component of general and administrative expenses in the accompanying consolidated statements of operations: -32- 2001 2000 ---------- --------- Merger costs and expenses................... $ 5,588 $ 1,700 Restructuring costs and expenses............ 8,708 13,245 Acceleration of depreciation................ 1,504 -- Long-Term Care Business bad debt charge..... 19,991 -- Goodwill impairment charge.................. -- 517 Operational tax charge...................... (749) (1,221) Other....................................... 3,789 -- ---------- --------- $ 38,831 $ 14,241 ========== ========= Merger Costs and Expenses Refer to Note 3, Charges Included in General and Administrative Expenses, in the footnotes to the accompanying consolidated financial statements for the Company's policy related to merger costs and expenses. Merger costs and expenses for fiscal 2001 and 2000 include $989 and $2,300, respectively, of charges for merger costs expensed as incurred. At the end of each quarter, management re-evaluates its plans and adjusts previous estimates. During fiscal 2001 and 2000, the Company reversed approximately $155 and $1,602, respectively, of merger costs and expenses previously established under prior plans, of which $148 and $1,437 related to accrued lease termination costs. Refer to Note 4, Accrued Merger and Restructuring Costs and Expenses, in the footnotes to the accompanying consolidated financial statements for further discussion regarding merger plans. Effective February 1, 2000, the Board of Directors approved and adopted the PSS World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical, Inc. Corporate Office Employee Retention Bonus Plan (collectively the "Retention Plans"). As part of the Company's strategic alternatives process, management adopted these plans to retain certain officers and key employees during the transition period. The total costs related to these plans is approximately $10,059 of which $4,754 and $1,002 were expensed during the years ended March 30, 2001 and March 31, 2000, respectively, and $2,872, and $1,431 will be recognized as expense in fiscal 2002 and 2003, respectively. Restructuring Costs and Expenses Refer to Note 4, Accrued Merger and Restructuring Costs and Expenses, in the footnotes to the accompanying consolidated financial statements for further discussion regarding merger plans. Fiscal 2001 During the quarter ended December 29, 2000, management approved and adopted a formal plan, among other things, to restructure certain leadership positions within the Company ("Plan E"). This plan includes costs related to the severance of certain members of senior management including the Company's former Chairman and Chief Executive Officer. Accordingly, the Company recorded restructuring costs and expenses of $4,887 at the commitment date of the restructuring plan adopted by management and an additional $644 of severance costs during the quarter ended March 30, 2001. The Company also recorded $3,446 of restructuring costs as incurred during the year ended March 30, 2001. In addition, the Company reversed $269, which primarily related to branch shutdown costs, previously established as restructuring costs under prior plans. Fiscal 2000 During the quarter ended September 30, 1999, management approved and adopted a formal plan to restructure certain operations of Gulf South ("Plan C"), an additional component to the previously established Plans A and B. This restructuring plan identified five additional distribution centers and the Gulf South corporate facility as redundant or inadequate for future operations. As a result, these locations were closed and made permanently idle. Accordingly, the Company recorded restructuring costs and -33- expenses of $4,967 at the commitment date of the restructuring plan adopted by management. Such costs include branch shutdown costs, lease termination costs, and involuntary employee termination costs of $494, $2,915, and $1,558, respectively. Restructuring costs and expenses for the year ended March 31, 2000 also included $9,213 of charges that were expensed as incurred and primarily relate to other exit costs. Other exit costs include costs to pack and move inventory, costs to set up new facilities, employee relocation costs, and other related facility closure costs. In addition, the Company reversed $1,341 of restructuring costs into income, which related to over-accrual for lease termination costs, and involuntary employee termination costs. During the quarter ended March 31, 2000, management approved and adopted another formal plan to restructure the Imaging Business' sales and service organization and the shut down of two facilities ("Plan D"). Accordingly, the Company recorded restructuring costs and expenses of $318 at the commitment date of the restructuring plan adopted by management. Restructuring costs and expenses for the quarter ended March 31, 2000 also included $88 of charges that were expensed as incurred and primarily relate to other exit costs. Other exit costs include costs to pack and move inventory, costs to set up new facilities, employee relocation costs, and other related facility closure costs. Acceleration of Depreciation During the quarter ended December 29, 2000, the Company identified certain assets for replacement due to the implementation of its Enterprise Resource Planning ("ERP") system. Pursuant to SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of ("SFAS 121"), the Company evaluated the recoverability of the assets. Based on the Company's analysis, the impairment did not exist at the division level; therefore, management reviewed its estimated useful lives in accordance with Accounting Principles Board No. 20, Accounting Changes ("APB 20"), and recorded $1,504 of accelerated depreciation. Long-Term Care Business Bad Debt Charge During the quarter ended December 29, 2000, the Company recorded $19,991 of bad debt expense to increase the accounts receivable reserves at Gulf South Medical. The increase to the reserve balance was primarily attributed to changes in assumptions concerning customers currently in bankruptcy based on information acquired during the second quarter, including the fact that the Company did not receive critical vendor designation for certain customers as it had received for other bankrupt customers in the past. In addition, the increase was also attributed to i) changes in reserve assumptions for non-performing customers based on the change in assumptions discussed above, ii) changes in management's credit policies and procedures, and iii) changes in credit and collection department management. Based on information currently available, management believes the Company has recorded appropriate reserves for uncollectible receivables. Goodwill Impairment Charge During fiscal 2000, the Imaging Business closed its Metro New York facility. The closure of this facility triggered an asset impairment as determined under SFAS 121. As a result, goodwill of $517 was written off during fiscal 2000. Operational Tax Charge During the years ended March 30, 2001 and March 31, 2000, the Company performed an analysis and reversed $749 and $1,221, respectively, of a previously recorded operating tax charge reserve. Other During the year ended March 30, 2001, the Company incurred $3,695 primarily relating to legal and professional fees and other costs pursuant to the Company's strategic alternatives process and severance costs. In addition, the Company incurred $94 of costs related to acquisitions not consummated. -34- Selling Expenses. Selling expenses for fiscal 2001 totaled $115.2 million, a decrease of $1.2 million, or 1.0%, over the fiscal 2000 total of $116.4 million. Selling expense as a percentage of net sales was approximately 6.3% and 6.5% for fiscals 2001 and 2000, respectively. The decrease in selling expense as a percentage of net sales is a result of a reduction in sales representatives primarily compensated under fixed pay arrangements. International Business Exit Charge. During the quarter ended December 29, 2000, the Company adopted a plan for divesting the Company's European operations. As a result, the Company recorded approximately $14.9 million as an International Business exit charge. Subsequent to year end, the Company sold its European operations. (Loss)/Income from Operations. The Company incurred an operating loss for fiscal 2001 of $27.9 million compared to operating income of $44.7 million for the fiscal 2000 primarily due to the factors discussed above. Interest Expense. Interest expense for fiscal 2001 totaled $20.4 million, an increase of $4.9 million, or 31.9%, over the fiscal 2000 total of $15.5 million. The increase in interest expense in fiscal 2001 over fiscal 2000 was due to i) a higher average revolving loan balance outstanding over the prior year, ii) higher incremental bank borrowing rates and LIBOR rates over the prior year, iii) higher incremental interest rates charged on revolving loan balances due to increases in the Company's leverage ratio as measured under the senior credit facility, and iv) the accelerated amortization of $1.1 million of debt issuance costs in the quarter ended March 30, 2001 in anticipation of refinancing the senior credit facility subsequent to year-end. Interest and Investment Income. Interest and investment income for fiscal 2001 totaled $2.7 million, an increase of $0.9 million, or 47.2%, over the fiscal year 2000 total of $1.8 million. The increase primarily resulted from an increase in the average invested balances over the prior year and an increase in the average investment interest rate of return over the prior year. The increase was partially offset by a $1.2 million other than temporary impairment on an available for sale security. Other Income. Other income for fiscal 2001 totaled $1.7 million, a decrease of $8.7 million, or 83.8%, over the fiscal 2000 total of $10.4 million. Other income consists of finance charges on customer accounts. Other income for fiscal year 2000 includes $6.5 million received due to a favorable medical x-ray film antitrust settlement claim. In addition, the decrease in other income resulted from improved accounts receivable agings that lowered finance charges on customer accounts and a decrease in gains on the sale of fixed assets over prior year amounts. (Benefit)/Provision for Income Taxes. Benefit for income taxes was $7.8 million for fiscal 2001, a change of $27.2 million from the provision for income taxes of $19.3 million for fiscal 2000. This decrease primarily resulted from the decrease in taxable income due to the factors discussed above. The effective income tax rate was 17.8% in fiscal 2001 versus 46.6% in fiscal 2000. The effective tax rate is generally higher than the Company's statutory rate in fiscal 2000 due to the nondeductible nature of certain merger related costs and the impact of the Company's foreign subsidiary. In addition, the initial non-deductible nature of the International Business exit charge negatively impacted the tax benefit in fiscal 2001. Net (Loss)/Income. The Company incurred a net loss for fiscal 2001 of $36.1 million compared to net income of $20.7 million for fiscal 2000 primarily due to the factors described above. FISCAL YEAR ENDED MARCH 31, 2000 VERSUS FISCAL YEAR ENDED APRIL 2, 1999 Net Sales. Net sales for fiscal 2000 totaled $1.80 billion, an increase of $236.8 million, or 15.1%, over the fiscal 1999 total of $1.57 billion. The increase in sales can be attributed to (i) net sales from the acquisition of companies during fiscal 1999 and 2000 accounted for as purchases; (ii) internal sales growth of centers operating at least two years; (iii) the Company's focus on diagnostic equipment sales; (iv) incremental sales generated in connection with exclusive and semi-exclusive vendor relationships; but (v) offset by sales lost from manufacturer recalls and supply issues. -35- Gross Profit. Gross profit for fiscal 2000 totaled $448.8 million, an increase of $46.8 million, or 11.6%, over the fiscal 1999 total of $402.0 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 24.9% and 25.7% for fiscal 2000 and 1999, respectively. Although there has been considerable gross margin pressure from competition and a consolidating customer base, as well as internal pressure from an increase of Imaging Business revenues at a lower margin, the Company has successfully maintained its overall gross margins. The slight decrease in gross margin as a percentage of sales is attributable to the expansion of imaging revenues with lower gross profit margins and loss of higher margin equipment in the fourth quarter due to product recall and supply issues offset by (i) an increase in the sales mix of higher margin diagnostic equipment and service, (ii) an increase in sales of higher margin private label supplies by all division, and (iii) the ability to negotiate lower product purchasing costs which resulted from increased purchasing volume subsequent to the Gulf South acquisition. During fiscal 2000, the Company experienced continued margin pressures in the Long-Term Care Business resulting from large chain customers renegotiating prices due to the implementation of PPS. The Company expects this trend to continue in the Long-Term Care Business. General and Administrative Expenses. General and administrative expenses for fiscal 2000 totaled $287.7 million, an increase of $56.9 million, or 24.7%, from the fiscal 1999 total of $230.8 million. General and administrative expenses as a percentage of net sales, increased to 16.0% for fiscal 2000 from 14.7% for fiscal 1999. The increase in general and administrative expenses as a percentage of net sales was a result of (i) write-offs, reserves and costs associated with long-term care customer receivables, (ii) loss of revenues from manufacturer recalls and supply issues without loss of costs associated with servicing those products, (iii) integration of systems and branch shutdowns in the Imaging division, (iv) incremental costs associated with product recalls, replacement, transition and training of new product replacing old products without revenues for replacement products, or new products, and (v) costs and lack of focus associated with the Company's strategic alternatives process. In addition to typical general and administrative expenses, this caption includes charges related to merger activity, restructuring activity, and other special items. The following table summarizes charges included as a component of general and administrative expenses in the accompanying consolidated statements of operations: 2000 1999 --------- -------- Merger costs and expenses.................... $ 1,700 $ 4,371 Restructuring costs and expenses............. 13,245 4,922 Acceleration of depreciation................. -- 5,379 Goodwill impairment charge................... 517 -- Operational tax charge....................... (1,221) -- Other........................................ -- 1,010 --------- -------- $ 14,241 $ 15,682 ========= ======== Merger Costs and Expenses Refer to Note 3, Charges Included in General and Administrative Expenses, in the footnotes to the accompanying consolidated financial statements for the Company's policy related to merger costs and expenses. Merger costs and expenses for fiscal 1999 include $2,818 of charges recorded at the commitment date of an integration plan adopted by management. Merger costs and expenses for fiscal 2000 and 1999 include $2,300 and $2,481, respectively, of charges for merger costs expensed as incurred. At the end of each quarter, management reevaluates its plans and adjusts previous estimates. During fiscal 2000 and 1999, the Company reversed approximately $1,602 and $928, respectively, of merger costs and expenses previously established under prior plans, of which $1,437 related to accrued lease termination costs in fiscal 2000 and $777 related to direct transactions costs in fiscal 1999. Refer to Note 4, Accrued Merger and Restructuring Costs and Expenses, in the footnotes to the accompanying consolidated financial statements for further discussion regarding merger plans. -36- Effective February 1, 2000, the Board of Directors approved and adopted the PSS World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical, Inc. Corporate Office Employee Retention Bonus Plan (collectively the "Retention Plans"). As part of the Company's strategic alternatives process, management adopted these plans to retain certain officers and key employees during the transition period. The total costs related to these plans is approximately $10,059 of which $1,002 was expensed during the year ended March 31, 2000, and $4,754, $2,872, and $1,431 will be recognized as expense in fiscal 2001, 2002 and 2003, respectively. Restructuring Costs and Expenses Refer to Note 4, Accrued Merger and Restructuring Costs and Expenses, in the footnotes to the accompanying consolidated financial statements for further discussion regarding merger plans. Fiscal 2000 During the quarter ended September 30, 1999, management approved and adopted a formal plan to restructure certain operations of Gulf South ("Plan C"), an additional component to the previously established Plans A and B. This restructuring plan identified five additional distribution centers and the Gulf South corporate facility as redundant or inadequate for future operations. As a result, these locations were closed and made permanently idle. Accordingly, the Company recorded restructuring costs and expenses of $4,967 at the commitment date of the restructuring plan adopted by management. Such costs include branch shutdown costs, lease termination costs, involuntary employee termination costs of $494, $2,915, and $1,558, respectively. Restructuring costs and expenses for the year ended March 31, 2000 also included $9,213 of charges that were expensed as incurred and primarily relate to other exit costs. Other exit costs include costs to pack and move inventory, costs to set up new facilities, employee relocation costs, and other related facility closure costs. In addition, the Company reversed $1,341 of restructuring costs into income, which related to over-accrual for lease termination costs, and involuntary employee termination costs. During the quarter ended March 31, 2000, management approved and adopted another formal plan to restructure the Imaging Business' sales and service organization and the shut down of two facilities ("Plan D"). Accordingly, the Company recorded restructuring costs and expenses of $318 at the commitment date of the restructuring plan adopted by management. Restructuring costs and expenses for the quarter ended March 31, 2000 also included $88 of charges that were expensed as incurred and primarily relate to other exit costs. Other exit costs include costs to pack and move inventory, costs to set up new facilities, employee relocation costs, and other related facility closure costs. Fiscal 1999 During the quarter ended June 30, 1998, management approved and adopted Plan B, an additional Gulf South component to the 1998 restructuring plan or Plan A. This restructuring plan identified two additional distribution centers and two corporate offices to be merged with existing facilities and identified three executives to be involuntarily terminated. Accordingly, the Company recorded restructuring costs and expenses of $1,503 at the commitment date of the restructuring plan adopted by management. Such costs include branch shutdown costs, lease termination costs, involuntary employee termination costs of $281, $570, and $652, respectively. The remaining $3,419 of restructuring costs recorded during fiscal 1999 represents 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. -37- Acceleration of 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 121, the Company evaluated the recoverability of the information system assets. Based on the Company's analysis, impairment did not exist at the division level; therefore, management reviewed its estimated useful lives in accordance with APB 20 and recorded $5,379 of incremental depreciation expense resulting from management's decision to replace its information systems. Goodwill Impairment Charge During fiscal 2000, the Imaging Business closed their Metro New York facility. The closure of this facility triggered an asset impairment as determined under SFAS 121. As a result, goodwill of $517 was written off during fiscal 2000. Operational Tax Charge During the fiscal year ended March 31, 2000, the Company performed an analysis and reversed $1,221 of a previously recorded operating tax charge reserve. Other During the year ended April 2, 1999, the Company incurred approximately $1,010 of costs related to acquisitions not consummated. Selling Expenses. Selling expenses for fiscal 2000 totaled $116.4 million, an increase of $19.0 million, or 19.5%, over the fiscal 1999 total of $97.4 million. Selling expense as a percentage of net sales was approximately 6.5% and 6.2% for fiscal 2000 and 1999, respectively. Selling expense as a percentage of net sales increased as a result of (i) incremental commissions incurred on product recalls, replacement and transition without recognition of revenue, (ii) replacement of lost Long-Term Care chain business without commission costs by new regional accounts revenue that are commissioned, (iii) salaries of equipment representatives not leveraged with sales due to supply issues, and (iv) lack of focus and performance associated with the strategic alternatives process. Operating Income. Operating income for fiscal 2000 totaled $44.7 million, a decrease of $29.2 million, or 39.5%, over the fiscal 1999 total of $73.9 million. As a percentage of net sales, operating income for fiscal 2000 decreased to 2.5% from 4.7% for fiscal 1999 as a result of the factors discussed above. Interest Expense. Interest expense for fiscal 2000 totaled $15.5 million, an increase of $4.0 million, or 34.2%, over the fiscal 1999 total of $11.5 million. The increase in interest expense in fiscal 2000 over fiscal 1999 was due to (i) borrowings used in connection with acquisitions during fiscal 2000, (ii) inventory build up associated with product recalls and Y2K inventory overstock, (iii) cash used in connection with capital expenditures of which most was invested in new systems and e-commerce and (iv) increase in Long-Term Care Business customer receivables due to its restructuring of the collection efforts from Jackson, Mississippi to Jacksonville, Florida. Interest and Investment Income. Interest and investment income for fiscal 2000 totaled $1.8 million, a decrease of $2.9 million, or 61.2%, over the fiscal 1999 total of $4.7 million. The decrease primarily resulted from lower levels of invested capital due to the use of cash and investments to fund capital expenditures and business acquisitions during fiscal 2000. Other Income. Other income for fiscal 2000 totaled $10.4 million, an increase of $3.8 million, or 57.7%, over the fiscal 1999 total of $6.6 million. Other income primarily consists of finance charges on customer accounts. In addition, other income for fiscal 2000 includes $6.5 million received due to a favorable medical x-ray film antitrust settlement claim. Provision for Income Taxes. Provision for income taxes for fiscal 2000 totaled $19.3 million, a decrease of $10.6 million, or 35.4%, over the fiscal year 1999 total of $29.9 million. This decrease primarily resulted from the -38- decrease in taxable income due to the factors discussed above. The effective income tax rate was 46.6% in fiscal 2000 versus 40.6% in fiscal 1999. The effective tax rate is generally higher than the Company's statutory rate due to the nondeductible nature of certain merger related costs and the impact of the Company's foreign subsidiary, both of which were higher in 2000 than 1999. In addition, the reduction of taxable income in 2000 resulted in the permanent items having a greater impact on the effective rate than in fiscal 1999. Net Income. Net income for fiscal 2000 totaled $20.7 million, a decrease of $23.0 million, or 52.6%, over the fiscal 1999 total of $43.7 million. As a percentage of net sales, net income decreased to 1.1% for fiscal 2000 from 2.8% for fiscal 1999 due primarily to the factors described above. In addition, the Company has changed its method of accounting for equipment sales and contingent rebate income effective April 3, 1999. As such, during fiscal 2000 the Company recorded the cumulative effect of the change in accounting principle, which reduced net income for the year ended March 31, 2000 by $1.4 million ($2.4 pre-tax). 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 anticipated growth of the Company's operations. This growth will be funded through a combination of cash flow from operations and revolving credit borrowings. Statement of Cash Flows Discussion Net cash provided by (used in) operating activities was $69.9 million, $17.0 million, and $(18.7) million in fiscal 2001, 2000, and 1999, respectively. The increase in operating cash flows during fiscal 2001 primarily resulted from a decrease in accounts receivable and inventory balances over the prior year due to working capital management initiatives implemented in fiscal 2001. The Gulf South bad debt charge of $19.9 million and the International Business exit charge of $14.9 million were non-cash in nature and therefore did not affect operating cash flows. Net cash used in investing activities was $27.4 million, $94.3 million, and $28.9 million, in fiscal 2001, 2000, and 1999, respectively. During fiscal 2001, the Company used approximately $22.9 million of cash primarily for capital expenditures related to hardware purchases and software development costs for the Physician Supply Business' JD Edwards One World ERP system. These capital expenditures were primarily funded by the operating cash flows of the Company. Net cash (used in) provided by financing activities was $(68.5) million, $96.7 million, and $7.6 million, for fiscal 2001, 2000, and 1999, respectively. During fiscal 2001, the Company repaid a net $67.4 million of debt, primarily on its senior credit facility. These repayments were funded by approximately $26.0 million of short-term investments and approximately $41.0 million of operating cash flows. Operating Trends The Company had working capital of $316.3 million and $414.1 million as of March 30, 2001 and March 31, 2000, respectively. Accounts receivable, net of allowances, were $236.8 million and $284.4 million at March 30, 2001 and March 31, 2000, respectively. The average number of days sales in consolidated accounts receivable outstanding was approximately 51.7 and 55.5 days for the years ended March 30, 2001 and March 31, 2000, respectively. For the year ended March 30, 2001, the Company's Physician Supply, Imaging, and Long-Term Care Businesses had days sales in accounts receivable of approximately 48.8, 44.1, and 69.3, respectively. Inventories were $154.7 million and $178.0 million as of March 30, 2001 and March 31, 2000, respectively. The Company had annualized consolidated inventory turnover of 8.4x and 8.2x times for the years ended March 30, 2001 and March 31, 2000, respectively. For the year ended March 30, 2001, the Company's Physician Supply, Imaging, and Long-Term Care Businesses had consolidated annualized inventory turnover of 7.7x, 9.0x, and 8.9x, respectively. Inventory financing historically has been achieved through negotiating extended payment terms from suppliers. -39- Senior Subordinated Notes The Company has issued $125.0 million aggregate principal amount of 8.5% senior subordinated notes due in 2007 (the "Notes"). The Notes are unconditionally guaranteed on a senior subordinated basis by all of the Company's domestic subsidiaries. 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 are expected to be funded by the operating cash flow of the Company. No 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. The Company may incur indebtedness up to certain specified levels and, provided that no event of default exists, 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. Senior Revolving Credit Agreement On February 11, 1999, the Company entered into a $140.0 million senior revolving credit facility (the "Original Credit Agreement") with a syndicate of financial institutions with NationsBank, N.A. as principal agent. Borrowings under the Original Credit Agreement were available for working capital, capital expenditures, and acquisitions, and secured by the common stock and assets of the Company and its subsidiaries. On October 20, 1999, the Company amended the Original Credit Agreement to allow, among other things, for repurchases of up to $50.0 million of the Company's common stock through October 31, 2000. In addition, effective August 4, 2000, the Company obtained an amendment to the Original Credit Agreement modifying certain financial ratios contained therein. Effective September 30, 2000, the Company obtained a limited waiver to the Original Credit Agreement for failure to meet the criteria for the fixed charge coverage ratio and the leverage ratio during the fiscal quarter ended September 30, 2000. On December 28, 2000, the Company amended and restated the Original Credit Agreement, as amended (the "Amended Credit Agreement"). Pursuant to the terms of the Amended Credit Agreement, the Company was permitted to make revolving credit borrowings in an amount up to the lesser of (a) the revolving committed amount, which initially was $120 million, reducing to $110 million on March 31, 2002, and $100 million on March 31, 2003, or (b) a borrowing base based on eligible receivables and inventory. In addition, under the Amended Credit Agreement the leverage and fixed charge covenants were amended for the quarter ended December 29, 2000, and adjusted over time as specified in the Amended Credit Agreement. As of March 30, 2001, the Company was not in compliance with certain covenants under the Amended Credit Agreement. However, since the Company successfully refinanced the indebtedness subsequent to year-end, waivers were not obtained. On May 24, 2001, the Company paid all outstanding amounts and obligations due under the Amended Credit Agreement. New Revolving Credit Agreement On May 24, 2001, the Company entered into a credit agreement (the "Agreement"), by and among the Company, as borrower thereunder (the "Borrower"), the subsidiaries of the Borrower party thereto, the lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as Agent for the Lenders (in such capacity, the "Agent", or the "Bank") and Banc of America Securities LLC, as Arranger. The Agreement provides for a four-year credit facility consisting of a revolving line of credit and letters of credit (the "Credit Facility"). Initial borrowings under the Credit Facility were used to refinance the Amended Credit Agreement. The maximum amount of the Credit Facility is $120.0 million until the Bank has syndicated $70.0 million of its commitments and thereafter $120.0 million plus the lesser of (a) the excess of the amount of the Bank's commitments that have been syndicated over $70.0 million and (b) $30.0 million. Availability of borrowings under the Credit Facility depends upon (a) the amount of a borrowing base consisting of accounts receivable and, upon satisfaction of certain requirements, inventory and (b) compliance with certain debt incurrence tests under the Company's Indenture, dated as of October 7, 1997, relating to the Notes. The Credit Facility will bear interest at the Bank's prime rate plus a margin of between 0.25% and 1.00% based on the Company's ratio of funded debt to EBITDA (as defined in the Agreement) or at LIBOR plus a margin of between 1.75% and 3.50% based on the Company's ratio of funded debt to EBITDA. Under the Agreement, the Company and its subsidiaries are subject to certain covenants, including but not limited to, limitations on (a) paying dividends and repurchasing stock, (b) repurchasing its Notes, (c) selling or transferring assets, (d) making certain investments (including acquisitions) and (e) incurring additional indebtedness and liens. Proceeds from the Credit Facility -40- will be used to refinance existing indebtedness outstanding under the Company's Amended Credit Agreement, issue letters of credit, finance ongoing working capital requirements, and general corporate purposes of the Company. The Credit Facility matures on May 24, 2005. As of March 30, 2001, the Company has not entered into any material working capital commitments that require funding. The Company believes that the expected cash flows from operations, available borrowing under the credit facility, and capital markets are sufficient to meet the Company's anticipated future requirements for working capital, capital expenditures, and acquisitions for the foreseeable future. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The following assessment of the Company's market risks does not include uncertainties that are either nonfinancial or nonquantifiable, such as political, economic, tax and credit risks. Interest Rates. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's credit agreements and investments. The Company's long-term debt obligations are primarily comprised of the $125.0 million Notes, which bear interest at a fixed rate of 8.5%, and variable rate borrowings under the Amended Credit Agreement. As of March 30, 2001, the Company had $65.0 million outstanding under the Amended Credit Agreement at variable interest rates, at the Company's option, at either the lender's base rate plus a margin of 2.75% (10.75% at March 30, 2001) or the Eurodollar rate plus a margin of 3.75%. The weighted-average interest rate under the Amended Credit Agreement was 9.74% as of March 30, 2001. Subsequent to year end, the Company refinanced the Amended Credit Agreement with the Credit Facility. The Credit Facility has substantially similar market risk characteristics as the variable rate facility described above. The Company's investment portfolio consists of cash and cash equivalents including deposits in banks, government securities, money market funds, and short-term investments with maturities, when acquired, of 90 days or less. The Company seeks to maximize capital preservation by investing these funds in high-quality issuers. As of March 30, 2001, the Company did not hold any derivative financial or commodity instruments. Foreign Currency. 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. Subsequent to year-end, the Company sold its European operations. -41- Item 8. Financial Statements and Supplementary Data
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS Page -------- Report of Independent Certified Public Accountants.................................................. F-2 Consolidated Balance Sheets - March 30, 2001 and March 31, 2000 .................................... F-3 Consolidated Statements of Operations for the Years Ended March 30, 2001, March 31, 2000, and April 2, 1999.................................................................................... F-4 Consolidated Statements of Shareholders' Equity for the Years Ended March 30, 2001, March 31, 2000, and April 2, 1999................................................................................ F-5 Consolidated Statements of Cash Flows for the Years Ended March 30, 2001, March 31, 2000, and April 2, 1999 F-6 Notes to Consolidated Financial Statements.......................................................... F-7 Schedule II - Valuation and Qualifying Accounts for the Years Ended April 2, 1999, March 31, 2000, and March 30, 2001............................................................................... F-37
-F-1- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To PSS World Medical, Inc.: We have audited the accompanying consolidated balance sheets of PSS World Medical, Inc. (a Florida corporation) and subsidiaries as of March 30, 2001 and March 31, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 30, 2001. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PSS World Medical, Inc. and subsidiaries as of March 30, 2001 and March 31, 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 30, 2001 in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to the consolidated financial statements, effective April 3, 1999, the Company changed certain of its accounting principles for revenue recognition as a result of the adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition". Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP - ----------------------- Arthur Andersen LLP Jacksonville, Florida June 19, 2001 -F-2- PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 30, 2001 and March 31, 2000 (Dollars in Thousands, Except Per Share Data) ASSETS
2001 2000 ---------- ---------- Current Assets: Cash and cash equivalents......................................................... $ 34,374 $ 60,414 Marketable securities............................................................. 314 4,328 Accounts receivable, net.......................................................... 236,846 284,441 Inventories, net.................................................................. 154,725 178,038 Employee advances................................................................. 478 973 Prepaid expenses and other........................................................ 60,633 57,515 ---------- ---------- Total current assets..................................................... 487,370 585,709 Property and equipment, net.......................................................... 76,247 65,783 Other Assets: Intangibles, net.................................................................. 183,452 202,242 Employee advances................................................................. 524 -- Other............................................................................. 25,041 19,683 ---------- ---------- Total assets............................................................. $772,634 $873,417 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.................................................................. $119,238 $124,448 Accrued expenses.................................................................. 39,234 35,434 Current maturities of long-term debt and capital lease obligations................ 1,752 4,274 Other............................................................................. 10,855 7,482 ---------- ---------- Total current liabilities................................................ 171,079 171,638 Long-term debt and capital lease obligations, net of current portion................. 190,040 254,959 Other................................................................................ 7,213 7,193 ---------- ---------- Total liabilities........................................................ 368,332 433,790 ---------- ---------- Commitments and contingencies (Notes 1, 2, 4, 9, 14, 15, 18, 19, and 20) Shareholders' Equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued and outstanding................................................................ -- -- Common stock, $.01 par value; 150,000,000 shares authorized, 71,077,236 shares issued and outstanding at March 30, 2001 and March 31, 2000.................... 711 711 Additional paid-in capital........................................................ 348,701 349,186 Retained earnings................................................................. 54,890 90,951 Cumulative other comprehensive loss............................................... -- (390) ---------- ---------- 404,302 440,458 Unearned ESOP shares.............................................................. -- (831) ---------- ---------- Total shareholders' equity............................................... 404,302 439,627 ---------- ---------- Total liabilities and shareholders' equity............................... $772,634 $873,417 ========== ========== The accompanying notes are an integral part of these consolidated balance sheets.
-F-3- PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended March 30, 2001, March 31, 2000, and April 2, 1999 (Dollars in Thousands, Except Share Data)
2001 2000 1999 ----------- ----------- ----------- Net sales.......................................................... $1,814,805 $1,803,990 $1,567,167 Cost of goods sold................................................. 1,398,390 1,355,178 1,165,145 ----------- ----------- ----------- Gross profit........................................... 416,415 448,812 402,022 General and administrative expenses................................ 314,233 287,741 230,804 Selling expenses................................................... 115,156 116,362 97,365 International Business exit charge................................. 14,917 -- -- ----------- ----------- ----------- (Loss) income from operations.......................... (27,891) 44,709 73,853 ----------- ----------- ----------- Other income (expense): Interest expense................................................ (20,394) (15,457) (11,522) Interest and investment income.................................. 2,706 1,838 4,732 Other income.................................................... 1,689 10,437 6,618 ----------- ----------- ----------- (15,999) (3,182) (172) ----------- ----------- ----------- (Loss) income before (benefit) provision for income taxes and cumulative effect of accounting change.......................... (43,890) 41,527 73,681 (Benefit) provision for income taxes............................... (7,829) 19,343 29,940 ----------- ----------- ----------- (Loss) income before cumulative effect of accounting change........ (36,061) 22,184 43,741 Cumulative effect of accounting change, net of taxes (Note 1) ..... -- (1,444) -- ----------- ----------- ----------- Net (loss) income.................................................. $ (36,061) $ 20,740 $ 43,741 =========== =========== =========== Earnings per share - Basic: (Loss) income before cumulative effect of accounting change..... $ (0.51) $ 0.31 $ 0.62 Cumulative effect of accounting change ......................... -- (0.02) -- ----------- ----------- ----------- Net (loss) income............................................... $ (0.51) $ 0.29 $ 0.62 =========== =========== =========== Earnings per share - Diluted: (Loss) income before cumulative effect of accounting change..... $ (0.51) $ 0.31 $ 0.61 Cumulative effect of accounting change.......................... -- (0.02) -- ----------- ----------- ----------- Net (loss) income............................................... $ (0.51) $ 0.29 $ 0.61 =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
-F-4- PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended March 30, 2001, March 31, 2000, and April 2, 1999 (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 April 4, 1998................ 70,374,594 $704 $344,581 $26,470 $(1,296) $(2,837) $367,622 Net income........................... -- -- -- 43,741 -- -- 43,741 Comprehensive income: Cumulative foreign currency translation adjustment ........ -- -- -- -- 119 -- 119 --------- Total comprehensive income........... 43,860 --------- Issuance of common stock............. 421,430 4 4,267 -- -- -- 4,271 Employee benefits and other.......... -- -- 612 -- -- 195 807 ---------- ------ ---------- -------- ------------- -------- --------- Balance at April 2, 1999................ 70,796,024 708 349,460 70,211 (1,177) (2,642) 416,560 ---------- ------ ---------- -------- ------------- -------- --------- Net income........................... -- -- -- 20,740 -- -- 20,740 Comprehensive income: Cumulative foreign currency translation adjustment ........ -- -- -- -- (939) -- (939) Change in unrealized gain on marketable security, net of tax -- -- -- -- 1,726 -- 1,726 --------- Total comprehensive income........... 21,527 --------- Issuance of common stock............. 281,212 3 98 -- -- -- 101 Employee benefits and other.......... -- -- (372) -- -- 1,811 1,439 ---------- ------ ---------- -------- ------------- -------- --------- Balance at March 31, 2000............... 71,077,236 711 349,186 90,951 (390) (831) 439,627 ---------- ------ ---------- -------- ------------- -------- --------- Net loss............................. -- -- -- (36,061) -- -- (36,061) Comprehensive income: Cumulative foreign currency translation adjustment ........ -- -- -- -- 2,116 -- 2,116 Change in unrealized gain on marketable security, net of tax -- -- -- -- (1,726) -- (1,726) --------- Total comprehensive loss............. (35,671) --------- Employee benefits and other.......... -- -- (485) -- -- 831 346 ---------- ------ ---------- -------- ------------- -------- --------- Balance at March 30, 2001............... 71,077,236 $711 $348,701 $54,890 $ -- $ -- $404,302 ========== ====== ========== ======== ============= ======== ========= The accompanying notes are an integral part of these consolidated financial statements.
-F-5- PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended March 30, 2001, March 31, 2000, and April 2, 1999 (Dollars in Thousands)
2001 2000 1999 ---------- --------- --------- Cash Flows From Operating Activities: Net (loss) income........................................................ $ (36,061) $ 20,740 $ 43,741 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Cumulative effect of accounting change................................ -- 1,444 -- Depreciation.......................................................... 11,952 9,446 12,209 Amortization.......................................................... 13,018 10,842 7,289 Amortization of debt issuance costs................................... 1,975 782 886 Provision for doubtful accounts....................................... 24,240 15,812 5,181 International Business exit charge.................................... 14,917 -- -- (Benefit) provision for deferred income taxes......................... (7,829) 11,878 10,901 Loss (gain) on sale of fixed assets................................... 14 (871) (836) Deferred compensation expense......................................... 345 721 365 Unrealized loss on marketable securities.............................. 1,186 -- 288 Changes in operating assets and liabilities, net of effects from business acquisitions: Accounts receivable, net........................................... 24,523 (23,041) (43,848) Inventories, net................................................... 23,849 5,597 1,275 Prepaid expenses and other current assets.......................... (10,026) 8,656 (4,916) Other assets....................................................... 665 (8,855) (2,265) Accounts payable, accrued expenses, and other liabilities.......... 7,092 (36,180) (48,974) ---------- --------- --------- Net cash provided by (used in) operating activities............. 69,860 16,971 (18,704) ---------- --------- --------- Cash Flows From Investing Activities: Purchases of marketable securities....................................... -- (1,500) (50,813) Proceeds from sales and maturities of marketable securities.............. 3 -- 125,098 Proceeds from sale of property and equipment............................. 405 2,595 1,586 Capital expenditures..................................................... (22,857) (27,182) (24,774) Purchases of businesses, net of cash acquired............................ (2,839) (59,410) (75,453) Payments on noncompete agreements........................................ (2,087) (8,825) (4,558) ---------- --------- --------- Net cash used in investing activities........................... (27,375) (94,322) (28,914) ---------- --------- --------- Cash Flows From Financing Activities: Proceeds from borrowings................................................. 100,180 175,797 24,000 Repayments of borrowings................................................. (167,542) (77,976) (20,337) Principal payments under capital lease obligations....................... (79) (325) (366) Proceeds from issuance of common stock................................... -- 101 4,174 Other.................................................................... (1,084) (938) 119 ---------- --------- --------- Net cash (used in) provided by financing activities............. (68,525) 96,659 7,590 ---------- --------- --------- Gulf South decrease in cash and cash equivalents for the three months ended April 3, 1999 -- -- (349) ---------- --------- --------- Net (decrease) increase in cash and cash equivalents........................ (26,040) 19,308 (40,377) Cash and cash equivalents, beginning of year................................ 60,414 41,106 81,483 ---------- --------- --------- Cash and cash equivalents, end of year...................................... $ 34,374 $ 60,414 $ 41,106 ========== ========= ========= Supplemental Disclosures: Cash paid for: Interest.............................................................. $ 19,393 $ 14,260 $ 11,026 ========== ========= ========= Income taxes.......................................................... $ 975 $ 27,137 $ 18,192 ========== ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
-F-6- PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 30, 2001, MARCH 31, 2000, AND APRIL 2, 1999 (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company and Nature of Business PSS World Medical, Inc. (the "Company" or "PSS") was incorporated in 1983 in Jacksonville, Florida. The Company, through its Physician Sales & Service division ("Physician Supply Business") is a distributor of medical supplies, equipment and pharmaceuticals to primary care and other office-based physicians in the United States. As of March 30, 2001, the Company operated 49 service centers distributing to over 100,000 physician office sites in all 50 states. In March 1996, PSS established two wholly-owned subsidiaries, WorldMed International, Inc. ("WorldMed Int'l") and WorldMed, Inc., (together, the "International Business"), to manage and develop the Company's European medical equipment and supply distribution market. As of March 30, 2001, the European operation included two service centers distributing to acute and alternate care sites in Belgium and Germany. Subsequent to year-end, the Company sold its International Business (Refer to Note 20, Subsequent Events). In November 1996, the Company established a wholly-owned subsidiary, Diagnostic Imaging, Inc. ("DI" or the "Imaging Business"). DI is a distributor of medical diagnostic imaging supplies, chemicals, equipment, and services to the acute and alternate care markets in the United States. As of March 30, 2001, DI operated 34 imaging division service centers distributing to approximately 24,000 customer sites in 42 states. 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 the "Long-Term Care Business"). As of March 30, 2001, Gulf South, a wholly-owned subsidiary of PSS, operated 14 long-term care distribution service centers serving over 14,000 long-term care accounts in all 50 states. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries using the fiscal year-ends discussed below. All intercompany accounts and transactions have been eliminated. The results of operations of companies acquired in purchase business transactions are included in the accompanying consolidated financial statements from the dates of acquisition. Fiscal Year The Company's fiscal year ends on the Friday closest to March 31 of each year. Fiscal 2001, 2000, and 1999 each consist of 52 weeks. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States, 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. -F-7- Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments, including cash and cash equivalents, marketable securities, short-term trade receivables, and accounts payable approximate their fair values due to the short-term nature of these assets and liabilities. The fair value of the senior subordinated debt is estimated using quoted market prices. The carrying value of the Company's senior subordinated debt at March 30, 2001 and March 31, 2000 was $125,000 and the market value was approximately $104,000 and $115,000, respectively. The carrying value of the Company's other long-term debt was $66,792 and $134,233, at March 30, 2001 and March 31, 2000, respectively, which approximates fair value. Cash and Cash Equivalents Cash and cash equivalents generally consist of cash held at banks, short-term government obligations, commercial paper, and money market instruments. The Company invests its excess cash in high-grade investments and, therefore, bears minimal risk. These instruments have original maturity dates not exceeding three months. Marketable Securities The Company holds investments classified as available-for-sale securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings but reported in other comprehensive income, net of the effect of income taxes, until sold. At the time of sale, any gains or losses are recognized as a component of operating results. Gains and losses are based on the specific identification method of determining cost. Concentration of Credit Risk The Company's trade accounts receivables are exposed to credit risk. However, the majority of the market served by the Physician Supply Business and Imaging Business are comprised of numerous individual accounts, none of which is individually significant to the Company. Gulf South depends on a limited number of large customers, and Gulf South's customers have been experiencing significant financial difficulty since the advent of the Prospective Payment System ("PPS"). Approximately 35%, 34%, and 38% of Gulf South's revenues for the years ended March 30, 2001, March 31, 2000, and April 2, 1999, respectively, represent sales to its top five customers. As of March 30, 2001, the top five customers represented 27% of Gulf South's gross accounts receivable and 24% of Gulf South's accounts receivable, net of allowance for doubtful accounts. As of March 31, 2000, the top five customers represented 32% of Gulf South's gross accounts receivable and 34% of Gulf South's accounts receivable, net of allowance for doubtful accounts. In addition, as of March 31, 2001, one of Gulf South's top five customers was in bankruptcy and represented approximately 9% of Gulf South's sales and less than 2% of the Company's consolidated sales. The Company monitors the creditworthiness of its customers on an ongoing basis and provides reserves for estimated bad debt losses and sales returns. The Company had allowances for doubtful accounts and notes receivable of approximately $18,742 and $12,418 as of March 30, 2001 and March 31, 2000, respectively, of which $15,176 and $7,524, respectively, related to Gulf South. Provisions for doubtful accounts were approximately $24,240, $15,812, and $5,181, for fiscal ended 2001, 2000, and 1999, respectively, of which $22,785, $11,193, and $2,485, respectively, related to Gulf South. During the quarter ended December 29, 2000, the Company recorded a bad debt charge of $19,991 in its Long-Term Care Business (refer to Note 3, Charges Included in General and Administrative Expenses). -F-8- Inventories Inventories, which are comprised principally of medical and related products, are stated at the lower of cost (first-in, first-out) or market. Market is defined as net realizable value. A company-wide 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 that time. Management reviews all branch inventory valuations and makes additional adjustments if necessary. Slow moving inventory is tracked using a report that details items that have not moved in the last 180 to 360 days and an appropriate reserve is established. Once slow moving inventory is identified, branches transfer inventory to other branches with a market for that inventory. If management determines the inventory is not saleable, the inventory is written off against the allowance for obsolete inventory. Property and Equipment Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to 39 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 operations. The Company evaluates the recoverability of long-lived assets not held for sale by measuring the carrying amount of the assets against the estimated undiscounted future cash flows. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. The Company capitalizes the following costs associated with developing internal-use computer software: (i) external direct costs of materials and services consumed in developing or obtaining internal-use computer software; (ii) certain payroll and payroll-related costs for employees who are directly associated with the development of internal-use software, to the extent of the time spent directly on the project; and (iii) interest costs incurred while developing internal-use computer software. Capitalized internal-use software costs are amortized over the estimated useful lives of the software, ranging from 7 to 10 years. Intangibles Noncompetition agreements are amortized on a straight-line basis over the lives of the agreements, which range from 3 to 15 years. The Company has classified as goodwill the cost in excess of the fair value of net identifiable assets purchased in business acquisitions that are accounted for as purchase transactions. Goodwill is being amortized over 15 to 30 years using the straight-line method. The Company periodically evaluates intangible assets to determine if an impairment exists. Self-Insurance Coverage The Company has a self-funded program for employee and dependent health coverage. This program includes an administrator, a large provider network, and stop loss reinsurance to cover individual claims in excess of $175 per person and up to $1.0 million catastrophic loss maximum, per life time benefit, per person. Claims incurred but not reported are recorded based on estimates of claims provided by the third party administrator and are included in accrued expenses in the accompanying consolidated balance sheets. Contingent Loss Accruals In determining the accrual necessary for probable loss contingencies as defined by Statement of Financial Accounting Standards ("SFAS") No. 5, Accounting for Contingencies ("SFAS 5"), the Company includes estimates for professional fees, such as legal, accounting, and consulting, and other related costs to be incurred, unless such fees and related costs are not probable of being incurred or are not reasonably estimable. -F-9- Income Taxes The Company uses the asset and liability method in accounting for income taxes. Deferred income taxes result primarily from the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Shareholders' Equity The Company realizes an income tax benefit from the exercise or early disposition of certain stock options. This benefit results in a decrease in current income taxes payable and a direct increase in additional paid-in capital (refer to Note 10, Income Taxes). Other Comprehensive Income Cumulative other comprehensive income and total comprehensive income has been separately disclosed in the accompanying consolidated statements of shareholders' equity. Revenue Recognition Effective April 3, 1999, the Company adopted Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"), which changed its method for accounting for equipment sales and contingent rebate income for the fiscal year ended March 31, 2000. The cumulative effect of this accounting change reduced net income for the year ended March 31, 2000, by $1.4 million ($2.4 million pre-tax). The cumulative after tax effect on both the basic and diluted earnings per share was a reduction of $0.02 per share. The effect of SAB 101, before the cumulative effect, did not have a material impact on fiscal 2000 and would not have been material to fiscal 1999. Revenue from the sale of products and equipment with no installation and training requirements is recognized when products are shipped. Revenue from the sale of equipment with installation and training requirements is recognized when installation and training are complete. Revenue from service contracts is recognized ratably over the term of the contract. The Company earns incentive rebates from its vendors if certain performance goals are achieved. Incentive rebate income is recognized in the accounting period in which the Company meets the performance measure. The Company allows 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 estimates, which are included in accounts receivable in the accompanying balance sheets, are based on historical experience. Foreign Currency Translation Financial statements for the International Business 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 cumulative 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 ("SFAS 123") for employee and director stock-based compensation. In accordance with SFAS 123, for footnote disclosure purposes only, the Company computes its earnings and earnings per share on a pro forma basis as if the fair value method had been applied. Earnings Per Common Share Basic and diluted earnings per common share are presented in accordance with SFAS No. 128, Earnings Per Share ("SFAS 128"). Basic earnings per common share is computed by dividing net income by the weighted average -F-10- number of shares outstanding. Diluted earnings per common share includes the dilutive effect of stock options (refer to Note 11, Earnings Per Share). Statements of Cash Flows The Company's noncash investing and financing activities were as follows:
2001 2000 1999 --------- --------- --------- Investing Activities: Business acquisitions: Fair value of assets acquired.................. $ 561 $ 41,146 $ 56,815 Liabilities assumed............................ 46 41,604 39,930 Noncompetition agreements issued............... 200 8,300 3,950 Financing Activities: Tax benefits related to stock option plans...... -- 194 759
Reclassifications Certain amounts for prior years have been reclassified to conform to the current year presentation. Recent Accounting Pronouncements During June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement 133 ("SFAS 137"), which delays the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The effect of adopting the provisions of this statement in the first quarter of fiscal 2002 was not material. During September 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-10, Accounting for Shipping and Handling Fees and Costs ("EITF 00-10"), which addresses the income statement classification of amounts charged to customers for, as well as costs incurred related to, shipping and handling. The effective date of EITF 00-10 was the quarter ended March 30, 2001. EITF 00-10 requires that amounts billed to a customer in a sale transaction related to shipping and handling be classified as revenue. In addition, if costs incurred related to shipping and handling are significant and are not included in cost of sales, an entity should disclose both the amount of such costs and the income statement classification. Shipping and handling costs billed to customers are classified as revenues for all periods presented; previously, these revenues were offset against the related costs incurred, which were included in general and administrative expenses. Revenues from shipping and handling for each of the three years in the periods ended 2001, 2000, and 1999 were $11,180, $10,454 and $2,663, respectively. Costs related to shipping and handling are classified as general and administrative expenses and were $79,562, $76,487 and $64,945, during each of the three years in the periods ended 2001, 2000, and 1999, respectively. 2. BUSINESS ACQUISTIONS Purchase Acquisitions During fiscal 2000, the Company acquired certain assets and assumed certain liabilities of 6 medical supply and equipment distributors, 12 imaging supply and equipment distributors, and 2 long-term health care distributors. In addition, the Company acquired the common stock of 4 imaging supply and equipment distributors. A summary of the details of the transactions follow: -F-11-
Fiscal Year --------------------------------------- 2001 (a) 2000 1999 ---------- --------- --------- Number of acquisitions......................... 1 24 25 Total consideration............................ $ 969 $101,014 $115,183 Cash paid, net of cash acquired................ 923 59,410 75,453 Goodwill recorded.............................. 2,324 59,868 58,368 Noncompete payments............................ 200 7,235 3,950
(a) During fiscal 2001, goodwill recorded includes approximately $1,916 of earnout payments. The operations of the acquired companies have been included in the Company's results of operations subsequent to the dates of acquisition. Supplemental unaudited pro forma information, assuming these acquisitions had been made at the beginning of the year in which the acquisition was made, and assuming the acquisitions were made at the beginning of the immediate preceding year, is included below. The unaudited pro forma selected financial data does not purport to represent what the Company's results of operation would actually have been had the transactions in fact occurred as of an earlier date or project the results for any future date or period.
Fiscal Year ------------------------- 2000 1999 ---------- ---------- Revenues............................................... $1,879,592 $1,850,583 Net Income............................................. 22,397 49,180 Earnings per share: Basic................................................ $0.32 $0.70 Diluted.............................................. $0.31 $0.69
These acquisitions were accounted for under the purchase method of accounting, and accordingly, the assets of the acquired companies have been recorded at their estimated fair values at the dates of the acquisitions. The excess of the purchase price over the estimated fair value of the net identifiable assets acquired has been recorded as goodwill and is amortized over 15 to 30 years. Goodwill was reduced by $494 during fiscal 2001 to reflect purchase price allocations of acquisitions consummated in fiscal 2000. Remaining contingent earnouts of $2.4 million will be assessed in fiscal 2002 and final purchase price allocations will be completed at that time. Merger costs and expenses During fiscal 2000, the Company recorded approximately $595 of merger integration costs and expenses directly to goodwill as incurred as these costs were contemplated at the time of acquisition. In addition, during fiscal 2000, the Company recorded approximately $489 of merger costs and expenses related to other acquisitions directly to goodwill for costs that were in excess of the original integration plan accrual estimated by management. Such merger costs and expenses are recorded directly to goodwill only if it is within one year from the date of the acquisition and such expenses were contemplated at the time of the acquisition. If merger costs and expenses are incurred subsequent to one year from the date of the acquisition, or were not contemplated at the time of the acquisition, such expenses are recorded in general and administrative expenses. Reversal of excess accrued merger costs and expenses During fiscal 2000, the Company reversed approximately $712 of certain accrued merger costs and expenses that management determined to be unnecessary due to changes in integration plans or estimates. Management evaluates integration plans at each period end and determines if revisions to the accruals are appropriate. Such revisions to the original estimates are recorded directly to goodwill. Deferred tax assets of acquired companies During fiscal 2001, the Company increased goodwill by approximately $420 and during fiscal 1999, the Company reduced goodwill by approximately $2,644. These adjustments reflect a true-up of the deferred tax assets and liabilities per the financial statements and the tax return, as a result of additional information received on the deductibility of certain pre-acquisition expenditures. -F-12- In addition, the terms of certain of the Company's recent acquisition agreements provide for additional consideration to be paid (earnout payments) 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 and is recorded when earned as additional purchase price. The maximum amount of remaining contingent consideration is approximately $2.4 million (payable through fiscal 2002). During the year ended March 30, 2001, there were earnout payments related to two Imaging Business acquisitions totaling $1.9 million. These amounts were recorded as an adjustment to goodwill related to the acquisitions. There were no earnout payments made during fiscal 2000 and 1999. 3. CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES In addition to normal general and administrative expenses, this caption includes charges related to merger activity, restructuring activity, and other special items. The following table summarizes unusual charges included as components of general and administrative expenses in the accompanying consolidated statements of operations:
2001 2000 1999 ----------- --------- --------- Merger costs and expenses.................... $ 5,588 $ 1,700 $ 4,371 Restructuring costs and expenses............. 8,708 13,245 4,922 Acceleration of depreciation................. 1,504 -- 5,379 Long-Term Care Business bad debt charge...... 19,991 -- -- Goodwill impairment charge................... -- 517 -- Operational tax charge....................... (749) (1,221) -- Other........................................ 3,789 -- 1,010 ----------- --------- --------- $ 38,831 $14,241 $15,682 =========== ========= =========
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 No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity ("EITF 94-3") or EITF No. 95-14, Recognition of Liabilities in Anticipation of a Business Combination ("EITF 95-14"), are met. Merger costs and expenses recorded at the commitment date primarily include charges for involuntary employee termination costs, branch shut-down costs, lease termination costs, and other exit costs. If the criteria described in EITF 94-3 or EITF 95-14 are not met, the Company records merger costs and expenses as incurred. Merger costs expensed as incurred include the following: (1) costs to pack and move inventory from one facility to another or within a facility in a consolidation of facilities, (2) relocation costs paid to employees in relation to an acquisition accounted for under the pooling-of-interests method of accounting, (3) systems or training costs to convert the acquired companies to the current existing information system, 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 2001, 2000, and 1999 include $989, $2,300, and $2,481, respectively, of charges for merger costs expensed as incurred. In addition, merger costs and expenses for fiscal 1999 include $2,818 of charges recorded at the commitment date of an integration plan adopted by management. At the end of each quarter, management reevaluates its plans and adjusts previous estimates. During fiscal 2001, 2000, and 1999, the Company reversed approximately $155, $1,602, and $928, respectively, of merger costs and expenses previously established under prior plans, of which $148 and $1,437 related to accrued lease termination costs in fiscal 2001 and 2000, respectively, and $777 related to direct transactions costs in fiscal 1999. Refer to Note 4, Accrued Merger and Restructuring Costs and Expenses, for further discussion regarding merger plans. Effective February 1, 2000, the Board of Directors approved and adopted the PSS World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical, Inc. Corporate Office Employee Retention Bonus Plan (collectively the "Retention Plans"). As part of the Company's strategic alternatives process, management adopted these plans to retain certain officers and key employees during the transition period. The total costs related to these -F-13- plans is approximately $10,059 of which $4,754 and $1,002 were expensed during the years ended March 30, 2001 and March 31, 2000, respectively, and $2,872, and $1,431 will be recognized as expense in fiscal 2002 and 2003, respectively. Restructuring Costs and Expenses Fiscal 2001 During the quarter ended December 29, 2000, management approved and adopted a formal plan, among other things, to restructure certain leadership positions within the Company ("Plan E"). This plan includes costs related to the severance of certain members of senior management including the Company's former Chairman and Chief Executive Officer. Accordingly, the Company recorded restructuring costs and expenses of $4,887 at the commitment date of the restructuring plan adopted by management and an additional $644 in severance costs in the quarter ended March 30, 2001. The Company also recorded $3,446 of restructuring costs as incurred during the year ended March 30, 2001. In addition, the Company reversed $269, which primarily related to branch shutdown costs, previously established as restructuring costs under prior plans. Fiscal 2000 During the quarter ended September 30, 1999, management approved and adopted a formal plan to restructure certain operations of Gulf South ("Plan C"), an additional component to the previously established Plans A and B. This restructuring plan identified five additional distribution centers and the Gulf South corporate facility as redundant or inadequate for future operations. As a result, these locations were closed and made permanently idle. Accordingly, the Company recorded restructuring costs and expenses of $4,967 at the commitment date of the restructuring plan adopted by management. Such costs include branch shutdown costs, lease termination costs, and involuntary employee termination costs of $494, $2,915, and $1,558, respectively. Refer to Note 4, Accrued Merger and Restructuring Costs and Expenses, for further discussion regarding the restructuring plan. Restructuring costs and expenses for the year ended March 31, 2000 also included $9,213 of charges that were expensed as incurred and primarily relate to other exit costs. Other exit costs include costs to pack and move inventory, costs to set up new facilities, employee relocation costs, and other related facility closure costs. In addition, the Company reversed $1,341 of restructuring costs into income, which related to over-accrual for lease termination costs, and involuntary employee termination costs. During the quarter ended March 31, 2000, management approved and adopted another formal plan to restructure the Imaging Business' sales and service organization and the shut down of two facilities ("Plan D"). Accordingly, the Company recorded restructuring costs and expenses of $318 at the commitment date of the restructuring plan adopted by management. Refer to Note 4, Accrued Merger and Restructuring Costs and Expenses, for further discussion regarding the restructuring plan. Restructuring costs and expenses for the quarter ended March 31, 2000 also included $88 of charges that were expensed as incurred and primarily relate to other exit costs. Other exit costs include costs to pack and move inventory, costs to set up new facilities, employee relocation costs, and other related facility closure costs. Fiscal 1999 During the quarter ended June 30, 1998, management approved and adopted Plan B, an additional Gulf South component to the 1998 restructuring plan or Plan A. This restructuring plan identified two additional distribution centers and two corporate offices to be merged with existing facilities and identified three executives to be involuntarily terminated. Accordingly, the Company recorded restructuring costs and expenses of $1,503 at the commitment date of the restructuring plan adopted by management. Such costs include branch shutdown costs, lease termination costs, involuntary employee termination costs of $281, $570, and $652, respectively. The remaining $3,419 of restructuring costs recorded during fiscal 1999 represents 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 -F-14- costs to pack and move inventory, costs to set up new facilities, employee relocation costs, and other related facility closure costs. Acceleration of Depreciation During the quarter ended December 29, 2000, the Company identified certain assets for replacement due to the implementation of its Enterprise Resource Planning ("ERP") system. Pursuant to SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of ("SFAS 121"), the Company evaluated the recoverability of the assets. Based on the Company's analysis, impairment did not exist at the division level; therefore, management reviewed its estimated useful lives in accordance with Accounting Principles Board No. 20, Accounting Changes ("APB 20"), and recorded $1,504 of 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 121, the Company evaluated the recoverability of the information system assets. Based on the Company's analysis, impairment did not exist at the division level; therefore, management reviewed its estimated useful lives in accordance with APB 20 and recorded $5,379 of incremental depreciation expense resulting from management's decision to replace its information systems. Long-Term Care Business Bad Debt Charge During the quarter ended December 29, 2000, the Company recorded $19,991 of bad debt expense to increase the accounts receivable reserves at Gulf South Medical Supply. The increase to the reserve balance was primarily attributed to changes in assumptions concerning customers currently in bankruptcy based on information acquired during the quarter, including the fact that the Company did not receive critical vendor designation for certain customers as it had received for other bankrupt customers in the past. In addition, the increase was also attributed to i) changes in reserve assumptions for non-performing customers based on the change in assumptions discussed above, ii) changes in management's credit policies and procedures, and iii) changes in credit and collection department management. Based on information currently available, management believes the Company has recorded appropriate reserves for uncollectible receivables. Goodwill Impairment Charge During fiscal 2000, the Imaging Business closed its Metro New York facility. The closure of this facility triggered an asset impairment as determined under SFAS 121. As a result, goodwill of $517 was written off during fiscal 2000. Operational Tax Charge During the year ended March 30, 2001 and March 31, 2000, the Company performed an analysis and reversed $749 and $1,221, respectively, of a previously recorded operating tax charge reserve. Other During the year ended March 30, 2001, the Company incurred $3,695, primarily relating to legal and professional fees and other costs pursuant to the Company's strategic alternatives process and severance costs. In addition, the Company incurred $94 of costs related to acquisitions not consummated. During the year ended April 2, 1999, the Company incurred approximately $1,010 of costs related to acquisitions not consummated. 4. ACCRUED MERGER AND RESTRUCTURING COSTS AND EXPENSES Summary of Accrued Merger Costs and Expenses In connection with the consummation of business combinations, management often develops formal plans to exit certain activities, involuntarily terminate employees, and relocate employees of the acquired companies. -F-15- Management's plans to exit an activity often include identification of duplicate facilities for closure and identification of facilities for consolidation into other facilities. Generally, completion of the integration plans will occur within one year from the date in which the plans were formalized and adopted by management. However, intervening events occurring prior to completion of the plan, such as subsequent acquisitions or system conversion issues, can significantly impact a plan that had been previously established. Such intervening events may cause modifications to the plans and are accounted for on a prospective basis. At the end of each quarter, management reevaluates its integration plans and adjusts previous estimates. As part of the integration plans, certain costs are recognized at the date in which the plan is formalized and adopted by management (commitment date). These costs are generally related to employee terminations and relocation, lease terminations, and branch shutdown. In addition, there are certain costs that do not meet the criteria for accrual at the commitment date and are expensed as the plan is implemented (refer to Note 3, Charges Included in General and Administrative Expenses). Involuntary employee termination costs are employee severance costs and termination benefits. Lease termination costs are lease cancellation fees and forfeited deposits. Branch shutdown costs include costs related to facility closure costs. Employee relocation costs are moving costs of employees of an acquired company in transactions accounted for under the purchase method of accounting. Accrued merger costs and expenses, classified as accrued expenses in the accompanying consolidated balance sheets, were $294 and $1,089, at March 30, 2001 and March 31, 2000, respectively. The discussion of the accrued merger costs and expenses below summarize the significant and nonsignificant integration plans adopted by management for business combinations accounted for under the purchase method of accounting and pooling-of-interests method of accounting. Integration plans are considered to be significant if the charge recorded to establish the accrual is in excess of 5% of consolidated pretax income. Significant Poolings-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. As of December 31, 1999, all of the employees had been terminated and all of the seven identified distribution facilities had been shut down. Therefore, all costs related to the merger plan had been incurred at March 30, 2001, except for lease termination costs for one location for which payments will extend through May 2001. During the year ended March 30, 2001, $86 of lease expense was charged against the accrual leaving a remaining accrual of $16. Nonsignificant Poolings-of-Interests Business Combination Plans The Imaging Business acquired Tristar Imaging Systems, Inc. in October 1998, and management formalized and adopted an integration plan in late fiscal 1999 to integrate the operations of the acquired company. Management determined that all costs related to the merger plan had been incurred at March 30, 2001. During the year ended March 30, 2001, $397 of lease expense was charged against the accrual and the Company reversed approximately $148 of merger costs and expenses previously established under prior plans, all of which is related to lease terminations. Therefore, no accrual remains at March 30, 2001. Nonsignificant Purchase Business Combination Plan The Imaging Business acquired South Jersey X-Ray, Inc. in October 1998, and management formalized and adopted an integration plan during the three months ended June 30, 1999 to integrate the operations of the acquired company. All costs related to the merger plan had been incurred at March 30, 2001, except for lease termination costs for which payments will extend through fiscal 2004. During the year ended March 30, 2001, $108 of lease expense and $56 of employee termination costs were charged against the accrual leaving a remaining balance of $278. 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"). The -F-16- accrued restructuring costs related to Plan A were fully utilized at March 30, 2001. Subsequently, the Company adopted a second restructuring plan during the first quarter of fiscal 1999 related to the Gulf South Medical Supply division ("Plan B") to further consolidate its operations. During the second quarter of fiscal 2000, management evaluated the Company's overall cost structure and implemented cost reductions in order to meet internal profitability targets. In addition, management decided to improve its distribution model and relocate the corporate office for Gulf South to Jacksonville, Florida where the corporate offices for the Imaging and Physician Supply Businesses are located. The Company implemented the restructuring plan during the second quarter of fiscal 2000 that impacted all divisions ("Plan C"). The total number of employees to be terminated was 272. During the fourth quarter of fiscal 2000, the Imaging Business' management made a discretionary decision to change its business strategy and the way it operates to improve future operations. These changes include restructuring the Imaging Business sales force, terminating approximately 50 service engineers, and closure of two distribution centers ("Plan D"). All employees were terminated as of June 30, 2000, and the accruals relating to Plan D were fully utilized at March 30, 2001. During the third quarter of fiscal 2001, the Company's Board of Directors along with senior management evaluated the Company's operating performance. During this process, the Board and management decided to implement a long-range action plan that would stabilize the workforce and business. As part of the new strategic plan, the Company planned to reorganize several senior management positions and make permanently idle two distribution centers; one in the Diagnostic Imaging division and one in the Physician Supply division ("Plan E"). The total number of employees to be terminated in Plan E is 29. Accrued restructuring costs and expenses related to Plans A, B, C, D and E, classified as accrued expenses in the accompanying consolidated balance sheets, totaled $3,715 and $1,607 at March 30, 2001 and March 31, 2000, respectively. The following is a summary of the restructuring plan activity:
Involuntary Employee Lease Branch Termination Termination Shutdown Costs Costs Costs Total ------------- -------------- -------------- -------------- Balance at April 2, 1999 $ 1,602 $ 1,320 $ 896 $ 3,818 Adjustments (1,107) (436) (467) (2,010) Additions 3,233 1,559 494 5,286 Utilized (3,352) (1,586) (549) (5,487) ------------- -------------- -------------- -------------- Balance at March 31, 2000 376 857 374 1,607 Adjustments (30) -- (239) (269) Additions 5,531 -- -- 5,531 Utilized (2,541) (478) (135) (3,154) ------------- -------------- -------------- -------------- Balance at March 30, 2001 $ 3,336 $ 379 $ -- $ 3,715 ============= ============== ============== ==============
Plan B As of December 31, 1999, all of the six locations had been shut down and all employees were terminated as a result of the plan. Approximately $67 of lease termination payments remain accrued at March 30, 2001 for which payments will extend through fiscal 2002. Plan C All employees were terminated as of March 31, 2000. After revising prior estimates, the Company reversed $30 related to involuntary employee terminations and $239 related to branch shutdown costs against restructuring costs and expenses during the year ended March 30, 2001. Accrued restructuring costs and expenses related to Plan C at March 30, 2001 were approximately $312, which relates to lease terminations. Plan E Accrued restructuring costs and expenses related to Plan E at March 30, 2001 were approximately $3,336, all of which relates to involuntary employee terminations. As of March 30, 2001, 16 employees had been terminated under the plan. -F-17- 5. INTERNATIONAL BUSINESS EXIT CHARGE During the quarter ended December 29, 2000, management adopted, and the Board of Directors approved, a plan for divesting the Company's European operations. Management's primary consideration for this decision was that the European operations are outside the core United States business segments, making effective management difficult and resulting in lower than expected operating performance for the past several years. The net assets held for disposal consist of the operating assets of the European operations less outstanding liabilities, and are valued at the lower of aggregate fair value less expected costs to be incurred for sale. Accordingly, during the quarter ended December 29, 2000 the Company recorded $14.9 million as an International Business exit charge, primarily to recognize an impairment of goodwill (net of accumulated amortization) of $8.8 million and to recognize prior cumulative foreign currency translation adjustments of $3.2 million. Subsequent to year-end, the Company sold its European operations (refer to Note 20, Subsequent Events). The European operations reported the following results of operations for each of the three years in the period ended:
March 30, 2001 March 31, 2000 April 2, 1999 ------------------ ------------------ ----------------- Net sales $ 19,873 $24,361 $19,925 Cost of goods sold 14,004 16,333 13,787 ------------------ ------------------ ----------------- Gross profit 5,869 8,028 6,138 Selling, general and administrative expenses 5,782 8,225 6,850 International Business exit charge 14,917 -- -- ------------------ ------------------ ----------------- Operating loss (14,830) (197) (712) Interest expense (724) (238) 86 Intercompany interest expense (1,000) (1,203) (400) Other income -- -- 142 ------------------ ------------------ ----------------- (1,724) (1,441) (172) ------------------ ------------------ ----------------- Loss before provision for (16,554) (1,638) (884) income taxes Provision for income taxes -- -- -- ------------------ ------------------ ----------------- Net loss $(16,554) $ (1,638) $ (884) ================== ================== =================
6. MARKETABLE SECURITY
Other than Original temporary New Cost Unrealized Available-for-Sale Security Cost impairment Basis Gain Fair Value ----------- ----------- --------- --------- ---------- March 30, 2001 $1,500 $(1,186) $ 314 -- $ 314 =========== =========== ========= ========= ========== March 31, 2000 $1,500 -- $1,500 $2,285 $4,325 =========== =========== ========= ========= ==========
The Company holds an investment classified as available-for-sale security at fair value, with unrealized gains and losses excluded from earnings but reported in equity and other comprehensive income (net of the effect of income taxes) until it is sold. At the time of the sales, any gains or losses are recognized as a component of operating results. Gains and losses are based on the specific identification method of determining cost. During the quarter ended March 30, 2001, the Company recognized an other than temporary impairment loss of $1,186 that was included in interest and investment income in the accompanying consolidated statements of operations. This charge related to an investment in an internet medical supply portal that had experienced a significant and continuing decrease in market value during fiscal 2001. -F-18- 7 . PROPERTY AND EQUIPMENT Property and equipment, stated at cost, are summarized as follows: 2001 2000 ---------- ----------- Land................................................ $ 1,184 $ 1,184 Building ........................................... 2,554 2,547 Equipment........................................... 88,064 76,304 Furniture, fixtures, and leasehold improvements..... 22,529 23,695 ---------- ----------- 114,331 103,730 Accumulated depreciation............................ (38,084) (37,947) ---------- ----------- $ 76,247 $ 65,783 ========== =========== Equipment includes equipment acquired under capital leases with a cost of $476 and related accumulated depreciation of $368 at March 31, 2000. Depreciation expense, included in general and administrative expenses in the accompanying consolidated statements of operations, aggregated approximately $11,952, $9,446, and $12,209 for fiscal 2001, 2000, and 1999, respectively. 8. INTANGIBLES Intangibles, stated at cost, consist of the following: 2001 2000 ---------- ----------- Goodwill ........................................... $ 182,690 $189,608 Noncompetition agreements and other................. 37,376 37,998 ---------- ----------- 220,066 227,606 Accumulated amortization............................ (36,614) (25,364) ---------- ----------- $ 183,452 $202,242 ========== =========== Future minimum payments required under noncompetition agreements at March 30, 2001 are as follows: Fiscal Year: 2002............................................. $ 766 2003............................................. 218 2004............................................. 59 2005............................................. 43 2006............................................. 36 Thereafter....................................... 178 --------- $ 1,300 ========= -F-19- Amortization expense, included in general and administrative expenses in the accompanying consolidated statements of operations aggregated approximately $13,018, $10,842, and $7,289 for fiscal 2001, 2000, and 1999, respectively, of which $6,202, $5,374, and $3,627 for fiscal 2001, 2000 and 1999, respectively, relates to goodwill amortization. 9. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations consist of the following:
March 30, March 31, 2001 2000 ---------- ---------- Senior subordinated notes........................................................ $125,000 $ 125,000 Senior revolving credit.......................................................... 65,000 121,000 Capital lease obligations........................................................ -- 171 Long-term debt of acquired companies............................................. -- 125 Notes payable to owners of acquired companies.................................... 65 2,093 Other notes...................................................................... 1,727 10,844 ---------- ---------- 191,792 259,233 Less current maturities.......................................................... (1,752) (4,274) ---------- ---------- $190,040 $ 254,959 ========== ==========
Senior Subordinated Notes The Company has issued $125.0 million aggregate principal amount of 8.5% senior subordinated notes due in 2007 (the "Notes"). The Notes are unconditionally guaranteed on a senior subordinated basis by all of the Company's domestic subsidiaries. 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 are expected to be funded by the operating cash flow of the Company. No 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. The Company may incur indebtedness up to certain specified levels and, provided that if no event of default exists, 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. Senior Revolving Credit Agreement On February 11, 1999, the Company entered into a $140.0 million senior revolving credit facility (the "Original Credit Agreement") with a syndicate of financial institutions with NationsBank, N.A. as principal agent. Borrowings under the Original Credit Agreement were available for working capital, capital expenditures, and acquisitions, and secured by the common stock and assets of the Company and its subsidiaries. On October 20, 1999, the Company amended the Original Credit Agreement to allow, among other things, for repurchases of up to $50.0 million of the Company's common stock through October 31, 2000. In addition, effective August 4, 2000, the Company obtained an amendment to the Original Credit Agreement modifying certain financial ratios contained therein. Effective September 30, 2000, the Company obtained a limited waiver to the Original Credit Agreement for failure to meet the criteria for the fixed charge coverage ratio and the leverage ratio during the fiscal quarter ended September 30, 2000. On December 28, 2000, the Company amended and restated the Original Credit Agreement, as amended (the "Amended Credit Agreement"). Pursuant to the terms of the Amended Credit Agreement, the Company was permitted to make revolving credit borrowings in an amount up to the lesser of (a) the revolving committed amount, which initially was $120 million, reducing to $110 million on March 31, 2002, and $100 million on March 31, 2003, or (b) a borrowing base based on eligible receivables and inventory. In addition, under the Amended Credit Agreement the leverage and fixed charge covenants were amended for the quarter ended December 29, 2000, and adjusted over time as specified in the Amended Credit Agreement. As of March 30, 2001, the Company was not in compliance with certain covenants under the Amended Credit Agreement. However, since the Company successfully refinanced the indebtedness subsequent to year-end, waivers -F-20- were not obtained. On May 24, 2001, the Company paid all outstanding amounts and obligations due under the Amended Credit Agreement. New Revolving Credit Agreement On May 24, 2001, the Company entered into a new credit agreement (the "Agreement"), by and among the Company, as borrower thereunder (the "Borrower"), the subsidiaries of the Borrower party thereto, the lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as Agent for the Lenders (in such capacity, the "Agent", or the "Bank") and Banc of America Securities LLC, as Arranger. The Agreement provides for a four-year credit facility consisting of a revolving line of credit and letters of credit (the "Credit Facility"). Initial borrowings under the Credit Facility were used to refinance the Amended Credit Agreement. The maximum amount of the Credit Facility is $120.0 million until the Bank has syndicated $70.0 million of its commitments and thereafter $120.0 million plus the lesser of (a) the excess of the amount of the Bank's commitments that have been syndicated over $70.0 million and (b) $30.0 million. Availability of borrowings under the Credit Facility depends upon (a) the amount of a borrowing base consisting of accounts receivable and, upon satisfaction of certain requirements, inventory and (b) compliance with certain debt incurrence tests under the Company's Indenture, dated as of October 7, 1997, relating to the Notes. The Credit Facility will bear interest at the Bank's prime rate plus a margin of between 0.25% and 1.00% based on the Company's ratio of funded debt to EBITDA (as defined in the Agreement) or at LIBOR plus a margin of between 1.75% and 3.50% based on the Company's ratio of funded debt to EBITDA. Under the Agreement, the Company and its subsidiaries are subject to certain covenants, including but not limited to, limitations on (a) paying dividends and repurchasing stock, (b) repurchasing its Notes, (c) selling or transferring assets, (d) making certain investments (including acquisitions) and (e) incurring additional indebtedness and liens. Proceeds from the Credit Facility will be used to refinance existing indebtedness outstanding under the Company's Amended Credit Agreement, issue letters of credit, finance ongoing working capital requirements, and general corporate purposes of the Company. The Credit Facility matures on May 24, 2005. Notes Payable to Owners of Acquired Companies Notes payable to owners of acquired companies consists of holdback agreements or notes payable that are paid to the previous owners after certain contingencies are met, such as collection of all acquired accounts receivable and the sale of acquired inventory. Other Notes At March 30, 2001, other notes consist of various debt maintained by WorldMed Int'l, including a working capital line of credit and a mortgage on facilities in Leuven, Belgium ("European Debt"). The interest rate on the related debt was approximately 6.2% at March 30, 2001. Subsequent to year end, the European Debt was assumed by a purchaser of the European operations. As of March 30, 2001, future minimum payments of long-term debt, excluding capital lease obligations, are approximately as follows: -F-21- Fiscal Year: 2002............................................. $ 1,752 2003............................................. 40 2004............................................. 65,000 2005............................................. -- Thereafter....................................... 125,000 ----------- Total................................... $191,700 =========== 10. INCOME TAXES The provisions for income taxes are detailed below:
2001 2000 1999 --------- --------- --------- Current tax provision: Federal......................................................... $ -- $ 6,410 $16,253 State........................................................... -- 1,055 2,786 --------- --------- --------- Total current.......................................... -- 7,465 19,039 --------- --------- --------- Deferred tax (benefit) provision: Federal......................................................... (6,683) 10,140 9,306 State........................................................... (1,146) 1,738 1,595 --------- --------- --------- Total deferred......................................... (7,829) 11,878 10,901 --------- --------- --------- Total income tax (benefit) provision................... $ (7,829) $19,343 $29,940 ========= ========= ========= The difference between income tax computed at the Federal statutory rate and the actual tax provision is shown below: 2001 2000 1999 --------- --------- --------- (Loss) income before provision for taxes and cumulative effect of accounting change............................................... $(43,890) $41,527 $73,681 ========= ========= ========= Tax (benefit) provision at the 35% statutory rate.................. (15,362) 14,534 25,788 --------- --------- --------- Increase (decrease) in taxes: State income tax, net of Federal benefit........................ (745) 1,847 2,847 Effect of foreign subsidiary.................................... 5,794 574 310 Merger costs and expenses....................................... -- 153 (250) Goodwill amortization........................................... 1,275 1,103 969 Meals and entertainment......................................... 427 438 454 Nontaxable interest income...................................... (113) (80) (374) Officer life insurance.......................................... 808 478 (3) Other, net...................................................... 87 296 199 --------- --------- --------- Total increase in taxes................................ 7,533 4,809 4,152 --------- --------- --------- Total income tax (benefit) provision................... $ (7,829) $19,343 $29,940 ========= ========= ========= Effective tax rate................................................. 17.8% 46.6% 40.6% ========= ========= =========
Deferred income taxes for fiscal 2001 and 2000 reflect the impact of temporary differences between the financial statement and tax bases of assets and liabilities. The tax effect of temporary differences which create deferred tax assets and liabilities at March 30, 2001 and March 31, 2000 are detailed below: -F-22-
2001 2000 --------- --------- Deferred tax assets: Net operating loss carryforwards............................................. $12,200 $ 1,156 Allowance for doubtful accounts and sales returns............................ 5,994 6,117 Deferred compensation........................................................ 3,494 2,724 Accrued expenses............................................................. 3,240 2,276 Merger, restructuring and other nonrecurring costs and expenses.............. 2,206 2,574 Inventory uniform cost capitalization........................................ 2,178 1,934 Operational tax reserve...................................................... 2,108 3,332 Reserve for inventory obsolescence........................................... 1,756 1,208 Excess of book depreciation and amortization over tax depreciation and amortization.............................................................. 911 1,030 Accrued professional fees.................................................... 786 949 Available for sale marketable securities..................................... 461 -- Other........................................................................ 600 428 --------- --------- Gross deferred tax assets........................................... 35,934 23,728 --------- --------- Deferred tax liabilities: Available for sale marketable security....................................... -- (1,099) Software development......................................................... (11,145) (6,820) --------- --------- Gross deferred tax liabilities...................................... (11,145) (7,919) --------- --------- Net deferred tax assets......................................................... $24,789 $15,809 ========= =========
As of March 30, 2001, net current deferred tax assets and net non-current deferred tax assets of $18,240 and $6,549 are included in prepaid and other current assets and other assets, respectively, in the accompanying consolidated balance sheets. As of March 31, 2000, net current deferred tax assets, net non-current deferred tax assets, and net non-current deferred tax liabilities of $16,461, $3,463, and $4,115 are included in prepaid expenses, other assets, and other long-term liabilities, respectively, in the accompanying consolidated balance sheets. The income tax benefits related to the exercise or early disposition of certain stock options and stock contribution to the ESOP reduce taxes currently payable and are credited directly to additional paid-in capital. Such amounts were $194 and $759 for fiscal 2000 and 1999, respectively. At March 30, 2001 and March 31, 2000, the Company had net operating loss carryforwards for income tax purposes of approximately $31,362 and 2,972, respectively, which expire from 2002 to 2021. The utilization of the net operating loss carryforwards is subject to limitation in certain years. All deferred tax assets as of March 30, 2001 and March 31, 2000 are considered to be realizable due to the projected future taxable income. Therefore, no valuation allowance has been recorded as of March 30, 2001 and March 31, 2000. -F-23- 11. EARNINGS PER SHARE In accordance with SFAS 128, the calculation of basic earnings per common share and diluted earnings per common share is presented below (share amounts in thousands, except per share data):
2001 2000 1999 --------- -------- -------- Net (loss) income................................... $(36,061) $20,740 $43,741 ========= ======== ======== Earnings per share: Basic............................................ $ (0.51) $0.29 $0.62 ========= ======== ======== Diluted.......................................... $ (0.51) $0.29 $0.61 ========= ======== ======== Weighted average shares outstanding: Common shares.................................... 71,187 70,966 70,548 Assumed exercise of stock options................ 122 219 850 --------- -------- -------- Diluted shares outstanding....................... 71,309 71,185 71,398 ========= ======== ========
12. RELATED-PARTY TRANSACTION During fiscal 1998, the Company loaned its former Chairman 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 2001, the principal amount of the loan increased approximately $1,788. The loan is unsecured, bears interest at the applicable Federal rate for long-term obligations 6.09% and 6.25% at March 30, 2001 and March 31, 2000, respectively), and is due September 2007. No principal payments are required under the loan. The note was amended in connection with the severance agreement to defer payments of interest due prior to May 2003 until the loan maturity date. Interest payments are due at least annually after May 2003. The note terms provide for forgiveness of the debt in the event of a change in control. The note was also amended, to provide for forgiveness of the debt if the former Chairman and Chief Executive Officer dies prior to the loan maturity date. Upon death,the loan will be repaid with proceeds from an insurance policy the Company maintains on the former Chairman and Chief Executive Officer's life. The outstanding principal, included in other assets in the accompanying consolidated balance sheets, at March 30, 2001 and March 31, 2000 was approximately $4,731 and $2,985, respectively. Accrued interest was approximately $243 and $151 at March 30, 2001 and March 31, 2000, respectively. Interest income, included in interest and investment income in the accompanying consolidated statements of operations for fiscal 2001 and 2000 was approximately $193 and $168, respectively. Principal payments for fiscal 2001 and 2000 were approximately $110 and $0, respectively. Interest payments for fiscal 2001 and 2000 were approximately $101 and $163, respectively. 13. STOCK-BASED COMPENSATION PLANS Broad-Based Employee Stock Plan Under the Company's Broad-Based Employee Stock Plan, 1,700,000 shares of the Company's common stock are reserved for issuance 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 generally exercisable five years from the date of grant. Any option may be exercisable no later than ten years from the date of grant. Information regarding this plan is summarized below (share amounts in thousands): -F-24- Weighted Average Shares Price --------- --------- Balance, April 3, 1998.............................. -- -- Granted.......................................... 453 $9.73 Exercised........................................ -- -- Forfeited........................................ -- -- --------- --------- Balance, April 2, 1999.............................. 453 9.73 Granted.......................................... 40 8.69 Exercised........................................ -- -- Forfeited........................................ (33) 9.03 --------- --------- Balance, March 31, 2000............................. 460 9.35 Granted.......................................... 828 5.10 Exercised........................................ -- -- Forfeited........................................ (70) 7.76 --------- --------- Balance, March 30, 2001............................. 1,218 $6.55 ========= ========= The weighted-average per share fair value of options granted was $4.61, $8.69, and $8.91 in fiscal 2001, 2000, and 1999, respectively. As of March 30, 2001, the range of exercise prices was $2.72 to $14.05 and the weighted-average remaining contractual life of outstanding options was 5.9 years. As of March 30, 2001, approximately 482,000 shares of common stock are available for issuance under the plan. 1999 Long-Term Incentive Plan On June 21, 1999, the Company adopted the 1999 Long-Term Incentive Plan (the "1999 LTIP"). Under the 1999 LTIP, 2,270,000 shares of the Company's Common Stock are reserved for issuance to employees, officers and directors. The Compensation Committee of the Board of Directors has discretion to make grants under this plan in the form of incentive stock options, nonqualified stock options, stock appreciation rights, performance units, restricted stock awards, dividend equivalents, restricted stock, or other stock-based awards. Information regarding this plan is summarized below (share amounts in thousands): Weighted Average Shares Price --------- --------- Balance, April 2, 1999............................. -- -- Granted.......................................... 575 $9.00 Exercised........................................ -- -- Forfeited........................................ -- -- --------- --------- Balance, March 31, 2000............................. 575 9.00 Granted.......................................... 1,149 4.19 Exercised........................................ -- -- Forfeited........................................ (32) 8.34 --------- --------- Balance, March 30, 2001............................. 1,692 $5.75 ========= ========= The weighted-average per share fair value of options granted was $3.92 and $8.60 in fiscal 2001 and 2000, respectively. As of March 30, 2001, the range of exercise prices was $2.59 to $10.87 and the weighted-average remaining contractual life of outstanding options was 7.8 years. As of March 30, 2001, approximately 578,000 shares of common stock are available for issuance under the plan. Incentive Stock Option Plan Under the Company's qualified 1986 Incentive Stock Option Plan, 6,570,000 shares of the Company's common stock were 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. -F-25- Information regarding this plan is summarized below (share amounts in thousands): Weighted Average Shares Price ---------- ---------- Balance, April 3, 1998.............................. 113 $3.67 Granted.......................................... -- -- Exercised........................................ (110) 3.67 Forfeited........................................ (3) 3.67 ---------- ---------- Balance, April 2, 1999.............................. -- $ -- ========== ========== All options are fully vested at the date of grant; therefore, all outstanding options at the end of each period are exercisable. As of March 30, 2001 and March 31, 2000, there were no remaining outstanding options. This plan has expired and no additional options may be granted. Long-Term Stock Plan In March 1994, the Company adopted the 1994 Long-Term Stock Plan under which the Compensation Committee of the Board of Directors has discretion to grant nonqualified stock options and restricted stock to any employee of the Company. A total of 2,190,000 shares of the Company's common stock have been reserved for issuance under this plan. The exercise price of options granted under this plan may not be less than the fair market value of the Company's common stock on the date of grant. Information regarding the stock option component of this plan is summarized below (share amounts in thousands): Weighted Average Shares Price ---------- ---------- Balance, April 3, 1998.............................. 1,545 $16.19 Granted.......................................... 476 13.27 Exercised........................................ (66) 13.76 Forfeited........................................ (5) 16.78 ---------- ---------- Balance, April 2, 1999.............................. 1,950 14.80 Granted.......................................... -- -- Exercised........................................ -- -- Forfeited........................................ -- -- ---------- ---------- Balance, March 31, 2000............................. 1,950 14.80 Granted.......................................... -- -- Exercised........................................ -- -- Forfeited........................................ -- -- ---------- ---------- Balance, March 30, 2001............................. 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 $13.27 in fiscal 1999. As of March 30, 2001, the range of exercise prices was $5.29 to $28.86 and the weighted-average remaining contractual life of outstanding options was 5.0 years. As of March 31, 2000, there were no remaining shares available for grant under this plan, and the Company does not intend to make additional grants. 1994 Long-Term Incentive Plan In March 1994, the Company adopted the 1994 Long-Term Incentive Plan which provides officers with performance awards, consisting of cash or registered shares of common stock, or a combination thereof, based primarily upon the Company's total shareholder return as ranked against the companies comprising the NASDAQ Composite Index over a three-year period. The maximum payable under this plan to an eligible employee, whether in the form of cash or common stock, may not exceed $1 million per fiscal year. -F-26- 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; 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 2001, 2000, and 1999. Information regarding the stock option component of the plan is summarized below (share amounts in thousands): Weighted Average Shares Price ---------- ---------- Balance, April 3, 1998.............................. 418 $15.90 Granted.......................................... -- -- Exercised........................................ -- -- Forfeited........................................ -- -- ---------- ---------- Balance, April 2, 1999.............................. 418 14.83 Granted.......................................... -- -- Exercised........................................ -- -- Forfeited........................................ -- -- ---------- ---------- Balance, March 31, 2000............................. 418 14.83 Granted.......................................... -- -- Exercised........................................ -- -- Forfeited........................................ (29) 14.75 ---------- ---------- Balance, March 30, 2001............................. 389 $14.83 ========== ========== All options are fully vested at the date of grant; therefore, all outstanding options at the end of each period are exercisable. As of March 30, 2001, the range of exercise prices was $14.75 to $14.88 and the weighted-average remaining contractual life of outstanding options was 4.8 years. As of March 30, 2001, no shares were available for grant under this plan. Directors' Stock Plan In March 1994, the Company adopted the Directors' Stock Plan under which non-employee directors receive an annual grant of an option to purchase shares of the Company's common stock. During fiscal 1999, the Plan was amended to increase the number of option grants from 1,500 to 3,000 and to increase the number of shares available for grant. A total of 400,000 shares of the Company's common stock have been reserved for issuance under this plan. The exercise price of options granted under this plan may not be less than the fair market value of the Company's common stock on the date of grant. Information regarding the stock option component of this plan is summarized below (share amounts in thousands): -F-27- Weighted Average Shares Price ---------- ---------- Balance, April 3, 1998.............................. 124 $15.70 Granted.......................................... 135 13.71 Exercised........................................ (6) 5.48 Forfeited........................................ (1) 5.48 ---------- ---------- Balance, April 2, 1999.............................. 252 13.69 Granted.......................................... 72 9.17 Exercised........................................ (4) 5.48 Forfeited........................................ -- -- ---------- ---------- Balance, March 31, 2000............................. 320 12.78 Granted.......................................... 123 6.78 Exercised........................................ -- -- Forfeited........................................ (43) 13.39 ---------- ---------- Balance, March 30, 2001............................. 400 $10.95 ========== ========== 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 $6.78, $9.17, and $13.71 in fiscals 2001, 2000, and 1999, respectively. As of March 30, 2001, the range of exercise prices was $5.48 to $15.81 and the weighted-average remaining contractual life of outstanding options was 7.6 years. At March 30, 2001, no 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, 1,487,500 and 2,275,000 shares, respectively, of common stock have been reserved for grant to key management personnel and to members of the former Board of Directors. The options granted have ten-year terms with vesting periods of either three or five years from either the date of grant or the first employment anniversary date. At March 30, 2001, approximately 898,000 and 1,216,000 shares were available for grant under the 1997 and 1992 plans, respectively. However, shareholder approval must be received for any of the remaining shares to be issued under this plan. A summary of the Gulf South's stock option activity and related information is as follows (share amounts in thousands): Weighted Average Shares Price ---------- ---------- Balance, April 3, 1998.............................. 2,207 $13.55 Granted.......................................... -- -- Exercised........................................ (239) 11.46 Forfeited........................................ (24) 17.07 ---------- ---------- Balance, April 2, 1999.............................. 1,944 13.77 Granted.......................................... -- -- Exercised........................................ (220) 10.52 Forfeited........................................ (950) 15.32 ---------- ---------- Balance, March 31, 2000............................. 774 12.77 Granted.......................................... -- -- Exercised........................................ -- -- Forfeited........................................ (71) 16.20 ---------- ---------- Balance, March 30, 2001............................. 703 $12.43 ========== ========== All options are fully vested at the date of grant; therefore, all outstanding options at the end of each period are exercisable. As of March 30, 2001, the range of exercise prices for the 1992 plan was $4.57 to $28.00 and the weighted-average remaining contractual life of outstanding options was 4.9 years. As of March 30, 2001, the range of exercise prices for the 1997 plan was $4.71 to $19.71 and the weighted-average remaining contractual life of outstanding options was 6.5 years. -F-28- Warrants 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. No warrants have been exercised to date. Fair Value of Stock Options Under SFAS 123, pro forma information regarding net income (loss) and earnings per share has been determined as if the Company had accounted for its employee and director stock options under the fair value method. The fair value of stock options granted has been estimated using a Black-Scholes option pricing model. The fair value of PSS' stock options (Broad-Based Employee Stock Plan, Incentive Stock Option Plan, Long-Term Stock Plan, Long-Term Incentive Plans, and Directors' Stock Plan) granted during fiscal 2001, 2000, and 1999 have been estimated based on the following weighted average assumptions: (i) risk-free interest rates ranging from 4.4% to 6.4%; (ii) expected option life ranging from 2 to 7.25 years; (iii) expected volatility of 75.0%, 60.0%, and 56.0%, respectively; and (iv) no expected dividend yield. Using these assumptions, the estimated fair values of options granted for fiscal 2001, 2000, and 1999, were approximately $4,839, $2,842, and $9,091, 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 (loss) and net income (loss) per share for the fiscal years ended 2001, 2000, and 1999, assuming the Company had accounted for the plans under the fair value approach, are as follows (in thousands, except per share data): 2001 2000 1999 --------- -------- -------- Net (loss) income: As reported.......................... $(36,061) $20,740 $43,741 Pro forma............................ (38,965) 19,035 38,287 Earnings per share: As reported: Basic............................. $(0.51) $0.29 $0.62 Diluted........................... $(0.51) $0.29 $0.61 Pro forma: Basic............................. $(0.55) $0.27 $0.54 Diluted........................... $(0.55) $0.27 $0.54 Because the fair value method of accounting has not been applied to options granted prior to March 31, 1996, the resulting pro forma compensation cost may not be representative of that to be expected in future years. -F-29- 14. EMPLOYEE BENEFIT PLANS The Company sponsors an employee stock ownership plan ("PSS ESOP") available to all employees with at least one year of service. Employees can invest their contributions in various mutual funds as well as the common stock of the Company. Employer contributions are invested in the common stock of the Company. A company acquired in fiscal 1999 sponsored a leveraged employee stock ownership plan ("Tristar ESOP"). The Tristar ESOP was merged into the PSS ESOP effective August 6, 1999, and the note payable to a third party was replaced with financing from the holding company. As a result of the merger, the PSS ESOP became a leveraged ESOP. The supplemental matches for fiscal 2001 and 2000 were $154 and $234, respectively. The Company accounts for the PSS ESOP in accordance with SOP 93-6, Employers Accounting for Employee Stock Ownership Plans. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the balance sheet. As shares are released from collateral, the Company reports compensation expense equal to the then current market price of the shares, and the shares become outstanding for the earnings per share computation. The PSS ESOP owned approximately 2,997,000 and 1,606,000 shares of the Company's common stock at March 30, 2001 and March 31, 2000, respectively. Company contributions to the plan, excluding the supplemental match, were approximately $1,108, $1,417, and $123, for fiscal 2001, 2000, and 1999, respectively, and are made at the discretion of the Company.
The following presents the PSS ESOP share activity: 2001 2000 1999 ---------- --------- -------- Allocated shares........................................ 183,354 89,496 76,972 Shares released for allocation.......................... 34,579 28,201 12,524 Shares committed to be released......................... -- 65,657 -- Unreleased shares....................................... 11,795 46,374 140,232 ---------- --------- -------- Total ESOP shares........................... 229,728 229,728 229,728 ========== ========= ======== Fair value of unreleased shares......................... $ 53 $ 314 $ 1,224 ========== ========= ========
Holdback shares of 11,795 related to the TriStar acquisition will be settled in fiscal 2002. Approximately $154, $690, and $221, of related expense was recognized in fiscal 2001, 2000, and 1999, respectively. Employee Stock Purchase Plan 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. PSS Deferred Compensation Program The Company offers a deferred compensation program (the "Program") to qualified executives, management, and salespeople. The Program, which is an unfunded plan, is comprised of a deferred compensation plan and a stock option program. The Company has purchased life insurance as a means to finance the benefits that become payable under the plan. Under the deferred compensation plan, participants can elect to defer up to 100% of their total compensation. The Company makes matching contributions of up to 10% to 15% of the participant's deferral. The match contribution ranges from 25% to 125% of the participant's deferral. Under the stock option plan, participants are granted stock options to purchase common stock of the Company. The number of stock options granted is a function of the participant's annual deferral amount plus the Company match. The grant price of the option is determined annually to reflect an exercise price which allows the annual deferral amount to be supplemented by the growth of the PSS stock in excess of the declared interest rate projected to compound for four years. Thus, the option price is not less than the fair market value of the common stock on the date such option is granted. Participant contributions are always 100% vested. The Company match and the stock options vest as follows: -F-30- # of Years in the plan Vesting % ---------------------- --------- Less than 4 years 0% 4 years 20% 5 years 40% 6 years 60% 7 years 80% 8 years 100% Death or disability 100% After the options are 100% vested, participants can exercise up to 25% of vested options in any calendar year. At age 60, or age 55 with 10 years of participation in the Program, the retirement benefit is distributed to participants in five equal annual installments, or in a lump sum payment if the vested account balance is $25 or less. The retirement benefit is distributed in a lump sum upon death and over five years upon disability. In the event of termination of employment, 100% of the participant's vested balance will be distributed in five equal installments, or in a lump sum payment if the vested account balance is $25 or less. During fiscal 2001 and 2000, the Company matched approximately $1,186 and $864, respectively, of employee deferrals. At March 30, 2001 and March 31, 2000, approximately $6,400 and $4,696, respectively, is recorded in other long-term assets in the accompanying consolidated balance sheets. In addition, $6,684 and $5,561 of deferred compensation is included in other long-term liabilities in the accompanying consolidated balance sheets at March 30, 2001 and March 30, 2000, respectively. 15. OPERATING LEASE COMMITMENTS The Company leases various facilities and equipment under operating leases. Certain lease commitments provide that the Company pay taxes, insurance, and maintenance expenses related to the leased assets. Rent expense approximated $31,529, $26,949 and $19,905, for fiscal 2001, 2000, and 1999, respectively. As of March 30, 2001, future minimum payments, by fiscal year and in the aggregate, required under noncancelable operating leases are as follows: Fiscal Year: 2002............................................. $25,875 2003............................................. 21,728 2004............................................. 15,526 2005............................................. 9,465 2006............................................. 5,694 Thereafter....................................... 8,923 --------- Total................................... $87,211 ========= 16. SEGMENT INFORMATION The Company's reportable segments are strategic businesses that offer different products and services to different segments of the health care industry, and are based upon how management regularly evaluates the Company. These segments are managed separately because of different customers and products. 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): -F-31-
2001 2000 1999 ---------- ---------- ---------- NET SALES: Physician Supply Business $ 689,444 $ 708,759 $ 677,360 Imaging Business 737,907 704,296 526,403 Long-Term Care Business 367,581 366,574 343,480 Other (a) 19,873 24,361 19,924 ---------- ---------- ---------- Total net sales $1,814,805 $1,803,990 $1,567,167 ========== ========== ========== CHARGES INCLUDED IN GENERAL & ADMINISTRATIVE EXPENSE: Physician Supply Business $ 1,952 $ 1,768 $ 3,358 Imaging Business 3,004 5,769 7,981 Long-Term Care Business 19,849 4,660 3,008 Other (a) 14,026 2,044 1,335 ---------- ---------- ---------- Total charges included in general & administrative expenses $ 38,831 $ 14,241 $ 15,682 ========== ========== ========== (LOSS) INCOME FROM OPERATIONS: Physician Supply Business $ 17,336 $ 32,681 $ 42,727 Imaging Business (1,404) 20,297 16,305 Long-Term Care Business (15,528) (4,990) 17,186 Other (a) (28,295) (3,279) (2,365) ---------- ---------- ---------- Total income from operations $ (27,891) $ 44,709 $ 73,853 ========== ========== ========== DEPRECIATION: Physician Supply Business $ 6,016 $ 4,393 $ 6,844 Imaging Business 3,457 3,127 3,614 Long-Term Care Business 1,862 1,698 1,429 Other (a) 617 228 322 ---------- ---------- ---------- Total depreciation $ 11,952 $ 9,446 $ 12,209 ========== ========== ========== AMORTIZATION OF INTANGIBLE ASSETS: Physician Supply Business $ 1,685 $ 1,932 $ 2,067 Imaging Business 8,754 6,327 3,460 Long-Term Care Business 2,309 2,223 1,762 Other (a) 270 360 0 ---------- ---------- ---------- Total amortization of intangible assets $ 13,018 $ 10,842 $ 7,289 ========== ========== ========== PROVISION FOR DOUBTFUL ACCOUNTS: Physician Supply Business $ 968 $ 1,241 $ 1,627 Imaging Business 487 3,378 846 Long-Term Care Business 22,785 11,193 2,485 Other (a) -- -- 223 ---------- ---------- ---------- Total provision for doubtful accounts $ 24,240 $ 15,812 $ 5,181 ========== ========== ========== INTEREST EXPENSE: Physician Supply Business $ 1,926 $ 2,604 $ 1,468 Imaging Business 9,645 4,067 4,247 Long-Term Care Business 5,291 4,343 2,219 Other (a) 3,532 4,443 3,588 ---------- ---------- ---------- Total interest expense $ 20,394 $ 15,457 $ 11,522 ========== ========== ========== INTEREST AND INVESTMENT INCOME: Physician Supply Business $ 103 $ 172 $ 67 Imaging Business -- -- 2 Long-Term Care Business 17 92 1,147 Other (a) 2,586 1,574 3,516 ---------- ---------- ---------- Total interest and investment income $ 2,706 $ 1,838 $ 4,732 ========== ========== ========== (BENEFIT) PROVISION FOR INCOME TAXES: Physician Supply Business $ 7,411 $ 13,103 $ 16,604 Imaging Business (2,613) 10,744 6,536 Long-Term Care Business (7,235) (2,845) 7,705 Other (a) (5,392) (1,659) (905) ---------- ---------- ---------- Total provision (benefit) for income taxes $ (7,829) $ 19,343 $ 29,940 ========== ========== ========== CAPITAL EXPENDITURES: Physician Supply Business $ 15,583 $ 13,031 $ 15,149 Imaging Business 4,545 6,838 6,735 Long-Term Care Business 583 4,631 2,890 Other (a) 2,146 2,682 -- ---------- ---------- ---------- Total capital expenditures $ 22,857 $ 27,182 $ 24,774 ========== ========== ========== 2001 2000 ---------- ---------- ASSETS: Physician Supply Business $ 225,080 $ 243,020 Imaging Business 324,830 346,073 Long-Term Care Business 156,581 182,024 Other (a) 66,143 102,300 ---------- ---------- Total assets $ 772,634 $ 873,417 ========== ==========
(a) Other includes the holding company and the international subsidiaries. -F-32- 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table presents summarized unaudited quarterly results of operations for the Company for fiscal 2001 and 2000. The Company believes all necessary adjustments have been included in the amounts stated below to present fairly the following selected information when read in conjunction with the consolidated financial statements of the Company. Future quarterly operating results may fluctuate depending on a number of factors, including the timing of business acquisitions, 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. Reclassification - EITF 00-10 During the fourth quarter of fiscal 2001, the Company adopted the provisions of EITF 00-10 (see Note 1, Background and Summary of Significant Accounting Policies, for related discussion). Accordingly, amounts billed to customers for shipping and handling were reclassified to net sales for each of the quarters presented for fiscal 2001 and 2000. In addition, other immaterial amounts were reclassified to conform to the current year presentation. Restatements During the fourth quarter of fiscal 2001, the Company restated its previously issued consolidated financial statements for the quarters ended June 30, 2000, September 30, 2000, and December 29, 2000. As a result of an analysis of the Company's accounts receivable records during the fourth quarter of fiscal 2001, the Company recorded adjustments to reduce sales and accounts receivable by $1.6 million, $1.9 million, and $0.5 million during the first, second, and third quarters of fiscal 2001, respectively. In connection with the Company's year end physical inventory procedures, the Company identified a $3.8 million adjustment to cost of goods sold and vendor liabilities, which applies to the second quarter of fiscal 2001.
Fiscal Year 2000 Fiscal Year 2001 ------------------------------------------ ----------------------------------------- (In Thousands, Except Per Share Data) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 --------- --------- --------- --------- --------- -------- --------- --------- Pre-Adjustment and Reclassification Net sales........................ $437,001 $451,001 $462,101 $443,433 $470,213 $444,917 $447,326 $447,613 Cost of goods sold............... 329,774 337,186 347,277 340,642 357,159 340,818 343,672 351,898 --------- --------- --------- --------- --------- -------- --------- --------- Gross profit................ 107,227 113,815 114,824 102,791 113,054 104,099 103,654 95,715 General and administrative expenses 58,026 66,625 61,807 91,127 69,765 66,636 94,747 75,380 Selling expenses................. 27,323 28,236 30,084 30,720 29,378 28,648 28,479 28,651 International Business Exit Charge -- -- -- -- -- -- 14,917 -- --------- --------- --------- --------- --------- -------- --------- --------- Operating income (loss)..... 21,878 18,954 22,933 (19,056) 13,911 8,815 (34,489) (8,316) Other income (expense) Interest expense............ (3,511) (2,862) (4,074) (5,007) (5,035) (4,687) (4,673) (5,999) Interest and investment income 451 477 391 516 700 561 547 898 Other income................ 1,058 7,293 1,551 533 812 715 567 (405) --------- --------- --------- --------- --------- -------- --------- --------- (2,002) 4,908 (2,132) (3,958) (3,523) (3,411) (3,559) (5,506) Income (loss) before provision for income taxes and cumulative effect of accounting change................ 19,878 23,862 20,801 (23,014) 10,388 5,404 (38,048) (13,822) Provision (benefit) for income taxes 8,191 9,563 8,881 7,294 4,764 2,908 (8,307) (4,154) --------- --------- --------- --------- --------- -------- --------- --------- Income (loss) before cumulative effect of accounting change............. 11,685 14,299 11,920 (15,720) 5,624 2,496 (29,741) (9,668) Cumulative effect of accounting change (1,444) -- -- -- -- -- -- -- --------- --------- --------- --------- --------- -------- --------- --------- Net income (loss)........... 10,241 14,299 11,920 (15,720) 5,624 2,496 (29,741) (9,668) ========= ========= ========= ========= ========= ======== ========= ========= Earnings per share - Basic and Diluted: Income (loss) before cumulative effect of accounting change. $0.16 $0.20 $0.17 $(0.22) $0.08 $0.04 $(0.42) $(0.14) Cumulative effect of accounting change (0.02) -- -- -- -- -- -- -- --------- --------- --------- --------- --------- -------- --------- --------- Net income (loss)........... $0.14 $0.20 $0.17 $(0.22) $0.08 $0.04 $(0.42) $(0.14) ========= ========= ========= ========= ========= ======== ========= =========
-F-33-
Fiscal Year 2000 Fiscal Year 2001 ------------------------------------------ ----------------------------------------- (In Thousands, Except Per Share Data) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 --------- --------- --------- --------- --------- -------- --------- --------- Reclassifications: EITF 00-10 Reclassification Net sales increase............ $1,336 $2,515 $3,254 $3,349 $3,078 $3,096 $2,573 -- Cost of goods sold increase (decrease)................. 186 (116) 132 98 203 6 833 -- G&A expenses increase......... 1,150 2,631 3,122 3,251 2,875 3,090 1,740 -- Restatements: Net sales decrease............ (1,643) (1,863) (505) -- Cost of goods sold increase... -- 3,801 -- -- Benefit from income taxes increase (639) (2,204) (197) -- --------- --------- --------- --------- Net loss $(1,004) $(3,460) $ (308) -- --------- --------- --------- --------- --------- --------- --------- --------- Earnings per share - Basic and Diluted: -- -- -- -- $(0.01) $(0.05) -- -- ========= ========= ========= ========= ========= ========= ========= ========= (In Thousands, Except Per Share Data) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 --------- --------- --------- --------- --------- --------- --------- --------- Final Adjusted and Reclassified (restated)(restated) (restated) Net sales........................ $438,337 $453,516 $465,355 $446,782 $471,648 $446,150 $449,394 $447,613 Cost of goods sold............... 329,960 337,070 347,409 340,739 357,362 344,625 344,505 351,898 --------- --------- --------- --------- --------- --------- --------- --------- Gross profit................ 108,377 116,446 117,946 106,043 114,286 101,525 104,889 95,715 General and administrative expenses 59,176 69,256 64,929 94,380 72,640 69,726 96,487 75,380 Selling expenses................. 27,323 28,236 30,084 30,719 29,378 28,648 28,479 28,651 International business exit charge -- -- -- -- -- -- 14,917 -- --------- --------- --------- --------- --------- --------- --------- --------- Operating income (loss)..... 21,878 18,954 22,933 (19,056) 12,268 3,151 (34,994) (8,316) Other income (expense) Interest expense............ (3,511) (2,862) (4,074) (5,010) (5,035) (4,687) (4,673) (5,999) Interest and investment income 451 477 391 519 700 561 547 898 Other income................ 1,058 7,293 1,551 535 812 715 567 (405) --------- --------- --------- --------- --------- --------- --------- --------- (2,002) 4,908 (2,132) (3,956) (3,523) (3,411) (3,559) (5,506) Income (loss) before provision for income taxes and cumulative effect of accounting change... 19,876 23,862 20,801 (23,014) 8,745 (260) (38,553) (13,822) Provision (benefit) for income taxes 8,191 9,563 8,881 7,294 4,125 704 (8,504) (4,154) --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before cumulative effect of accounting change... 11,685 14,299 11,920 (15,720) 4,620 (964) (30,049) (9,668) Cumulative effect of accounting change (1,444) -- -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss)........... 10,241 14,299 11,920 (15,720) 4,620 (964) (30,049) (9,668) ========= ========= ========= ========= ========= ========= ========= ========= Earnings per share - Basic and Diluted: Income (loss) before cumulative effect of accounting change $0.16 $0.20 $0.17 $(0.22) $0.06 $(0.01) $(0.42) $(0.14) Cumulative effect of accounting change (0.02) -- -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss)............. $0.14 $0.20 $0.17 $(0.22) $0.06 $(0.01) $(0.42) $(0.14) ========= ========= ========= ========= ========= ========= ========= =========
-F-34- 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 3 to 12 months for certain 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. During fiscal 2000, the Board of Directors approved and adopted the PSS World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical, Inc. Corporate Office Employee Retention Bonus Plan. Refer to Note 3, Charges included in General and Administrative Expenses for further discussion. During the second quarter of fiscal 2000, the Company received approximately $6.5 million relating to a favorable medical x-ray film antitrust settlement claim. The amount is classified as other income in the accompanying consolidated statement of operations. The Company, through its Gulf South Medical Supply subsidiary, Physician Sales & Service subsidiary and/or predecessor companies, has been named as one of many defendants in latex glove product liability claims in various Federal and state courts. The defendants are primarily distributors of certain brands of latex gloves. Currently, state litigation exists in New Hampshire, Illinois, Massachusetts and California, while Federal and/or Federal multi-district litigation is present in Washington, Georgia, Indiana, New Hampshire, Pennsylvania and Ohio. Defense costs are currently allocated by agreement between a consortium of insurers on a pro rata basis for each case depending upon policy years and alleged years of exposure. All of the insurance carriers are defending subject to a reservation of rights. Ultimately, the manufacturers from which the gloves were purchased may assume the defense and liability obligations. The Company intends to vigorously defend the proceeding. The Company and certain of its current officers and directors were named as defendants in a purported securities class action lawsuit filed on or about May 28, 1998. The allegations are based upon a decline in the Company's stock price following announcements by the Company in May 1998 regarding the Gulf South merger, which resulted in earnings below analyst's expectations. The defendants' motion to dismiss the complaint was granted by order dated February 9, 2000. Plaintiffs filed an amended complaint on March 15, 2000. Defendants' motion to dismiss, filed May 1, 2000, is still pending. The Company believes that the allegations contained in the complaint are without merit and intends to defend vigorously against the claims. However, the lawsuit is in the earliest stages, and there can be no assurance that this litigation will 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. Other than discussed above, the Company has not experienced any significant product liability claims and maintains product liability insurance coverage. In addition, the Company is also a 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, after consultation with its outside legal counsel, believes that the outcome of any proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations. On September 30, 1999, DI entered into a three year distributorship agreement with an imaging supply vendor. The agreement stipulates that, among other things, in the event of termination of the agreement due to a change in control of DI, the Company will pay liquidated damages to the vendor in the amount of the lesser of $6 million or $250,000 times the number of months remaining under the agreement. -F-35- 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, had a five-year term. 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. On December 1, 2000, the Company renewed the Distribution Agreement with Abbott Laboratories for an additional term of 3 years. 20. SUBSEQUENT EVENTS Subsequent to year-end, the Company sold its International Business, to the then management of the European operations, in the first quarter of fiscal 2002. The Company believes that no further losses related to exit activities will be recorded. On May 24, 2001, the Company refinanced its existing Amended Credit Agreement with a Credit Facility (refer to Note 9, Long-Term Debt and Capital Lease Obligations). -F-36- SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED APRIL 2, 1999, MARCH 31, 2000, AND MARCH 30, 2001 (Dollars in Thousands)
Additions ------------------------ Balance Provision at Charged Transfers Balance Valuation Allowance for Beginning to From at End of Accounts Receivable of Period Expense Acquisitions Write-offs Period - ----------------------------------------------- ---------- ----------- ------------ ---------- ----------- Year ended April 2, 1999 9,990 4,181 332 7,585 6,918 Year ended March 31, 2000 6,918 14,312 -- 10,391 10,839 Year ended March 30, 2001 10,839 23,073 -- 16,341 17,571 Additions ------------------------ Balance Provision at Charged Transfers Balance Valuation Allowance for Beginning to From at End of Notes Receivable of Period Expense Acquisitions Write-offs Period - ----------------------------------------------- ---------- ----------- ------------ ---------- ----------- Year ended April 2, 1999 -- 1,000 -- -- 1,000 Year ended March 31, 2000 1,000 1,500 -- 921 1,579 Year ended March 30, 2001 1,579 1,167 -- 1,575 1,171 Additions ------------------------ Balance Provision at Charged Transfers Balance Gulf South Operational Beginning to From at End of Tax Charge Reserve of Period Expense Acquisitions Write-offs Period - ----------------------------------------------- ---------- ----------- ------------ ---------- ----------- Year ended April 2, 1999 6,227 801 1,019 5,136 2,911 Year ended March 31, 2000 2,911 499 -- 141 3,269 Year ended March 30, 2001 3,269 2,070 -- -- 5,339 Charged To Balance General at & Balance Valuation Allowance for Beginning Admin. at End of Inventory Obsolescence of Period Expense Utilizations Period - ----------------------------------------------- ---------- ----------- ------------ ---------- Year ended April 2, 1999 9,492 -- 1,646 7,846 Year ended March 31, 2000 7,846 (1,221) 496 6,129 Year ended March 30, 2001 6,129 (749) 992 4,388
-F-37- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Incorporated by reference from the Company's Definitive Proxy Statement to be filed by July 30, 2001 for its fiscal 2001 Annual Meeting of Shareholders under the caption "Directors and Executive Officers of the Registrant." Item 11. Executive Compensation Incorporated by reference from the Company's Definitive Proxy Statement to be filed by July 30, 2001 for its fiscal 2001 Annual Meeting of Shareholders under the caption "Executive Compensation." Item 12. Security Ownership of Certain Beneficial Owners Incorporated by reference from the Company's Definitive Proxy Statement to be filed by July 30, 2001 for its fiscal 2001 Annual Meeting of Shareholders under the caption "Beneficial Ownership of Certain Stockholders" and "Stock Ownership of Directors and Officers." Item 13. Certain Relationships and Related Transactions Incorporated by reference from the Company's Definitive Proxy Statement to be filed by July 30, 2001 for its fiscal 2001 Annual Meeting of Shareholders under the caption "Certain Relationships and Related Transactions." -42- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this Registration Statement: 1. Consolidated Financial Statements Refer to Item 8 "Financial Statements and Supplementary Data" for a listing of the Consolidated Financial Statements included therein. 2. Supplementary Data Refer to Item 8 "Financial Statements and Supplementary Data" for a listing of the Supplementary Data included therein. Exhibit Number Description - ---------- ---------------------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation, dated as of March 15, 1994, as amended.(12) 3.2 Amended and Restated Bylaws, dated as of March 15, 1994.(3) 4.1 Form of Indenture, dated as of October 7, 1997, by and among the Company, the Subsidiary Guarantors named therein, and SunTrust Bank, Central Florida, National Association, as Trustee.(4) 4.1a Supplemental Indenture, dated as of February 15, 2001, by and among the New Subsidiary Guarantors named therein and SunTrust Bank (formerly known as SunTrust Bank, Central Florida, National Association), as Trustee. (11) 4.2 Registration Rights Agreement, dated as of October 7, 1997, by and among the Company, the Subsidiary Guarantors named therein, BT Alex. Brown Incorporated, Salomon Brothers Inc. and NationsBanc Montgomery Securities, Inc.(4) 4.3 Form of 81/2% Senior Subordinated Note due 2007, including Form of Guarantee (Exchange Notes).(4) 4.4 Shareholder Protection Rights Agreement, dated as of April 20, 1998, between PSS World Medical, Inc. and Continental Stock Transfer & Trust Company, as Rights Agent.(13) 4.4a Amendment to Shareholder Protection Rights Agreement, dated as of June 21, 2000, between PSS World Medical, Inc. and Continental Stock Transfer & Trust Company as Rights Agent.(10) 10.1 Incentive Stock Option Plan, dated as of May 14, 1986.(1) 10.2 Amended and Restated Directors Stock Plan.(7) 10.3 Amended and Restated 1994 Long-Term Incentive Plan.(7) 10.4 Amended and Restated 1994 Long-Term Stock Plan.(7) 10.5 1994 Employee Stock Purchase Plan.(2) 10.6 1994 Amended Incentive Stock Option Plan.(1) -43- 10.7 PSS World Medical, Inc. 1999 Long-Term Incentive Plan.(9) 10.8 Distributorship Agreement between Abbott Laboratories and PSS World Medical, Inc. (Portions omitted pursuant to a request for confidential treatment -- Separately filed with Commission).(6) 10.9 Stock Purchase Agreement between Abbott Laboratories and Physician Sales & Service, Inc.(6) 10.10 Amended and Restated Physician Sales and Service, Inc. Employee Stock Ownership and Savings Plan.(8) 10.10a First Amendment to the Physician Sales and Service, Inc. Employee Stock Ownership and Savings Plan.(8) 10.11 Agreement and Plan of Merger, dated as of December 14, 1997, by and among the Company, PSS Merger Corp. and Gulf South Medical Supply, Inc.(5) 10.12 Credit Agreement, dated as of May 24, 2001, by and among the Company, each of the Company's subsidiaries therein named, the Lenders from time to time party thereto, Bank of America,, N.A., as Agent, and Banc of America Securities LLC, as Arranger.(15) 10.13 Employment Agreement, dated as of March 4, 1998, by and between the Company and David A. Smith. 10.13a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and David A. Smith. 10.14 Employment Agreement, dated as of April 1, 1998, by and between the Company and John F. Sasen, Sr. 10.14a Amendment to Employment Agreement, dated as of April 1, 1998, by and between the Company and John F. Sasen, Sr. 10.15 Severance Agreement, dated as of October 11, 2000, by and between the Company and Frederick E. Dell. 10.16 Severance Agreement, dated as of February 1, 2001, by and between the Company and Kirk A. Zambetti. 10.17 Severance Agreement, dated as of March 21, 2001, by and between the Company and Patrick C. Kelly. 21.1 List of subsidiaries of the Company.
(1) Incorporated by Reference to the Company's Registration Statement on Form S-1, Registration No. 33-76580. (2) Incorporated by Reference to the Company's Registration Statement on Form S-8, Registration No. 33-80657. (3) Incorporated by Reference to the Company's Registration Statement on Form S-3, Registration No. 33-97524. (4) Incorporated by Reference to the Company's Registration Statement on Form S-4, Registration No. 333-39679. (5) Incorporated by Reference from Annex A to the Company's Registration Statement on Form S-4, Registration No. 333-44323. (6) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal ended March 30, 1995. (7) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996. (8) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (9) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999. (10) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. (11) Incorporated by Reference to the Company's Quarterly Report on From 10-Q for the quarterly period ended December 29, 2000. (12) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 8, 1998. (13) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 22, 1998. (14) Incorporated by Reference to the Company's Current Report on Form 8-K, filed June 5, 2001.
(b) Reports on Form 8-K The following current reports on Form 8-K were filed during the quarter ended March 30, 2001: ------------------ -------------------------------------------------------- Date of Report Items Reported ------------------ -------------------------------------------------------- January 12, 2001 Announcing the terms of the Amended and Restated Credit Agreement, dated as of December 28, 2000 ------------------ -------------------------------------------------------- -44- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jacksonville, State of Florida, on June 27, 2001. PSS WORLD MEDICAL, INC. By: /s/ David A. Smith -------------------------------------------- David A. Smith President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /s/ Clark A. Johnson - ------------------------------- June 25, 2001 Clark A. Johnson Chairman of the Board of Directors /s/ David A. Smith - ------------------------------- President, Chief Financial Officer, and Director June 25, 2001 David A. Smith (Principal Financial Officer) /s/ Hugh M. Brown - ------------------------------- June 25, 2001 Hugh M. Brown Director /s/ T. O'Neal Douglas - ------------------------------- June 25, 2001 T. O'Neal Douglas Director /s/ Melvin L. Heckman - ------------------------------- June 25, 2001 Melvin L. Heckman Director /s/ Delores Kesler - ------------------------------- Director June 25, 2001 Delores Kesler /s/ Charles R. Scott - ------------------------------- June 25, 2001 Charles R. Scott Director /s/ Donna Williamson - ------------------------------- June 25, 2001 Donna Williamson Director
-45- Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statement File Nos. 33-80657, 33-90464, 333-15043, 333-64185, 33-85004, 33-97756, 33-99046, 33-97754, 333-30427, 333-64187, 333-50526, and 333-58272. /s/ Arthur Andersen LLP - ----------------------- ARTHUR ANDERSEN LLP Jacksonville, Florida June 26, 2001 -46- EX-10 5 exhibit10_15.txt 10.15 FRED E. DELL SEVERANCE AGREEMENT EXHIBIT 10.15 PSS World Medical, Inc. 4345 Southpoint Boulevard Jacksonville, Florida 32216 Mr. Frederick E. Dell 4644 Swilcan Bridge Lane South Jacksonville, Florida 32224 October 11, 2000 Dear Gene: This letter will memorialize our agreement with respect to the termination of your employment. Please acknowledge your agreement by signing in the space indicated at the end of this letter. 1. Termination of Employment. Effective as October 15, 2000 (the "Date of Termination"), your employment with PSS World Medical, Inc. (the "Company") or any of its affiliates is hereby terminated without Cause. 2. No Change of Control. You and the Company acknowledge that, as of the Date of Termination, there has not occurred a Change of Control of the Company, as defined in your Employment Agreement with the Company (the "Employment Agreement"), or as defined in the PSS World Medical, Inc. Officer Retention Bonus Plan, in which you are a participant (the "Retention Bonus Plan"). You and we further represent and acknowledge that your employment is not being terminated in contemplation of or otherwise in connection with a Change of Control. 3. Severance Benefits. In consideration of your promises and covenants contained in this agreement, and in accordance with the terms of the Employment Agreement, the Company agrees to provide you the following benefits: (i) the Company shall pay to you in a lump sum in cash within 30 days after the Date of Termination (but not sooner than the expiration of the seven-day revocation period described in Section 7(b) of this agreement), the aggregate of the following amounts: A. the sum of (1) your base salary through the Date of Termination to the extent not theretofore paid, and (2) any compensation previously deferred by you (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid; and B. the amount equal to twenty-four (24) times your monthly base salary in effect as of the Date of Termination (the "Severance Payment"); and (ii) for twelve (12) months after the Date of Termination, the Company shall continue benefits to you and/or your family at least equal to those that would have been provided to you in accordance with the welfare plans, programs, practices and policies of the Company described in Section 5(c) of your Employment Agreement in which you were participating immediately prior to the Date of Termination; provided, however, that if you become re-employed with another employer and are eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and (iii)in lieu of providing you the use of a Company automobile for 24 months after the Date of Termination, the Company shall provide you with a lump sum automobile allowance of $24,000; and (iv) for twelve (12) months after the Date of Termination, the Company shall continue to provide you with the fringe benefits provided to you under Section 5(e) of your Employment Agreement, as such benefits are identified on Exhibit A hereto, on the same terms and conditions as such fringe benefits were being provided to you immediately before the Date of Termination; and (v) the Company shall, within 30 days of receipt of reasonably documented invoices therefor, reimburse your actual cost (not to exceed $15,000) for outplacement expenses incurred within one year after the Date of Termination; and (vi) all of your options to acquire stock of the Company (the "Options") shall cease to vest of the Date of Termination and shall expire as to any then-unvested shares, but, in acknowledgement that all of the Options are currently "underwater", the Options are hereby amended as of the Date of Termination to provide that they shall remain exercisable as to all then-vested shares until the later of (i) the end of the Retention Bonus Payment Period (as defined in Section 4 below) or (ii) 90 days after a Change of Control that occurs on or before the end of the Retention Bonus Period; and (vii) the provisions of Section 10 of your Employment Agreement, which relate to the excise tax-gross up obligations of the Company in the event of a change of control of the Company, shall survive the Date of Termination and continue in full force and effect for two years after the end of the Retention Bonus Payment Period (as defined in Section 4 below); and (viii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to you any other amounts or benefits required to be paid or provided or which you are eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies. You acknowledge that the payments and benefits described herein are in exchange for your signing this agreement. You are reminded of your right to purchase continued health insurance coverage for a period of up to eighteen (18) months following the Date of Termination pursuant to the terms of applicable law. Such eighteen (18) month period shall run concurrently with the period for which the Company is providing coverage under Section 3(ii) above. 4. Substitute Retention Bonus. In lieu of any rights you may have under the Retention Bonus Plan, which you hereby waive, the Company shall pay to you on February 1, 2001, 2002 and 2003 (the first, second and third anniversaries, respectively, of your initial participation in the Retention Bonus Plan) the amounts equal to 50%, 30% and 20%, respectively, of the dollar amount of your Retention Bonus (as defined therein) as in effect on the Date of Termination, i.e., without future increase due to forfeitures by other participants in the Retention Bonus Plan after the Date of Termination (the "Substitute Retention Bonus"); provided, however, that upon the occurrence of a Change of Control (as defined in the Retention Bonus Plan), any unpaid amount of your Substitute Retention Bonus (calculated as set forth above) shall be paid to you in a lump sum cash payment within 30 days after the occurrence of the Change of Control. The period beginning on the Date of Termination and ending on the last date that any portion of the Substitute Retention Bonus is due and payable to you in accordance with this Section 4 shall be referred to herein as the "Retention Bonus Payment Period." 5. Restrictions on Your Conduct. (a) General. The restrictive covenants in this Section 5 replace the restrictive covenants in your Employment Agreement. Such Employment Agreement restrictive covenants shall be void and of no further force or effect from and after the Date of Termination. You and the Company understand and agree that the purpose of the provisions of this Section 5 is to protect legitimate business interests of the Company, as more fully described below, and is not intended to eliminate your post-employment competition with the Company per se, nor is it intended to impair or infringe upon your right to work, earn a living, or acquire and possess property from the fruits of your labor. You hereby acknowledge that the post-employment restrictions set forth in this Section 5 are reasonable and that they do not, and will not, unduly impair your ability to earn a living after the Date of Termination. Therefore, subject to the limitations of reasonableness imposed by law, and in consideration of the severance benefits described in Section 3 of this letter agreement, you shall be subject to the restrictions set forth in this Section 5. (b) Definitions. The following capitalized terms used in this Section 5 shall have the meanings assigned to them below, which definitions shall apply to both the singular and the plural forms of such terms: "Competitive Position" means any position with a Competitor as a Principal or Representative in which you will use or is likely to use any Confidential Information or Trade Secrets of the Company, or in which you have duties for, provide services to, or otherwise assist such Competitor where such duties, services or assistance involve Competitive Services. "Competitive Services" means any activities engaged in by the Company as of the Date of Termination that relate directly to the distribution of medical supplies, equipment and pharmaceuticals to primary care and other office-based physicians, or the distribution of medical diagnostic imaging supplies, chemicals, equipment and service to the acute care and alternate care market; provided, however, but without limitation, that Competitive Services shall not include (i) the manufacture of medical supplies, equipment or pharmaceuticals or medical diagnostic imaging supplies, chemicals or equipment (collectively "Medical Products"), (ii) the provisions of e-commerce or internet services with respect to the dissemination of information or services related to the distribution of Medical Products, or (iii) the provision of group purchasing contract pricing or cost analyses for physicians or medical practices. "Competitor" means any Person engaged, wholly or in material part, in Competitive Services. "Confidential Information" means all information regarding the Company, its activities, business or clients that is the subject of reasonable efforts by the Company to maintain its confidentiality and that is not generally disclosed by practice or authority to persons not employed by the Company, but that does not rise to the level of a Trade Secret. "Confidential Information" shall include, but is not limited to, financial plans and data concerning the Company; management planning information; business plans; operational methods; market studies; marketing plans or strategies; product development techniques or plans; customer lists; details of customer contracts; current and anticipated customer requirements; past, current and planned research and development; business acquisition plans; and new personnel acquisition plans. "Confidential Information" shall not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right or privilege of the Company. This definition shall not limit any definition of "confidential information" or any equivalent term under state or federal law. "Person" means any individual or any corporation, partnership, joint venture, limited liability company, association or other entity or enterprise. "Principal or Representative" means a principal, owner, partner, shareholder, joint venturer, investor, member, trustee, director, officer, manager, employee, agent, representative or consultant. "Protected Customers" means any Person to whom the Company has sold its products or services or to whom the Company has submitted a written proposal to sell its products or services during the twelve (12) months prior to the Date of Termination. "Protected Employees" means employees of the Company who were employed by the Company at any time within six (6) months prior to the Date of Termination. "Restricted Period" means the Retention Bonus Payment Period. "Restricted Territory" means each of the fifty states in the United States of America. "Restrictive Covenants" means the restrictive covenants contained in Section 5(c) hereof. "Trade Secret" means all information, without regard to form, including, but not limited to, technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, distribution lists or a list of actual or potential customers, advertisers or suppliers which is not commonly known by or available to the public and which information: (A) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Without limiting the foregoing, Trade Secret means any item of confidential information that constitutes a "trade secret(s)" under the common law or statutory law of the State of Florida. (c) Restrictive Covenants. (i) Restriction on Disclosure and Use of Confidential Information and Trade Secrets. You understand and agree that the Confidential Information and Trade Secrets constitute valuable assets of the Company and its affiliated entities, and may not be converted to your own use. Accordingly, you hereby agree that you shall not, directly or indirectly, at any time during the Restricted Period reveal, divulge, or disclose to any Person not expressly authorized by the Company any Confidential Information, and you shall not, directly or indirectly, at any time during the Restricted Period use or make use of any Confidential Information in connection with any business activity. During the Restricted Period, you shall not directly or indirectly transmit or disclose any Trade Secret of the Company to any Person, and shall not make use of any such Trade Secret, directly or indirectly, for yourself or for others, without the prior written consent of the Company. You and we acknowledge and agree that this Section 5 is not intended to, and does not, alter either the Company's rights or your obligations under any state or federal statutory or common law regarding trade secrets and unfair trade practices. (ii) Nonsolicitation of Protected Employees. You understand and agree that the relationship between the Company and each of its Protected Employees constitutes a valuable asset of the Company and may not be converted through your solicitation to your own use. Accordingly, you hereby agree that during the Restricted Period, you will not directly or indirectly on your own behalf or as a Principal or Representative of any Person or otherwise solicit or induce any Protected Employee to terminate his or her employment relationship with the Company or to enter into any relationship of employment, agency or independent contractorship with any other Person. (iii) Restriction on Relationships with Protected Customers. You understand and agree that the relationship between the Company and each of its Protected Customers constitutes a valuable asset of the Company and may not be converted through your solicitation to your own use. Accordingly, you hereby agree that, during the Restricted Period, you will not, without the prior written consent of the Company, directly or indirectly, on your own behalf or as a Principal or Representative of any Person, solicit, divert, or attempt to solicit or divert a Protected Customer for the purpose of providing or selling Competitive Services; provided, however, that the prohibition of this covenant shall apply only to Protected Customers with whom you had Material Contact on the Company's behalf during the twelve (12) months immediately preceding the Date of Termination. For purposes of this Agreement, you had "Material Contact" with a Protected Customer if (a) you had business dealings with the Protected Customer on the Company's behalf; (b) you were responsible for supervising or coordinating the dealings between the Company and the Protected Customer; or (c) you obtained Trade Secrets or Confidential Information about the customer as a result of your association with the Company. (iv) Noncompetition with the Company. The parties acknowledge: (A) that your services on behalf of the Company require special expertise and talent in the provision of Competitive Services and that you have had substantial contacts with customers of the Company; (B) that pursuant to your employment with the Company, you have been in a position of trust and responsibility and you have had access to a substantial amount of Confidential Information and Trade Secrets and that the Company has placed you in such position and given you access to such information in reliance upon your agreement not to compete with the Company during the Restricted Period; (C) that due to your management duties, you have been the repository of a substantial portion of the goodwill of the Company and would have an unfair advantage in competing with the Company; (D) that you are capable of competing with the Company; and (E) that you are capable of obtaining gainful, lucrative and desirable employment that does not violate the restrictions contained in this Agreement. In consideration of the compensation and benefits being paid and to be paid by the Company to you hereunder, you hereby agree that, during the Restricted Period, you will not, without prior written consent of the Company, directly or indirectly seek or obtain a Competitive Position in the Restricted Territory with a Competitor; provided, however, that the provisions of this Agreement shall not be deemed to prohibit the ownership by you of any securities of the Company or its affiliated entities or not more than five percent (5%) of any class of securities of any corporation having a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended. (d) Exceptions from Disclosure Restrictions. Anything herein to the contrary notwithstanding, you will not be restricted from disclosing or using Confidential Information that: (a) is or becomes generally available to the public other than as a result of an unauthorized disclosure by you or your agent; (b) becomes available to you in a manner that is not in contravention of applicable law from a source (other than the Company or its affiliated entities or one of its or their officers, employees, agents or representatives) that is not bound by a confidential relationship with the Company or its affiliated entities or by a confidentiality or other similar agreement; (c) was known to you on a non-confidential basis and not in contravention of applicable law or a confidentiality or other similar agreement before its disclosure to you by the Company or its affiliated entities or one of its or their officers, employees, agents or representatives; or (d) is required to be disclosed by law, court order or other legal process; provided, however, that in the event disclosure is required by law, you will provide the Company with prompt notice of such requirement so that the Company may seek an appropriate protective order prior to any such required disclosure by you. (e) Reasonableness. The covenants contained in this Section 5 are considered by the parties hereto to be fair, reasonable and necessary for the protection of the legitimate business interests of the Company. (f) Enforcement of Restrictive Covenants. (i) Rights and Remedies Upon Breach. In the event you breach, or threaten to commit a breach of, any of the provisions of the Restrictive Covenants, the Company shall have the right and remedy to enjoin, preliminarily and permanently, you from violating or threatening to violate the Restrictive Covenants and to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company. Such right and remedy shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity. (ii) Severability of Covenants. You acknowledge and agree that the Restrictive Covenants are reasonable and valid in time and scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, are invalid or unenforceable, the remainder of the Restrictive Covenants will not thereby be affected and will be given full effect, without regard to the invalid portions. (iii) Reformation. You and the Company agree that it is our mutual intention that the Restrictive Covenants be enforced in accordance with their terms to the maximum extent possible under applicable law. You and the Company further agree that, in the event any court of competent jurisdiction shall find that any provision hereof is not enforceable in accordance with its terms, the court shall reform the Restrictive Covenants such that they will be enforceable to the maximum extent permissible at law. 6. Certain Additional Covenants. (a) Agreement Not to Disparage. You and the Company agree that neither shall say, write or communicate in any manner to any person or entity in the medical community or the medical distribution industry anything substantially derogatory about the other, regardless of the truth or falsity of the information; provided, that nothing contained herein is intended to or shall limit your or the Company's ability to comply with applicable laws, rules or regulations, to obtain any benefits under any bond and/or insurance policy, or to commence, institute, prosecute or defend any lawsuit, action, claim or proceeding before or in any court, regulatory, governmental, arbitral or other authority. In this connection, you specifically agree that, for purposes hereof, the "Company" means and includes the Company and its officers, directors, employees, affiliates and representatives. (b) Return of Company Property. At such time as you cease to be affiliated with the Company in any capacity, you will deliver to the Company all property belonging to the Company, including, without limitation, all confidential information of the Company then in your possession, including soft and hard copies thereof, and all keys to the Company premises. 7. General Release and Forbearance. (a) Release by Employee. In consideration of the severance benefits provided to you by the Company, you, for yourself, your successors, heirs, legatees, personal and legal representatives, and assigns (the "Releasors"), hereby forever release and discharge the Company, its officers, directors, stockholders, employees, agents, corporate affiliates, controlling persons, and successors, and their representatives (the "Releasees") from any claims, demands, causes of action, suits, contracts or liabilities whatsoever, in law or in equity, whether known or unknown or suspected to exist by you, which you have had or may now have against the Company or any of such related parties arising from or connected with your employment with the Company or the termination of that employment, but specifically excluding whatever rights the Releasors might have to indemnification or payment of expenses arising under the Company's charter or bylaws or any other source (the "Release"). Such claims or causes of action shall include, but not be limited to, (i) any claims, demands, suits or causes of action (i) in connection with any privacy right, civil rights claim, claim for emotional and mental distress; your employment with the Company; or the termination of that employment; or (ii) pursuant to any federal, state, or local employment laws, regulations, executive orders, or other requirements, including without limitation those that may relate to sex, race or other forms of discrimination, including, without limitation, Title VII of the Civil Rights Act of 1964, The Americans With Disabilities Act, and the Age Discrimination in Employment Act Title VII of the Civil Rights Act of 1964; provided, however, that this Release covers only claims that you may have under the Age Discrimination in Employment Act as of the effective date of this Release. Without limiting the generality of the foregoing, you hereby acknowledge and covenant that you have knowingly relinquished and forever released any and all rights and remedies which might otherwise be available to you, including claims for back pay, liquidated damages, recovery of interest, costs, punitive damages or attorneys' fees, and any claims for employment or reemployment with the Company. (b) Acknowledgments. You acknowledge that you have been advised in writing to consult with an attorney before signing this agreement and the Release. You acknowledge that you have read this Release and understand that it is a general release of the Company from any past or existing claim which you have against the Company, including any claim relating to your employment or termination of employment. You acknowledge that you have had twenty one (21) days from receipt of this Release to review it prior to signing (or have voluntarily signed this Release prior to the expiration of such 21-day prior review period) and have voluntarily decided to sign this Release. You have the right to revoke this Release within seven (7) days following the date of its execution by you. However, if you fail to execute this Release or elect to revoke this Release within such seven (7) day period, no benefits will be payable to you under this agreement and you shall return to the Company any payments thus received prior to that date. 8. Tax Matters. You and we acknowledge and agree that the payments and benefits described herein may be taxable income, and we each covenant to comply with all federal and state income and employment tax requirements, including all reporting and withholding requirements, relating thereto. 9. Prior Agreements. You and the Company agree that, except as set forth in Section 7(a) above with respect to any rights to indemnification or payment of expenses, and except for the remaining time to exercise your Options and the survival of the excise tax gross-up provisions of Section 10 in your Employment Agreement, as stated in Section 3 above, this agreement supersedes and terminates any and all prior employment, separation or similar agreements, oral or written, between you and the Company, including without limitation the Employment Agreement, and that the mutual benefits and obligations of each of the parties are solely as provided for and contained in this agreement. 10. Governing Law. Except to the extent preempted by federal law, and without regard to conflict of laws principles, the laws of the State of Florida shall govern this agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. Again, to indicate your acknowledgment of our agreement as memorialized above, please sign and date this letter and the enclosed duplicate copy in the space provided below and return one originally executed copy to the Company. Very truly yours, PSS World Medical, Inc. By: /s/ David A. Smith ---------------------------------------------- David A. Smith President (signatures continued on following page) THE UNDERSIGNED HAS CAREFULLY READ THIS RELEASE AND ACKNOWLEDGES THAT IT CONSTITUTES A GENERAL RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS AGAINST THE COMPANY UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT. THE UNDERSIGNED ACKNOWLEDGES THAT THE UNDERSIGNED HAS HAD A FULL OPPORTUNITY TO CONSULT WITH AN ATTORNEY OR OTHER ADVISOR OF HIS OR HER CHOOSING CONCERNING THE EXECUTION OF THIS RELEASE AND THAT THE UNDERSIGNED IS SIGNING THIS RELEASE VOLUNTARILY AND WITH THE FULL INTENT OF RELEASING THE COMPANY FROM ALL SUCH CLAIMS. Acknowledged as being the true agreement of the parties, this 11th day of October, 2000. EMPLOYEE /s/ Frederick E. Dell - ------------------------------------ Frederick E. Dell EX-10 6 exhibit10_16.txt 10.16 KIRK A. ZAMBETTI SEVERANCE AGREEMENT EXHIBIT 10.16 PSS World Medical, Inc. 4345 Southpoint Boulevard Jacksonville, Florida 32216 February 1, 2001 Mr. Kirk Zambetti 3693 E. Wexford Hollow Jacksonville, FL 32224 Dear Kirk: This letter will memorialize our agreement with respect to the termination of your employment and provision of consulting services for a period of time thereafter. Please acknowledge your agreement by signing in the space indicated at the end of this letter. 1. Termination of Employment; Consulting Period. Effective as of February 1, 2001 (the "Date of Termination"), your employment with PSS World Medical, Inc. (the "Company") is hereby terminated without cause, and you will begin a 3-month period of providing consulting services to the Company (such 3-month period from February 1, 2001 to April 30, 2001 is referred to herein as the "Consulting Period"). 2. No Change of Control. You and the Company acknowledge that, as of the date hereof, there has not occurred a Change of Control of the Company, as defined in your Employment Agreement with the Company (the "Employment Agreement"), or as defined in the PSS World Medical, Inc. Officer Retention Bonus Plan, in which you are a participant (the "Retention Bonus Plan"). You and we further acknowledge that your employment is not being terminated in contemplation of or otherwise in connection with a Change of Control. 3. Severance Benefits. In consideration of your promises and covenants contained in this agreement, and in accordance with the terms of the Employment Agreement, the Company agrees to provide you the following severance benefits: (i) the Company shall pay to you in a lump sum in cash within 30 days after the Date of Termination (but not sooner than the expiration of the seven-day revocation period described in Section 8(b) of this agreement), the aggregate of the following amounts: A. the sum of (1) your base salary through the Date of Termination to the extent not theretofore paid, and (2) any compensation previously deferred by you (together with any accrued interest or earnings thereon), including without limitation deferrals under the PSS World Medical, Inc. Amended and Restated Officer Deferred Compensation Plan (ODIP), and any accrued vacation pay, in each case to the extent not theretofore paid; and B. the amount equal to twelve (12) times your monthly base salary in effect as of the Date of Termination, for a total of $264,000 (the "Severance Payment"); provided, however that (i) such amount shall be reduced by the fair value of the personal property to be retained by you, as shown on Schedule A, and (ii) $2,700 of such amount shall be paid in nine installments of $300 each beginning on the first day of the month next following the end of the Consulting Period; and (ii) for twelve (12) months after the Date of Termination, the Company shall continue benefits to you and/or your family at least equal to those that would have been provided to you in accordance with the welfare plans, programs, practices and policies of the Company described in Section 5(c) of your Employment Agreement in which you were participating immediately prior to the Date of Termination; provided, however, that if you become re-employed with another employer and are eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and (iii) the Company shall, within 30 days of receipt of reasonably documented invoices therefor, reimburse your actual cost (not to exceed $15,000) for outplacement expenses incurred within one year after the Date of Termination; and (iv) the Company shall, within 30 days of receipt of reasonably documented invoices therefor, reimburse your actual cost (not to exceed $1,000) for legal advice and counsel in connection with your entering into this Agreement; and (v) the Company shall, within 30 days of receipt of reasonably documented invoices therefor, reimburse your actual cost (not to exceed $10,000) for maintaining your membership in the professional organization known as The Executive Committee; and (vi) all of your unvested options to acquire stock of the Company (the "Options") shall cease to vest of the Date of Termination and shall expire as to any then-unvested shares, but those Options in which the exercise price is in excess of $5.50 per share are hereby amended as of the Date of Termination to provide that they shall remain exercisable as to all then-vested shares until the end of the Retention Bonus Payment Period (as defined in Section 4 below); and (vii) the provisions of Section 10 of your Employment Agreement, which relate to the excise tax-gross up obligations of the Company in the event of a change of control of the Company, shall survive the Date of Termination and continue in full force and effect for two years after the end of the Retention Bonus Payment Period (as defined in Section 4 below); and (viii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to you any other amounts or benefits required to be paid or provided or which you are eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies. You acknowledge that the payments and benefits described herein are in exchange for your signing this agreement. You are reminded of your right to purchase continued health insurance coverage for a period of up to eighteen (18) months following the Date of Termination pursuant to the terms of applicable law. Such eighteen (18) month period shall run concurrently with the period for which the Company is providing coverage under Section 3(ii) above. 4. Substitute Retention Bonus. In lieu of any rights you may have under the Retention Bonus Plan, which you hereby waive, the Company shall pay to you on the first, second and third anniversaries, respectively, of your initial participation in the Retention Bonus Plan (to the extent such amounts have not previously been paid to you as Retention Bonus) the amounts equal to 50% ($175,000), 30% ($105,000) and 20% ($70,000), respectively, of the dollar amount of your Retention Bonus (as defined therein) as in effect on the Date of Termination, i.e., without future increase due to forfeitures by other participants in the Retention Bonus Plan after the Date of Termination (the "Substitute Retention Bonus"); provided, however, that upon the occurrence of a Change of Control (as defined in the Retention Bonus Plan), any unpaid amount of your Substitute Retention Bonus (calculated as set forth above) shall be paid to you in a lump sum cash payment within 30 days after the occurrence of the Change of Control. The period beginning on the Date of Termination and ending on the last date that any portion of the Substitute Retention Bonus is due and payable to you in accordance with this Section 4 shall be referred to herein as the "Retention Bonus Payment Period." 5. Consulting Services. The parties acknowledge that during your employment with the Company, you served in the capacity of President of Diagnostic Imaging, division of the Company. During the Consulting Period, you agree to remain available to assist the Company in transitioning to other personnel matters relating to the "Zorro" project. During the Consulting Period, the Company will, in addition to other payments required hereunder, pay you a consulting fee based on an annual rate equal to your annual Base Salary as in effect on the Date of Termination. Such payments shall begin on the later of (i) the Date of Termination, or (ii) the expiration of the seven-day revocation period described in Section 8(b) of this agreement (the "First Payment Date"), and shall be payable over the 3-month period immediately following the First Payment Date in equal monthly or more frequent installments as are customary under the Company's payroll practices from time to time. If requested by the Company, you agree to continue to provide consulting services to the Company from and after the end of such 3-month period at the rate of $1,000 per hour. 6. Restrictions on Your Conduct. (a) General. The restrictive covenants in this Section 6 replace the restrictive covenants in your Employment Agreement. Such Employment Agreement restrictive covenants shall be void and of no further force or effect from and after the Date of Termination. You and the Company understand and agree that the purpose of the provisions of this Section 6 is to protect legitimate business interests of the Company, as more fully described below, and is not intended to eliminate your post-employment competition with the Company per se, nor is it intended to impair or infringe upon your right to work, earn a living, or acquire and possess property from the fruits of your labor. You hereby acknowledge that the post-employment restrictions set forth in this Section 6 are reasonable and that they do not, and will not, unduly impair your ability to earn a living after the Date of Termination. Therefore, subject to the limitations of reasonableness imposed by law, and in consideration of the severance benefits described in Section 3 of this letter agreement and the consulting fee described in Section 5 of this letter agreement, you shall be subject to the restrictions set forth in this Section 6. (b) Definitions. The following capitalized terms used in this Section 6 shall have the meanings assigned to them below, which definitions shall apply to both the singular and the plural forms of such terms: "Competitive Position" means any position with a Competitor as a Principal or Representative in which you will use or is likely to use any Confidential Information or Trade Secrets of the Company, or in which you have duties for, provide services to, or otherwise assist such Competitor where such duties, services or assistance involve Competitive Services. "Competitive Services" means any activities engaged in by the Company as of the Date of Termination that relate directly to the distribution of medical supplies, equipment and pharmaceuticals to primary care and other office-based physicians, or the distribution of medical diagnostic imaging supplies, chemicals, equipment and service to the acute care and alternate care market; provided, however, but without limitation, that Competitive Services shall not include (i) the manufacture of medical supplies, equipment or pharmaceuticals or medical diagnostic imaging supplies, chemicals or equipment (collectively "Medical Products"), (ii) the provisions of e-commerce or internet services with respect to the dissemination of information or services related to the distribution of Medical Products, or (iii) the provision of group purchasing contract pricing or cost analyses for physicians or medical practices. "Competitor" means any Person engaged, wholly or in material part, in Competitive Services. "Confidential Information" means all information regarding the Company, its activities, business or clients that is the subject of reasonable efforts by the Company to maintain its confidentiality and that is not generally disclosed by practice or authority to persons not employed by the Company, but that does not rise to the level of a Trade Secret. "Confidential Information" shall include, but is not limited to, financial plans and data concerning the Company; management planning information; business plans; operational methods; market studies; marketing plans or strategies; product development techniques or plans; customer lists; details of customer contracts; current and anticipated customer requirements; past, current and planned research and development; business acquisition plans; and new personnel acquisition plans. "Confidential Information" shall not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right or privilege of the Company. This definition shall not limit any definition of "confidential information" or any equivalent term under state or federal law. "Person" means any individual or any corporation, partnership, joint venture, limited liability company, association or other entity or enterprise. "Principal or Representative" means a principal, owner, partner, shareholder, joint venturer, investor, member, trustee, director, officer, manager, employee, agent, representative or consultant. "Protected Customers" means any Person to whom the Company has sold its products or services or to whom the Company has submitted a written proposal to sell its products or services during the twelve (12) months prior to the Date of Termination. "Protected Employees" means employees of the Company who were employed by the Company at any time within six (6) months prior to the Date of Termination. "Restricted Period" means the Retention Bonus Payment Period. "Restricted Territory" means each of the fifty states in the United States of America. "Restrictive Covenants" means the restrictive covenants contained in Section 6(c) hereof. "Trade Secret" means all information, without regard to form, including, but not limited to, technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, distribution lists or a list of actual or potential customers, advertisers or suppliers which is not commonly known by or available to the public and which information: (A) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Without limiting the foregoing, Trade Secret means any item of confidential information that constitutes a "trade secret(s)" under the common law or statutory law of the State of Florida. (c) Restrictive Covenants. (i) Restriction on Disclosure and Use of Confidential Information and Trade Secrets. You understand and agree that the Confidential Information and Trade Secrets constitute valuable assets of the Company and its affiliated entities, and may not be converted to your own use. Accordingly, you hereby agree that you shall not, directly or indirectly, at any time during the Restricted Period reveal, divulge, or disclose to any Person not expressly authorized by the Company any Confidential Information, and you shall not, directly or indirectly, at any time during the Restricted Period use or make use of any Confidential Information in connection with any business activity. During the Restricted Period, you shall not directly or indirectly transmit or disclose any Trade Secret of the Company to any Person, and shall not make use of any such Trade Secret, directly or indirectly, for yourself or for others, without the prior written consent of the Company. You and we acknowledge and agree that this Section 6 is not intended to, and does not, alter either the Company's rights or your obligations under any state or federal statutory or common law regarding trade secrets and unfair trade practices. (ii) Nonsolicitation of Protected Employees. You understand and agree that the relationship between the Company and each of its Protected Employees constitutes a valuable asset of the Company and may not be converted through your solicitation to your own use. Accordingly, you hereby agree that during the Restricted Period, you will not directly or indirectly on your own behalf or as a Principal or Representative of any Person or otherwise solicit or induce any Protected Employee to terminate his or her employment relationship with the Company or to enter into any relationship of employment, agency or independent contractorship with any other Person. (iii) Restriction on Relationships with Protected Customers. You understand and agree that the relationship between the Company and each of its Protected Customers constitutes a valuable asset of the Company and may not be converted through your solicitation to your own use. Accordingly, you hereby agree that, during the Restricted Period, you will not, without the prior written consent of the Company, directly or indirectly, on your own behalf or as a Principal or Representative of any Person, solicit, divert, or attempt to solicit or divert a Protected Customer for the purpose of providing or selling Competitive Services; provided, however, that the prohibition of this covenant shall apply only to Protected Customers with whom you had Material Contact on the Company's behalf during the twelve (12) months immediately preceding the Date of Termination. For purposes of this Agreement, you had "Material Contact" with a Protected Customer if (a) you had business dealings with the Protected Customer on the Company's behalf; (b) you were responsible for supervising or coordinating the dealings between the Company and the Protected Customer; or (c) you obtained Trade Secrets or Confidential Information about the customer as a result of your association with the Company. (iv) Noncompetition with the Company. The parties acknowledge: (A) that your services on behalf of the Company require special expertise and talent in the provision of Competitive Services and that you have had substantial contacts with customers of the Company; (B) that pursuant to your employment with the Company, you have been in a position of trust and responsibility and you have had access to a substantial amount of Confidential Information and Trade Secrets and that the Company has placed you in such position and given you access to such information in reliance upon your agreement not to compete with the Company during the Restricted Period; (C) that due to your management duties, you have been the repository of a substantial portion of the goodwill of the Company and would have an unfair advantage in competing with the Company; (D) that you are capable of competing with the Company; and (E) that you are capable of obtaining gainful, lucrative and desirable employment that does not violate the restrictions contained in this Agreement. In consideration of the compensation and benefits being paid and to be paid by the Company to you hereunder, you hereby agree that, during the Restricted Period, you will not, without prior written consent of the Company, directly or indirectly seek or obtain a Competitive Position in the Restricted Territory with a Competitor; provided, however, that the provisions of this Agreement shall not be deemed to prohibit the ownership by you of any securities of the Company or its affiliated entities or not more than five percent (5%) of any class of securities of any corporation having a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended; and provided further that the restrictions of this subsection (iv) shall not apply in the event of a default by the Company in the performance of any of its obligations under this Agreement, excluding for this purpose an isolated, insubstantial and inadvertent default not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof. (d) Exceptions from Disclosure Restrictions. Anything herein to the contrary notwithstanding, you will not be restricted from disclosing or using Confidential Information that: (a) is or becomes generally available to the public other than as a result of an unauthorized disclosure by you or your agent; (b) becomes available to you in a manner that is not in contravention of applicable law from a source (other than the Company or its affiliated entities or one of its or their officers, employees, agents or representatives) that is not bound by a confidential relationship with the Company or its affiliated entities or by a confidentiality or other similar agreement; (c) was known to you on a non-confidential basis and not in contravention of applicable law or a confidentiality or other similar agreement before its disclosure to you by the Company or its affiliated entities or one of its or their officers, employees, agents or representatives; or (d) is required to be disclosed by law, court order or other legal process; provided, however, that in the event disclosure is required by law, you will provide the Company with prompt notice of such requirement so that the Company may seek an appropriate protective order prior to any such required disclosure by you. (e) Reasonableness. The covenants contained in this Section 6 are considered by the parties hereto to be fair, reasonable and necessary for the protection of the legitimate business interests of the Company. (f) Enforcement of Restrictive Covenants. (i) Rights and Remedies Upon Breach. In the event you breach, or threaten to commit a breach of, any of the provisions of the Restrictive Covenants, the Company shall have the right and remedy to enjoin, preliminarily and permanently, you from violating or threatening to violate the Restrictive Covenants and to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company. Such right and remedy shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity. (ii) Severability of Covenants. You acknowledge and agree that the Restrictive Covenants are reasonable and valid in time and scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, are invalid or unenforceable, the remainder of the Restrictive Covenants will not thereby be affected and will be given full effect, without regard to the invalid portions. (iii) Reformation. You and the Company agree that it is our mutual intention that the Restrictive Covenants be enforced in accordance with their terms to the maximum extent possible under applicable law. You and the Company further agree that, in the event any court of competent jurisdiction shall find that any provision hereof is not enforceable in accordance with its terms, the court shall reform the Restrictive Covenants such that they will be enforceable to the maximum extent permissible at law. 7. Certain Additional Covenants. (a) Agreement Not to Disparage. You and the Company agree that neither shall say, write or communicate in any manner to any person or entity in the medical community or the medical distribution industry anything substantially derogatory about the other, regardless of the truth or falsity of the information; provided, that nothing contained herein is intended to or shall limit your or the Company's ability to comply with applicable laws, rules or regulations, to obtain any benefits under any bond and/or insurance policy, or to commence, institute, prosecute or defend any lawsuit, action, claim or proceeding before or in any court, regulatory, governmental, arbitral or other authority. In this connection, you specifically agree that, for purposes hereof, the "Company" means and includes the Company and its officers, directors, employees, affiliates and representatives. (b) Return of Company Property. At such time as you cease to be affiliated with the Company in any capacity, you will deliver to the Company all property belonging to the Company (except those items listed on Schedule A hereto), including, without limitation, all confidential information of the Company then in your possession, including soft and hard copies thereof, and all keys to the Company premises. 8. General Release and Forbearance. (a) Release by Employee. In consideration of the severance benefits provided to you by the Company, you, for yourself, your successors, heirs, legatees, personal and legal representatives, and assigns (the "Releasors"), hereby forever release and discharge the Company, its officers, directors, stockholders, employees, agents, corporate affiliates, controlling persons, and successors, and their representatives (the "Releasees") from any claims, demands, causes of action, suits, contracts or liabilities whatsoever, in law or in equity, whether known or unknown or suspected to exist by you, which you have had or may now have against the Company or any of such related parties arising from or connected with your employment with the Company or the termination of that employment, but specifically excluding (i) whatever rights the Releasors might have to indemnification or payment of expenses arising under the Company's charter or bylaws or any other source, and (ii) the Company's obligations under this Agreement (the "Release"). Such claims or causes of action shall include, but not be limited to, (i) any claims, demands, suits or causes of action (i) in connection with any privacy right, civil rights claim, claim for emotional and mental distress; your employment with the Company; or the termination of that employment; or (ii) pursuant to any federal, state, or local employment laws, regulations, executive orders, or other requirements, including without limitation those that may relate to sex, race or other forms of discrimination, including, without limitation, Title VII of the Civil Rights Act of 1964, The Americans With Disabilities Act, and the Age Discrimination in Employment Act Title VII of the Civil Rights Act of 1964; provided, however, that this Release covers only claims that you may have under the Age Discrimination in Employment Act as of the effective date of this Release. Without limiting the generality of the foregoing, you hereby acknowledge and covenant that you have knowingly relinquished and forever released any and all rights and remedies which might otherwise be available to you, including claims for back pay, liquidated damages, recovery of interest, costs, punitive damages or attorneys' fees, and any claims for employment or reemployment with the Company. (b) Acknowledgments. You acknowledge that you have been advised in writing to consult with an attorney before signing this agreement and the Release. You acknowledge that you have read this Release and understand that it is a general release of the Company from any past or existing claim which you have against the Company, including any claim relating to your employment or termination of employment. You acknowledge that you have had twenty one (21) days from receipt of this Release to review it prior to signing (or have voluntarily signed this Release prior to the expiration of such 21-day prior review period) and have voluntarily decided to sign this Release. You have the right to revoke this Release within seven (7) days following the date of its execution by you. However, if you fail to execute this Release or revoke this Release within such seven (7) day period, no benefits will be payable to you under this agreement and you shall return to the Company any payments thus received prior to that date. 9. Tax Matters. You and we acknowledge and agree that the payments and benefits described herein may be taxable income, and we each covenant to comply with all federal and state income and employment tax requirements, including all reporting and withholding requirements, relating thereto. 10. Prior Agreements. You and the Company agree that, except as set forth in Section 8(a) above with respect to any rights to indemnification or payment of expenses, and except for the remaining time to exercise your Options and the survival of the excise tax gross-up provisions of Section 10 in your Employment Agreement, as stated in Section 3 above, this agreement supersedes and terminates any and all prior employment, separation or similar agreements, oral or written, between you and the Company, including without limitation the Employment Agreement, and that the mutual benefits and obligations of each of the parties are solely as provided for and contained in this agreement. 11. Governing Law. Except to the extent preempted by federal law, and without regard to conflict of laws principles, the laws of the State of Florida shall govern this agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. Again, to indicate your acknowledgment of our agreement as memorialized above, please sign and date this letter and the enclosed duplicate copy in the space provided below and return one originally executed copy to the Company. Very truly yours, PSS World Medical, Inc. By: /s/ David A. Smith ---------------------------------------- David A. Smith President THE UNDERSIGNED HAS CAREFULLY READ THIS RELEASE AND ACKNOWLEDGES THAT IT CONSTITUTES A GENERAL RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS AGAINST THE COMPANY UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT. THE UNDERSIGNED ACKNOWLEDGES THAT THE UNDERSIGNED HAS HAD A FULL OPPORTUNITY TO CONSULT WITH AN ATTORNEY OR OTHER ADVISOR OF HIS OR HER CHOOSING CONCERNING THE EXECUTION OF THIS RELEASE AND THAT THE UNDERSIGNED IS SIGNING THIS RELEASE VOLUNTARILY AND WITH THE FULL INTENT OF RELEASING THE COMPANY FROM ALL SUCH CLAIMS. Acknowledged as being the true agreement of the parties, this 9th day of February, 2001. EMPLOYEE /s/ Kirk Zambetti - ------------------------------- Kirk Zambetti EX-10 7 exhibit10_17.txt 10.17 PATRICK C. KELLY SEVERANCE AGREEMENT EXHIBIT 10.17 PSS World Medical, Inc. 4345 Southpoint Boulevard Jacksonville, Florida 32216 March 21, 2001 Mr. Patrick C. Kelly 1091 Ponte Vedra Boulevard Ponte Vedra Beach, Florida 32082 Dear Patrick: This letter will memorialize our agreement with respect to your resignation as the Chairman of the Board and Chief Executive Officer of PSS World Medical, Inc. (the "Company"), as well as all other positions you held with the Company and its affiliates. Please acknowledge your agreement by signing in the space indicated at the end of this letter. 1. Termination of Employment. Effective October 2, 2000 (the "Separation Date"), your employment with the Company and its affiliates was terminated. You and the Company have agreed that this termination will be treated as a "termination without Cause" for purposes of your Employment Agreement with the Company, dated March 4, 1998, as amended (your "Employment Agreement"). 2. Severance Benefits. In consideration of your promises and covenants made in this agreement, and in recognition of the terms of your Employment Agreement, the Company agrees to provide you the following benefits: (a) the Company has paid to you your base salary in effect as of the Separation Date ($660,000 per year) and maintained your medical and insurance benefits through December 31, 2000; (b) the Company shall pay to you $677,000 in cash within ten (10) days of the execution hereof (but not sooner than the expiration of the seven-day revocation period described in Section 5(b) of this agreement) and receipt of all executed exhibits and documents (including shares of Company stock pledged pursuant to Section 2(g)(i)(C) below) related thereto and hereto; (c) the Company shall pay to you, on the first day of each month from July, 2002, through December, 2002 (the last six months of the Restricted Period, as defined in Section 3(b) below), $55,000 in cash, which in total represents six months of your base salary ($330,000); (d) until June 30, 2003, you and your family will be eligible for participation in Welfare Benefit Plans, in accordance with Section 6(c) of your Employment Agreement, as in effect generally at any time prior to June 30, 2003, with respect to and on the same basis as other peer executives of the Company and its affiliated companies and their families; provided, however, that if you become re-employed with another employer before June 30, 2003, and are eligible to receive medical or other welfare benefits under another employer provided plan, while you are so employed the medical and other welfare benefits described herein shall be secondary to those provided under such other plan until the earlier of the date such re-employment ends or June 30, 2003, and if such re-employment ends before June 30, 2003, the full benefits coverage described in the first part of this sentence shall once again resume until the earlier of June 30, 2003, or the date of additional re-employment; (e) the Company has paid to you $55,250 on January 31, 2001 and $50,000 on March 7, 2001, and shall pay to you $44,750 on the date of execution hereof (such payment to be made upon the same conditions as payment in Section 2(b) above); (f) the obligations reflected in that certain Promissory Note from you to the Company, dated September 16, 1997, in the original principal amount of $3,000,000, shall be amended, with such amendments embodied in a new note in the form attached hereto as Exhibit A (the "Note"), which shall be executed contemporaneously herewith, such that: (i) until the third anniversary of the date of the last interest payment, made April 30, 2000, interest accruing (and accruing thereon) shall be deferred, to be due and payable upon the earlier of a Change of Control, as defined in Section 3(b) below, or maturity, with interest accruing thereafter to be due and payable annually, (ii) upon a Change of Control, as defined below, the principal of the Note shall be forgiven, but any and all interest that has accrued, regardless of any deferral of such interest under subsection (i) above, shall become immediately due and payable, and (iii) the Company shall purchase and pay the premiums on, and be named beneficiary under, a six-year term life insurance policy on your life in the amount of $4,000,000, which shall satisfy any remaining obligations on the Note in the event of your death; (g) the $1,994,243 advance loaned to you by the Company (the "Margin Loan") shall be satisfied as follows: (i) as to $997,122: (A) interest shall accrue at the lowest acceptable rate published by the Internal Revenue Service to avoid imputation of income to you, (B) the principal, which shall include the interest outstanding on the Margin Loan as of the date hereof, and the interest that accrues on such principal shall become due and payable three (3) years from the Separation Date, though either or both may be paid, in full or in part, prior to the maturity date, (C) the above terms shall be evidenced by a note that will be secured by the 340,000 shares of Company common stock you currently own, which may be sold by you to satisfy the principal or the accrued interest or both, in the form of the Secured Recourse Promissory Note and Pledge Agreement annexed hereto as Exhibit B (the "Margin Note"), which shall be executed contemporaneously herewith, and (ii) as to the balance ($997,121) (the "Margin Loan Balance"), you promise to pay the Margin Loan Balance in the following manner: (A) the Company agrees to extend the date on which the Margin Loan Balance is to be repaid in the manner set forth in the Note annexed hereto as Exhibit C, and (B) pursuant to a Split Dollar Agreement in the form attached to this Agreement as Exhibit D, you shall purchase and the Company shall pay the premiums on a "split-dollar" life insurance policy on your life, and in exchange for the Company's payment of these premiums (i) you shall grant the Company a collateral assignment of all cash surrender value and such amount of the death benefit to repay the Company the Termination Priority Amount as such term is defined in the Split-Dollar Agreement, and (ii) you shall name the Company as a beneficiary of your portion of the death benefit under the policy sufficient in amount to repay the Termination Priority Amount as defined in the Split-Dollar Agreement, on your death; (h) the Company shall terminate the "split-dollar" life insurance policy the Company currently maintains on your life; (i) all of your options to acquire stock of the Company (the "Options") shall fully and immediately vest as of the Separation Date, and in acknowledgement that all of the Options are currently "underwater," the Options are hereby amended as of the Separation Date to provide that they shall remain exercisable until the end of the original term; (j) you shall be permitted to purchase from the Company the automobile that you were using as of the Separation Date at the Company's book value of $19,543; (k) your vesting and payout in the ODIP Deferred Compensation Plan shall be in accordance with the terms of the plan; and (l) the provisions of Section 11 of your Employment Agreement, which relate to the excise tax-gross up obligations of the Company in the event of a Change of Control, as defined below, shall survive the Separation Date and continue in full force and effect. You acknowledge that the payments and benefits described herein are in exchange for your signing this agreement and exceed the payments and benefits to which you would be entitled but for this agreement. 3. Restrictions on Your Conduct. (a) General. The restrictive covenants in this Section 3 replace the restrictive covenants in your Employment Agreement, which shall be void and of no further force or effect from and after the effectiveness hereof. You and the Company understand and agree that the purpose of the provisions of this Section 3 is to protect legitimate business interests of the Company, as more fully described below, and is not intended to eliminate your post-employment competition with the Company per se, nor is it intended to impair or infringe upon your right to work, earn a living, or acquire and possess property from the fruits of your labor. You hereby acknowledge that the post-employment restrictions set forth in this Section 3 are reasonable and that they do not, and will not, unduly impair your ability to earn a living after the effectiveness hereof. Therefore, in consideration of the benefits you received under your Employment Agreement as well as the severance benefits you are to receive under Section 2 of this letter agreement, you shall be subject to the restrictions set forth in this Section 3, subject to the limitations of reasonableness imposed by law. (b) Definitions. The following capitalized terms used in this Section 3 or elsewhere in this agreement, as the case may be, shall have the meanings assigned to them below, which definitions shall apply to both the singular and the plural forms of such terms: "Change of Control" means: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (for the purposes of this definition, a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the combined voting power of the then outstanding voting securities of the Holder entitled to vote generally in the election of directors (the "Outstanding Holder Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Holder or any corporation controlled by the Holder, or (B) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this definition; or (ii) Individuals who, as of January 1, 2001 (the "Effective Date"), constitute the Board of Directors of the Holder (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors of the Holder (the "Board"); provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Holder's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Holder (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the then outstanding shares of common stock of the Holder (the "Outstanding Holder Common Stock") and Outstanding Holder Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Holder or all or substantially all of the Holder's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Holder Common Stock and Outstanding Holder Voting Securities, as the case may be, (B) no Person (excluding the Holder or any employee benefit plan (or related trust) of the Holder or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of the combined voting power of the then outstanding voting securities of such corporation resulting from such Business Combination except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. "Competitive Services" means any activities engaged in by the Company as of the Separation Date, including but not limited to the following: (i) the marketing, sale and distribution of medical supplies, equipment and pharmaceuticals to primary care and other office-based physicians; (ii) the marketing, sale and distribution of medical diagnostic imaging supplies, chemicals, equipment and services to the acute care and alternate care market; (iii) the marketing, sale and distribution of medical supplies, equipment and pharmaceuticals to the long-term care market; and (iv) the provision of special group purchasing contract pricing or cost analyses to physicians or medical practices. "Confidential Information" means any confidential or proprietary information possessed by, or relating to the business of, the Company or any of its affiliates, including but not limited to the following: o financial information, plans and data, management planning information, business acquisition plans, new personnel acquisition plans; o business plans, market studies, marketing plans or strategies, pricing policies and lists; o Company "know-how," operational methods, product development techniques or plans; o customer lists, details of customer or consultant contracts, current or anticipated customer requirements; o past, current and planned research and development, inventions and ideas; and o computer software programs (including object and source codes), data and documentation, database technologies, systems, structures and architectures, and other compilations, devises, methods, techniques and processes. This definition shall not limit any definition of "confidential information" or any equivalent term under state or federal law. "Person" means any individual or any corporation, partnership, joint venture, limited liability company, association or other entity or enterprise. "Principal or Representative" means a principal, owner, partner, shareholder, joint venturer, investor, member, trustee, director, officer, manager, employee, agent, representative or consultant. "Protected Customers" means any Person to whom the Company has provided its products or services or to whom the Company has submitted a written proposal to provide its products or services during the eighteen (18) months prior to the Separation Date. "Protected Employees" means employees of the Company who were employed by the Company at the date hereof. "Restricted Period" means the period extending from the Separation Date until the earlier of (i) January 1, 2003, except that the period shall extend until January 1, 2005, with regard to the restrictions on disclosure of Trade Secrets under Section (3)(c) below, or (ii) the occurrence of a Change of Control, as defined above; provided, however, that such period shall be extended by any length of time during which you are in breach of any of the Restrictive Covenants. "Restrictive Covenants" means the restrictive covenants contained in Section 3(c) hereof. "Trade Secret" means all information, without regard to form, including but not limited to technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, distribution lists or a list of actual or potential customers, advertisers or suppliers which is not commonly known by or available to the public, and such information: (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Without limiting the foregoing, Trade Secret means any item of confidential information that constitutes a "trade secret(s)" under the common law or statutory law of the State of Florida. (c) Restrictive Covenants. (i) Restriction on Disclosure and Use of Confidential Information and Trade Secrets. You understand and agree that the Confidential Information and Trade Secrets constitute valuable assets of the Company and its affiliated entities, and may not be converted to your own use. Accordingly, you hereby agree that you shall not, directly or indirectly, at any time during the Restricted Period reveal, divulge or disclose any Confidential Information to any Person not expressly authorized by the Company, and you shall not, directly or indirectly, at any time during the Restricted Period use or make use of any Confidential Information in connection with any business activity. During the Restricted Period, you shall not directly or indirectly transmit or disclose any Trade Secret of the Company to any Person, and shall not make use of any such Trade Secret, directly or indirectly, for yourself or for others, without the prior written consent of the Company. You and the Company acknowledge and agree that this Section 3 is not intended to, and does not, alter either the Company's rights or your obligations under any state or federal statutory or common law regarding trade secrets and unfair trade practices. (ii) Restriction on Relationships with and Solicitation of Protected Employees. You understand and agree that the relationship between the Company and each of its Protected Employees constitutes a valuable asset of the Company and may not be converted through solicitation to your own use. Accordingly, you hereby agree that during the Restricted Period you shall not, directly or indirectly, on your own behalf or as a Principal or Representative of any Person or otherwise, enter into any relationship of employment, agency or independent contractorship with any Protected Employee, or solicit or induce any Protected Employee to terminate his or her employment relationship with the Company or to enter into any relationship of employment, agency or independent contractorship with any other Person. (iii) Restriction on Relationships with Protected Customers. You understand and agree that the relationship between the Company and each of its Protected Customers constitutes a valuable asset of the Company and may not be converted to your own use. Accordingly, you hereby agree that during the Restricted Period you shall not, without the prior written consent of the Company, become a Principal or Representative of, or otherwise provide services to, a Protected Customer, or solicit, divert or attempt to solicit or divert, directly or indirectly, on your own behalf or as a Principal or Representative of any Person, a Protected Customer for the purpose of providing or selling Competitive Services. (iv) Noncompetition with the Company. The parties acknowledge the following: o that your services on behalf of the Company required special expertise and talent in the provision of Competitive Services and that you have had substantial contacts with customers of the Company; o that pursuant to your employment with the Company, you have been in a position of trust and responsibility and you have had access to a substantial amount of Confidential Information and Trade Secrets and that the Company has placed you in such position and given you access to such information in reliance upon your agreement not to compete with the Company during the Restricted Period; o that due to your management duties, you have been the repository of a substantial portion of the goodwill of the Company and would have an unfair advantage in competing with the Company; o that you are capable of competing with the Company; and o that you are capable of obtaining gainful, lucrative and desirable employment that does not violate the restrictions contained in this Agreement. Therefore, you hereby agree that during the Restricted Period you shall not, without prior written consent of the Company, directly or indirectly provide, or consult with regard to, any Competitive Services to any Person within the territory in which the Company provides Competitive Services as of the Separation Date. You also hereby agree that during the Restricted Period you shall not, without prior written consent of the Company, (A) be connected as a Principal or Representative with, (B) own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or (C) permit your name to be used by or in connection with, any Person engaged in providing Competitive Services to any other Person conducting business activities within the territory in which the Company provides Competitive Services as of the Separation Date. Provided, however, that the provisions of this Agreement shall not be deemed to prohibit the ownership by you of any securities of the Company or its affiliated entities or not more than five percent (5%) of any class of securities of any corporation having a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended. (d) Exceptions from Disclosure Restrictions. Anything herein to the contrary notwithstanding, you will not be restricted from disclosing or using information that: (i) is or becomes generally available to the public other than as a result of an unauthorized disclosure by you or your agent; (ii) becomes available to you in a manner that is not in contravention of applicable law from a source (other than the Company or its affiliated entities or one of its or their officers, employees, agents or representatives) that is not bound by a confidential relationship with the Company or its affiliated entities or by a confidentiality or other similar agreement; (iii) was known to you on a non-confidential basis and not in contravention of applicable law or a confidentiality or other similar agreement before its disclosure to you by the Company or its affiliated entities or one of its or their officers, employees, agents or representatives; or (iv) is required to be disclosed by law, court order or other legal process, provided, that in the event disclosure is required by law you shall provide the Company with prompt notice of such requirement, so that the Company may seek an appropriate protective order prior to any such required disclosure by you. (e) Reasonableness. The covenants contained in this Section 3 are considered by the parties hereto to be fair, reasonable and necessary for the protection of the legitimate business interests of the Company. (f) Enforcement of Restrictive Covenants. (i) Rights and Remedies Upon Breach. In the event you breach, or threaten to commit a breach of, any of the provisions of the Restrictive Covenants, the Company shall have the following rights and remedies, which shall be independent of any others, severally enforceable, and in addition to, not in lieu of, any other rights and remedies available to the Company at law or in equity: (A) the right and remedy to enjoin, preliminarily and permanently, you from violating or threatening to violate the Restrictive Covenants and to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of any of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company; and (B) the right and remedy to require you to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits you derive or receive as the result of any transactions constituting a breach of any of the Restrictive Covenants. (ii) Severability of Covenants. You acknowledge and agree that the Restrictive Covenants are reasonable and valid in time and scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, are invalid or unenforceable, the remainder of the Restrictive Covenants will not thereby be affected and will be given full effect, without regard to the invalid portions. (iii) Reformation. You and the Company agree that it is our mutual intention that the Restrictive Covenants be enforced in accordance with their terms to the maximum extent possible under applicable law. You and the Company further agree that, in the event any court of competent jurisdiction shall find that any provision hereof is not enforceable in accordance with its terms, the court shall reform the Restrictive Covenants such that they will be enforceable to the maximum extent permissible at law. (iv) Elective Right of the Company. In the event that you challenge the enforceability of the Restrictive Covenants (or assert an affirmative defense to an action seeking to enforce the Restrictive Covenants) based on an argument that the Restrictive Covenants are not enforceable as a matter of law, unreasonable in geographical scope or duration or void as against public policy, the Company shall have the right (A) to cease making the payments required under Sections 2(a) through (e), and, upon demand, to have you repay, within 10 business days of any such demand, any such payments previously made under those Sections, and (B) notwithstanding the provisions of Sections 2(f) and 2(g), to demand that the interest and principal due on the Note and the Margin Note shall be accelerated and be immediately due and payable, regardless of whether any such challenge (or defense) is found to be meritorious, in whole or in part. Any right afforded to, or exercised by, the Company hereunder shall in no way affect the enforceability of the Restrictive Covenants or any other right of the Company hereunder. Nothing in this Section 3(f)(iv) shall be construed to preclude a challenge (or defense) by you against the application of the Restrictive Covenants as to a particular set of facts and circumstances (as opposed to the arguments enumerated above). 4. Certain Additional Covenants. (a) Consulting Services. You agree to provide consulting services and advice to the Company on an as requested basis until January 1, 2003, provided, however, that the Company shall not require you to provide more than eight (8) hours of service in any month and shall not require you to travel to provide such services, other than to and from the Company's offices in Jacksonville, Florida. (b) Agreement Not to Disparage. You and the Company agree that neither shall say, write or communicate in any manner to any person or entity in the medical community or the medical, imaging or long-term care distribution industries anything substantially derogatory about the other, regardless of the truth or falsity of the information; provided, however, that nothing contained herein is intended to or shall limit your or the Company's ability to comply with applicable laws, rules or regulations, to obtain any benefits under any bond or insurance policy, or to commence, institute, prosecute or defend any lawsuit, action, claim or proceeding before or in any court, regulatory, governmental, arbitral or other authority. In this connection, you specifically agree that, for purposes hereof, the "Company" means and includes the Company and its officers, directors, employees, affiliates and representatives. (c) Return of Company Property. You will deliver promptly to the Company all property belonging to the Company, including, without limitation, all confidential information of the Company in your possession, including soft and hard copies thereof, and all keys to the Company premises. The Company will provide you with a written receipt identifying all such materials that are returned to the Company. 5. General Release and Forbearance. (a) Release by Employee. Except for obligations of the Company to you under this agreement and vested benefits payable to you under the Company's benefit programs, in consideration of the severance benefits provided to you by the Company, you, for yourself, your successors, heirs, legatees, personal and legal representatives, and assigns (the "Releasors"), hereby forever release and discharge the Company, its officers, directors, stockholders, employees, agents, corporate affiliates, controlling persons, and successors, and their representatives (the "Releasees") from any claims, demands, causes of action, suits, contracts or liabilities whatsoever, in law or in equity, whether known or unknown or suspected to exist by you, which you have had or may now have against the Company or any of such related parties arising from or connected with your employment with the Company or the termination of that employment, but specifically excluding whatever rights the Releasors might have to indemnification or payment of expenses arising under the Company's charter or bylaws or any other source (the "Release"). Such claims or causes of action shall include, but not be limited to, any claims, demands, suits or causes of action (i) in connection with any privacy right, civil rights claim, claim for emotional and mental distress, your employment with the Company; or the termination of that employment, or (ii) pursuant to any federal, state, or local employment laws, regulations, executive orders, or other requirements, including without limitation those that may relate to sex, race or other forms of discrimination, including, without limitation, Title VII of the Civil Rights Act of 1964, The Americans With Disabilities Act, and the Age Discrimination in Employment Act Title VII of the Civil Rights Act of 1964; provided, however, that this Release covers only claims that you may have under the Age Discrimination in Employment Act as of the effective date of this Release. Without limiting the generality of the foregoing, you hereby acknowledge and covenant that you have knowingly relinquished and forever released any and all rights and remedies which might otherwise be available to you, including claims for back pay, liquidated damages, recovery of interest, costs, punitive damages or attorneys' fees, and any claims for employment or re-employment with the Company. (b) Acknowledgments. You acknowledge that you have been advised in writing to consult with an attorney before signing this agreement and the Release. You acknowledge that you have read this Release and understand that it is a general release of the Company from any past or existing claim that you have against the Company, including any claim relating to your employment or termination of employment. You acknowledge that you have had twenty-one (21) days from receipt of this Release to review it prior to signing (or have voluntarily signed this Release prior to the expiration of such 21-day prior review period) and have voluntarily decided to sign this Release. You have the right to revoke this Release within seven (7) days following the date of its execution by you. However, if you fail to execute this Release or revoke this Release within such seven (7) day period, no benefits will be payable to you under this agreement and you shall return to the Company any payments thus received prior to that date. (c) Release by Company. Except for your obligations to the Company under this agreement, which shall remain effective in accordance with their terms, the Company, on behalf of itself, its affiliates, its successors, and assigns, irrevocably and unconditionally, releases, acquits, and forever discharges you and your attorneys, executors, administrators and heirs from any and all charges, complaints, claims, contracts, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and legal expenses), of any nature whatsoever, in law or in equity, whether known or unknown, (excluding any claims for which you would not be entitled to indemnification pursuant to the Company's certificate of incorporation, the Company's by-laws, and relevant law) which the Company now has, or may hereafter claim to have had, against you by reason of any matter, act, omissions, cause or event that has occurred up to the present date, except any claims pursuant to or arising from this agreement. The Company expressly acknowledges that this release agreement may be pled as a complete defense and will fully and finally bar any such known or unknown claim or claims based on any acts or omissions of you up to the present date. 6. Indemnification and Insurance. The Company shall continue to provide for you the indemnification provisions contained in the Company's by-laws and shall continue to maintain for your benefit such policies of liability insurance, providing protection to you as an officer, director, agent or employee of the Company and its subsidiaries, as may from time to time be purchased by the Company for officers and directors generally as authorized by or in furtherance of the indemnification provisions contained in the Company's by-laws. Neither the insurance nor your right to indemnification thereunder may be canceled by the Company without your permission for a period of five (5) years following the Separation Date, except in the event of a Change of Control, as defined above; provided, however, that the Company may obtain a substitute insurance policy as long as the rights of indemnity to you are at least equivalent to the most favorable rights provided under the policies in effect immediately prior to your Separation Date. 7. Tax Matters. You and the Company acknowledge and agree that the payments and benefits described herein may be taxable income, and we each covenant to comply with all federal and state income and employment tax requirements, including all reporting and withholding requirements, relating thereto. 8. Prior Agreements. You and the Company agree that, except as set forth in this agreement, this agreement and all documents entered into in connection herewith supersede and terminate any and all prior employment, separation or similar agreements, oral or written, between you and the Company, including without limitation your Employment Agreement, and that the mutual benefits and obligations of each of the parties are solely as provided for and contained in this agreement. 9. Governing Law. Except to the extent preempted by federal law, and without regard to conflict of laws principles, the laws of the State of Florida shall govern this agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 10. Right of Set-off. You and the Company agree that the Company shall have the right to set-off any amounts due to you pursuant to this agreement to the extent that you have failed to make payment to the Company of any amounts owed by you to the Company pursuant to this agreement including the exhibits hereto when such amounts become due. You hereby grant, and agree to cooperate with the Company in perfecting, a security interest in any such amounts. Again, to indicate your acknowledgment of our agreement as memorialized above, please sign and date this letter and the enclosed duplicate copy in the space provided below and return one originally executed copy to the Company. Very truly yours, PSS WORLD MEDICAL, INC. By: /s/ David A. Smith ---------------------------------------------- David A. Smith President The undersigned has carefully read this Release and acknowledges that it constitutes a general release of all known and unknown claims against the Company under the Age Discrimination in Employment Act. The undersigned acknowledges that he has had a full opportunity to consult with an attorney or other advisor of his choosing concerning the execution of this Release and that he is signing this Release voluntarily and with the full intent of releasing the Company from all such claims. Acknowledged as being the true agreement of the parties, this 21st day of March, 2001. /s/ Patrick C. Kelly -------------------------------------------- Patrick C. Kelly EX-10 8 exhibit10_13.txt 10.13, EMPLOYMENT AGREEMENT DAVID A. SMITH Exhibit 10.13 Employment AGREEMENT This EMPLOYMENT Agreement (this "Agreement") is made and entered into this 4th day of March, 1998 by and between Physician Sales & Service, Inc., a Florida corporation (hereinafter, the "Company" which term shall include the Company's other subsidiaries, affiliates and successors), and David A. Smith (hereinafter, "Executive"). BACKGROUND The Company desires to engage Executive in Executive capacities set forth herein, in accordance with the terms and conditions of this Agreement. Executive is willing to serve as such in accordance with the terms and conditions of this Agreement. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Effective Date. This Agreement is effective as of March 4, 1998 (the "Effective Date"). 2. Employment. Executive is hereby employed on the Effective Date as the Executive Vice President and Chief Financial Officer of PSS/World Medical, Inc. Executive's responsibilities under this Agreement shall be in accordance with the policies and objectives established by the President or the Board of Directors of the Company and shall be consistent with the responsibilities of similarly situated executives of comparable companies in similar lines of business. In his capacity as Executive Vice President and Chief Financial Officer of PSS/World Medical, Inc., Executive will report directly to the Chairman of the Board of Directors of the Company and the Board of Directors of the Company. 3. Employment Period. Unless earlier terminated herein in accordance with Section 7 hereof, Executive's employment shall be for a three-year term (the "Employment Period"), beginning on the Effective Date. The Employment Period shall, without further action by Executive or the Company, be extended by an additional one-year period on each anniversary of the Effective Date; provided, however, that either party may, by notice to the other, cause the Employment Period to cease to extend automatically. Upon such notice, the Employment Period shall terminate upon the expiration of the then-current term, including any prior extensions. 4. Extent of Service. During the Employment Period, and excluding any periods of vacation and sick leave to which Executive is entitled, Executive agrees to devote his business time, attention, skill and efforts exclusively to the faithful performance of his duties hereunder; provided, however, that it shall not be a violation of this Agreement for Executive to (i) devote reasonable periods of time to charitable and community activities and, with the approval of the Company, industry or professional activities, and/or (ii) manage personal business interests and investments, so long as such activities do not materially interfere with the performance of Executive's responsibilities under this Agreement. 5. Compensation and Benefits. (a) Base Salary. During the Employment Period, the Company will pay to Executive a base salary in an amount of $255,000.00 per year ("Base Salary"), less normal withholdings, payable in equal monthly or more frequent installments as are customary under the Company's payroll practices from time to time. The Compensation Committee of the Board of Directors of the Company shall review Executive's Base Salary annually and in its sole discretion, subject to approval of the Board of Directors of the Company, may increase Executive's Base Salary from year to year. The annual review of Executive's salary by the Board will consider, among other things, Executive's own performance and the Company's performance. (b) Incentive, Savings and Retirement Plans. During the Employment Period, Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to peer executives of the Company and its affiliated companies ("Peer Executives"), and on the same basis as such Peer Executives. (c) Welfare Benefit Plans. During the Employment Period, Executive and Executive's family shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to Peer Executives. (d) Expenses. During the Employment Period, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Executive in accordance with the policies, practices and procedures of the Company and its affiliated companies to the extent applicable generally to Peer Executives. (e) Fringe Benefits. During the Employment Period, Executive shall be entitled to fringe benefits in accordance with the plans, practices, programs and policies of the Company and its affiliated companies in effect for Peer Executives. 6. Change of Control. Subject to the last sentence of this Section 6, for the purpose of this Agreement, a "Change of Control" shall mean. (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (ii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 6; or (b) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of the combined voting power of the then outstanding voting securities of such corporation resulting from such Business Combination except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. Notwithstanding the above definition, a Change of Control will not be deemed to have occurred for purposes of this Agreement if, immediately after the event that otherwise would constitute a Change of Control, Patrick Kelly and at least a majority of the 12 next most highly compensated officers of the Company and its subsidiaries (as measured immediately prior to such transaction) remain employed by the Company for at least one year or mutually agree to new employment contacts, the resulting or surviving company, or its or their subsidiaries. 7. Termination of Employment. (a) Death, Retirement or Disability. Executive's employment shall terminate automatically upon Executive's death or Retirement during the Employment Period. For purposes of this Agreement, "Retirement" shall mean normal retirement as defined in the Company's then-current retirement plan, or there is no such retirement plan, "Retirement" shall mean voluntary termination after age 65 with ten years of service. If the Company determines in good faith that the Disability of Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to Executive written notice in accordance with Section 15(f) of this Agreement of its intention to terminate Executive's employment. In such event, Executive's employment with the Company shall terminate effective on the 30th day after receipt of such written notice by Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, Executive shall not have returned to full-time performance of Executive's duties. For purposes of this Agreement, "Disability" shall mean a mental or physical disability as determined by the Board of Directors of the Company in accordance with standards and procedures similar to those under the Company's employee long-term disability plan, if any. At any time that the Company does not maintain such a long-term disability plan, Disability shall mean the inability of Executive, as determined by the Board, to perform the essential functions of his regular duties and responsibilities (with or without reasonable accommodation) due to a medically determinable physical or mental illness which has lasted (or can reasonably be expected to last) for a period of six consecutive months. (b) Termination by the Company. The Company may terminate Executive's employment during the Employment Period with or without Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of Executive to perform substantially Executive's duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness, and specifically excluding any failure by Executive, after reasonable efforts, to meet performance expectations), after a written demand for substantial performance is delivered to Executive by the President or the Board of Directors of the Company which specifically identifies the manner in which such Board or the President believes that Executive has not substantially performed Executive's duties, or (ii) the willful engaging by Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company, or (iii) Executive engages in any misconduct involving moral turpitude whether occurring in the performance of his duties or otherwise. For purposes of this provision, no act or failure to act, on the part of Executive, shall be considered "willful" unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. The cessation of employment of Executive shall not be deemed to be for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board of the Company at a meeting of such Board called and held for such purpose (after reasonable notice is provided to Executive and Executive is given an opportunity, together with counsel, to be heard before such Board), finding that, in the good faith opinion of such Board, Executive is guilty of the conduct described in subparagraph (i), (ii) or (iii) above, and specifying the particulars thereof in detail. (c) Termination by Executive. Executive's employment may be terminated by Executive for Good Reason or no reason. For purposes of this Agreement, "Good Reason" shall mean: (i) without the written consent of Executive, the assignment to Executive of any duties materially inconsistent with Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as in effect on the Effective Date, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (ii) a reduction by the Company in Executive's Base Salary and benefits as in effect on the Effective Date or as the same may be increased from time to time, unless a similar reduction is made in salary and benefits of Peer Executives, or the failure by the Company to increase Executive's Base Salary each year during the Employment Period by an amount which at least equals, on a percentage basis, the mean average percentage increase in base salary for Peer Executives, unless such failure to increase is based on nonarbitrary criteria applied to Executive and Peer Executives; (iii) after the occurrence of a Change of Control, the Company's requiring Executive to be based at any office or location other than in the greater Jacksonville, Florida metropolitan area or the Company's requiring Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any failure by the Company to comply with and satisfy Section 14(b) of this Agreement; or (v) any termination by Executive for any reason or no reason during the 30-day period beginning on the first anniversary of a Change of Control. (d) Notice of Termination. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 15(f) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if Executive's employment is terminated by the Company for Cause, or by Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies Executive of such termination and (iii) if Executive's employment is terminated by reason of death, Retirement or Disability, the Date of Termination shall be the date of death or Retirement of Executive or the Disability Effective Date, as the case may be. 8. Obligations of the Company upon Termination. (a) Termination by Executive for Good Reason; Termination by the Company Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate Executive's employment other than for Cause, death or Disability, or Executive shall terminate employment for Good Reason within a period of 30 days after the occurrence of the event giving rise to Good Reason, then in consideration of Executive's services rendered prior to such termination and as reasonable compensation for his compliance with the Restrictive Covenants in Section 13 hereof: (i) the Company shall pay to Executive in a lump sum in cash within 30 days after the Date of Termination or, with respect to the prorata bonus described in clause A(2) below, within 30 days after the determination of the bonus amount, the aggregate of the following amounts: A. the sum of (1) Executive's Base Salary through the Date of Termination to the extent not theretofore paid, (2) if the Date of Termination occurs after or in connection with the occurrence of a Change of Control, the product of (x) Executive's annual bonus that would have been payable with respect to the fiscal year in which the Date of Termination occurs (determined at the end of such year based on actual performance results through the end of such year) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, and (3) any compensation previously deferred by Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to one times Executive's annual Base Salary in effect as of the Date of Termination (the "Severance Payment"); provided, however, that if the Date of Termination occurs after or in connection with the occurrence of a Change of Control, the Severance Payment shall be the amount equal to two times Executive's annual Base Salary in effect as of the Date of Termination; and (ii) for one year after Executive's Date of Termination (or two years in the event that the Date of Termination occurs after or in connection with the occurrence of a Change of Control), or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to Executive and/or Executive's family at least equal to those which would have been provided to them in accordance with the welfare plans, programs, practices and policies described in Section 5(c) of this Agreement if Executive's employment had not been terminated or, if more favorable to Executive, as in effect generally at any time thereafter with respect to Peer Executives and their families, provided, however, that if Executive becomes re-employed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility ("Welfare Benefits"); and (iii) the Company shall, within 30 days of receipt of reasonably documented invoices therefor, reimburse Executive's actual cost (not to exceed $30,000) for outplacement expenses incurred within one year after the Date of Termination; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to Executive any other amounts or benefits required to be paid or provided or which Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If Executive's employment is terminated by reason of Executive's death during the Employment Period, this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations (excluding the pro-rata bonus described in clause 2 of Section 8(a)(i)(A)), the timely payment or provision of Other Benefits, and a lump sum amount equal to two (2) months' salary, based on Executive's Base Salary in effect as of the date of death. Accrued Obligations shall be paid to Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 8(b) shall include, without limitation, and Executive's estate and/or beneficiaries shall be entitled to receive, benefits under such plans, programs, practices and policies relating to death benefits, if any, as applicable to Executive on the Date of Termination. (c) Disability. If Executive's employment is terminated by reason of Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations (excluding the pro-rata bonus described in clause 2 of Section 8(a)(i)(A)) and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 8(c) shall include, without limitation, and Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits under such plans, programs, practices and policies relating to disability, if any, as applicable to Executive on the Date of Termination. (d) Retirement. If Executive's employment is terminated by reason of Executive's Retirement during the Employment Period, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations (excluding the pro-rata bonus described in clause 2 of Section 8(a)(i)(A)) and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 8(d) shall include, without limitation, and Executive shall be entitled after the Date of Termination to receive, retirement and other benefits under such plans, programs, practices and policies relating to retirement, if any, as applicable to Executive on the Date of Termination. (e) Cause or Voluntary Termination without Good Reason. If Executive's employment shall be terminated for Cause during the Employment Period, or if Executive voluntarily terminates employment during the Employment Period without Good Reason, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations (excluding the pro-rata bonus described in clause 2 of Section 8(a)(i)(A)), the continuation of Welfare Benefits for a period of 30 days after the Date of Termination, payment of a lump sum amount equal to 30 days' salary, based on Executive's Base Salary in effect as of the Date of Termination. 9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which Executive may qualify, nor, subject to Section 15(d), shall anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 10. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any benefit, payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then: Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 10(a), if it shall be determined that Executive is entitled to a Gross-Up Payment, but that Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the "Reduced Amount") such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. The Executive may select the Payments to be limited or reduced. (b) Subject to the provisions of Section 10(c), all determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's regular independent accounting firm at the expense of the Company or, at the election and expense of Executive, another nationally recognized independent accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations. Any determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 10(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. (c) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section 10(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 10(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of Section 10(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). 11. Costs of Enforcement. In any action taken in good faith relating to the enforcement of this Agreement or any provision herein after the occurrence of a Change of Control, Executive shall be entitled to be paid any and all costs and expenses incurred by him in enforcing or establishing his rights thereunder, including, without limitation, reasonable attorneys' fees, whether suit be brought or not, and whether or not incurred in trial, bankruptcy or appellate proceedings. In all other circumstances, each party in any such action shall pay his or its own such costs and expenses. 12. Representations and Warranties. Executive hereby represents and warrants to the Company that Executive is not a party to, or otherwise subject to, any covenant not to compete (other than as contained herein) with any person or entity, and Executive's execution of this Agreement and performance of his obligations hereunder will not violate the terms or conditions of any contract or obligation, written or oral, between Executive and any other person or entity. 13. Restrictions on Conduct of Executive. (a) General. Executive and the Company understand and agree that the purpose of the provisions of this Section 13 is to protect legitimate business interests of the Company, as more fully described below, and is not intended to eliminate Executive's post-employment competition with the Company per se, nor is it intended to impair or infringe upon Executive's right to work, earn a living, or acquire and possess property from the fruits of his labor. Executive hereby acknowledges that the post-employment restrictions set forth in this Section 13 are reasonable and that they do not, and will not, unduly impair his ability to earn a living after the termination of this Agreement. Therefore, subject to the limitations of reasonableness imposed by law upon the restrictions set forth herein, Executive shall be subject to the restrictions set forth in this Section 13. (b) Definitions. The following capitalized terms used in this Section 13 shall have the meanings assigned to them below, which definitions shall apply to both the singular and the plural forms of such terms: "Competitive Services" means any services provided by Company at the Determination Date, including, but not limited to the marketing, sale and distribution of medical supplies, equipment and pharmaceuticals to primary care and other office-based physicians; the marketing, sale and distribution of medical diagnostic imaging supplies, chemicals, equipment and service to the acute care and alternate care market; and the provisions of special group purchasing contract pricing and periodic cost analyses to help manage the supply needs of individual physicians or practices. "Confidential Information" means any confidential or proprietary information possessed by the Company or its affiliated entities or relating to its or their business, including without limitation, any confidential "know-how", customer lists, details of client or consultant contracts, current and anticipated customer requirements, pricing policies price lists, market studies, business plans, operational methods, marketing plans or strategies, product development techniques or plans, computer software programs (including object code and source code), data and documentation, data base technologies, systems, structures and architectures, inventions and ideas, past, current and planned research and development, compilations, devices, methods, techniques, processes, financial information and data, business acquisition plans, new personnel acquisition plans and any other information that would constitute a Trade Secret (as defined herein). "Determination Date" means the date of termination of Executive's employment with the Company for any reason whatsoever or any earlier date (during the Employment Period) of an alleged breach of the Restrictive Covenants by Executive. "Person" means any individual or any corporation, partnership, joint venture, association or other entity or enterprise. "Principal or Representative" means a principal, owner, partner, shareholder, joint venturer, investor, member, trustee, director, officer, manager, employee, agent, representative or consultant. "Protected Clients" means any Person to whom the Company provided services or submitted a written proposal therefor, within eighteen (18) months prior to the Determination Date. "Protected Employees" means employees of the Company who were employed by the Company at any time within six (6) months prior to the Determination Date. "Restricted Period" means the term of Executive's employment hereunder and a period extending until eighteen (18) months from the Date of Termination; provided, however that such period shall be extended by any length of time during which Executive is in breach of the Restricted Covenants. "Restrictive Covenants" means the restrictive covenants contained in Section 13(c) hereof. "Trade Secret" means any item of Confidential Information that constitutes a "trade secret(s)" under the common law or statutory law of the State of Florida. (c) Restrictive Covenants. (i) Restriction on Disclosure and Use of Confidential Information. Executive understands and agrees that the Confidential Information constitutes a valuable asset of the Company and its affiliated entities, and may not be converted to Executive's own use. Accordingly, Executive hereby agrees that Executive shall not, directly or indirectly, at any time during the Restricted Period reveal, divulge, or disclose to any Person not expressly authorized by the Company any Confidential Information, and Executive shall not, directly or indirectly, at any time during the Restricted Period use or make use of any Confidential Information in connection with any business activity other than that of the Company; provided, however, in the event the Confidential Information constitutes a Trade Secret, the Restricted Period referred to above shall be five (5) years. Notwithstanding the above, this covenant shall expire (except with respect to Trade Secrets) upon the occurrence of a Change of Control. (ii) Nonsolicitation of Protected Employees. Executive understands and agrees that the relationship between the Company and each of its Protected Employees constitutes a valuable asset of the Company and may not be converted to Executive's own use. Accordingly, Executive hereby agrees that during the Restricted Period Executive shall not directly or indirectly on Executive's own behalf or as a Principal or Representative of any Person or otherwise solicit or induce any Protected Employee to terminate his or her employment relationship with the Company or to enter into any relationship of employment, agency or independent contractorship with any other Person. Notwithstanding the above, this covenant shall expire upon the occurrence of a Change of Control. (iii) Restriction on Relationships with Protected Clients. Executive understands and agrees that the relationship between the Company and each of its Protected Clients constitutes a valuable asset of the Company and may not be converted to Executive's own use. Accordingly, Executive hereby agrees that during the Restricted Period Executive shall not, without the prior written consent of the Company, become a Principal or Representative of a Protected Client or otherwise provide services to a Protected Client as a consultant or independent contractor. Notwithstanding the above, this covenant shall expire upon the occurrence of a Change of Control. (iv) Noncompetition with the Company. During the Restricted Period Executive, unless acting in accordance with the Company's prior written consent, will not directly provide any Competitive Services to, and will not, directly or indirectly, (i) own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or (ii) be connected as a Principal or Representative or otherwise with, or (iii) permit Executive's name to be used by or in connection with, any Person engaged in providing Competitive Services to any Person conducting business activities within the territory in which the Company is or was engaged in the provision of the Competitive Services on the Determination Date; provided, however, that the provisions of this Agreement shall not be deemed to prohibit the ownership by Executive of any securities of the Company or its affiliated entities or not more than five percent (5%) of any class of securities of any corporation having a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended. Notwithstanding the above, this covenant shall expire upon the occurrence of a Change of Control. (d) Exceptions from Disclosure Restrictions. Anything herein to the contrary notwithstanding, Executive shall not be restricted from disclosing or using Confidential Information that: (a) is or becomes generally available to the public other than as a result of an unauthorized disclosure by Executive or his agent; (b) becomes available to Executive in a manner that is not in contravention of applicable law from a source (other than the Company or its affiliated entities or one of its or their officers, employees, agents or representatives) that is not bound by a confidential relationship with the Company or its affiliated entities or by a confidentiality or other similar agreement; (c) was known to Executive on a non-confidential basis and not in contravention of applicable law or a confidentiality or other similar agreement before its disclosure to Executive by the Company or its affiliated entities or one of its or their officers, employees, agents or representatives; or (d) is required to be disclosed by law, court order or other legal process; provided, however, that in the event disclosure is required by law, Executive shall provide the Company with prompt notice of such requirement so that the Company may seek an appropriate protective order prior to any such required disclosure by Executive. (e) Enforcement of Restrictive Covenants. (i) Rights and Remedies Upon Breach. In the event Executive breaches, or threatens to commit a breach of, any of the provisions of the Restrictive Covenants, the Company shall have the following rights and remedies, which shall be independent of any others and severally enforceable, and shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity: A. the right and remedy to enjoin, preliminarily and permanently, Executive from violating or threatening to violate the Restrictive Covenants and to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company; and B. the right and remedy to require Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any transactions constituting a breach of the Restrictive Covenants. (ii) Severability of Covenants. Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in time and scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, are invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. 14. Assignment and Successors. (a) Executive. This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. (b) The Company. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company will require any successor to all or substantially all of the business and/or assets of the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "the Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 15. Miscellaneous. (a) Waiver. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by the party making the waiver. (b) Severability. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which shall remain in full force and effect. (c) Other Agents. Nothing in this Agreement is to be interpreted as limiting the Company from employing other personnel on such terms and conditions as may be satisfactory to it. (d) Entire Agreement. Except as provided herein, this Agreement contains the entire agreement between the Company and Executive with respect to the subject matter hereof, and it supersedes and invalidates any previous agreements or contracts between them which relate to the subject matter hereof, including without limitation that certain Contract of Employment, dated as of May 30, 1992 by and between Executive and the Company. No representations, inducements, promises or agreements, oral or otherwise, which are not embodied herein shall be of any force or effect. (e) Governing Law. Except to the extent preempted by federal law, and without regard to conflict of laws principles, the laws of the State of Florida shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. (f) Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered or three days after mailing if mailed, first class, certified mail, postage prepaid: To Company: PSS World Medical, Inc. 4345 Southpoint Boulevard Jacksonville, Florida 32216 Facsimile No. (904) 332-3209 Attention: President To Executive: David A. Smith Any party may change the address to which notices, requests, demands and other communications shall be delivered or mailed by giving notice thereof to the other party in the same manner provided herein. (g) Amendments and Modifications. This Agreement may be amended or modified only by a writing signed by both parties hereto, which makes specific reference to this Agreement; provided, however, that if, in the opinion of the Corporation's accountants, any provision of this Agreement would preclude the use of "pooling of interest" accounting treatment for a Change of Control transaction that (1) would otherwise qualify for such accounting treatment, and (2) is contingent upon qualifying for such accounting treatment, then Executive and the Company agree to negotiate in good faith to amend this Agreement so that it will not preclude the use of "pooling of interest" accounting treatment for such Change of Control transaction. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Employment Agreement as of the date first above written. PSS WORLD MEDICAL, INC. By: /s/ Patrick Kelly --------------------------- Patrick Kelly Chairman of the Board EXECUTIVE: /s/ David A. Smith --------------------------- David A. Smith EX-10 9 exhibit1013_a.txt 10.13A Exhibit 10.13a AMENDMENT TO EMPLOYMENT AGREEMENT with DAVID A. SMITH This AMENDMENT (the "Amendment"), effective as of April 17, 2000, by and between PSS World Medical, Inc., a Florida corporation (the "Company"), and David A. Smith ("Executive"), amends that certain Employment Agreement, dated as of the date indicated below, by and between the Company and Executive, as heretofore amended (the "Employment Agreement"). In consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: 1. Section 3 of the Employment Agreement is hereby amended by adding the following sentence at the end thereof: "Notwithstanding the foregoing, if a Change of Control occurs the Employment Period shall be automatically extended through the later of (i) the third anniversary of the Change of Control, or (ii) the normal expiration of the then-current term, including any prior extensions." 2. Section 6 of the Employment Agreement is hereby amended by deleting in its entirety the definition of Change of Control and substituting therefor the following: A "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (ii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this definition; or (b) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of the combined voting power of the then outstanding voting securities of such corporation resulting from such Business Combination except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) If Executive's employment responsibilities are primarily with Diagnostic Imaging, Inc., a disposition by the Company of a majority of the stock or substantially all of the assets of Diagnostic Imaging, Inc.; provided, however, that if Executive is offered and accepts a position with the Company or another subsidiary or division of the Company immediately following such disposition of Diagnostic Imaging, Inc., then a Change of Control shall not be deemed to have occurred by virtue of this subsection (d); or (e) If Executive's employment responsibilities are primarily with Gulf South Medical Supply, Inc., a disposition by the Company of a majority of the stock or substantially all of the assets of Gulf South Medical Supply, Inc.; provided, however, that if Executive is offered and accepts a position with the Company or another subsidiary or division of the Company immediately following such disposition of Gulf South Medical Supply, Inc., then a Change of Control shall not be deemed to have occurred by virtue of this subsection (e); or (f) If Executive's employment responsibilities are primarily with the Physician Sales & Service division of the Company, a disposition by the Company of substantially all of the assets of such division; provided, however, that if Executive is offered and accepts a position with the Company or another subsidiary or division of the Company immediately following such disposition of the Physician Sales & Service division, then a Change of Control shall not be deemed to have occurred by virtue of this subsection (f). 3. Notwithstanding the foregoing, if, in the opinion of the Company's accountants, the foregoing amendments (or any portion thereof) would preclude the use of "pooling of interest" accounting treatment for a Change of Control transaction that (a) would otherwise qualify for such accounting treatment, and (b) is contingent upon qualifying for such accounting treatment, then such amendments (to the extent so determined to preclude such pooling of interests accounting treatment) will not be effective and the terms of the Employment Agreement will remain in effect as if such amendments (or portion thereof) had not been proposed. 4. As amended hereby, the Employment Agreement, as heretofore amended, shall be and remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. PSS WORLD MEDICAL, INC. By: /s/ Patrick C. Kelly -------------------------------------------- Patrick C. Kelly Chairman of the Board and CEO By: /s/ John F. Sasen, Sr. ----------------------------------- John F. Sasen, Sr. Executive Vice President and CMO EXECUTIVE /s/ David A. Smith -------------------------------------- David A. Smith Date of original Employment Agreement: March 1998 -----END PRIVACY-ENHANCED MESSAGE-----