FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2000
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-23832
PSS WORLD MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2280364
------- ----------
(State or other jurisdiction (IRS employer
of incorporation) Identification number)
4345 Southpoint Blvd.
Jacksonville, Florida 32216
--------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number (904) 332-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of February 9, 2001 a total of 71,077,236 shares of common stock,
par value $.01 per share, of the registrant were outstanding.
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
December 31, 2000
INDEX
PAGE NUMBER
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2000 and March 31, 2000 3
Condensed Consolidated Statements of Operations -
For the Three and Nine months Ended December 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
For the Nine months Ended December 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements - December 31, 2000 and 1999 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 28
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 29
Item 2 - Change in Securities and Use of Proceeds 29
Item 3 - Defaults Upon Senior Securities 29
Item 4 - Submission of Matters to a Vote of Security Holders 30
Item 5 - Other Information 30
Item 6 - Exhibits and Reports on Form 8-K 30
SIGNATURES 33
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigation and
investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business and
economic conditions; and other factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
December 31, March 31,
2000 2000
------------------ -----------------
(Unaudited) *
ASSETS
Current Assets:
Cash and cash equivalents $ 36,935 $ 60,414
Marketable securities 215 4,328
Accounts receivable, net 250,824 284,441
Inventories, net 185,255 178,038
Employee advances 3,657 973
Prepaid expenses and other 55,979 57,515
------------------ -----------------
Total current assets 532,865 585,709
Property and equipment, net 72,578 65,783
Other Assets:
Intangibles, net 186,557 202,242
Other 25,230 19,683
------------------ -----------------
Total assets $ 817,230 $ 873,417
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 126,500 $ 124,448
Accrued expenses 34,774 35,434
Current maturities of long-term debt and capital lease obligations 2,225 4,274
Other 11,405 7,482
------------------ -----------------
Total current liabilities 174,904 171,638
Long-term debt and capital lease obligations, net of current portion 217,639 254,959
Other 6,731 7,193
------------------ -----------------
Total liabilities 399,274 433,790
------------------ -----------------
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 December 31, 2000 and March 31, 2000 711 711
Additional paid-in capital 348,701 349,186
Retained earnings 69,331 90,951
Cumulative other comprehensive income (787) (390)
------------------ -----------------
417,956 440,458
Unearned ESOP shares -- (831)
------------------ -----------------
Total shareholders' equity 417,956 439,627
------------------ -----------------
Total liabilities and shareholders' equity $ 817,230 $ 873,417
================== =================
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated statements.
3
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
---------------------------------------- ----------------------------------------
December 31, 2000 December 31, 1999 December 31, 2000 December 31, 1999
------------------- ------------------- ------------------- -------------------
Net sales $ 447,326 $ 462,101 $ 1,362,456 $ 1,350,103
Cost of goods sold 343,672 347,277 1,041,304 1,014,237
------------------- ------------------- ------------------- -------------------
Gross profit 103,654 114,824 321,152 335,866
General and administrative expenses 94,747 61,807 231,147 186,458
Selling expenses 28,479 30,084 86,850 85,643
International business exit charge 14,917 -- 14,917 --
------------------- ------------------- ------------------- -------------------
(Loss) income from operations (34,489) 22,933 (11,762) 63,765
------------------- ------------------- ------------------- -------------------
Other income (expense):
Interest expense (4,673) (4,074) (14,396) (10,450)
Interest and investment income 547 391 1,808 1,322
Other income 567 1,551 2,094 9,904
------------------- ------------------- ------------------- -------------------
(3,559) (2,132) (10,494) 776
------------------- ------------------- ------------------- -------------------
(Loss) income before provision for income
taxes and cumulative effect of accounting (38,048) 20,801 (22,256) 64,541
change
Provision (benefit) for income taxes (8,307) 8,881 (636) 26,636
------------------- ------------------- ------------------- -------------------
Income before cumulative effect of (29,741) 11,920 (21,620) 37,905
accounting change
Cumulative effect of accounting change -- -- -- (1,444)
------------------- ------------------- ------------------- -------------------
Net (loss) income $ (29,741) $ 11,920 $ (21,620) $ 36,461
=================== =================== =================== ===================
Earnings per share - Basic:
(Loss) income before cumulative effect of
accounting change $ (0.42) $ 0.17 $ (0.30) $ 0.53
Cumulative effect of accounting change -- -- (0.02)
------------------- ------------------- ------------------- -------------------
Net (loss) income $ (0.42) $ 0.17 $ (0.30) $ 0.51
=================== =================== =================== ===================
Earnings per share - Diluted:
(Loss) income before cumulative effect of
accounting change $ (0.42) $ 0.17 $ (0.30) $ 0.53
Cumulative effect of accounting change -- -- -- (0.02)
------------------- ------------------- ------------------- -------------------
Net (loss) income $ (0.42) $ 0.17 $ (0.30) $ 0.51
=================== =================== =================== ===================
The accompanying notes are an integral part of these condensed consolidated statements.
4
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Nine Months Ended
------------------------------------
December 31, December 31,
2000 1999
------------------ -----------------
Cash Flows From Operating Activities:
Net income $ (21,620) $ 36,461
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of accounting change -- 1,444
Depreciation and amortization 18,693 14,427
Amortization of debt issuance costs 608 550
Provision for doubtful accounts 23,164 2,897
International business exit charge 14,917 --
Gain (loss) on sale of fixed assets 1 (296)
Deferred compensation -- 198
ESOP amortization 345 435
Changes in operating assets and liabilities, net of effects from business
acquisitions:
Accounts receivable, net 11,621 (39,944)
Inventories (7,217) (27,334)
Prepaid expenses and other (6,587) (14,357)
Other assets (5,314) (7,019)
Accounts payable, accrued expenses and other liabilities 6,287 24,689
------------------ -----------------
Net cash provided by (used in) operating activities 34,898 (7,849)
------------------ -----------------
Cash Flows From Investing Activities:
Purchases of marketable securities -- (10,665)
Proceeds from sales and maturities of marketable securities 3 --
Capital expenditures (16,494) (17,893)
Proceeds from sales of fixed assets 365 2,003
Purchases of businesses, net of cash acquired (658) (45,975)
Payments on non-compete agreements (1,140) (5,081)
------------------ -----------------
Net cash used in investing activities (17,924) (77,611)
------------------ -----------------
Cash Flows From Financing Activities:
Proceeds from borrowings 80,000 79,487
Repayment of borrowings (119,302) (3,489)
Principal payments under capital lease obligations (66) (245)
Proceeds from issuance of common stock -- 60
Other (1,085) (65)
Net cash (used in) provided by financing activities (40,453) 75,748
------------------ -----------------
Net decrease in cash and cash equivalents (23,479) (9,712)
Cash and cash equivalents, beginning of period 60,414 41,106
------------------ -----------------
Cash and cash equivalents, end of period $ 36,935 $ 31,394
================== =================
The accompanying notes are an integral part of these condensed consolidated statements.
5
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
NOTE 1 - BASIS OF PRESENTATION
PSS World Medical, Inc. (the "Company" or "PSS") is a specialty marketer
and distributor of medical products to physicians, alternate-site imaging
centers, long-term care providers, home care providers, and hospitals
through 101 service centers to customers in all 50 states and four European
countries.
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with the rules and regulations of the U.S.
Securities and Exchange Commission (the "SEC"). Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted pursuant to the SEC rules
and regulations. The condensed consolidated financial statements reflect,
in the opinion of management, all adjustments necessary to present fairly
the financial position and results of operations for the periods indicated.
The Condensed Consolidated Balance Sheet as of March 31, 2000 has been
derived from the Company's audited consolidated financial statements for
the year ended March 31, 2000. The financial statements and related notes
included in this Report should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended March 31, 2000.
Financial statements for the Company's subsidiaries outside the United
States are translated into U.S. dollars at period-end exchange rates for
assets and liabilities and weighted average exchange rates for income and
expenses. The resulting translation adjustments are recorded in the other
comprehensive income component of shareholders' equity. During the quarter
ending December 31, 2000, the Company recorded a $3.2 million charge as
part of an International Business exit charge to recognize prior cumulative
foreign currency translation adjustments through the income statement.
The Company operates on a thirteen week quarter which ends on the Friday
closest to each calendar quarter end. For purposes of presentation and
clarity, calendar quarter dates will be used for discussion and tables in
this filing.
The results of operations for the interim periods covered by this report
may not necessarily be indicative of operating results for the full fiscal
year.
Certain fiscal 2000 amounts have been reclassified to conform to fiscal
2001 presentation.
NOTE 2 - BUSINESS ACQUISITIONS
Purchase Acquisitions
There were no acquisitions during the three months ended December 31, 2000.
During the three months ended December 31, 1999, the Company acquired
certain assets and assumed certain liabilities of four imaging supply and
equipment distributors. The following is a summary of the transactions:
6
December 31, 1999
-----------------
Number of acquisitions........................ 4
Total consideration........................... $ 16,884
Cash paid, net of cash acquired............... 12,007
Goodwill recorded............................. 9,670
Value of Noncompete Agreements................ 820
The operations of the acquired companies have been included in the
Company's results of operations subsequent to the dates of acquisition.
Supplemental pro forma information, assuming these acquisitions had been
made at the beginning of the year, is not provided, as the results would
not be materially different from the Company's reported results of
operations.
These acquisitions were accounted for under the purchase method of
accounting, and accordingly, the assets of the acquired companies have been
recorded at their estimated fair values at the dates of the acquisitions.
The excess of the purchase price over the estimated fair value of the net
assets acquired has been recorded as goodwill and is amortized over 15 to
30 years. The accompanying consolidated financial statements reflect the
final allocation of the purchase price for acquisitions accounted for under
the purchase method of accounting.
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 $8.4
million (payable through fiscal 2003).
During the three months ended December 31, 2000, there were no earnout
payments.
NOTE 3 - CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES
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 charges included as a
component of general and administrative expenses in the accompanying
consolidated statements of operations:
Three Months Ended Nine months Ended
----------------------------- -----------------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ ------------- ------------ -------------
Merger costs and expenses $ 1,527 $ (14) $ 4,686 $ (260)
Restructuring costs and expenses 5,333 1,589 7,586 9,808
Acceleration of depreciation 1,504 -- 1,504 --
Long-Term Care Business bad debt charge 19,991 -- 19,991 --
Other 170 (1,221) 2,590 (1,221)
------------ ------------- ------------ -------------
Total $ 28,525 $ 354 $ 36,357 $ 8,327
============ ============= ============ =============
Merger Costs and Expenses
The Company's policy is to accrue merger costs and expenses at the
commitment date of an integration plan if certain criteria under EITF 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity ("EITF 94-3") or EITF 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.
7
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 Company's 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.
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 strategic alternatives transition period. Accordingly,
during the three and nine months ended December 31, 2000, the Company
expensed $1,271 and $3,813, respectively, related to the Retention Plans.
In addition, the Company has recorded merger costs and expenses that
primarily related to branch shutdown and lease termination costs. For the
three months ended December 31, 2000 and 1999, the Company recorded $264
and $399, respectively, of merger charges expensed as incurred. For the
nine months ended December 31, 2000 and 1999, the Company recorded $881 and
$1,175, respectively,of merger charges and expenses as incurred. At the end
of each quarter, management reevaluates its plans and adjusts previous
estimates. For the three months ended December 31, 2000 and 1999, the
Company reversed $8 and $413, respectively, of merger costs and expenses,
and for the nine months ended December 31, 2000 and 1999, the Company
reversed $8 and $1,435, respectively, of merger costs and expenses
previously established under prior plans. Refer to Note 4, Accrued Merger
and Restructuring Costs and Expenses, for further discussion regarding
merger plans.
Restructuring Costs and Expenses
The Company has recorded restructuring costs and expenses primarily related
to other exit costs as incurred, which include costs to pack and move
inventory, costs to set up new facilities, employee relocation costs, and
other related facility closure costs. For the three months ended December
31, 2000 and 1999, the Company recorded $543 and $2,590, respectively, of
restructuring costs as incurred. For the nine months ended December 31,
2000 and 1999, the Company recorded $2,796 and $6,056, respectively, of
restructuring costs as incurred. At the end of each quarter, management
reevaluates its plans and adjusts previous estimates. For the three months
ended December 31, 2000 and 1999, the Company reversed $269 and $1,001,
respectively, of restructuring costs, and for the nine months ended
December 31, 2000 and 1999, the Company reversed $269 and $1,215,
respectively, of restructuring costs previously established under prior
plans due to overaccruals for lease termination, involuntary employee
termination, and branch shutdown costs.
During the three months ended December 31, 2000, management approved and
adopted a formal plan 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 $5,059 at the commitment date of the
restructuring plan adopted by management. During the three months ended
September 30, 1999, management approved and adopted a formal plan to
restructure the company ("Plan C"). Accordingly, the Company recorded
restructuring costs and expenses of $4,967 at the commitment date of the
restructuring plan adopted by management. Refer to Note 4, Accrued Merger
and Restructuring Costs and Expenses, for an update of the current status
of restructuring plans.
8
Acceleration of Depreciation
During the quarter ended December 31, 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, the Company evaluated
the recoverability of the assets. Based on the Company's analysis, the
impairment did not exist on the division level; therefore, management
reviewed the depreciation estimates in accordance with Accounting
Principles Board No. 20, Accounting Changes, and recorded $1,504 of
accelerated depreciation.
Long-Term Care Business Bad Debt Charge
During the quarter ended December 31, 2000, the Company recorded
approximately $20 million in bad debt expense to increase the accounts
receivable reserves at its Gulf South Medical Supply subsidiary. 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.
Other
During the three and nine months ended December 31, 2000, the Company
incurred $170 and $2,590, respectively, primarily relating to legal and
professional fees and other costs pursuant to the Company's strategic
alternative process. During the three and nine months ended December 31,
1999, the Company performed an analysis and reversed $1,221 of a previously
recorded operating tax charge reserve.
NOTE 4 - ACCRUED MERGER AND RESTRUCTURING COSTS AND EXPENSES
Summary of Accrued Merger Costs and Expenses
In connection with the consummation of business combinations, management
often develops formal plans to exit certain activities, involuntarily
terminate employees, and relocate employees of acquired companies.
Management's plans to exit an activity often include identification of
duplicate facilities for closure and identification of facilities for
consolidation into other facilities.
Generally, completion of the integration plans will occur within one year
from the date in which the plans are 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 previously established plan. 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.
9
As part of the integration plans, certain costs are recognized at the date
in which a plan is formalized and adopted by management (commitment date).
These costs are generally related to employee terminations and relocation,
lease terminations, and branch shutdown. In addition, there are certain
costs that do not meet the criteria for accrual at the commitment date and
are expensed as the plan is implemented (refer to Note 3, Charges Included
in General and Administrative Expenses). Involuntary employee termination
costs are employee severance costs and termination benefits. Lease
termination costs are lease cancellation fees and forfeited deposits.
Branch shutdown costs include costs related to facility closure costs.
Employee relocation costs are moving costs of employees of an acquired
company in transactions accounted for under the purchase method of
accounting.
Accrued merger costs and expenses, classified as accrued expenses in the
accompanying consolidated balance sheet, were $492 at December 31, 2000.
The discussion and rollforward of the accrued merger costs and expenses
below summarize the significant and nonsignificant integration plans
adopted by management for business combinations accounted for under the
purchase method of accounting and pooling-of-interests method of
accounting. Integration plans are considered to be significant if the
charge recorded to establish the accrual is in excess of 5% of consolidated
pretax income.
Significant Pooling-of-Interests Business Combination Plan
The Company formalized and adopted an integration plan in December 1997 to
integrate the operations of S&W X-Ray, Inc. with the Imaging Business. As
of December 31, 2000, all of the employees have been terminated and all of
the seven identified distribution facilities have been shut down.
Therefore, all costs related to the merger plan had been incurred at
December 31, 2000, except for lease termination costs for one location for
which payment will extend through May 2001. During the three months ended
December 31, 2000, $22 of lease expense was charged against the accrual
leaving a remaining accrual of $37.
Nonsignificant Pooling-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. All costs
related to the merger plan had been incurred at December 31, 2000, except
for lease termination costs for which payments will extend through fiscal
2004. During the three months ended December 31, 2000, $336 of lease
expense was charged against the accrual leaving a remaining accrual of
$148.
Nonsignificant Purchase Business Combination Plans
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 December
31, 2000, except for lease termination costs for which payments will extend
through fiscal 2004. During the three months ended December 31, 2000, $22
of lease expense was charged against the accrual leaving a remaining
accrual of $307.
Summary of Accrued Restructuring Costs and Expenses
Primarily as a result of the impact of the merger with Gulf South Medical
Supply, 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 implemented a
restructuring plan during the fourth quarter of fiscal 1998 that impacted
all divisions ("Plan A"). The accruals related to Plan A were fully
utilized at December 31, 2000. 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.
10
During the second quarter of fiscal 2000, management evaluated the
Company's overall cost structure and implemented cost reductions in order
to meet internal profitability targets. In addition, management decided to
improve its distribution model and relocate the corporate office for the
Gulf South Medical Supply division to Jacksonville, Florida where the
corporate offices for the Diagnostic Imaging and Physician Supply divisions
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").
The accruals related to Plan D were fully utilized at December 31, 2000.
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. The total number of employees to be terminated in Plan E
is 29. As of December 31, 2000, 15 employees had been terminated.
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 $4,411 at December 31, 2000. The following is a summary of
the restructuring plan activity for the three months ended December 31,
2000:
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
------------- -------------- -------------- --------------
Balance at September 30, 2000 $ 35 $ 607 $ 241 $ 883
Adjustments (30) -- (239) (269)
Additions 4,887 -- -- 4,887
Utilized (951) (137) (2) (1,090)
------------- -------------- -------------- --------------
Balance at December 31, 2000 $ 3,941 $ 470 $ 0 $ 4,411
============= ============== ============== ==============
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 $80 of
lease termination payments remain accrued at December 31, 2000 for which
payments will extend through fiscal 2002.
Plan C
All employees have been terminated at March 31, 2000. Accrued restructuring
costs and expenses related to Plan C at December 31, 2000 were
approximately $390, which relates to lease terminations. 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 for the three months ended December 31,
2000.
Plan E
Accrued restructuring costs and expenses related to Plan E at December 31,
2000 were approximately $3,941, all of which relates to involuntary
employee terminations.
11
Note 5 - INTERNATIONAL BUSINESS EXIT CHARGE
During the quarter ended December 31, 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. Management
expects to complete this plan prior to June 30, 2001. 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, the Company
recorded $14.9 million as an International Business exit charge during the
quarter ended December 31, 2000.
During the quarter ended December 31, 2000, the European operations
reported the following results:
Three Months Ended Nine Months Ended
----------------------------------- ----------------------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
----------------- --------------- ----------------- ---------------
Net sales $ 7,265 $ 7,607 $ 15,420 $ 23,282
Cost of goods sold 5,405 5,571 10,908 16,459
----------------- --------------- ----------------- ---------------
Gross profit 1,860 2,036 4,512 6,823
Selling, General and administrative 1,559 1,750 4,484 6,189
expenses
International Business exit charge 14,917 -- 14,917 --
----------------- --------------- ----------------- ---------------
Operating income (14,616) 286 (14,889) 634
Interest expense (external) (201) 84 (466) (69)
Interest expense (intercompany) (300) (300) (900) (903)
----------------- --------------- ----------------- ---------------
(501) (216) (1,366) (972)
----------------- --------------- ----------------- ---------------
Income before provision for income (15,117) 70 (16,255) (338)
taxes
Provision for income taxes -- -- -- --
----------------- --------------- ----------------- ---------------
Net income $ (15,117) $ 70 $ (16,255) $ (338)
================= =============== ================= ===============
NOTE 6 - COMPREHENSIVE INCOME
Comprehensive income is defined as net income plus direct adjustments to
shareholders' equity. The following details the components of comprehensive
income for the periods presented:
Three Months Ended Nine months Ended
---------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ ------------- ------------ ------------
Net (loss) income........................ $ (29,741) $ 11,920 $ (21,620) $ 36,461
Other comprehensive (expense) income, net of tax:
Foreign currency translation adjustment..... -- (106) 2,113 (65)
Unrealized loss on available for sale
security............................ (469) -- (2,512) --
------------ ------------- ------------ ------------
Comprehensive income.................... $ (30,210) $ 11,814 $ (22,019) $ 36,396
============ ============= ============ ============
12
NOTE 7 - EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, the calculation of
basic net earnings per common share and diluted earnings per common share
is presented below (share amounts in thousands, except per share data):
Three Months Ended Nine months Ended
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------- ------------ ------------ ------------
Net income............................... $ (29,741) $ 11,920 $ (21,620) $ 36,461
Earnings per share - Basic:
(Loss) income before cumulative effect of
accounting change.................. $ (0.42) $ 0.17 $ (0.30) $ 0.53
Cumulative effect..................... -- -- -- (0.02)
------------- ------------ ------------ ------------
Net (loss) income..................... $ (0.42) $ 0.17 $ (0.30) $ 0.51
============= ============ ============ ============
Earnings per share - Dilutive:
(Loss) income before cumulative effect of
accounting change.................. $ (0.42) $ 0.17 $ (0.30) $ 0.53
Cumulative effect..................... -- -- -- (0.02)
------------- ------------ ------------ ------------
Net (loss) income..................... $ (0.42) $ 0.17 $ (0.30) $ 0.51
============= ============ ============ ============
Weighted average shares outstanding:
Common shares......................... 71,077 71,075 71,077 71,006
Assumed exercise of stock options..... 183 175 194 251
------------- ------------ ------------ ------------
Diluted shares outstanding............ 71,260 71,250 71,271 71,257
============= ============ ============ ============
NOTE 8 - SEGMENT INFORMATION
SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, requires segment reporting in interim periods and disclosures
regarding products and services, geographic areas, and major customers.
The Company's reportable segments are strategic businesses that offer
different products and services to different segments of the health care
industry, and are based upon how management regularly evaluates the
Company. These segments are managed separately because of different
customers and products. These segments include the Physician Sales &
Service division (the "Physician Supply Business"), Diagnostic Imaging,
Inc. ("DI" or the "Imaging Business"), Gulf South Medical Supply, Inc.
("GSMS" or the "Long-Term Care Business"), and the Other segment that
combines WorldMed International, Inc. ("WorldMed Int'l") with corporate and
back office operations.
The Physician Supply Business is a distributor of medical supplies,
equipment, and pharmaceuticals to office-based physicians in the United
States. DI is a distributor of medical diagnostic imaging supplies,
chemicals, equipment, and service to the acute and alternate-care markets
in the United States. GSMS is a distributor of medical supplies and related
products to the long-term care market in the United States. WorldMed Int'l
along with WorldMed, Inc. manages and develops PSS' European medical
equipment and supply distribution market.
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:
13
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ ------------- ------------ -------------
NET SALES:
Physician Supply Business $ 168,584 $ 178,012 $ 516,375 $ 531,245
Imaging Business 179,855 183,901 559,036 518,704
Long-Term Care Business 91,622 92,580 271,625 276,872
Other (a) 7,265 7,608 15,420 23,282
------------ ------------- ------------ -------------
Total net sales $ 447,326 $ 462,101 $ 1,362,456 $ 1,350,103
============ ============= ============ =============
CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES:
Physician Supply Business $ 1,585 $ 360 $ 1,755 $ 1,590
Imaging Business 591 447 2,745 2,261
Long-Term Care Business 19,869 (481) 20,494 3,507
Other (a) 6,480 28 11,363 969
------------ ------------- ------------ -------------
Total charges included in general and
administrative expenses $ 28,525 $ 354 $ 36,357 $ 8,327
============ ============= ============ =============
(LOSS) INCOME FROM OPERATIONS:
Physician Supply Business $ 5,579 $ 11,597 $ 24,205 $ 34,814
Imaging Business (125) 7,789 5,368 21,193
Long-Term Care Business (19,867) 3,672 (16,282) 7,763
Other (a) (20,076) (125) (25,053) (5)
------------ ------------- ------------ -------------
Total(loss) income from operations $ (34,489) $ 22,933 $ (11,762) $ 63,765
============ ============= ============ =============
DEPRECIATION:
Physician Supply Business $ 2,771 $ 1,065 $ 4,898 $ 3,046
Imaging Business 902 839 2,583 2,390
Long-Term Care Business 477 337 1,401 1,148
Other (a) 207 67 426 167
------------ ------------- ------------ -------------
Total depreciation $ 4,357 $ 2,308 $ 9,308 $ 6,751
============ ============= ============ =============
AMORTIZATION OF INTANGIBLE AND OTHER ASSETS:
Physician Supply Business $ 440 $ 417 $ 1,299 $ 1,480
Imaging Business 2,061 1,538 6,081 4,235
Long-Term Care Business 610 604 1,736 1,765
Other (a) 294 283 877 746
------------ ------------- ------------ -------------
Total amortization of intangible and other assets $ 3,405 $ 2,842 $ 9,993 $ 8,226
============ ============= ============ =============
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business $ 389 $ 434 $ 592 $ 700
Imaging Business 47 597 187 840
Long-Term Care Business 20,591 500 22,385 1,357
Other -- (8) -- --
------------ ------------- ------------ -------------
Total provision for doubtful accounts $ 21,027 $ 1,523 $ 23,164 $ 2,897
============ ============= ============ =============
CAPITAL EXPENDITURES:
Physician Supply Business $ 4,838 $ 2,914 $ 11,284 $ 8,882
Imaging Business 1,188 1,267 3,729 4,947
Long-Term Care Business 87 1,226 477 3,078
Other (a) 575 453 1,004 986
------------ ------------- ------------ -------------
Total capital expenditures $ 6,688 $ 5,860 $ 16,494 $ 7,893
============ ============= ============ =============
December 31, 2000 March 31, 2000
----------------- --------------
ASSETS:
Physician Supply Business $ 246,975 $ 243,020
Imaging Business 335,917 346,073
Long-Term Care Business 173,782 182,024
Other (a) 60,556 102,300
----------------- --------------
Total assets $ 817,230 $ 873,417
================= ==============
(a) Other includes the corporat office and the International subsidiaries.
14
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain executive officers which
provide that in the event of their termination or resignation, under
certain conditions, the Company may be required to continue salary payments
and provide insurance for a period ranging from 12 to 36 months for the
Chief Executive Officer and from 3 to 12 months for other executives and to
repurchase a portion or all of the shares of common stock held by the
executives upon their demand at the fair market value at the time of
repurchase. The period of salary and insurance continuation and the level
of stock repurchases are based on the conditions of the termination or
resignation. During the three months ended December 31, 2000, management
approved and adopted a formal plan to restructure certain leadership
positions within the Company. 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 $5,059 at the commitment date
of the restructuring plan adopted by management
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.
PSS and certain of its current officers and directors were named as
defendants in a purported securities class action lawsuit originally filed
on or about May 28, 1998. The allegations are based upon a decline in the
PSS stock price following announcements by PSS in May 1998 regarding the
merger with GSMS that 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 complaints are
without merit and intends to defend vigorously against the claims. However,
the lawsuit is in the earliest stages, and there can be no assurances that
this litigation will ultimately be resolved on terms that are favorable to
the Company.
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability.
The Company has not experienced any significant product liability claims
and maintains product liability insurance coverage. In addition, the
Company is party to various legal and administrative proceedings and claims
arising in the normal course of business. While any litigation contains an
element of uncertainty, management believes that the outcome of any
proceedings or claims which are pending or known to be threatened will not
have a material adverse effect on the Company's consolidated financial
position, liquidity, or results of operations.
On December 31, 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 $250,000 times the number of months remaining under
the agreement.
The Company's trade receivables are subject to pre-petition bankruptcy risk
relating to certain GSMS customers that resulted from receivable balances
outstanding prior to notification by these customers of their intent to
seek Chapter 11 bankruptcy protection. In addition, the Company is subject
to credit risk through the continued servicing of these customers on a
post-petition basis with payments remitted under negotiated terms. As these
customers are in the process of reorganization, the Company is not able to
estimate the final collectability of the accounts. As of December 31, 2000,
the balances subject to pre-petition bankruptcy risk totaled approximately
$9.9 million and the total outstanding balances related to these customers
totaled approximately $18.0 million. Based on information currently
available, management believes the Company has recorded an appropriate
reserve for these outstanding receivables. However, should circumstances
change that would cause these balances to become uncollectible, the
resulting bad debt charge would be material to the financial statements.
15
NOTE 10 - INDEBTEDNESS
On December 28, 2000, the Company amended and restated its credit agreement
(the "Credit Agreement"). Pursuant to the terms of the Credit Agreement,
the Company can make revolving credit borrowings in an amount up to the
lesser of (a) the Revolving Committed Amount, which initially is $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. Borrowings under the Credit Agreement bear interest, at the
Company's option, at either the "Base Rate" plus a margin of between 0.35%
and 2.75%, based on the Company's leverage ratio, or the "Eurodollar Rate"
plus a margin of between 1.375% and 3.75%, based on the Company's leverage
ratio. As of December 31, 2000, there was $87 million of borrowings
outstanding under the Credit Agreement, with a weighted average interest
rate of 8.22% per annum. Borrowings under the Credit Agreement must be
repaid on or prior to February 11, 2004. In addition, under the Credit
Agreement the leverage and fixed charge covenants were amended for the
quarter ended December 31, 2000, and will adjust over time as specified in
the Credit Agreement.
16
ITEM 2. PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
PSS World Medical, Inc. (the "Company" or "PSS") is a specialty marketer
and distributor of medical products to physicians, alternate-site imaging
centers, long-term care providers, home care providers, and hospitals
through 101 service centers to customers in all 50 states and four European
countries. Since its inception in 1983, the Company has become a leader in
three of the market segments it serves through a focused, market-specific
approach to customer service, a consultative sales force, strategic
acquisitions, strong arrangements with product manufacturers, innovative
systems, and a unique culture of performance.
The Company, through its Physician Sales & Service division, is 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,
number of service centers, and exclusively distributed products. Physician
Sales & Service currently operates 50 medical supply distribution service
centers with approximately 735 sales representatives ("Physician Supply
Business") serving over 100,000 physician offices in all 50 states. The
Physician Supply Business' primary market are office-based physicians
throughout the United States.
The Company, through its wholly-owned 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, number of distribution centers, and number of sales
representatives. DI currently operates 34 imaging distribution service
centers with approximately 850 service specialists and 223 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.
Through its wholly-owned subsidiary Gulf South Medical Supply, Inc.
("GSMS"), the Company is a leading national distributor of medical supplies
and related products to the long-term care industry in the United States
based on revenues, number of sales representatives, and number of service
centers. GSMS currently operates 14 distribution service centers with
approximately 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.
In addition to its operations in the United States, the Company, through
its wholly-owned subsidiary WorldMed International, Inc. ("WorldMed"),
operates two European service centers distributing medical products to the
physician office and hospital markets in Belgium, France, Germany, and
Luxembourg.
INDUSTRY
According to industry estimates, the United States medical supply and
equipment segment of the health care industry represents a $34 billion
market comprised of the 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 to physician offices, providers of imaging services, and
long-term care facilities that comprise $14 billion, or approximately 40%,
of the overall market.
Revenues of the medical products distribution industry are estimated to
increase as a result of a growing and aging population, increased health
care awareness, proliferation of medical technology and testing, and
expanding third-party insurance coverage. In addition, the physician market
is benefiting from the shift of procedures and diagnostic testing from
hospitals to alternate sites, particularly physician offices, despite a
migration of significantly lower hospital medical product pricing into the
physician office market.
17
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 to hospitals, long-term care
facilities, and other health care providers have affected spending budgets
in certain markets within the medical products industry. Recently, Congress
has passed radical changes to reimbursements for nursing homes and home
care providers. The industry has struggled with these changes and the
ability of providers, distributors, and manufacturers to adopt to the
changes is not yet determined. The Company estimates that approximately 19%
of the beds of its clients in the long-term care industry are in homes that
are managed by companies that have filed for bankruptcy protection.
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 36% of Long-Term
Care Business revenues for the three months ended December 31, 2000
represented sales to its top five customers. Three of these top five
customers are currently in Chapter 11 bankruptcy reorganization, and sales
to these customers represent approximately 23% of Long-Term Care Business
revenues for the three months ended December 31, 2000. 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.
18
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000 VERSUS THREE MONTHS ENDED DECEMBER 31, 1999
Net Sales. Net sales for the three months ended December 31, 2000 totaled
$447.3 million, a decrease of $14.8 million, or 3.2%, from net sales of
$462.1 million for the three months ended December 31, 1999. The net sales
decrease over the prior year quarter was primarily attributable to i) the
continued impact of certain manufacturer product recalls in the Physician
Supply division that started in the fourth quarter of fiscal 2000, ii) the
absence of Year 2000 driven incremental sales experienced during the prior
year comparable period, and iii) the continued tightening of credit
policies in the Long-Term Care division. These factors were partially
offset by approximately $7.0 million of net sales from imaging businesses
acquired during and subsequent to the December 31, 1999 quarter.
Gross Profit. Gross profit for the three months ended December 31, 2000
totaled $103.7 million, a decrease of $11.1 million, or 9.7%, from gross
profit of $114.8 million for the three months ended December 31, 1999.
Gross profit as a percentage of net sales was 23.2% and 24.8% for the three
months ended December 31, 2000 and 1999, respectively. The gross profit
decrease over the prior year quarter was primarily attributable to i) the
decrease in sales volume described above, ii) 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
divisions, iii) increased fixed service costs resulting from Imaging
division businesses acquired during and subsequent to the December 31, 1999
quarter, and iv) 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.
General and Administrative Expenses. General and administrative expenses
for the three months ended December 31, 2000 totaled $94.7 million, an
increase of $32.9 million, or 53.2%, from general and administrative
expenses of $61.8 million for the three months ended December 31, 1999.
General and administrative expense as a percentage of net sales increased
to 21.2% from 13.4% for the comparable three-month period. The variation in
general and administrative expenses primarily resulted from 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 (in thousands):
Three Months Ended
-----------------------------
December 31, December 31,
2000 1999
------------- -------------
Merger costs and expenses $ 1,527 $ (14)
Restructuring costs and expenses 5,333 1,589
Acceleration of depreciation 1,504 --
Long-Term Care Business bad debt charge 19,991 --
Other 170 (1,221)
------------- -------------
Total $ 28,525 $ 354
============= =============
Merger Costs and Expenses
Refer to Note 3, Charges Included in General and Administrative Expenses,
for the Company's policy related to merger costs and expenses.
19
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 strategic alternatives transition period. Accordingly,
during the three months ended December 31, 2000, the Company expensed
$1,271 related to the Retention Plans.
In addition, the Company has recorded merger costs and expenses that
primarily related to branch shutdown and lease termination costs. For the
three months ended December 31, 2000 and 1999, the Company recorded $264
and $399, respectively, of merger charges expensed as incurred. At the end
of each quarter, management reevaluates its plans and adjusts previous
estimates. For the three months ended December 31, 2000 and 1999, the
Company reversed $8 and $413, respectively, of merger costs and expenses
previously established under prior plans.
Restructuring Costs and Expenses
The Company has recorded restructuring costs and expenses primarily related
to other exit costs as incurred, which include costs to pack and move
inventory, costs to set up new facilities, employee relocation costs, and
other related facility closure costs. For the three months ended December
31, 2000 and 1999, the Company recorded $543 and $2,590, respectively, of
restructuring costs as incurred. At the end of each quarter, management
reevaluates its plans and adjusts previous estimates. For the nine months
ended December 31, 2000 and 1999, the Company reversed $269 and $1,215,
respectively, of restructuring costs previously established under prior
plans due to overaccruals for lease termination, involuntary employee
termination and branch shutdown costs.
During the three months ended December 31, 2000, management approved and
adopted a formal plan 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 $5,059 at the commitment date of the
restructuring plan adopted by management.
Acceleration of Depreciation
During the quarter ended December 31, 2000, the Company identified certain
assets for replacement due to the implementation of its ERP system.
Pursuant to SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of, the Company evaluated the recoverability of the
assets. Based on the Company's analysis, the impairment did not exist on
the division level; therefore, management reviewed the depreciation
estimates in accordance with Accounting Principles Board No. 20, Accounting
Changes, and recorded $1,504 of accelerated depreciation.
Long-Term Care Business Bad Debt Charge
During the quarter ended December 31, 2000, the Company recorded
approximately $20 million in bad debt expense to increase the accounts
receivable reserves at its Gulf South Medical Supply subsidiary. 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.
20
Other
During the three months ended December 31, 2000, the Company incurred $170
in legal and professional fees and other costs pursuant to the Company's
strategic alternative process. During the three months ended December 31,
1999, the Company performed an analysis and reversed $1,221 of a previously
recorded operating tax charge reserve.
Selling Expenses. Selling expenses for the three months ended December 31,
2000 totaled $28.5 million, a decrease of $1.6 million, or 5.3%, from
selling expenses of $30.1 million for the three months ended December 31,
1999. Selling expense as a percentage of net sales was approximately 6.4%
and 6.5% for the three months ended December 31, 2000 and 1999,
respectively. The Company utilizes a variable commission plan, which pays
commissions based on gross profit as a percentage of net sales.
Operating Income (Loss). The Company incurred an operating loss for the
three months ended December 31, 2000 of $(34.5) million compared to
operating income of $22.9 million for the three months ended December 31,
1999, primarily due to the impact of the factors described above.
Interest Expense. Interest expense for the three months ended December 31,
2000 totaled $4.7 million, an increase of $0.6 million, or 14.6%, from
interest expense of $4.1 million for the three months ended December 31,
1999. The increase in interest expense is primarily attributable to higher
debt balances under the revolving Credit Agreement over the prior year
period primarily due to acquisitions completed during fiscal 2000.
Interest and Investment Income. Interest and investment income for the
three months ended December 31, 2000 totaled $0.5 million, an increase of
$0.1 million, or 25%, from interest and investment income of $0.4 million
for the three months ended December 31, 1999.
Other Income. Other income for the three months ended December 31, 2000
totaled $0.6 million, a decrease of $1.0 million, or 62.5%, from other
income of $1.6 million for the three months ended December 31, 1999. Other
income primarily consists of finance charges on customer accounts and
financing performance incentives. The decrease in other income is primarily
due to asset disposal gains recognized in the prior year quarter that did
not recur in the current quarter.
Provision for Income Taxes. Benefit for income taxes was $(8.3) million for
the three months ended December 31, 2000, a change of $17.2 million from
the provision for income taxes of $8.9 million for the three months ended
December 31, 1999. The effective income tax rate was approximately 21.8%
and 42.8% for the three months ended December 31, 2000 and 1999,
respectively. Generally, the effective tax rate is higher than the
Company's statutory rate. However, for the three months ended December 31,
2000, the Company was not able to record a tax benefit due to the
non-deductible nature of the International Business exit charge. This
negatively impacted the effective rate during this period.
Net Income (Loss). The Company incurred a net loss for the three months
ended December 31, 2000 of $(29.7) million compared to net income of $11.9
million for the three months ended December 31, 1999, primarily due to the
factors described above.
NINE MONTHS ENDED DECEMBER 31, 2000 VERSUS NINE MONTHS ENDED DECEMBER 31, 1999
Net Sales. Net sales for the nine months ended December 31, 2000 totaled
$1,362.5 million, an increase of $12.4 million, or 0.9%, from net sales of
$1,350.1 million for the nine months ended December 31, 1999. The net sales
increase over the prior year nine-month period was primarily due to
approximately $59.0 million of net sales from imaging businesses acquired
during and subsequent to the nine months ended December 31, 1999. This was
partially offset by i) the continued impact of certain manufacturer product
recalls in the Physician Supply division that started in the fourth quarter
of fiscal 2000, ii) the continued impact of vendor supply interruptions in
the imaging division that started in the fourth quarter of fiscal 2000,
iii) the absence of Year 2000 driven incremental sales experienced during
the prior year comparable period, and iv) the continued tightening of
credit policies in the Long-Term Care division.
21
Gross Profit. Gross profit for the nine months ended December 31, 2000
totaled $321.2 million, a decrease of $14.7 million, or 4.4%, from gross
profit of $335.9 million for the nine months ended December 31, 1999. Gross
profit as a percentage of net sales was 23.6% and 24.9% for the nine months
ended December 31, 2000 and 1999, respectively. The gross profit decrease
over the prior year nine-month period 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 divisions, ii) increased fixed service costs
resulting from Imaging division businesses acquired during and subsequent
to the December 31, 1999 nine-month period, 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. These decreases were offset by the increased
sales volume described above.
General and Administrative Expenses. General and administrative expenses
for the nine months ended December 31, 2000 totaled $231.1 million, an
increase of $44.6 million, or 23.9%, from general and administrative
expenses of $186.5 million for the nine months ended December 31, 1999.
General and administrative expenses as a percentage of net sales increased
to 17.0% from 13.8% for the comparable nine-month period. The variation in
general and administrative expenses primarily resulted from 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 (in thousands):
Nine months Ended
-----------------------------
December 31, December 31,
2000 1999
------------ -------------
Merger costs and expenses $ 4,686 $ (260)
Restructuring costs and expenses 7,586 9,808
Acceleration of depreciation 1,504 --
Long-Term Care Business bad debt charge 19,991 --
Other 2,590 (1,221)
------------ -------------
Total $ 36,357 $ 8,327
============ =============
Merger Costs and Expenses
Refer to Note 3, Charges Included in General and Administrative Expenses,
for the Company's policy related to merger costs and expenses.
Effective February 1, 2000, the Board of Directors approved and adopted 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 strategic alternatives transition period. Accordingly, during
the nine months ended December 31, 2000, the Company expensed $3,813
related to the Retention Plans.
In addition, the Company has recorded merger costs and expenses that
primarily related to branch shutdown and lease termination costs. For the
nine months ended December 31, 2000 and 1999, the Company recorded $881 and
$1,175, respectively of merger charges and expenses as incurred. At the end
of each quarter, management reevaluates its plans and adjusts previous
estimates. For the nine months ended December 31, 2000 and 1999, the
Company reversed $8 and $1,435 of merger costs and expenses previously
established under prior plans.
22
Restructuring Costs and Expenses
The Company has recorded restructuring costs and expenses primarily related
to other exit costs as incurred which include costs to pack and move
inventory, costs to set up new facilities, employee relocation costs, and
other related facility closure costs. For the nine months ended December
31, 2000 and 1999, the Company recorded $2,796 and $6,056, respectively, of
restructuring costs as incurred. At the end of each quarter, management
reevaluates its plans and adjusts previous estimates. For the nine months
ended December 31, 2000 and 1999, the Company reversed $269 and $1,215,
respectively, of restructuring costs previously established under prior
plans due to overaccruals for lease termination, involuntary employee
termination, and branch shutdown costs.
During the three months ended December 31, 2000, management approved and
adopted Plan E to restructure certain leadership positions within the
Company. 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 $5,059 at the commitment date of the restructuring
plan adopted by management.
During the three months ended September 30, 1999, management approved and
adopted a formal plan to restructure the company ("Plan C"). Accordingly,
the Company recorded restructuring costs and expenses of $4,967 at the
commitment date of the restructuring plan adopted by management.
Acceleration of Depreciation
During the quarter ended December 31, 2000, the Company identified certain
assets for replacement due to the implementation of its ERP system.
Pursuant to SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of, the Company evaluated the recoverability of the
assets. Based on the Company's analysis, the impairment did not exist on
the division level; therefore, management reviewed the depreciation
estimates in accordance with Accounting Principles Board No. 20, Accounting
Changes, and recorded $1,504 of accelerated depreciation.
Long-Term Care Business Bad Debt Charge
During the quarter ended December 31, 2000, the Company recorded
approximately $20 million in bad debt expense to increase the accounts
receivable reserves at its Gulf South Medical Supply subsidiary. 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.
Other
During the nine months ended December 31, 2000, the Company incurred $2,590
primarily relating to legal and professional fees and other costs pursuant
to the Company's strategic alternative process. During the nine months
ended December 31, 1999, the Company performed an analysis and reversed
$1,221 of a previously recorded operating tax charge reserve.
Selling Expenses. Selling expenses for the nine months ended December 31,
2000 totaled $86.9 million, an increase of $1.3 million, or 1.5%, from
selling expenses of $85.6 million from the nine months ended December 31,
1999. Selling expense as a percentage of net sales was approximately 6.4%
and 6.3% for the nine months ended December 31, 2000 and 1999,
respectively. The Company utilizes a variable commission plan, which pays
commissions based on gross profit as a percentage of net sales.
23
Operating Income (Loss). The Company incurred an operating loss for the
nine months ended December 31, 2000 of $(11.8) million compared to
operating income of $63.8 million for the nine months ended December 31,
1999 primarily due to the impact of the factors described above.
Interest Expense. Interest expense for the nine months ended December 31,
2000 totaled $14.4 million, an increase of $3.9 million, or 37.1%, from
interest expense of $10.5 million for the nine months ended December 31,
1999. The increase in interest expense is primarily attributable to higher
debt balances under the revolving Credit Agreement over the prior year
period primarily due to acquisitions completed during fiscal 2000.
Interest and Investment Income. Interest and investment income for the nine
months ended December 31, 2000 totaled $1.8 million, an increase of $0.5
million, or 38.5%, from interest and investment income of $1.3 million for
the nine months ended December 31, 1999.
Other Income. Other income for the nine months ended December 31, 2000
totaled $2.1 million, a decrease of $7.8 million, or 78.8%, from other
income of $9.9 million for the nine months ended December 31, 1999. Other
income primarily consists of finance charges on customer accounts and
financing performance incentives. During the quarter ending September 30,
1999, the Company received $6.5 million related to a favorable medical
x-ray film antitrust settlement claim.
Provision for Income Taxes. Benefit for income taxes was $(0.6) million for
the nine months ended December 31, 2000, a change of $27.2 million from the
provision for income taxes of $26.6 million for the nine months ended
December 31, 1999. The effective income tax rate was approximately 28.6%
and 41.1% for the nine months ended December 31, 2000 and 1999,
respectively. Generally, the effective tax rate is higher than the
Company's statutory rate; however, for the nine months ended December 31,
2000, the Company was not able to record a tax benefit due to the
non-deductible nature of the International Business exit charge. This
negatively impacted the effective rate during this period.
Net Income (Loss). The Company incurred a net loss for the nine months
ended December 31, 2000 of $(21.6) million compared to net income of $37.9
million for the nine months ended December 31, 1999, primarily due to the
factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $34.9 million and
$(7.8) million for the nine months ended December 31, 2000 and 1999,
respectively. For the nine months ended December 31, 2000, net cash
provided by operating activities primarily resulted from operating income
adjusted to exclude non-cash charges of $14.9 million for the International
Business exit charge and $19.9 million for the Long-Term Care Business bad
debt charge. During the nine months ended December 31, 2000, changes in
individual operating assets approximately offset changes in individual
operating liabilities. Therefore, these changes did not significantly
affect cash flows provided by operating activities. For the nine months
ended December 31, 1999, the effect of positive operating income was
primarily offset by an increase in inventory carried by PSS, DI, and GSMS
due to year 2000 build-up and an increase in accounts receivable due to
disruptions caused by the transition of Gulf South Medical Supply's
administrative offices and function to Jacksonville, FL.
Net cash used in investing activities was $17.9 million and $77.6 million
for the nine months ended December 31, 2000 and 1999, respectively. The
decrease in cash outflows from investing activities primarily results from
a reduction of purchase business combinations over the prior comparable
period and a reduction in investments made in marketable securities.
Net cash (used in) provided by financing activities was ($40.4) million and
$75.8 million for the nine months ended December 31, 2000 and 1999,
respectively. During the current fiscal year, the increase in cash outflows
from financing activities primarily results from a approximate net $39
million repayment on the revolving credit facility and other debt. During
the prior fiscal year, cash provided by financing activities was primarily
used to fund purchase business acquisitions.
The Company had working capital of $395.3 million and $414.1 million as of
December 31, 2000 and March 31, 2000, respectively. Accounts receivable,
net of allowances, were $284.2 million and $284.4 million at December 31,
2000 and March 31, 2000. The average number of days sales in accounts
receivable outstanding was approximately 53.0 and 55.8 days for the nine
months ended December 31, 2000 (annualized) and the year ended March 31,
2000, respectively. For the nine months ended December 31, 2000, the
Company's Physician Supply, Imaging, and Long-Term Care Businesses had
annualized days sales in accounts receivable of approximately 50.6, 45.6,
and 70.3 days, respectively.
24
Inventories were $185.3 million and $178.0 million as of December 31, 2000
and March 31, 2000, respectively. The Company had inventory turnover of
7.6x and 8.0x for the nine months ended December 31, 2000 (annualized) and
the year ended March 31, 2000, respectively. For the nine months ended
December 31, 2000, the Company's Physician Supply, Imaging, and Long-Term
Care Businesses had annualized inventory turnover of 6.5x, 8.6x, and 8.5x,
respectively.
25
The following table presents EBITDA and other financial data for the three
and nine months ended December 31, 2000 and 1999 (in thousands):
Three Months Ended Nine months Ended
---------------------------- ------------------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ -------------- -------------- -------------
Other Financial Data:
(Loss) income before provision for income taxes and
cumulative effect of accounting change $ (38,048) $ 20,801 $ (22,256) $ 64,541
Plus: Interest Expense 4,673 4,074 14,396 10,450
------------ -------------- -------------- -------------
EBIT (a) (33,375) 24,875 (7,860) 74,991
Plus: Depreciation and amortization 7,558 4,967 18,693 14,427
------------ -------------- -------------- -------------
EBITDA (b) (25,817) 29,842 10,833 89,418
Unusual Charges Included in Continuing Operations 27,021 354 34,853 8,327
International Business Exit Charge 14,917 -- 14,917 --
Cash Paid For Unusual Charges Included in Continuing (2,565) (5,192) (9,841) (13,205)
Operations
------------ -------------- -------------- -------------
Adjusted EBITDA (c) $ 13,556 $ 25,004 $ 50,762 $ 84,540
EBITDA Coverage (d) N/A 7.3x 0.8x 8.6x
EBITDA Margin (e) N/A 6.5% 0.8% 6.6%
Adjusted EBITDA Coverage (f) 2.9x 6.1x 3.5x 8.1x
Adjusted EBITDA Margin (g) 3.0% 1.9% 3.7% 6.3%
Cash provided by (used in) operating activities $ 34.9 $ (7.8)
Cash used in investing activities (17.9) (77.6)
Cash (used in) provided by financing activities (40.4) 75.8
(a) EBIT represents income before income taxes plus interest expense.
(b) EBITDA represents EBIT plus depreciation and amortization. EBITDA is
not a measure of performance or financial condition under generally
accepted accounting principles ("GAAP"). EBITDA is not intended to
represent cash flow from operations and should not be considered as an
alternative measure to income from operations or net income computed in
accordance with GAAP, as an indicator of the Company's operating
performance, as an alternative to cash flow from operating activities,
or as a measure of liquidity. In addition, EBITDA does not provide
information regarding cash flows from investing and financing
activities which are integral to assessing the effects on the Company's
financial position and liquidity as well as understanding the Company's
historical growth. The Company believes that EBITDA is a standard
measure of liquidity commonly reported and widely used by analysts,
investors, and other interested parties in the financial markets.
However, not all companies calculate EBITDA using the same method and
the EBITDA numbers set forth above may not be comparable to EBITDA
reported by other companies.
(c) Adjusted EBITDA represents EBITDA plus unusual charges included in
continuing operations less cash paid for unusual charges included in
continuing operations.
(d) EBITDA coverage represents the ratio of EBITDA to interest expense.
(e) EBITDA margin represents the ratio of EBITDA to net sales.
(f) Adjusted EBITDA coverage represents the ratio of Adjusted EBITDA to
interest expense.
(g) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to net
sales.
26
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. Provided, however, that
if no event of default exist, additional indebtedness may be incurred if
the Company maintains a consolidated fixed charge coverage ratio, after
giving effect to such additional indebtedness, of greater than 2.0 to 1.0.
On February 11, 1999, the Company entered into a $140.0 million senior
revolving credit facility (the "Original Credit Agreement") with a
syndicate of financial institutions with NationsBank, N.A. as principal
agent. Borrowings under the credit facility are available for working
capital, capital expenditures, and acquisitions, and are secured by the
common stock and assets of the Company and its subsidiaries. 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. Effective August 4, 2000, the
Company obtained an amendment to the Original Credit Agreement modifying
certain ratios contained therein. Effective September 30, 2000, the Company
obtained a limited waiver to its the Original Credit Agreement for failure
to meet the criteria for the fixed charge coverage ratio and the leverage
ratio for the fiscal quarter ended September 30, 2000.
On December 28, 2000, the Company amended and restated its credit agreement
(the "Credit Agreement"). Pursuant to the terms of the Credit Agreement,
the Company can make revolving credit borrowings in an amount up to the
lesser of (a) the Revolving Committed Amount, which initially is $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. Borrowings under the Credit Agreement bear interest, at the
Company's option, at either the "Base Rate" plus a margin of between 0.35%
and 2.75%, based on the Company's leverage ratio, or the "Eurodollar Rate"
plus a margin of between 1.375% and 3.75%, based on the Company's leverage
ratio. As of December 31, 2000, there was $87 million of borrowings
outstanding under the Credit Agreement, with a weighted average interest
rate of 8.22% per annum. Borrowings under the Credit Agreement must be
repaid on or prior to February 11, 2004. In addition, under the Credit
Agreement the leverage and fixed charge covenants were amended for the
quarter ended December 31, 2000, and will adjust over time as specified in
the Credit Agreement.
As of December 31, 2000, the Company has not entered into any material
working capital commitments that require funding. The Company believes that
the expected cash flows from operations, available borrowing under the
Credit Agreement, and capital markets are sufficient to meet the Company's
anticipated future requirements for working capital and capital
expenditures for the foreseeable future.
27
ITEM 3. PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
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 Agreement and
investments.
The Company's long-term debt obligations are primarily comprised of the
$125.0 million senior subordinated notes, which bear interest at a fixed
rate of 8.5%, and borrowings under the Credit Agreement. As of December 31,
2000, the Company had $87.0 million outstanding under the Credit Agreement
at variable interest rates, at the Company's option, at either the lender's
"Base Rate" plus a margin of 2.75% (12.25% at December 31, 2000) or the
"Eurodollar Rate" plus a margin of 3.75% The weighted-average interest rate
under the Credit Agreement was 8.22% as December 31, 2000.
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 December 31, 2000, 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.
28
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PSS and certain of its current officers and directors are named as
defendants in a purported securities class action lawsuit entitled Jack
Hirsch v. PSS World Medical, Inc., et al., Civil Action No.
98-502-cv-J-20A. 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 Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder. The allegations are based
upon a decline in the PSS stock price following announcement by PSS in May
1998 regarding the Gulf South merger which resulted in earnings below
analysts' expectations. The plaintiff seeks indeterminate damages,
including costs and expenses. PSS 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. PSS filed a motion to dismiss
the second amended complaint on May 1, 2000, which is pending. PSS believes
that the allegations contained in the second amended 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 PSS.
Although PSS does not manufacture products, the distribution of medical
supplies and equipment entails inherent risks of product liability. PSS is
a party to various legal and administrative legal proceedings and claims
arising in the normal course of business. However, PSS has not experienced
any significant product liability claims and maintains product liability
insurance coverage. While any litigation contains an element of
uncertainty, management believes that, other than as discussed above, the
outcome of any proceedings or claims which are pending or known to be
threatened will not have a material adverse effect on the Company's
consolidated financial position, liquidity, or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) The Company failed to deliver a supplemental indenture (the
"Supplemental Indenture") substantially in the form of Exhibit E
to that certain Indenture, by and among the Company, the
Subsidiary Guarantors (as defined therein) and SunTrust Bank
(formerly known as SunTrust Bank, Central Florida, National
Association) as trustee (the "Trustee"), dated as of October 7,
1997 (the "Indenture"), evidencing the guarantee by certain of the
Company's direct and indirect wholly owned domestic subsidiaries
of the Company's obligations under the Notes as required by
Section 4.20 of the Indenture. On February 15, 2001, the Company
delivered to the Trustee the Supplemental Indenture and has
therefore cured the breach of Section 4.20 of the Indenture and is
no longer in Default (as defined in the Indenture) under the
Indenture.
(b) Not applicable.
29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of PSS was held on December 11, 2000.
The following items were presented to the Stockholders with the following
results.
Directors Votes For Votes Against
----------------- ------------ ---------------
Clark A. Johnson 64,204,157 1,238,640
T. O'Neal Douglas 64,211,680 1,231,117
Immediately following the meeting, the directors of PSS consisted of the
individuals:
Clark A. Johnson
T. O'Neal Douglas
Melvin L. Hecktman
Delores P. Kesler
David A. Smith
Hugh M. Brown
Donna C.E. Williamson
Charles R. Scott
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)The following exhibits are filed as a part of this Quarterly Report on
Form 10-Q:
Exhibit
Number Description
--------- -----------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation, dated as of March 15, 1994, as amended.(11)
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.
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.(12)
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)
30
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)
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)
10.16 Amended and Restated Credit Agreement, dated as of December 28, 2000, among the Company, each of
the Lenders therein named and Bank of America, N.A., as Agent and Issuing Lender.(13)
10.17 Form of Revolving Note made in favor of each Bank of America, N.A., Cooperatieve Centrale
Raiffeisen -Boerenleenbank B.A. "Rabobank of Nederland", New York Branch, N.A., Bankers Trust
Company, SunTrust Bank and First Union National Bank.
10.18 Joinder Agreement, dated as of December 28, 2000, by and among the Company, the New Subsidiaries
named therein, and Bank of America, N.A. as Agent for the Lenders (as defined therein).
10.19 Subsidiaries' Consent and Agreement, dated as of December 28, 2000, by and among the Subsidiaries
named therein and Bank of America, N.A. as Agent and Issuing Lender for the Lenders (as defined
therein).
27 Financial Data Schedule (for SEC use only)
(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 year 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 Current Report on Form 8-K, filed April 8, 1998.
(12) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 22, 1998.
(13) Incorporated by Reference to the Company's Current Report on Form 8-K, filed January 12, 2001.
(b) Reports on Form 8-K
31
The following current reports on Form 8-K were filed during the quarter
ended December 31, 2000:
---------------- ------------------------------------------------------
Date of Report Items Reported
---------------- ------------------------------------------------------
Announcing the resignation of Patrick C. Kelly as the
Company's Chairman and CEO, the appointment of Clark
A. Johnson as the Chairman, the election of David A.
October 3, 2000 Smith as President, and the creation of an office of
the President
---------------- ------------------------------------------------------
---------------- ------------------------------------------------------
January 12, 2001 Announcing the terms of the Amended and Restated
Credit Agreement, dated as of December 28, 2000
---------------- ------------------------------------------------------
32
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 February 16, 2001.
PSS WORLD MEDICAL, INC.
By: /s/ David A. Smith
-------------------------------------
David A. Smith,
President and Chief Financial Officer
33