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 June 29, 2001
-------------
[ ] 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 August 10, 2001 a total of 71,071,025 shares of common stock, par
value $.01 per share, of the registrant were outstanding.
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
June 29, 2001
TABLE OF CONTENTS
PAGE
<s> <c>
ITEM
Information Regarding Forward-Looking Statements.............................................. 3
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Balance Sheets - June 29, 2001 and March 30, 2001...................... 4
Condensed Consolidated Income Statements for the Three Months Ended June 29, 2001 and June 30, 2000 5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 29, 2001 and June 6
30, 2000..................................................................................
Notes to Condensed Consolidated Financial Statements - June 29, 2001 and June 30, 2000........ 7
2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 17
3. Quantitative and Qualitative Disclosures About Market Risk........................................ 24
PART II - OTHER INFORMATION
1. Legal Proceedings................................................................................. 25
2. Change in Securities and Use of Proceeds.......................................................... 25
3. Defaults Upon Senior Securities................................................................... 25
4. Submission of Matters to a Vote of Security Holders............................................... 25
5. Other Information................................................................................. 25
6. Exhibits and Reports on Form 8-K.................................................................. 25
SIGNATURES........................................................................................... 28
2
CAUTIONARY STATEMENTS
Forward-Looking Statements
This Form 10-Q includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements regarding the Company's and its subsidiaries' expected
future financial position, results of operations, cash flows, funds from
operations, dividends and dividend plans, financing plans, business strategy,
budgets, projected costs, capital expenditures, competitive positions, growth
opportunities, plans and objectives of management for future operations and
statements that include words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," "may," "could," and other similar expressions
are forward-looking statements. Such forward-looking statements are inherently
uncertain, and stockholders must recognize that actual results may differ from
the Company's expectations.
Actual future results and trends for the Company may differ materially depending
on a variety of factors discussed in the Company's Annual Report on Form 10-K
and in this Form 10-Q and elsewhere in the Company's filings with the Securities
and Exchange Commission (the "Commission"). Factors that may affect the plans or
results of the Company include (a) the ability of the Company to successfully
implement its business plan; (b) the availability of sufficient capital to
finance the Company's business plans on terms satisfactory to the Company; (c)
competitive factors; (d) the ability of the Company to adequately defend or
reach a settlement of outstanding litigations and investigations involving the
Company or its management; (d) changes in labor, equipment and capital costs;
(e) changes in regulations affecting the Company's business; (f) future
acquisitions or strategic partnerships; and (g) general business and economic
conditions. Many of these factors are outside the control of the Company and its
management. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which are made pursuant to the private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made. The Company undertakes no duty to update such forward-looking statements.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
June 29, March 30,
2001 2001
------------------ -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents.................................................. $ 28,336 $ 34,374
Marketable securities...................................................... 264 314
Accounts receivable, net................................................... 229,598 236,846
Inventories, net........................................................... 162,376 154,725
Employee advances.......................................................... 359 478
Prepaid expenses and other................................................. 51,443 60,633
------------------ -----------------
Total current assets............................................... 472,376 487,370
Property and equipment, net................................................... 78,141 76,247
Other Assets:
Goodwill .................................................................. 163,879 163,879
Intangibles................................................................ 18,317 19,573
Employee advances.......................................................... 527 524
Other...................................................................... 16,780 25,041
------------------ -----------------
Total assets....................................................... $ 750,020 $ 772,634
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................... $ 146,944 $ 119,238
Accrued expenses........................................................... 31,354 39,234
Current maturities of long-term debt and capital lease obligations......... 124 1,752
Other...................................................................... 9,188 10,855
------------------ -----------------
Total current liabilities.......................................... 187,610 171,079
Long-term debt and capital lease obligations, net of current portion.......... 147,379 190,040
Other......................................................................... 8,117 7,213
------------------ -----------------
Total liabilities.................................................. 343,106 368,332
------------------ -----------------
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, 71,071,025 and
71,077,236 shares issued and outstanding at June 29, 2001 and March 30,
2001, respectively..................................................... 711 711
Additional paid-in capital................................................. 348,623 348,701
Retained earnings.......................................................... 57,580 54,890
Total shareholders' equity......................................... 406,914 404,302
------------------ -----------------
Total liabilities and shareholders' equity......................... $ 750,020 $ 772,634
================== =================
The accompanying notes are an integral part of these condensed consolidated statements.
4
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Three Months Ended
----------------------------------------
June 29, 2001 June 30, 2000
------------------- -------------------
Net sales.................................. $ 446,740 $ 471,648
Cost of goods sold......................... 344,996 357,362
------------------- -------------------
Gross profit......................... 101,744 114,286
General and administrative expenses........ 68,461 72,640
Selling expenses........................... 26,499 29,378
International business exit charge reversal (514) --
------------------- -------------------
Income from operations............... 7,298 12,268
------------------- -------------------
Other income (expense):
Interest expense..................... (4,251) (5,035)
Interest and investment income....... 238 700
Other income......................... 946 812
------------------- -------------------
(3,067) (3,523)
------------------- -------------------
Income before provision for income taxes... 4,231 8,745
Provision for income taxes................. 1,541 4,125
------------------- -------------------
Net income................................. $ 2,690 $ 4,620
=================== ===================
Earnings per share - Basic:
Net income.............................. $ 0.04 $ 0.06
=================== ===================
Earnings per share - Diluted:
Net income.............................. $ 0.04 $ 0.06
=================== ===================
The accompanying notes are an integral part of these condensed consolidated statements.
5
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three Months Ended
------------------------------------
June 29, 2001 June 30, 2000
------------------ ----------------
Cash Flows From Operating Activities:
Net income................................................................. $ 2,690 $ 4,620
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................... 2,836 2,390
Amortization of intangible assets...................................... 1,455 3,084
Amortization of debt issuance costs.................................... 689 201
Provision for doubtful accounts........................................ 1,590 1,484
International Business exit charge reversal............................ (514) --
Gain on sale of fixed assets........................................... 13 7
Changes in operating assets and liabilities, net of effects from business
acquisitions:
Accounts receivable................................................. 3,039 (1,529)
Inventories, net.................................................... (10,494) 12,377
Prepaid expenses and other current assets........................... 9,051 (3,142)
Other assets........................................................ 7,370 (3,469)
Accounts payable, accrued expenses, and other liabilities........... 25,410 (3,135)
------------------ -----------------
Net cash provided by operating activities....................... 43,135 12,888
------------------ -----------------
Cash Flows From Investing Activities:
Proceeds from sales and maturities of marketable securities............... 50 --
Proceeds from sales of property and equipment............................. 46 8
Capital expenditures...................................................... (6,108) (4,407)
Proceeds from sale of International Business.............................. 222 --
Payments on noncompete agreements......................................... (729) (168)
------------------ -----------------
Net cash used in investing activities........................... (6,519) (4,567)
------------------ -----------------
Cash Flows From Financing Activities:
Proceeds from borrowings.................................................. 25,052 43
Repayment of borrowings................................................... (67,702) (27,074)
Other..................................................................... (4) 126
Net cash used in financing activities........................... (42,654) (26,905)
------------------ -----------------
Net decrease in cash and cash equivalents..................................... (6,038) (18,584)
Cash and cash equivalents, beginning of period................................ 34,374 60,414
------------------ -----------------
Cash and cash equivalents, end of period...................................... $ 28,336 $ 41,830
================== =================
The accompanying notes are an integral part of these condensed consolidated statements.
6
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 29, 2001 AND JUNE 30, 2000
(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 94 service centers to customers in all 50 states.
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 30, 2001 has been
derived from the Company's audited consolidated financial statements for
the year ended March 30, 2001. 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 30, 2001.
The Company operates on a thirteen week quarter which ends on the Friday
closest to each calendar quarter end.
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.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141"). SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
poolings-of-interests method. The Company will apply the provisions of SFAS
141 to future acquisitions.
In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other
Intangibles ("SFAS 142"). SFAS 142 requires, among other things, the
discontinuance of goodwill amortization and includes provisions for
reassessment of the useful lives of existing intangibles and the
identification of reporting units for purposes of assessing potential
future impairments of goodwill. SFAS 142 also requires the Company to
complete a two-step transitional goodwill impairment test. The first step
of the impairment test must be completed six months from the date of
adoption and the second step must be completed as soon as possible, but no
later than the end of the year of initial application. The Company is
currently in the process of performing the first step of the transitional
goodwill impairment test, which will be completed during the second
quarter. Therefore, the Company is currently assessing but has not yet
determined the impact of SFAS 142 on its financial position and results of
operations. Refer to Note 5, Intangibles for further discussion relating to
the adoption of the Statement.
NOTE 2 - CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES
In addition to normal general and administrative expenses, this caption
includes charges related to merger activity, restructuring activity, and
other special items. The following table summarizes unusual charges
7
included as components of general and administrative expenses in the
accompanying consolidated income statements:
Three Months Ended
-------------------------------
June 29, 2001 June 30, 2000
-------------- ---------------
Merger costs and expenses............ $ 541 $ 1,575
Restructuring costs and expenses..... 494 1,240
Operational tax charge............... (451) --
Other................................ 8 786
-------------- ---------------
$ 592 $ 3,601
============== ===============
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.
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 months ended June 29, 2001 and June 30, 2000, the Company
expensed $776 and $1,271 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 June 29, 2001 and June 30, 2000, the Company recorded
$36 and $304, 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 June 29, 2001, the Company reversed
$271 of merger costs and expenses, which primarily related to lease
termination expenses not incurred as previously expected. Refer to Note 3,
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 June 29,
2001 and June 30, 2000, the Company recorded $505 and $1,240, 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 June 29, 2001, the Company reversed $11 of restructuring costs.
Operational Tax Charge
During the three months ended June 29, 2001, the Company performed an
analysis and reversed $451 of a previously recorded operating tax charge
reserve.
8
Other
During the three months ended June 29, 2001 and June 30, 2000, the Company
incurred $8 and $692, respectively, primarily relating to legal and
professional fees and other costs pursuant to the Company's strategic
alternatives process and severance costs. In addition, during the three
months ended June 30, 2000, the Imaging Business incurred $94 of
professional fees for acquisitions not consummated.
NOTE 3 - 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 plan that had been previously established. Such intervening events
may cause modifications to the plans and are accounted for on a prospective
basis. At the end of each quarter, management reevaluates its integration
plans and adjusts previous estimates.
As part of the integration plans, certain costs are recognized at the date
in which 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 2, 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 condensed consolidated balance sheets, were $29 and $294 at
June 29, 2001 and March 30, 2001, respectively. The discussion of the
accrued merger costs and expenses below summarize the significant and
nonsignificant integration plans adopted by management for business
combinations accounted for under the purchase method of accounting and
pooling-of-interests method of accounting. Integration plans are considered
to be significant if the charge recorded to establish the accrual is in
excess of 5% of consolidated pretax income.
Significant 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 Diagnostic Imaging, Inc.
("DI" or the "Imaging Business"). As of June 29, 2001, all of the employees
have been terminated and all of the seven identified distribution
facilities have been shut down, and all costs related to the merger plan
had been incurred. During the three months ended June 29, 2001, $16 of
lease expense was charged against the accrual leaving no remaining accrual.
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 March
30, 2001. During the three months ended June 29, 2001, $10 of lease expense
was charged against the accrual and the Company reversed approximately $235
9
of merger costs and expenses previously established under prior plans, all
of which related to lease termination costs.
Summary of Accrued Restructuring Costs and Expenses
As a result of the impact of the merger with Gulf South Medical Supply,
Inc. ("Gulf South" or the "Long-Term Care Business") and to improve
customer service, reduce costs, and improve productivity and asset
utilization, the Company decided to realign and consolidate its operations.
Accordingly, the Company adopted a restructuring plan during the first
quarter of fiscal 1999 related to Gulf South ("Plan B").
During the second quarter of fiscal 2000, management evaluated the
Company's overall cost structure and implemented cost reductions in order
to meet internal profitability targets. In addition, management decided to
improve its distribution model and relocate the corporate office for Gulf
South to Jacksonville, Florida where the corporate offices for the Imaging
and Physician Supply Businesses are located. The Company implemented the
restructuring plan during the second quarter of fiscal 2000 that impacted
all divisions ("Plan C"). The total number of employees to be terminated
was 272.
During the third quarter of fiscal 2001, the Company's Board of Directors
along with senior management evaluated the Company's operating performance.
During this process, the Board and management decided to implement a
long-range action plan that would stabilize the workforce and business. As
part of the new strategic plan, the Company planned to reorganize several
senior management positions and make permanently idle two distribution
centers - one in the Diagnostic Imaging division and one in the Physician
Supply division ("Plan E"). The total number of employees to be terminated
in Plan E is 29.
Accrued restructuring costs and expenses related to Plans B, C, and E,
classified as accrued expenses in the accompanying consolidated balance
sheets, totaled $2,484 and $3,715 at June 29, 2001 and March 30, 2001,
respectively. The following is a summary of the restructuring plan activity
for the three months ended June 29, 2001:
Involuntary
Employee Lease
Termination Termination
Costs Costs Total
------------- -------------- --------------
Balance at March 30, 2001...... $ $ 379 $ 3,715
3,336
Adjustments............... (11) -- (11)
Utilized.................. (1,122) (98) (1,220)
------------- -------------- --------------
Balance at June 29, 2001....... $ 2,203 $ 281 $ 2,484
============= ============== ==============
Plans B and C
As of December 31, 1999, all of the six locations had been shut down and
all employees were terminated as a result of Plan B. As of March 31, 2000,
all employees scheduled to be terminated had been terminated as a result of
Plan C. Approximately $54 and $227 of lease termination payments remain
accrued at June 29, 2001 related to Plans B and C, respectively, for which
payments will extend through fiscal 2002.
Plan E
Accrued restructuring costs and expenses related to Plan E at June 29, 2001
were approximately $2,203, all of which relates to involuntary employee
terminations. As of June 29, 2001, 28 employees had been terminated under
the plan. Payments related to Plan E will extend through fiscal 2004.
Note 4 - International Business Exit Charge
During the quarter ended December 29, 2000, management adopted, and the
Board of Directors approved, a plan for divesting the Company's European
operations. Management's primary consideration for this decision was that
the European operations are outside the core United States business
segments, making effective management difficult and resulting in lower than
10
expected operating performance for the past several years. The net assets
held for disposal consisted of the operating assets of the European
operations less outstanding liabilities, and were valued at the lower of
aggregate fair value less costs incurred for sale. During the quarter ended
December 29, 2000, the Company recorded $14.9 million as an International
Business exit charge. The Company consummated the sale of the German
operations on April 6, 2001 and the Belgium operations on May 20, 2001.
Proceeds received consisted of approximately $222 and a note receivable of
$400 from the sale of the common stock of these entities. Upon completion
of the transactions, the Company recorded a reversal of $0.5 million of the
previously established charge due to lower than expected costs to exit the
operations.
During the quarters ended June 29, 2001 and June 30, 2000, the European
operations reported the following results through the date of sale:
Three Months Ended
------------------------------------
June 29, 2001 June 30, 2000
------------------- ---------------
Net sales.................................. $ 431 $ 5,051
Cost of goods sold......................... 295 3,355
------------------- ---------------
Gross profit......................... 136 1,696
Selling, general and administrative expenses 66 1,858
International Business exit charge reversal (514) --
------------------- ---------------
Operating income (loss).............. 584 (162)
Interest expense (external)................ (14) 179
Interest expense (intercompany)............ -- (600)
------------------- ---------------
(14) (421)
------------------- ---------------
Income before provision for income taxes... 570 (583)
Provision for income taxes................. -- 26
------------------- ---------------
Net income (loss).................... $ 570 $ (609)
=================== ===============
NOTE 5 - INTANGIBLES
The Company adopted SFAS 142, Goodwill and Other Intangibles, effective
March 31, 2001. In connection with the adoption of SFAS 142, the Company
has discontinued amortizing goodwill. During the quarter ended June 29,
2001, there was no change in the carrying amount of goodwill.
The following table summarizes, by business segment and major asset class,
the gross carrying amount and accumulated amortization for existing
intangible assets subject to amortization:
11
As of March 30, 2001
----------------------------------------
Gross
Carrying Accumulated
Amount Amortization Net
------------ ------------- ---------
Non-Competition Agreements:.....
Physician Supply Business.... $ 5,432 $ (3,953) $ 1,479
Imaging Business............. 22,662 (8,615) 14,047
Long-Term Care Business...... 1,570 (685) 885
------------ ------------- ---------
29,664 (13,253) 16,411
------------ ------------- ---------
Signing Bonuses:
Physician Supply Business.... 1,210 (964) 246
Imaging Business............. 3,325 (1,881) 1,444
Long-Term Care Business...... 221 (125) 96
------------ ------------- ---------
4,756 (2,970) 1,786
------------ ------------- ---------
Customer Lists:
Physician Supply Business.... 2,956 (1,580) 1,376
Imaging Business............. - - -
Long-Term Care Business...... - - -
------------ ------------- ---------
2,956 (1,580) 1,376
------------ ------------- ---------
Total $ 37,376 $ (17,803) $ 19,573
============ ============= =========
The Company has reassessed the useful lives of the existing intangible
assets summarized above and determined that they are appropriate in
determining amortization expense. Total amortization expense for the
quarter ended June 29, 2001 and June 30, 2000 was $1,455 and $3,084,
respectively. The estimated amortization expense for the next five fiscal
years are as follows:
Fiscal 2002.......................... $ 5,294
Fiscal 2003.......................... 4,320
Fiscal 2004.......................... 3,430
Fiscal 2005.......................... 2,206
Fiscal 2006.......................... 853
-----------
Total............................ $ 16,103
===========
The following table provides comparative disclosure of adjusted net income
excluding goodwill amortization expense, net of taxes, for the periods
presented.
Three Months Ended
------------------------------------
June 29, 2001 June 30, 2000
------------------- ---------------
Net income, as reported................... $ 2,690 $ 4,620
Goodwill amortization, net of tax......... -- 1,460
------------------- ---------------
Adjusted Net income....................... $ 2,690 $ 6,080
=================== ===============
Basic and Diluted EPS, as reported........ $0.04 $0.06
Goodwill amortization, net of tax......... -- 0.03
------------------- ---------------
Basic and Diluted EPS, adjusted........... $0.04 $0.09
=================== ===============
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:
12
Three Months Ended
-----------------------------
June 29, 2001 June 30, 2000
------------- -------------
Net income.............................. $ 2,690 $ 4,620
Other comprehensive (expense) income, net of tax:
Foreign currency translation -- 161
adjustment................
Unrealized loss on available for sale
security -- (1,507)
------------- -------------
Comprehensive income.................... $ 2,690 $ 3,274
============= =============
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
-----------------------------
June 29, 2001 June 30, 2000
------------- -------------
Net income............................... $ 2,690 $ 4,620
============= =============
Earnings per share - Basic:
Net income............................ $0.04 $0.06
============= =============
Earnings per share - Dilutive:
Net income............................ $0.04 $0.06
============= =============
Weighted average shares outstanding:
Common shares......................... 71,201 71,128
Assumed exercise of stock options..... 300 123
------------- -------------
Diluted shares outstanding............ 71,501 71,251
============= =============
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., Gulf South Medical Supply, Inc., 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 primary care and other 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. Gulf South is a distributor of
medical supplies and other related products to the long-term care market in
the United States. WorldMed Int'l along with WorldMed, Inc. managed and
developed PSS' European medical equipment and supply distribution market.
During the quarter ended June 29, 2001, the Company sold its European
operations.
The Company primarily evaluates the operating performance of its segments
based on net sales and income from operations. The following table presents
financial information about the Company's business segments (in thousands):
13
Three Months Ended
-----------------------------
June 29, 2001 June 30, 2000
------------- -------------
NET SALES:
Physician Supply Business....................... $ 171,343 $ 177,937
Imaging Business................................ 179,608 196,426
Long-Term Care Business......................... 95,358 92,234
Other........................................... 431 5,051
------------- -------------
Total net sales............................. $ 446,740 $ 471,648
------------- -------------
CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE
EXPENSES:
Physician Supply Business....................... $ 145 $ 75
Imaging Business................................ 13 1,170
Long-Term Care Business......................... 89 387
Other........................................... 345 1,969
------------- -------------
Total charges included in general and
administrative expenses............. $ 592 $ 3,601
------------- -------------
INCOME (LOSS) FROM OPERATIONS:
Physician Supply Business....................... $ 5,735 $ 11,333
Imaging Business................................ 107 2,107
Long-Term Care Business......................... 1,773 1,789
Other........................................... (317) (2,961)
------------- -------------
Total income (loss) from operations......... $ 7,298 $ 12,268
------------- -------------
DEPRECIATION:
Physician Supply Business....................... $ 1,145 $ 1,009
Imaging Business................................ 1,097 813
Long-Term Care Business......................... 462 461
Other........................................... 132 107
------------- -------------
Total depreciation.......................... $ 2,836 $ 2,390
------------- -------------
AMORTIZATION OF INTANGIBLE ASSETS:
Physician Supply Business....................... $ 234 $ 428
Imaging Business................................ 1,117 2,005
Long-Term Care Business......................... 104 560
Other........................................... -- 91
------------- -------------
Total amortization of intangible assets..... $ 1,455 $ 3,084
------------- -------------
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business....................... $ 320 $ (77)
Imaging Business................................ 325 367
Long-Term Care Business......................... 945 1,194
Other........................................... -- --
------------- -------------
Total provision for doubtful accounts....... $ 1,590 $ 1,484
------------- -------------
INTEREST EXPENSE:
Physician Supply Business....................... $ 278 $ 521
Imaging Business................................ 2,592 2,427
Long-Term Care Business......................... 1,377 1,328
Other........................................... 4 759
------------- -------------
Total interest expense...................... $ 4,251 $ 5,035
------------- -------------
INTEREST AND INVESTMENT INCOME:
Physician Supply Business....................... $ $ 47
1
Imaging Business................................ -- --
Long-Term Care Business......................... -- 13
Other........................................... 237 640
------------- -------------
Total interest and investment income........ $ 238 $ 700
------------- -------------
PROVISION (BENEFIT) FOR INCOME TAXES:
Physician Supply Business....................... $ 2,284 $ 4,459
Imaging Business................................ (840) 336
Long-Term Care Business......................... 231 --
Other........................................... (134) (670)
------------- -------------
Total provision (benefit) for income taxes.. $ 1,541 $ 4,125
------------- -------------
14
Three Months Ended
-----------------------------
June 29, 2001 June 30, 2000
------------- -------------
CAPITAL EXPENDITURES:
Physician Supply Business....................... $ 3,292 $ 2,756
Imaging Business................................ 878 1,227
Long-Term Care Business......................... 183 200
Other........................................... 1,755 224
------------- -------------
Total capital expenditures.................. $ 6,108 $ 4,407
------------- -------------
June 29, 2001 March 30, 2001
------------- -------------
ASSETS:
Physician Supply Business....................... $ 229,169 $ 225,080
Imaging Business................................ 325,891 324,830
Long-Term Care Business......................... 163,298 156,581
Other........................................... 31,662 66,143
------------- -------------
Total assets $ 750,020 $ 772,634
------------- -------------
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 3 to 12 months for certain
executives and to repurchase a portion or all of the shares of common stock
held by the executives upon their demand at the fair market value at the
time of repurchase. The period of salary and insurance continuation and the
level of stock repurchases are based on the conditions of the termination
or resignation.
During fiscal 2000, the Board of Directors approved and adopted the PSS
World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical,
Inc. Corporate Office Employee Retention Bonus Plan. Refer to Note 2,
Charges included in General and Administrative Expenses for further
discussion.
The Company, through its Gulf South Medical Supply subsidiary, Physician
Sales & Service division and/or predecessor companies, has been named as
one of many defendants in latex glove product liability claims in various
Federal and state courts. The defendants are primarily distributors of
certain brands of latex gloves. Currently, state litigation exists in New
Hampshire, Massachusetts and California, while Federal and/or Federal
multi-district litigation is present in Washington, Georgia, Indiana, New
Hampshire, Pennsylvania and Ohio. Defense costs are currently allocated by
agreement between a consortium of insurers on a pro rata basis for each
case depending upon policy years and alleged years of exposure. All of the
insurance carriers are defending subject to a reservation of rights.
Ultimately, the manufacturers from which the gloves were purchased may
assume the defense and liability obligations. The Company intends to
vigorously defend the proceedings.
The Company and certain of its current officers and directors are named as
defendants in a purported securities class action lawsuit entitled Jack
Hirsch v. PSS World Medical, Inc., et al., Civil Action No.
3:98-cv-502-J-21TEM. The action, which was filed on or about May 28, 1998,
is pending in the United States District Court for the Middle District of
Florida, Jacksonville Division. An amended complaint was filed on December
11, 1998. The plaintiff alleges, for himself and for a purported class of
similarly situated stockholders who allegedly purchased the Company's stock
between December 23, 1997 and May 8, 1998, that the defendants engaged in
violations of certain provisions of the Exchange Act, and Rule 10b-5
promulgated thereunder. The allegations are based upon a decline in the
Company's stock price following announcement by the Company in May 1998
regarding the Gulf South Merger which resulted in earnings below analyst's
expectations. The plaintiff seeks indeterminate damages, including costs
and expenses. The Company filed a motion to dismiss the first amended
complaint on January 25, 1999. The court granted that motion without
prejudice by order dated February 9, 2000. Plaintiffs filed their second
amended complaint on March 15, 2000. The Company filed a motion to dismiss
the second amended complaint on May 1, 2000, which is pending. The Company
believes that the allegations contained in the complaint are without merit
and intends to defend vigorously against the claims. There can be no
assurance that this litigation will be ultimately resolved on terms that
are favorable to the Company.
15
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability,
for which the Company maintains product liability insurance coverage. The
Company is also a party to various other legal and administrative
proceedings and claims arising in the normal course of business. While any
litigation contains an element of uncertainty, management, after
consultation with outside legal counsel, believes that the outcome of such
other proceedings or claims which are pending or known to be threatened
will not have a material adverse effect on the Company's consolidated
financial position, liquidity, or results of operations.
On September 30, 1999, DI entered into a three year distributorship
agreement with an imaging supply vendor. The agreement stipulates that,
among other things, in the event of termination of the agreement due to a
change in control of DI, the Company will pay liquidated damages to the
vendor in the amount of $250,000 multiplied by the number of months
remaining under the agreement.
The Company's trade receivables are subject to pre-petition bankruptcy risk
relating to certain Gulf South customers that resulted from receivable
balances outstanding prior to the filing of these customers for relief
under Chapter 11 of the Bankruptcy Code. 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 June 29,
2001, Gulf South had one customer with balances subject to pre-petition
bankruptcy risk, which totaled approximately $1.9 million and the total
outstanding balances related to this customer was approximately $1.9
million. Based on information currently available, management believes the
Company has recorded an appropriate reserve for these outstanding
receivables.
The terms of certain of the Company's past acquisition agreements provide
for additional consideration to be paid (earnout payments) if the acquired
entity's results of operations exceed certain targeted levels. Targeted
levels are generally set above the historical experience of the acquired
entity at the time of acquisition. Such additional consideration is to be
paid in cash and is recorded when earned as additional purchase price. The
maximum amount of remaining contingent consideration is approximately $2.4
million (payable through fiscal 2003). During the three months ended June
29, 2001 and June 30, 2000, there were no earnout payments.
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to the end of the fiscal quarter ended June 29, 2001, the
Company was named in the following seven class action complaints: (1)
Bordeaux v. PSS World Medical, Inc. et al.; (2) Gold v. PSS World Medical,
Inc., et al; (3) McIntosh v. PSS World Medical, Inc. et al. ; (4) Rothbart
v. PSS World Medical, Inc. et al.; (5) Schaechter v. PSS World Medical,
Inc. et al.; (6) Van Den Haag v. PSS World Medical, Inc. et al. ; and (7)
Rodighiero v. PSS World Medical, Inc. et al.
Certain present and former directors and officers of the Company have also
been named as defendants. The complaints have all been filed in the United
States District Court for the Middle District of Florida. They were filed
as purported class actions on behalf of persons who purchased or acquired
the Company's common stock at various times during the period between
October 26, 1999 and October 3, 2000.
The complaints allege, among other things, violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, and seek unspecified damages. The plaintiffs allege that the
defendants issued false and misleading statements and failed to disclose
material facts concerning, among other things, the Company's financial
condition. The plaintiffs further allege that because of the issuance of
false and misleading statements and/or failure to disclose material facts,
the price of the Company's common stock was artificially inflated during
the class period. The Company believes that the allegations contained in
the complaints 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 favorable to the Company.
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., a Florida corporation (the "Company", "PSS World
Medical", or "PSS") is a specialty marketer and distributor of medical
products to physicians, alternate-site imaging centers, long-term care
providers, home care providers, and hospitals through 94 service centers to
customers in all 50 states. Since its inception in 1983, the Company,
through strategic acquisitions and internal growth, has become a leader in
three market segments it serves. The company's strategic advantages include
a focused and differentiated approach to customer service, a consultative
sales force, unique arrangements with product manufacturers, innovative
systems, and a culture of performance.
The Company's Physician Sales & Service division is a leading distributor
of medical supplies, equipment and pharmaceuticals to office-based
physicians in the United States based on revenues, number of
physician-office customers, number and quality of sales representatives,
number of service centers, and exclusively distributed products. Physician
Sales & Service currently operates 49 medical supply distribution service
centers with approximately 715 sales representatives ("Physician Supply
Business") serving physician offices in all 50 states. The Physician Supply
Business' primary market is office-based physicians throughout the United
States.
The Company's subsidiary Diagnostic Imaging, Inc. ("DI") is a leading
distributor of medical diagnostic imaging supplies, chemicals, equipment,
and service to the acute care and alternate-care markets in the United
States based on revenues, number of service specialists, and number of
sales representatives. DI currently operates 31 imaging distribution
service centers with approximately 860 service specialists and 199 sales
representatives ("Imaging Business") serving customer sites in 42 states.
The Imaging Business' primary markets are acute-care hospitals, imaging
centers, and private practice physicians, veterinarians and chiropractors.
The Company's subsidiary Gulf South Medical Supply, Inc. ("GSMS", or "Gulf
South") is a leading national distributor of medical supplies and related
products to the long-term care industry in the United States based on
revenues and number of sales representatives. GSMS currently operates 14
distribution service centers with approximately 105 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.
Previously, the Company's subsidiary WorldMed International, Inc.
("WorldMed") operated two European service centers ("International
Business") distributing medical products to the physician office and
hospital markets in Belgium and Germany. During the quarter ended June 29,
2001, the Company sold its European operations.
INDUSTRY
According to industry estimates, the United States medical supply and
equipment segment of the health care industry represents approximately a
$43 billion market comprised of distribution of medical products to
hospitals, home health care agencies, imaging centers, physician offices,
dental offices, and long-term care facilities. The Company's primary focus
is the distribution of medical products to physician offices, providers of
imaging services, and long-term care facilities. Approximately 60% of
products in this market come through the distributor channel, representing
an approximate $25 billion market potential for the Company.
Revenues of the medical products distribution industry are estimated to be
growing as a result of a growing and aging population, increased health
care awareness, proliferation of medical technology and testing, and
expanding third-party insurance coverage. In addition, the physician market
continues to benefit from the shift of procedures and diagnostic testing
from hospitals to alternate sites, particularly physician offices, despite
a migration of significantly lower hospital medical product pricing into
the physician office market. Also, as the cosmetic surgery and elective
market continues to grow, physicians are increasingly performing more
procedures in-office.
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 of hospitals, long-term care
facilities, and other health care providers have affected spending budgets
in certain markets within the medical products industry. In 1997, the
Balanced Budget Act passed by Congress made radical changes to
reimbursements for nursing homes and home care providers. The healthcare
industry has struggled with these changes and the ability of providers,
distributors and manufacturers to adapt to the changes is not yet
determined. These changes also affect some distributors who directly bill
the government for these providers. The industry estimates that
approximately 11% of Long-Term Care facilities have filed for bankruptcy
protection. Over 100 of the Company's customers filed for bankruptcy in the
last two years.
Over the past few years, the health care industry has undergone significant
consolidation. Physician provider groups, long-term care facilities, and
other alternate-site providers, along with hospitals, continue to
consolidate, creating new and larger customers. However, the majority of
the market serviced by the Company remains small customers, with no single
customer exceeding 10% of the consolidated Company's revenues. However, the
Long-Term Care Business depends on a limited number of large customers for
a significant portion of its net sales, and approximately 35% of Long-Term
Care Business' revenues for the three months ended June 29, 2001
represented sales to its top five customers. One of these top five
customers is currently in Chapter 11 bankruptcy reorganization, and sales
to this customer represents approximately 9% of Long-Term Care Business
revenues, and less than 2% of the Company's consolidated sales, for the
quarter ended June 29, 2001. Growth in the Long-Term Care Business, as well
as consolidation of the health care industry, may increase the Company's
dependence on large customers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 29, 2001 VERSUS THREE MONTHS ENDED JUNE 30, 2000
Net Sales. Net sales for the three months ended June 29, 2001 totaled
$446.7 million, a decrease of $24.9 million, or 5.3%, from net sales of
$471.6 million for the three months ended June 30, 2000. The net sales
decrease over the prior year quarter was primarily attributable to i)
approximately $14 million in reduced net sales due to vendor supply
interruptions that began in fiscal year 2001, ii) the elimination of $4.7
million of International Business revenues due to the sale of the European
operations, iii) the reduction of $6.6 million of revenues related to the
elimination of certain product lines that were not supported by the new
Strategic Business Unit ("SBU") structure of the Imaging Business, and iv)
the reduction of $2.2 million of revenues related the termination of
certain vendor relationships in the Physician Supply Business. In addition,
on a comparative basis, the Physician Supply Business and Long-term Care
Business experienced moderate growth of approximately 3% to 4% in sales for
the consumable product category.
Gross Profit. Gross profit for the three months ended June 29, 2001 totaled
$101.7 million, a decrease of $12.6 million, or 11.0%, from gross profit of
$114.3 million for the three months ended June 30, 2000. Gross profit as a
percentage of net sales was 22.8% and 24.2% for the three months ended June
29, 2001 and June 30, 2000, respectively. The gross profit decrease over
the prior year quarter was primarily attributable to the factors discussed
in the change in net sales discussed above. These factors include i)
approximately $5.0 million in reduced gross profit due to vendor supply
interruptions that began in fiscal year 2001, ii) the elimination of $1.6
million of International Business gross profit due to the sale of the
European operations, iii) the reduction of $1.2 million of gross profit
related to the elimination of certain product lines that were not supported
by the new SBU structure of the Imaging Business, iv) the reduction of $0.5
million of gross profit related the termination of certain vendor
relationships in the Physician Business, v) increases in reserves of
approximately $1.0 million for inventory associated with the product lines
eliminated in the Imaging Business and the termination of vendor
relationships in the Physician Supply Business, and vi) a decrease of $3.6
million due to changes in product mix. Gross profit as a percentage of
sales was unfavorably impacted by changes in product mix.
18
General and Administrative Expenses. General and administrative expenses
for the three months ended June 29, 2001 totaled $68.5 million, a decrease
of $4.1 million, or 5.6%, from general and administrative expenses of $72.6
million for the three months ended June 30, 2000. General and
administrative expense as a percentage of net sales decreased to 15.3% from
15.4% for the comparable three-month period.
On March 31, 2001, the Company elected to early adopt Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangibles
("SFAS 142"). SFAS 142 requires, among other things, the discontinuance of
goodwill amortization and includes provisions for reassessment of the
useful lives of existing intangibles and the identification of reporting
units for purposes of assessing potential future impairments of goodwill.
SFAS 142 also requires the Company to complete a two-step transitional
goodwill impairment test. The first step of the impairment test must be
completed six months from the date of adoption and the second step must be
completed as soon as possible, but no later than the end of the year of
initial application. The Company is currently in the process of performing
the first step of the transitional goodwill impairment test, which will be
completed during the second quarter. Therefore, the Company is currently
assessing but has not yet determined the impact of SFAS 142 on its
financial position and results of operations. During the quarter ended June
29, 2001, the adoption of these provisions eliminated approximately $1.5
million of goodwill amortization that would be recorded under prior
accounting pronouncements. In addition, the prior year comparable period
included $1.6 million of goodwill amortization (refer to Note 5,
Intangibles in the accompanying condensed consolidated financial statements
for further discussion).
General and administrative expenses in the Company's Other Segment
decreased over the prior year period by $1.5 million due to the sale of the
European operations.
In addition to typical general and administrative expenses, this caption
includes charges related to merger activity, restructuring activity, and
other special items. The following table summarizes charges included as a
component of general and administrative expenses in the accompanying
consolidated statements of operations:
Three Months Ended
------------------------------
June 29, 2001 June 30, 2000
------------- -------------
Merger costs and expenses............ $ 541 $ 1,575
Restructuring costs and expenses..... 494 1,240
Operational tax charge............... (451) --
Other................................ 8 786
------------- -------------
$ 592 $ 3,601
============= =============
Merger Costs and Expenses
Refer to Note 2, 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 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 June 29, 2001 and
June 30, 2000, the Company expensed $776 and $1,271, 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 June 29, 2001 and June 30, 2000, the Company
recorded $36 and $304, 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 June 29,
2001, the Company reversed $271 of merger costs and expenses previously
established under prior plans not incurred as previously expected.
19
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 June 29, 2001 and June 30, 2000, the Company recorded $505 and
$1,240, 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 June 29, 2001, the Company
reversed $11 of restructuring costs.
Operational Tax Charge
During the three months ended June 29, 2001, the Company performed an
analysis and reversed $451 of a previously recorded operating tax charge
reserve.
Other
During the three months ended June 29, 2001 and June 30, 2000, the
Company incurred $8 and $692 in legal and professional fees and other
costs pursuant to the Company's strategic alternative process and
severance costs. In addition, during the three months ended June 30,
2000, the Imaging Business incurred $94 of professional fees for
acquisitions not consummated.
Selling Expenses. Selling expenses for the three months ended June 29, 2001
totaled $26.5 million, a decrease of $2.9 million, or 9.9%, from selling
expenses of $29.4 million for the three months ended June 30, 2000. Selling
expense as a percentage of net sales was approximately 5.9% and 6.2% for
the three months ended June 29, 2001 and June 30, 2000, respectively. The
decrease in selling expense as a percentage of net sales is a result of i)
a reduction in sales representatives in the Long-Term Care Business, a
portion of which were compensated under fixed commission plans and ii)
changes in the compensation programs in the Physician Supply Business and
Long-Term Care Business.
International Business Exit Charge. During the quarter ended December 29,
2000, the Company adopted a plan for divesting the Company's European
operations and recorded a $14.9 million charge as an International Business
exit charge. During the quarter ended June 29, 2001, the Company completed
the sale of its European operations and recorded a reversal of $0.5 million
of the previously established charge due to lower than expected costs to
exit the operations.
Operating Income. Operating income for the three months ended June 29, 2001
totaled $7.3 million, a decrease of $5.0 million, compared to the three
months ended June 30, 2000 total of $12.3 million due to the factors
discussed above.
Interest Expense. Interest expense for the three months ended June 29, 2001
totaled $4.3 million, a decrease of $0.7 million, or 14.0%, from interest
expense of $5.0 million for the three months ended June 30, 2000. The
decrease is primarily attributable to lower outstanding debt balances under
the revolving Credit Agreement over the prior year partially offset by the
accelerated amortization of approximately $400 of debt issuance costs upon
refinancing the prior credit facility on May 24, 2001.
Interest and Investment Income. Interest and investment income for the
three months ended June 29, 2001 totaled $0.2 million, a decrease of $0.5
million, or 71.4%, from interest and investment income of $0.7 million for
the three months ended June 30, 2000. The decrease primarily results from
lower invested cash balances over the prior year period.
Other Income. Other income for the three months ended June 29, 2001 totaled
$0.9 million, an increase of $0.1 million, or 12.5%, from other income of
$0.8 million for the three months ended June 30, 2000. Other income
primarily consists of finance charges on customer accounts.
Provision for Income Taxes. Provision for income taxes was $1.5 million for
the three months ended June 29, 2001, a change of $2.6 million from the
provision for income taxes of $4.1 million for the three months ended June
20
30, 2000. The effective income tax rate was approximately 36.4% and 47.2%
for the three months ended June 29, 2001 and June 30, 2000, respectively.
Historically, the effective tax rate has been higher than the Company's
statutory rate due to the non-deductibility of a portion of goodwill
amortization expense resulting from the tax-free nature of certain
acquisitions. The elimination of goodwill amortization during the quarter
ended June 29, 2001 due to the adoption of SFAS 142 has resulted in
increased pretax earnings with minimal incremental effect on the provision
of income taxes.
Net Income. Net income for the three months ended June 29, 2001 totaled
$2.7 million compared to net income of $4.6 million for the three months
ended June 30, 2000 due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As the Company's business grows, its cash and working capital requirements
will also continue to increase as a result of the anticipated growth of the
Company's operations. This growth will be funded through a combination of
cash flow from operations and revolving credit borrowings.
Statement of Cash Flows Discussion
Net cash provided by operating activities was $43.1 million and $12.9
million for the three months ended June 29, 2001 and June 30, 2000,
respectively. The increase in operating cash flows primarily resulted from
the continued implementation of working capital reduction initiatives.
During the three months ended June 29, 2001, operating cash flows were
positively impacted by a $25 million increase in accounts payable and
accrued liabilities, a $3 million decrease in accounts receivable, and a
$16 million decrease in other assets, of which $7 million relates to an
Internal Revenue Service tax refund. These items were negatively impacted
by a $10 million increase in inventory.
Net cash used in investing activities was $6.5 million and $4.6 million for
the three months ended June 29, 2001 and June 30, 2000, respectively.
During the three months ended June 29, 2001, cash used in investing
activities resulted from approximately $6 million of capital expenditures
primarily related to the continued development of the Company's Enterprise
Resource Planning System, E-Commerce platforms and supply chain
integration.
Net cash used in financing activities was $42.7 million and $26.9 million
for the three months ended June 29, 2001 and June 30, 2000, respectively.
During the three months ended June 29, 2001, the Company repaid a net $42
million in bank debt. Sources of the repayment included approximately $7
million from cash balances and $35 from cash flows from operating
activities.
Operating Trends
The Company had working capital of $284.8 million and $316.3 million as of
June 29, 2001 and March 30, 2001, respectively. Accounts receivable, net of
allowances, were $229.6 million and $236.8 million at June 29, 2001 and
March 30, 2001, respectively. The average number of days sales in accounts
receivable outstanding was approximately 47.0 and 51.7 days for the three
months ended June 29, 2001 (annualized) and the year ended March 30, 2001,
respectively. For the three months ended June 29, 2001, the Company's
Physician Supply, Imaging, and Long-Term Care Businesses had annualized
days sales in accounts receivable of approximately 46.4, 40.8, and 58.7
days, respectively.
Inventories were $162.4 million and $154.7 million as of June 29, 2001 and
March 30, 2001, respectively. The Company had inventory turnover of 8.7x
and 8.4x for the three months ended June 29, 2001 (annualized) and the year
ended March 30, 2001, respectively. For the three months ended June 29,
2001, the Company's Physician Supply, Imaging, and Long-Term Care
Businesses had annualized inventory turnover of 8.5x, 8.5x, and 10.0x,
respectively.
The following table presents EBITDA and other financial data for the three
months ended June 29, 2001 and June 30, 2000:
21
Three Months Ended
----------------------------
June 29, 2001 June 30, 2000
------------- -------------
(Dollars in thousands)
Other Financial Data:
Income from operations............................................ $ 7,298 $ 12,268
Plus: other income............................................... 946 812
Plus: depreciation and amortization.............................. 4,291 5,474
------------- -------------
EBITDA (a).......................................................... $ 12,535 $ 18,554
------------- -------------
Interest expense.................................................. $ 4,251 $ 5,035
Interest coverage (b)............................................. 2.9x 3.7x
EBITDA margin (c)................................................. 2.8% 3.9%
Cash provided by operating activities............................. $ 43,135 $ 12,888
Cash used in investing activities................................. $ (6,519) $ (4,567)
Cash used in financing activities................................. $ (42,654) $ (26,905)
Refer to the Liquidity and Capital Resources section above of Management's
Discussion and Analysis of Financial Condition and Results of Operations
for a discussion of cash flows from operating, investing and financing
activities.
(a) EBITDA represents income (loss) from operations, plus other income,
plus depreciation and amortization, and excludes net interest expense and
provision for income taxes. EBITDA is not a measure of performance or
financial condition under generally accepted accounting principles
("GAAP"). EBITDA is not intended to represent cash flow from operations and
should not be considered as an alternative measure to income from
operations or net income computed in accordance with GAAP, as an indicator
of the Company's operating performance, as an alternative to cash flow from
operating activities, or as a measure of liquidity. In addition, EBITDA
does not provide information regarding cash flows from investing and
financing activities which are integral to assessing the effects on the
Company's financial position and liquidity as well as understanding the
Company's historical growth. The Company believes that EBITDA is a standard
measure of liquidity commonly reported and widely used by analysts,
investors, and other interested parties in the financial markets. However,
not all companies calculate EBITDA using the same method and the EBITDA
numbers set forth above may not be comparable to EBITDA reported by other
companies.
(b) Interest coverage represents the Ratio of EBITDA to interest expense.
(c) EBITDA margin represents the ratio of EBITDA to net sales.
Senior Subordinated Notes
The Company has issued $125.0 million aggregate principal amount of 8.5%
senior subordinated notes due in 2007 (the "Notes"). The Notes are
unconditionally guaranteed on a senior subordinated basis by all of the
Company's domestic subsidiaries. Interest on the Notes accrues from the
date of original issuance and is payable semiannually on April 1 and
October 1 of each year, commencing on April 1, 1998, at a rate of 8.5% per
annum. The semiannual payments of approximately $5.3 million are expected
to be funded by the operating cash flow of the Company. No principal
payments on the Notes are required over the next five years. The Notes
contain certain restrictive covenants that, among other things, limit the
Company's ability to incur additional indebtedness. The Company may incur
indebtedness up to certain specified levels and, provided that no event of
default exists, additional indebtedness may be incurred if the Company
maintains a consolidated fixed charge coverage ratio, after giving effect
to such additional indebtedness, of greater than 2.0 to 1.0.
New Revolving Credit Agreement
On May 24, 2001, the Company entered into a credit agreement (the "Credit
Agreement"), by and among the Company, as borrower thereunder (the
"Borrower"), the subsidiaries of the Borrower party thereto, the lenders
22
from time to time party thereto (the "Lenders"), Bank of America, N.A., as
Agent for the Lenders (in such capacity, the "Agent", or the "Bank") and
Banc of America Securities LLC, as Arranger.
The Credit Agreement provides for a four-year credit facility consisting of
an aggregate $120 million revolving line of credit and letters of credit
(the "Credit Facility"). Availability of borrowings under the Credit
Facility depends upon (a) the amount of a borrowing base consisting of
accounts receivable and, upon satisfaction of certain requirements,
inventory and (b) compliance with certain debt incurrence tests under the
Company's Indenture, dated as of October 7, 1997, relating to the Notes.
The Credit Facility will bear interest at the Bank's prime rate plus a
margin of between 0.25% and 1.00% based on the Company's ratio of funded
debt to EBITDA (as defined in the Agreement) or at LIBOR plus a margin of
between 1.75% and 3.50% based on the Company's ratio of funded debt to
EBITDA. Under the Credit Agreement, the Company and its subsidiaries are
subject to certain covenants, including but not limited to, limitations on
(a) paying dividends and repurchasing stock, (b) repurchasing its Notes,
(c) selling or transferring assets, (d) making certain investments
(including acquisitions) and (e) incurring additional indebtedness and
liens. Initial proceeds from the Credit Facility were used to refinance
existing indebtedness outstanding under the Company's prior credit
agreement, and future proceeds will be used to issue letters of credit,
finance ongoing working capital requirements and general corporate purposes
of the Company. The Credit Facility matures on May 24, 2005.
On June 28, 2001, the Company entered into a First Amendment to the Credit
Agreement (the "Amendment"), by and among the Company, as borrower
thereunder, the subsidiaries of the Company party thereto, the Lenders and
the Agent for the Lenders. The Amendment amends the Credit Agreement. As a
result of the Amendment, the maximum available borrowings under the Credit
Agreement were increased from $120 million to $150 million. The Amendment
also, among other things, increased the percentage of Lenders whose consent
was required for an amendment of Credit Agreement from more than 50% to
more than 55% and amended certain provisions relating to protective
advances, limitations on issuances of letters of credit, indemnification,
and landlord consents. The conditions to the effectiveness of the Amendment
were satisfied on June 29, 2001.
As of June 29, 2001, the Company has not entered into any material working
capital commitments that require funding. The Company believes that the
expected cash flows from operations, available borrowing under the credit
facility, and capital markets are sufficient to meet the Company's
anticipated future requirements for working capital, capital expenditures,
and acquisitions for the foreseeable future.
23
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 Facility 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 Facility. As of June 29,
2001, the Company had $22.4 million outstanding under the Credit Facility
at variable interest rates, at the Company's option, at either the bank's
prime rate plus a margin of between 0.25% and 1.00% or at LIBOR plus a
margin of between 1.75% and 3.50%. The weighted-average interest rate of
borrowings under the Credit Agreement was 6.39% as of June 29, 2001.
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 June 29, 2001, the Company did not hold any derivative financial or
commodity instruments.
24
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 9 and 10 of this Form 10-Q and Item 3 of the Company's Form 10-K
for the fiscal year ended on March 30, 2001.
The Company disputed the calculation of a supplemental premium charged by
CIGNA upon the termination by the Company of the health insurance program
administered by CIGNA. The Company has entered into a definitive settlement
agreement with CIGNA, wherein the Company has agreed to pay CIGNA $2.85
million.
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) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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.(13)
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. (12)
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)
25
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.(14)
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.(11)
10.1 Incentive Stock Option Plan, dated as of May 14, 1986.(1)
10.2 Amended and Restated Directors Stock Plan.(8)
10.3 Amended and Restated 1994 Long-Term Incentive Plan.(8)
10.4 Amended and Restated 1994 Long-Term Stock Plan.(8)
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.(10)
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.(9)
10.10a First Amendment to the Physician Sales and Service, Inc. Employee Stock Ownership and Savings
Plan.(9)
10.11 Agreement and Plan of Merger, dated as of December 14, 1997, by and among the Company, PSS Merger
Corp. and Gulf South Medical Supply, Inc.(5)
10.12 Credit Agreement, dated as of May 24, 2001, by and among the Company, each of the Company's
subsidiaries therein named, the Lenders from time to time party thereto, Bank of America,, N.A.,
as Agent, and Banc of America Securities LLC, as Arranger. (16)
10.12a Amendment No. 1 to Credit Agreement, dated as of June 28, 2001, by and among the Company, each of
the Company's subsidiaries therein named, the Lenders from time to time party thereto, Bank of
America,, N.A., as Agent, and Banc of America Securities LLC, as Arranger.(17)
10.13 Employment Agreement, dated as of March 4, 1998, by and between the Company and David A. Smith.(7)
10.13a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
David A. Smith.(7)
10.14 Employment Agreement, dated as of April 1, 1998, by and between the Company and John F. Sasen,
Sr.(7)
10.14a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and John
F. Sasen, Sr.(7)
26
10.15 Employment Agreement, dated as of April 1, 1998, by and between the Company and Douglas J. Harper.
10.15a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
Douglas J. Harper.
10.16 Employment Agreement, dated as of April 1, 1998, by and between the Company and Gary A. Corless.
10.16a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and Gary
A. Corless.
10.17 Employment Agreement, dated as of April 1, 1998, by and between the Company and Kevin P. English.
10.17a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
Kevin P. English.
10.18 Severance Agreement, dated as of October 11, 2000, by and between the Company and Frederick E.
Dell.(7)
10.19 Severance Agreement, dated as of February 1, 2001, by and between the Company and Kirk A.
Zambetti.(7)
10.20 Severance Agreement, dated as of March 21, 2001, by and between the Company and Patrick C.
Kelly.(7)
21.1 List of Subsidiaries of the Company.(7)
(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 year ended March 30, 1995.
(7) Incorporated by Reference to the Company's Annual Report on Form 10-K for the year ended March 30, 2001.
(8) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996.
(9) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997.
(10) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999.
(11) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000.
(12) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2000.
(13) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 8, 1998.
(14) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 22, 1998.
(15) Incorporated by Reference to the Company's Current Report on Form 8-K, filed January 12, 2001.
(16) Incorporated by Reference to the Company's Current Report on Form 8-K, filed June 5, 2001.
(17) Incorporated by Reference to the Company's Current Report on Form 8-K, filed July 3, 2001.
(b) Reports on Form 8-K
The following current reports on Form 8-K were filed during the quarter
ended June 29, 2001:
Date of Report Items Reported
--------------- -------------------------------------------------------
July 3, 2001 Announcing the terms of an amendment, dated as of June
28, 2001, to the Company's Credit Agreement.
--------------- -------------------------------------------------------
27
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 August 10, 2001.
PSS WORLD MEDICAL, INC.
By: /s/ David A. Smith
--------------------------------------------
David A. Smith,
President and Chief Financial Officer
28