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 September 28, 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 November 8, 2001 a total of 71,161,414 shares of common stock,
par value $.01 per share, of the registrant were outstanding.
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
September 28, 2001
TABLE OF CONTENTS
[PAGE]
ITEM
Information Regarding Forward-Looking Statements.................................................. 3
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Balance Sheets - September 28, 2001 and March 30, 2001..................... 4
Condensed Consolidated Statements of Operations - for the Three and Six Months Ended September 28, 5
2001 and September 29, 2000...................................................................
Condensed Consolidated Statements of Cash Flows - for the Six Months Ended September 28, 2001 and 6
September 29, 2000............................................................................
Notes to Condensed Consolidated Financial Statements - September 28, 2001 and September 29, 2000 7
2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 18
3. Quantitative and Qualitative Disclosures About Market Risk............................................ 28
PART II - OTHER INFORMATION
Other Information........................................................................................ 29
Signatures............................................................................................... 33
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 "SEC"). 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)
September 28, March 30,
2001 2001
------------------ -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents.................................................. $ 24,228 $ 34,374
Marketable securities...................................................... 200 314
Accounts receivable, net................................................... 235,468 236,846
Inventories, net........................................................... 161,469 154,725
Employee advances.......................................................... 675 478
Prepaid expenses and other................................................. 41,799 60,633
------------------ -----------------
Total current assets............................................... 463,839 487,370
Property and equipment, net................................................... 80,840 76,247
Other Assets:
Goodwill .................................................................. 60,644 163,879
Intangibles, net........................................................... 17,036 19,573
Employee advances.......................................................... 534 524
Other...................................................................... 28,880 25,041
------------------ -----------------
Total assets....................................................... $651,773 $772,634
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank revolver.............................................................. $ 10,805 $ --
Accounts payable........................................................... 142,950 119,238
Accrued expenses........................................................... 34,556 39,234
Current maturities of long-term debt and capital lease obligations......... 98 1,752
Other...................................................................... 9,311 10,855
------------------ -----------------
Total current liabilities.......................................... 197,720 171,079
Long-term debt and capital lease obligations, net of current portion.......... 125,000 190,040
Other......................................................................... 8,094 7,213
------------------ -----------------
Total liabilities.................................................. 330,814 368,332
------------------ -----------------
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, 71,161,086 and
71,077,236 shares issued and outstanding at September 28, 2001 and March
30, 2001, respectively................................................. 712 711
Additional paid-in capital................................................. 349,311 348,701
(Accumulated deficit) retained earnings.................................... (29,064) 54,890
------------------ -----------------
Total shareholders' equity......................................... 320,959 404,302
------------------ -----------------
Total liabilities and shareholders' equity......................... $651,773 $772,634
================== =================
The accompanying notes are an integral part of these condensed consolidated balance sheets.
4
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
---------------------------------------- ----------------------------------------
September 28, 2001 September 29, 2000 September 28, 2001 September 29, 2000
------------------- ------------------- ------------------- -------------------
Net sales $448,370 $446,150 $895,110 $917,798
Cost of goods sold 343,898 344,625 688,895 701,987
------------------- ------------------- ------------------- -------------------
Gross profit 104,472 101,525 206,215 215,811
General and administrative expenses 69,411 69,726 137,872 142,366
Selling expenses 27,139 28,648 53,638 58,026
International business exit charge reversal -- -- (514) --
------------------- ------------------- ------------------- -------------------
Income from operations 7,922 3,151 15,219 15,419
------------------- ------------------- ------------------- -------------------
Other income (expense):
Interest expense (2,942) (4,687) (7,193) (9,722)
Interest and investment income 40 561 278 1,261
Other income 462 715 1,408 1,527
------------------- ------------------- ------------------- -------------------
(2,440) (3,411) (5,507) (6,934)
------------------- ------------------- ------------------- -------------------
Income (loss) before provision for income
taxes and cumulative effect of accounting
change 5,482 (260) 9,712 8,485
Provision for income taxes 2,080 704 3,621 4,829
------------------- ------------------- ------------------- -------------------
Income (loss) before cumulative effect of 3,402 (964) 6,091 3,656
accounting change
Cumulative effect of accounting change (net
of income taxes of $14,444) -- -- (90,045) --
------------------- ------------------- ------------------- -------------------
Net income (loss) $ 3,402 $ (964) $(83,954) $ 3,656
=================== =================== =================== ===================
Earnings per share - Basic:
Income (loss) before cumulative effect of
accounting change $ 0.05 $ (0.01) $ 0.09 $ 0.05
Cumulative effect of accounting change -- -- (1.27) --
------------------- ------------------- ------------------- -------------------
Net income (loss) $ 0.05 $ (0.01) $ (1.18) $ 0.05
=================== =================== =================== ===================
Earnings per share - Diluted:
Income (loss) before cumulative effect of
accounting change $ 0.05 $ (0.01) $ 0.09 $ 0.05
Cumulative effect of accounting change -- -- (1.26) --
------------------- ------------------- ------------------- -------------------
Net income (loss) $ 0.05 $ (0.01) $ (1.17) $ 0.05
=================== =================== =================== ===================
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)
Six Months Ended
--------------------------------------
September 28, September 29,
2001 2000
------------------ ------------------
Cash Flows From Operating Activities:
Net (loss) income.......................................................... $ (83,954) $ 3,656
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of accounting change................................. 90,045 --
Depreciation........................................................... 5,843 4,950
Amortization of goodwill and intangible assets......................... 2,957 6,185
Amortization of debt issuance costs.................................... 993 403
Provision for doubtful accounts........................................ 3,118 2,137
International Business exit charge reversal............................ (514) --
ESOP amortization...................................................... -- 345
Loss on marketable securities.......................................... 114 --
Gain on sale of fixed assets........................................... 21 7
Changes in operating assets and liabilities:
Accounts receivable................................................. (4,359) 1,594
Inventories, net.................................................... (9,587) 9,278
Prepaid expenses and other current assets........................... 18,523 2,965
Other assets........................................................ 7,324 (8,326)
Accounts payable, accrued expenses, and other liabilities........... 26,063 (10,205)
------------------ -------------------
Net cash provided by operating activities....................... 56,587 12,989
------------------ -------------------
Cash Flows From Investing Activities:
Proceeds from sales of property and equipment............................. 59 11
Capital expenditures...................................................... (11,835) (9,806)
Proceeds from sale of International Business.............................. 222 --
Payments on noncompete agreements......................................... (925) (657)
------------------ -------------------
Net cash used in investing activities........................... (12,479) (10,452)
------------------ -------------------
Cash Flows From Financing Activities:
Proceeds from borrowings.................................................. 67,995 60,000
Repayment of borrowings................................................... (122,226) (80,408)
Principal payments under capital lease obligations........................ (23) (49)
Other..................................................................... -- (343)
Net cash used in financing activities........................... (54,254) (20,800)
------------------ -------------------
Net decrease in cash and cash equivalents..................................... (10,146) (18,263)
Cash and cash equivalents, beginning of period................................ 34,374 60,414
------------------ -------------------
Cash and cash equivalents, end of period...................................... $ 24,228 $ 42,151
================== ===================
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 SEPTEMBER 28, 2001 AND SEPTEMBER 29, 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 91 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 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 June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations ("SFAS 141"). SFAS 141 requires the purchase method of
accounting for business combinations consummated after June 30, 2001 and
eliminates the poolings-of-interests method. The Company will apply the
provisions of SFAS 141 to acquisitions initiated after June 30, 2001.
In June 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 the
reassessment of the useful lives of existing intangibles and assessing
potential impairments of goodwill. SFAS 142 also requires that the Company
complete a two-step goodwill impairment test. The first step compares the
fair value of each reporting unit to its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying
amount, goodwill is not considered to be impaired and the second step is
not required. SFAS 142 requires completion of this first step within the
first six months of initial adoption and annually thereafter. If the
carrying amount of a reporting unit exceeds its fair value, the second step
is performed to measure the amount of impairment loss, if any. The second
step compares the implied fair value of goodwill to the carrying value of a
reporting unit's goodwill. The implied fair value of goodwill is determined
in a manner similar to accounting for a business combination with the
allocation of the assessed fair value determined in the first step to the
assets and liabilities of the reporting unit. The excess of the fair value
of the reporting unit over the amounts assigned to the assets and
liabilities is the implied fair value of goodwill. This allocation process
is only performed for purposes of evaluating goodwill impairment and does
not result in an entry to adjust the value of any assets or liabilities. An
impairment loss is recognized for any excess in the carrying value of
goodwill over the implied fair value of goodwill. In the initial year of
7
adoption, any impairment loss identified is presented as a change in
accounting principal and recorded as of the beginning of that fiscal year.
In years subsequent to the initial year of adoption, any impairment loss
recognized is recorded as a charge to income from operations.
The Company elected to adopt SFAS 142 as of March 31, 2001. During the
quarter ended September 28, 2001, the Company completed both steps of the
transitional goodwill impairment tests which resulted in an impairment
charge of $90,045, net of income taxes of $14,444. Refer to Note 5,
Goodwill for further discussion of the impact of SFAS 142 on the Company's
financial position and results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144
addresses the financial accounting and reporting for the impairment or
disposal of long-lived assets. The Company will apply the provisions of
SFAS 144 beginning March 30, 2002. Management believes that the adoption of
SFAS 144 will not have a material impact on its results of operations.
NOTE 2 - CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses may include charges related to merger
activity, restructuring activity, and other special items. The following
table summarizes unusual charges included as components of general and
administrative expenses in the accompanying consolidated income statements:
Three Months Ended Six Months Ended
------------------------------ --------------------------------
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
-------------- ------------- -------------- --------------
Merger costs and expenses....... $ 757 $ 1,584 $ 1,297 $ 3,159
Restructuring costs and expenses 596 1,013 1,090 2,253
Operational tax charge reversal. (1,008) -- (1,459) --
Other......................... 2 1,634 11 2,420
-------------- ------------- -------------- --------------
Merger Costs and Expenses $ 347 $ 4,231 $ 939 $ 7,832
============== ============= ============== ==============
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.
The Company has recorded merger costs and expenses related to branch
shutdown and lease termination costs. For the three months ended September
29, 2000, the Company recorded $313 of merger charges expensed as incurred.
For the six months ended September 28, 2001 and September 29, 2000, the
Company recorded $35 and $617, respectively, of merger charges expensed as
incurred. At the end of each quarter, management reevaluates its plans and
adjusts previous estimates. For the three and six months ended September
28, 2001, the Company reversed $19 and $290, respectively, 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.
8
In addition, 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 September 28, 2001 and
September 29, 2000, the Company expensed $776 and $1,271 respectively,
related to the Retention Plans. During the six months ended September 28,
2001 and September 29, 2000, the Company expensed $1,552 and $2,542
respectively, related to the Retention Plans.
Restructuring Costs and Expenses
The Company has recorded restructuring costs and expenses 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 September 28,
2001 and September 29, 2000, the Company recorded $667 and $1,013,
respectively, of restructuring costs as incurred. The costs for the three
months ended September 28, 2001, resulted from the involuntary termination
of 14 employees, branch shutdown costs and lease termination costs for the
merger of two Physician Supply Business and two Imaging Business
distribution centers into existing locations. For six months ended
September 28, 2001 and September 29, 2000, the Company recorded $1,172 and
$2,253, respectively, of restructuring costs as incurred. The costs for the
six month period ended September 28, 2001, resulted from the involuntary
termination of 52 employees, branch shutdown costs and lease termination
costs for the merger of three Physician Supply Business and three Imaging
Business distribution centers into existing locations. At the end of each
quarter, management reevaluates its plans and adjusts previous estimates.
For the three and six months ended September 28, 2001, the Company
reversed $71 and $82, respectively, of restructuring costs relating to
lease termination and severance costs.
Operational Tax Charge
The Company performed an analysis of previously recorded operating tax
charge reserves and reversed $1,008 and $1,459 during the three and six
months ended September 28, 2001.
Other
During the three months ended September 28, 2001 and September 29, 2000,
the Company incurred $2 and $1,634, respectively, primarily relating to
legal and professional fees and other costs pursuant to the Company's
strategic alternatives process and severance costs. During the six months
ended September 28, 2001 and September 29, 2000, the Company incurred $11
and $2,326, respectively, relating to the same. In addition, during the six
months ended September 29, 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
Accrued merger costs and expenses, classified as accrued expenses in the
accompanying condensed consolidated balance sheets, were $23 and $294 at
September 28, 2001 and March 30, 2001, respectively. The remaining accruals
at September 28, 2001 primarily relate to lease termination costs and are
scheduled to be paid through the end of fiscal year 2002.
Summary of Accrued Restructuring Costs and Expenses
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
9
centers - one in the Company's subsidiary, Diagnostic Imaging, Inc., and
one in the Company's Physician Sales & Service 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 an accrued expense in the accompanying consolidated balance
sheets totaled $2,095 and $3,715 at September 28, 2001 and March 30, 2001,
respectively. The following is a summary of the restructuring plan activity
for the three months ended September 28, 2001:
Involuntary
Employee Lease
Termination Termination
Costs Costs Total
---------------- --------------- ---------------
Balance at June 29, 2001.................... $ 2,203 $ 281 $ 2,484
Adjustments............................ (10) (61) (71)
Utilized............................... (241) (77) (318)
----------------- -------------- ---------------
Balance at September 28, 2001............... $ 1,952 $ 143 $ 2,095
================= ============== ===============
Plans B and C
Approximately $143 of lease termination payments remain accrued at
September 28, 2001 related to Plans B and C, for which payments will extend
through fiscal 2002. These amounts were originally accrued under
restructuring plans for the closure of the Company's subsidiary, Gulf South
Medical Supply, Inc. in fiscal years 1999 and 2000.
Plan E
Accrued restructuring costs and expenses related to Plan E at September 28,
2001 were approximately $1,952, all of which relates to involuntary
employee terminations. As of September 28, 2001, all 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 were outside the core United States business
segments, making effective management difficult and resulting in lower than
expected operating performance for the past several years. The net assets
held for disposal consisted of the operating assets of the European
operations less outstanding liabilities, and were valued at the aggregate
fair value less costs incurred for sale. During the quarter ended December
29, 2000, the Company recorded $14,917 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 $514 of the previously established
charge due to lower than expected costs to exit the operations. No further
expenses relating to the disposal of the International Business were
incurred subsequent to June 29, 2001.
NOTE 5 - GOODWILL
The Company adopted SFAS 142, Goodwill and Other Intangibles, effective
March 31, 2001. In connection with the adoption of SFAS 142, the Company
discontinued amortizing goodwill. The changes in the carrying amount of
goodwill for the six months ended September 28, 2001, are as follows:
10
Physician
Supply Imaging Long-Term
Business Business Care Business Total
------------- ------------ --------------- ---------------
Balance as of March 30, 2001.... $ 9,788 $ 104,489 $ 49,602 $ 163,879
Settlement of contingent
consideration................ -- 1,254 -- 1,254
Impairment loss................. -- (104,489) -- (104,489)
------------- ------------ --------------- ---------------
Balance as of September 28, 2001 $ 9,788 $ 1,254 $ 49,602 $ 60,644
============= ============ =============== ===============
In accordance with SFAS 142, the Company performed transitional goodwill
impairment tests at each of its operating segments - the Physician Sales &
Service division (the "Physician Supply Business"), Diagnostic Imaging,
Inc. ("DI" or the "Imaging Business"), and Gulf South Medical Supply,
Inc.("Gulf South" or the "Long-Term Care Business"). These operating
segments meet the reporting unit requirements as defined in SFAS 142. The
Company engaged independent valuation consultants to assist with the
transitional goodwill impairment tests. Based on the results of these
tests, goodwill was deemed not to be impaired at the Physician Supply
Business or the Long-Term Care Business as the fair value of each of these
reporting units exceeded their carrying values. Therefore, the second step
of the goodwill impairment test was not required to be performed. However,
the carrying amount of the Imaging division exceeded its fair value,
indicating a potential impairment of the respective goodwill. The Imaging
Business' operating results have been impacted by a decline in actual and
projected operating margins and these factors affect the fair value
calculation, which were considered in calculating the enterprise value of
the reporting unit.
The fair value of each of the operating segments was calculated on an
enterprise value basis using the following approaches: (i) market multiple
approach; (ii) discounted cash flow approach; and (iii) comparable
transaction approach.
o Under the market multiple approach, market ratios and performance
fundamentals relating to similar public companies' stock prices or
enterprise values were applied to the reporting units to determine
their enterprise value.
o Under the discounted cash flow ("DCF") approach, the indicated
enterprise value was determined using the present value of the
projected future cash flows to be generated considering appropriate
discount rates. The discount rates used in the calculation
reflected all associated risks of realizing the projected future
cash flows.
o Under the comparable transaction approach, recent transactions
between companies in the same or similar lines of business to the
reporting units were examined to determine the indicated enterprise
value. Acquisition values and pricing evidence were used in much
the same manner as the Market Multiple Approach for the
determination of the reporting units' enterprise value.
The fair value conclusion of the operating segments reflects an equally
blended value of the market multiple approach and the DCF approach
discussed above.
Because the carrying amount of the Imaging Business exceeded its fair
value, step 2 of the goodwill impairment test was completed. Under step 2
of the test, the implied fair value of the Imaging Business's goodwill was
compared to its carrying amount of goodwill to measure the amount of
impairment loss. As a result, a loss of $90,045 (net of taxes of $14,444)
was recognized and recorded as a cumulative effect of accounting change in
the accompanying consolidated statements of income.
As required by SFAS 142, the impairment loss was recognized as of March 31,
2001; therefore, the Company has restated its historical consolidated
financial information for the three months ended June 29, 2001 as follows:
11
Three Months
Ended
June 29, 2001
----------------
(Restated)
Net sales.......................................... $ 446,740
Cost of goods sold................................. 344,996
----------------
Gross profit................................. 101,744
General and administrative expenses................ 68,461
Selling expenses................................... 26,499
International business exit charge reversal........ (514)
----------------
Income from operations....................... 7,298
----------------
Other income (expense):
Interest expense............................. (4,251)
Interest and investment income............... 238
Other income................................. 946
----------------
(3,067)
----------------
Income before provision for income taxes and
cumulative effect of accounting change.......... 4,231
Provision for income taxes......................... 1,541
----------------
Income before cumulative effect of accounting change 2,690
Cumulative effect of accounting change (net of taxes
of $14,444)........................................ (90,045)
----------------
Net loss........................................... $ (87,355)
================
Earnings per share - Basic and Diluted:
Income before cumulative effect of accounting $ 0.04
change.......................................
Cumulative effect of accounting change ......... (1.26)
----------------
Net loss........................................ $ (1.22)
================
The following table provides comparative disclosure of adjusted net income
excluding goodwill amortization expense, net of taxes, for the periods
presented:
Three Months Ended Six Months Ended
----------------------------- ------------------------------
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Income (loss) before cumulative
effect of accounting change, as
reported.......................... $ 3,402 $ (964) $ 6,091 $ 3,656
Cumulative effect of accounting
change............................ -- -- (90,045) --
------------- ------------- ------------- -------------
Net income (loss), as reported....... 3,402 (964) (83,954) 3,656
Goodwill amortization, net of tax.... -- 1,269 -- 2,729
------------- ------------- ------------- -------------
Net income (loss), adjusted.......... $ 3,402 $ 305 $ (83,954) $ 6,385
============= ============= ============= =============
Earnings per share - Basic:
Income (loss) before cumulative
effect of accounting change.... $0.05 $(0.01) $ 0.09 $0.05
Cumulative effect of accounting
change......................... -- -- (1.27) --
------------- ------------- ------------- -------------
Net income (loss), as reported.... $0.05 (0.01) $(1.18) $0.05
Goodwill amortization, net of tax. -- 0.02 -- 0.05
------------- ------------- ------------- -------------
Basic earnings per share, adjusted... $0.05 $ 0.01 $(1.18) $0.10
============= ============= ============= =============
12
Earnings per share - Basic:
Income (loss) before cumulative
effect of accounting change.... $0.05 $(0.01) $ 0.09 $0.05
Cumulative effect of accounting
change......................... -- -- (1.26) --
------------- ------------- ------------- -------------
Net income (loss), as reported.... $0.05 (0.01) $(1.17) $0.05
Goodwill amortization, net of tax. -- 0.02 -- 0.05
------------- ------------- ------------- -------------
Basic earnings per share, adjusted... $0.05 $ 0.01 $(1.17) $0.10
============= ============= ============= =============
The terms of certain of the Company's past acquisition agreements provided
for additional consideration to be paid (earnout payments) if the acquired
entity's results of operations exceed certain targeted levels. As of
September 28, 2001, the Company accrued $1.2 million included in other
current liabilities related to earnout payments and will pay them in the
quarter ended December 28, 2001. These final payments will satisfy all
remaining contingent earnout obligations.
NOTE 6 - COMPREHENSIVE INCOME
Comprehensive income is defined as net income plus or minus direct
adjustments to shareholders' equity. The following details the components
of comprehensive income for the periods presented:
Three Months Ended Six Months Ended
----------------------- -----------------------
September September September September
28, 2001 29, 2000 28, 2001 29, 2000
----------- --------- ---------- ---------
Net income (loss)......................... $ 3,402 $ (964) $(83,954) $ 3,656
Other comprehensive expense, net of tax:
Foreign currency translation
adjustment................ -- (504) -- (343)
Unrealized loss on available for sale
security.............................. -- (534) -- (2,041)
----------- --------- ---------- ---------
Comprehensive income...................... $ 3,402 $(2,002) $(83,954) $ 1,272
=========== ========= ========== =========
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 Six Months Ended
---------------------------------------- ----------------------------------------
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
Income (loss) before cumulative effect of 3,402 (964) 6,091 3,656
accounting change
Cumulative effect of accounting change (net
of income taxes of $14,444) -- -- (90,045) --
------------------- ------------------- ------------------- -------------------
Net income (loss) $ 3,402 $ (964) $(83,954) $ 3,656
=================== =================== =================== ===================
Earnings per share - Basic:
Income (loss) before cumulative effect of
accounting change $ 0.05 $ (0.01) $ 0.09 $ 0.05
Cumulative effect of accounting change -- -- (1.27) --
------------------- ------------------- ------------------- -------------------
Net income (loss) $ 0.05 $ (0.01) $ (1.18) $ 0.05
=================== =================== =================== ===================
Earnings per share - Diluted:
Income (loss) before cumulative effect of
accounting change $ 0.05 $ (0.01) $ 0.09 $ 0.05
Cumulative effect of accounting change -- -- (1.26) --
------------------- ------------------- ------------------- -------------------
Net income (loss) $ 0.05 $ (0.01) $ (1.17) $ 0.05
=================== =================== =================== ===================
Weighted average shares outstanding:
Common shares.................... 71,165 71,187 71,165 71,187
Assumed exercise of stock options 667 -- 483 71
------------------- ------------------- ------------------- -------------------
Diluted shares outstanding.... 71,832 71,187 71,648 71,258
=================== =================== =================== ===================
13
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 Supply
Business, the Imaging Business, the Long-Term Care Business, and the Other
segment that combines WorldMed International, Inc. ("WorldMed Int'l") with
corporate and back office operations. During the quarter ended June 29,
2001, the Company sold its European operations. Therefore, the Other
segment only includes corporate and back office activity subsequent to June
29, 2001.
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 managed and developed the Company's
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 (in thousands):
14
Three Months Ended Six Months Ended
---------------------------- -----------------------------
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
------------- ------------- ------------- -------------
NET SALES:
Physician Supply Business....................... $176,115 $170,167 $347,458 $348,104
Imaging Business................................ 176,544 182,983 356,152 379,409
Long-Term Care Business......................... 95,711 89,896 191,069 182,130
Other........................................... -- 3,104 431 8,155
------------- ------------- ------------- -------------
Total net sales............................. $448,370 $446,150 $895,110 $917,798
============= ============= ============= =============
CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE
EXPENSES:
Physician Supply Business....................... $ 401 $ 95 $ 546 $ 170
Imaging Business................................ 109 984 122 2,154
Long-Term Care Business......................... 65 238 154 625
Other........................................... (228) 2,914 117 4,883
------------- ------------- ------------- -------------
Total charges included in general and
administrative expenses............. $ 347 $ 4,231 $ 939 $ 7,832
============= ============= ============= =============
INCOME (LOSS) FROM OPERATIONS:
Physician Supply Business....................... $ 6,398 $ 1,896 $ 12,133 $ 13,229
Imaging Business................................ 136 1,475 243 3,582
Long-Term Care Business......................... 2,256 1,796 4,028 3,585
Other........................................... (868) (2,016) (1,185) (4,977)
------------- ------------- ------------- -------------
Total income (loss) from operations......... $ 7,922 $ 3,151 $ 15,219 $ 15,419
============= ============= ============= =============
DEPRECIATION
Physician Supply Business....................... $ 1,152 $ 1,118 $ 2,297 $ 2,127
Imaging Business................................ 1,163 867 2,260 1,680
Long-Term Care Business......................... 461 463 923 924
Other........................................... 231 112 363 219
------------- ------------- ------------- -------------
Total depreciation.......................... $ 3,007 $ 2,560 $ 5,843 $ 4,950
============= ============= ============= =============
AMORTIZATION OF gOODWILL AND INTANGIBLE ASSETS:
Physician Supply Business....................... $ 278 $ 431 $ 512 $ 859
Imaging Business................................ 1,121 2,015 2,238 4,020
Long-Term Care Business......................... 103 566 207 1,126
Other........................................... -- 289 -- 180
------------- ------------- ------------- -------------
Total amortization of goodwill and intangible $ 1,502 $ 3,301 $ 2,957 $ 6,185
assets..............................
============= ============= ============= =============
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business....................... $ 289 $ 280 $ 609 $ 203
Imaging Business................................ 288 (227) 613 140
Long-Term Care Business......................... 951 600 1,896 1,794
Other........................................... -- -- -- --
------------- ------------- ------------- -------------
Total provision for doubtful accounts....... $ 1,528 $ 653 $ 3,118 $ 2,137
============= ============= ============= =============
INTEREST EXPENSE:
Physician Supply Business....................... $ 189 $ 491 $ 467 $ 1,012
Imaging Business................................ 2,449 2,425 5,041 4,852
Long-Term Care Business......................... 1,268 1,322 2,645 2,650
Other........................................... (964) 449 (960) 1,208
------------- ------------- ------------- -------------
Total interest expense...................... $ 2,942 $ 4,687 $ 7,193 $ 9,722
============= ============= ============= =============
15
Three Months Ended Six Months Ended
September 28, September 29, September 28, September 28,
2001 2000 2001 2001
------------- ------------- ------------- -------------
INTEREST AND INVESTMENT INCOME:
Physician Supply Business....................... $ 1 $ 60 $ 2 $ 107
Imaging Business................................ -- -- -- --
Long-Term Care Business......................... -- 4 -- 17
Other........................................... 39 497 276 1,137
------------- ------------- ------------- -------------
Total interest and investment income........ $ 40 $ 561 $ 278 $ 1,261
============= ============= ============= =============
PROVISION (BENEFIT) FOR INCOME TAXES:
Physician Supply Business....................... $ 2,810 $ 770 $ 5,094 $ 5,229
Imaging Business................................ (740) (29) (1,580) 307
Long-Term Care Business......................... 451 754 682 754
Other........................................... (441) (791) (575) (1,461)
------------- ------------- ------------- -------------
Total provision (benefit) for income taxes.. $ 2,080 $ 704 $ 3,621 $ 4,829
============= ============= ============= =============
CAPITAL EXPENDITURES:
Physician Supply Business....................... $ 2,222 $ 3,690 $ 5,514 $ 6,446
Imaging Business................................ 693 1,314 1,571 2,541
Long-Term Care Business......................... 37 190 220 390
Other........................................... 2,775 205 4,530 429
------------- ------------- ------------- -------------
Total capital expenditures.................. $ 5,727 $ 5,399 $ 11,835 $ 9,806
============= ============= ============= =============
September 28, March 30,
2001 2001
------------- -------------
ASSETS:
Physician Supply Business....................... $ 235,836 $ 225,080
Imaging Business................................ 234,110 324,830
Long-Term Care Business......................... 153,925 156,581
Other........................................... 27,902 66,143
------------- -------------
Total assets............................... $ 651,773 $ 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 Gulf South, it's 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, 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; however, there can be
no assurance that this litigation will be ultimately resolved on terms that
are favorable to the Company.
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
16
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.
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.
Subsequent to the quarter ended June 29, 2001, the Company was named in the
following 10 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. ; (7) Rodighiero v. PSS World Medical, Inc.
et al.; (8) Foster v. PSS World Medical, Inc. et al.; (9) Weiler v. PSS
World Medical, Inc. et al.; and (10) Adams 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. On September 13, 2001, certain plaintiffs filed a motion
for consolidation of the above actions and for appointment of lead
plaintiff and lead counsel. That motion remains pending. 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.
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.
17
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 91 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 46 medical supply distribution service
centers with approximately 701 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 857 service specialists and 196 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 13
distribution service centers and 1 satellite center with approximately 107
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
surgery markets continue to grow, physicians are increasingly performing
more procedures in-office.
18
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 September 28, 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 8% of Long-Term Care Business
revenues, and less than 2% of the Company's consolidated sales, for the
quarter ended September 28, 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.
19
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 28, 2001 VERSUS THREE MONTHS ENDED SEPTEMBER 29,
2000
Net Sales. Net sales for the three months ended September 28, 2001 totaled
$448.4 million, an increase of $2.2 million, or 0.5%, from net sales of
$446.2 million for the three months ended September 29, 2000. During this
period, sales of consumable products grew by approximately $6 million in
the Physician Supply Business and $6 million in the Long-Term Care
Business. The launch of the SRx and Answers sales initiatives, implemented
during the last nine months, provided our sales force with a solutions
based sales approach designed to meet customer needs and increase
consumable product sales. In addition, the Company's Imaging Business
experienced growth of approximately $4 million in its Women's Health Care
strategic business unit ("SBU") on a comparable prior period basis. This
growth was offset by the loss of revenues associated with i) the
elimination of low profitability business in the Imaging Business, ii) the
elimination of the underperforming Surgical SBU under a revised Imaging
Business SBU structure, iii) vendor supply interruptions affecting the
Imaging Business, and iv) the elimination of $3.1 million of International
Business revenues due to the sale of the European operations.
Gross Profit. Gross profit for the three months ended September 28, 2001
totaled $104.5 million, an increase of $3.0 million, or 3.0%, from gross
profit of $101.5 million for the three months ended September 29, 2000.
Gross profit as a percentage of net sales was 23.3% and 22.8% for the three
months ended September 28, 2001 and September 29, 2000, respectively. The
overall gross profit increase over the prior year quarter was primarily
attributable to the sales growth discussed above. Within the operating
segments, the Physician Supply Business realized improved gross profit from
increased sales of higher margin consumable products, the Imaging Business
was impacted by the revenue decreases discussed above, and the Long-Term
Care Business maintained gross profit while continuing to experience large
chain customer pricing pressure.
General and Administrative Expenses. General and administrative expenses
for the three months ended September 28, 2001 totaled $69.4 million, a
decrease of $0.3 million, or 0.4%, from general and administrative expenses
of $69.7 million for the three months ended September 29, 2000. General and
administrative expense as a percentage of net sales decreased to 15.5% from
15.6% 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. During the three months ended September 28, 2001,
general and administrative expenses included $1.6 million of goodwill
amortization. Refer to Note 5, Goodwill in the accompanying condensed
consolidated financial statements for further discussion.
During the three months ended September 28, 2001, the Company recognized
additional depreciation expense over the prior comparative period for
completed phases of its Enterprise Resource Planning System, electronic
commerce platforms (MyPSS.com and MyDIOnline.com), and supply chain
integration. In addition, the Company incurred additional consulting fees
for assistance in the validation of its strategic plan and other expenses
for business process improvements. However, general and administrative
expenses in the Company's Other Segment decreased over the prior year
period by $0.3 million due to the sale of the European operations.
General and administrative expenses may include 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:
20
Three Months Ended
-----------------------------
September 28, September 29,
2001 2000
------------- -------------
Merger costs and expenses....... $ 757 $ 1,584
Restructuring costs and expenses 596 1,013
Operational tax charge.......... (1,008) --
Other........................... 2 1,634
------------- -------------
$ 347 $ 4,231
============= =============
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.
The Company has recorded merger costs and expenses related to branch
shutdown and lease termination costs. For the three months ended
September 29, 2000, the Company recorded $0.3 million 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 September 28, 2001, the Company reversed $19,000 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.
In addition, 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 September 28, 2001 and September 29, 2000, the Company expensed
$0.8 million and $1.3 million respectively, related to the Retention
Plans.
Restructuring Costs and Expenses
The Company has recorded restructuring costs and expenses 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
September 28, 2001 and September 29, 2000, the Company recorded $0.7
million and $1.0 million, respectively, of restructuring costs as
incurred. These costs for the three months ended September 28, 2001,
resulted from the involuntary termination of 14 employees and branch
shutdown and lease termination costs incurred for the merger of two
distribution centers into existing locations. At the end of each
quarter, management reevaluates its plans and adjusts previous
estimates. For the three months ended September 28, 2001, the Company
reversed $71,000 of restructuring costs.
21
Operational Tax Charge
The Company performed an analysis of previously recorded operating tax
charge reserves and reversed $1.0 million during the three months ended
September 28, 2001.
Other
During the three months ended September 28, 2001 and September 29,
2000, the Company incurred $2,000 and $1.6 million, respectively,
primarily relating to legal and professional fees and other costs
pursuant to the Company's strategic alternatives process and severance
costs.
Selling Expenses. Selling expenses for the three months ended September 28,
2001 totaled $27.1 million, a decrease of $1.5 million, or 5.2%, from
selling expenses of $28.6 million for the three months ended September 29,
2000. Selling expense as a percentage of net sales was approximately 6.1%
and 6.4% for the three months ended September 28, 2001 and September 29,
2000, respectively
Operating Income. Operating income for the three months ended September 28,
2001 totaled $7.9 million, an increase of $4.8 million, compared to the
three months ended September 29, 2000 total of $3.1 million due to the
factors discussed above.
Interest Expense. Interest expense for the three months ended September 28,
2001 totaled $3.0 million, a decrease of $1.7 million, or 36.2%, from
interest expense of $4.7 million for the three months ended September 29,
2000. The decrease is primarily attributable to lower outstanding debt
balances under the revolving Credit Agreement over the prior year period
and a general reduction in interest rates.
Interest and Investment Income. Interest and investment income for the
three months ended September 28, 2001 totaled $0.1 million, a decrease of
$0.5 million, or 83.3%, from interest and investment income of $0.6 million
for the three months ended September 29, 2000. The decrease results from
lower invested cash balances over the prior year period.
Other Income. Other income for the three months ended September 28, 2001
totaled $0.5 million, a decrease of $0.2 million, or 28.6%, from other
income of $0.7 million for the three months ended September 29, 2000. Other
income primarily consists of finance charges on customer accounts.
Provision for Income Taxes. Provision for income taxes was $2.1 million for
the three months ended September 28, 2001, a change of $1.4 million from
the provision for income taxes of $0.7 million for the three months ended
September 29, 2000. The effective income tax rate was approximately 37.9%
for the three months ended September 28, 2001. 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 September 28, 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 September 28, 2001
totaled $3.4 million compared to net loss of $1.0 million for the three
months ended September 29, 2000 due to the factors discussed above.
SIX MONTHS ENDED SEPTEMBER 28, 2001 VERSUS SIX MONTHS ENDED SEPTEMBER 29, 2000
Net Sales. Net sales for the six months ended September 28, 2001 totaled
$895.1 million, a decrease of $22.7 million, or 2.5%, from net sales of
$917.8 million for the six months ended September 29, 2000. During this
period, sales of consumable products grew by approximately $11 million in
the Physician Supply Business and $9 million in the Long-Term Care
Business. The launch of the SRx and Answers sales initiatives, implemented
during the last nine months, provided our sales force with a solutions
based sales approach designed to meet customer needs and increase
consumable product sales. In addition, the Company's Imaging Business
experienced growth of approximately $4 million in its Women's Health Care
SBU on a comparable prior period basis. This growth was offset by the loss
22
of revenues associated with i) the elimination of low profitability
business in the Imaging Business, ii) the elimination of the
underperforming Surgical SBU under a revised Imaging Business SBU
structure, iii) vendor supply interruptions affecting the Imaging Business,
iv) the termination of certain equipment vendor relationships in the
Physician Supply Business, and v) the elimination of $8 million of
International Business revenues due to the sale of the European operations.
Gross Profit. Gross profit for the six months ended September 28, 2001
totaled $206.2 million, a decrease of $9.6 million, or 4.4%, from gross
profit of $215.8 million for the six months ended September 29, 2000. Gross
profit as a percentage of net sales was 23.0% and 23.5% for the six months
ended September 28, 2001 and September 29, 2000, respectively. The overall
gross profit decrease over the prior year quarter was primarily
attributable to the sales decrease discussed above. Within the operating
segments, the Physician Supply Business realized improved gross profit from
increased sales of higher margin consumable products, the Imaging Business
was impacted by the revenue decreases discussed above, and the Long-Term
Care Business maintained gross profit while experiencing continued large
chain customer pricing pressure.
General and Administrative Expenses. General and administrative expenses
for the six months ended September 28, 2001 totaled $137.9 million, a
decrease of $4.5 million, or 3.2%, from general and administrative expenses
of $142.4 million for the six months ended September 29, 2000. General and
administrative expense as a percentage of net sales decreased to 15.4% from
15.5% for the comparable six-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. During the six months ended September 28, 2001,
general and administrative expenses included $3.2 million of goodwill
amortization. Refer to Note 5, Goodwill in the accompanying condensed
consolidated financial statements for further discussion.
During the six months ended September 28, 2001, the Company recognized
additional depreciation expense over the prior comparative period for
completed phases of its Enterprise Resource Planning System, electronic
commerce platforms (MyPSS.com and MyDIOnline.com), and supply chain
integration. In addition, the Company incurred additional consulting fees
for assistance in the validation of its strategic plan and other expenses
for business process improvements. However, general and administrative
expenses in the Company's Other Segment decreased over the prior year six
month period by $1.7 million due to the sale of the European operations.
General and administrative expenses may include charges related to merger
activity, restructuring activity, and other special items. The following
table summarizes unusual charges included as components of general and
administrative expenses in the accompanying consolidated income statements:
Six Months Ended
------------------------------
September 28, September 29,
2001 2000
------------- -------------
Merger costs and expenses....... $ 1,297 $ 3,159
Restructuring costs and expenses 1,090 2,253
Operational tax charge.......... (1,459) --
Other........................... 11 2,420
------------- -------------
$ 939 $ 7,832
============= =============
Merger Costs and Expenses
The Company has recorded merger costs and expenses related to branch
shutdown and lease termination costs. For the six months ended
September 28, 2001 and September 29, 2000, the Company recorded $35,000
and $0.6 million, respectively, of merger charges expensed as incurred.
At the end of each quarter, management reevaluates its plans and
adjusts previous estimates. For the six months ended September 28,
2001, the Company reversed $0.3 million 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.
23
In addition, 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. During the six months ended September
28, 2001 and September 29, 2000, the Company expensed $1.6 million and
$2.5 million respectively, related to the Retention Plans.
Restructuring Costs and Expenses
The Company has recorded restructuring costs and expenses 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 six months ended
September 28, 2001 and September 29, 2000, the Company recorded $1.2
million and $2.3 million, respectively, of restructuring costs as
incurred. These costs for the six month period end September 28, 2001,
resulted from the involuntary termination of 52 employees and branch
shutdown and lease termination costs incurred for the merger of five
distribution centers into existing locations. At the end of each
quarter, management reevaluates its plans and adjusts previous
estimates. For the six months ended September 28, 2001, the Company
reversed $0.1 million of restructuring costs.
Operational Tax Charge
The Company performed an analysis of previously recorded operating tax
charge reserves and reversed $1.5 million during the six months ended
September 28, 2001.
Other
During the six months ended September 28, 2001 and September 29, 2000,
the Company incurred $11,000 and $2.3 million, 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 six months ended September 29, 2000, the Imaging
Business incurred $0.1 million of professional fees for acquisitions
not consummated.
Selling Expenses. Selling expenses for the six months ended September 28,
2001 totaled $53.6 million, a decrease of $4.4 million, or 7.6%, from
selling expenses of $58.0 million for the six months ended September 29,
2000. Selling expense as a percentage of net sales was approximately 6.0%
and 6.3% for the six months ended September 28, 2001 and September 29,
2000, respectively.
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 International
Business exit charge due to lower than expected costs to exit the
operations.
Operating Income. Operating income for the six months ended September 28,
2001 totaled $15.2 million, a decrease of $0.2 million, compared to the six
months ended September 29, 2000 total of $15.4 million due to the factors
discussed above.
Interest Expense. Interest expense for the six months ended September 28,
2001 totaled $7.2 million, a decrease of $2.5 million, or 25.8%, from
interest expense of $9.7 million for the six months ended September 29,
2000. The decrease is primarily attributable to lower outstanding debt
balances under the revolving Credit Agreement over the prior year and a
general reduction in interest rates, 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 six
months ended September 28, 2001 totaled $0.3 million, a decrease of $1.0
million, or 76.9%, from interest and investment income of $1.3 million for
the six months ended September 29, 2000. The decrease results from lower
invested cash balances over the prior year period.
24
Other Income. Other income for the six months ended September 28, 2001
totaled $1.4 million, a decrease of $0.1 million, or 6.7%, from other
income of $1.5 million for the six months ended September 29, 2000. Other
income primarily consists of finance charges on customer accounts.
Provision for Income Taxes. Provision for income taxes was $3.6 million for
the six months ended September 28, 2001, a change of $1.2 million from the
provision for income taxes of $4.8 million for the six months ended
September 29, 2000. The effective income tax rate was approximately 37.3%
for the six months ended September 28, 2001. 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 September 28, 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 (Loss). The Company incurred a net loss for the six months ended
September 28, 2001 of $84.0 million compared to net income of $3.7 million
for the six months ended September 29, 2000. The increase in the loss
primarily relates to a goodwill impairment charge of $90.0 million, net of
income taxes of $14.4 million, recorded as a cumulative effect of an
accounting change due to the implementation of SFAS 142. Refer to Note 5,
Goodwill for further discussion. Otherwise, variances are 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 $56.6 million and $13.0
million for the six months ended September 28, 2001 and September 29, 2000,
respectively. During the six months ended September 28, 2001, the Company
reported income before the cumulative effect of an accounting change of
$6.1 million. In addition, to reconcile reported income to cash flows from
operating activities, operating cash flows were positively impacted by
$12.9 million, in aggregate, of non-cash items related to depreciation,
intangibles amortization, debt issuance cost amortization, and provisions
for doubtful accounts. Operating cash flows were also positively impacted
by the continued implementation of working capital reduction initiatives
that started in the last half of fiscal 2001 and continued into the first
half of fiscal 2002. During the six months ended September 28, 2001,
accounts payable increased by approximately $27 million, accounts
receivable increased $5 million, and inventory increased $10 million,
resulting in a net $12 million decrease in operating working capital which
positively impacted operating cash flows. In addition, other assets, net of
other liabilities, decreased by $25.0 million and include the collection of
a $7.0 million IRS refund receivable.
Net cash used in investing activities was $12.5 million and $10.5 million
for the six months ended September 28, 2001 and September 29, 2000,
respectively. During the six months ended September 28, 2001, net cash used
in investing activities resulted from approximately $11.8 million of
capital expenditures primarily related to the continued development of the
Company's Enterprise Resource Planning System, electronic commerce
platforms, and supply chain integration.
Net cash used in financing activities was $54.3 million and $20.8 million
for the six months ended September 28, 2001 and September 29, 2000,
respectively. During the six months ended September 28, 2001, the Company
repaid a net $54 million in bank debt. Sources of the repayment included
approximately $10 million of cash balances and $44 of cash flows from
operating activities.
Operating Trends
The Company had working capital of $266.1 million and $316.3 million as of
September 28, 2001 and March 30, 2001, respectively. Accounts receivable,
net of allowances, were $235.5 million and $236.8 million at September 28,
25
2001 and March 30, 2001, respectively. The average number of days sales in
accounts receivable outstanding was approximately 46.7 and 51.7 days for
the three months ended September 28, 2001 and the year ended March 30,
2001, respectively. For the three months ended September 28, 2001, the
Company's Physician Supply, Imaging, and Long-Term Care Businesses had days
sales in accounts receivable of approximately 46.2, 41.8, and 56.5 days,
respectively.
Inventories were $161.5 million and $154.7 million as of September 28, 2001
and March 30, 2001, respectively. The Company had inventory turnover of
8.5x and 8.4x for the three months ended September 28, 2001 and the year
ended March 30, 2001, respectively. For the three months ended September
28, 2001, the Company's Physician Supply, Imaging, and Long-Term Care
Businesses had inventory turnover of 8.7x, 7.7x, and 10.2x, respectively.
The following table presents EBITDA and other financial data for the three
and six months ended September 28, 2001 and September 29, 2000:
Three Months Ended Six Months Ended
---------------------------- -----------------------------
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
-------------- ------------- ------------- -------------
(Dollars in thousands)
Other Financial Data:
Income from operations................... $ 7,922 $ 3,151 $ 15,219 $ 15,419
Plus: other income...................... 462 71 1,408 1,527
Plus: depreciation and amortization..... 4,509 5,661 8,800 11,135
-------------- ------------- ------------- -------------
EBITDA (a) ........................... $ 12,893 $ 9,527 $ 25,427 $ 28,081
-------------- ------------- ------------- -------------
Interest expense......................... $ 2,942 $ 4,687 $ 7,193 $ 9,722
Interest coverage (b).................... 4.4x 2.0x 3.6x 2.9x
EBITDA margin (c)........................ 2.9% 2.1% 2.8% 3.1%
Cash provided by operating activities.... $ 56,587 $ 12,989
Cash used in investing activities........ $ (12,479) $ (10,452)
Cash used in financing activities........ $ (54,254) $ (20,800)
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 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.
26
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.
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
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 to
increase the maximum available borrowings under the Credit Agreement 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
September 28, 2001.
As of September 28, 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, borrowing availability 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.
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 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 September 28,
2001, the Company had $11.0 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 6.25% as of September 28, 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 September 28, 2001, the Company did not hold any derivative financial
or commodity instruments.
28
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 9 of this Form 10-Q and Item 3 of the Company's Form 10-K for the
fiscal year ended on March 30, 2001.
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
The Annual Meeting of Shareholders of the Company was held on August 23, 2001.
The following items were presented for the vote of the shareholders, with the
results indicated below:
1. The following directors were elected to serve a three-year term of office to
expire at the annual meeting in 2004 or until their successors have been elected
and qualified.
Directors Votes For Votes Against Abstentions Broker Non-Votes
------------------ ------------- -------------- -------------- ----------------
Melvin L. Hecktman 64,087,163 -- 1,545,667 --
Delores P. Kesler 64,086,211 -- 1,546,619 --
David A. Smith 63,642,848 -- 1,989,982 --
Immediately following the meeting, the directors of the Company consisted
of the following individuals:
Clark A. Johnson
T. O'Neal Douglas
Melvin L. Hecktman
Delores P. Kesler
David A. Smith
Hugh M. Brown
Charles R. Scott
Donna C.E. Williamson
29
2. The Company's Amended and Restated Directors' Stock Plan was amended to
increase the number of shares of the Company's common stock available under the
plan from 400,000 to 800,000 shares.
Votes For Votes Against Abstentions Broker Non-Votes
---------- ------------- ----------- ----------------
42,170,260 23,205,223 257,347 --
3. The Company's 1999 Long-Term Incentive Plan was amended to (i) increase the
number of shares of the Company's common stock available under the plan from
2,270,000 to 4,370,000 shares, (ii) to expand the class of individuals eligible
to participate under the plan, and (iii) to limit the term of any option granted
under the plan to no more than ten years.
Votes For Votes Against Abstentions Broker Non-Votes
---------- ------------- ----------- ----------------
58,813,347 6,665,817 153,666 --
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.(14)
3.1a Articles of Amendment to Articles of Incorporation, dated as of September
24, 2001.
3.1b Articles of Amendment to Articles of Incorporation, dated as of November
9, 2001].
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)
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.(15)
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)
30
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 the SEC).(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)
10.15 Employment Agreement, dated as of April 1, 1998, by and between the Company and Douglas J.
Harper.(13)
10.15a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
Douglas J. Harper.(13)
10.16 Employment Agreement, dated as of April 1, 1998, by and between the Company and Gary A.
Corless.(13)
31
10.16a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and Gary
A. Corless.(13)
10.17 Employment Agreement, dated as of April 1, 1998, by and between the Company and Kevin P.
English.(13)
10.17a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
Kevin P. English.(13)
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 Quarterly Report on Form 10-Q for the quarterly period ended June 29, 2001.
(14) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 8, 1998.
(15) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 22, 1998.
(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 September 28, 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.
---------------- ------------------------------------------------------
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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 November 12, 2001.
PSS WORLD MEDICAL, INC.
By: /s/ David A. Smith
--------------------------------------------
David A. Smith,
President and Chief Financial Officer
33