FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 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 February 11, 2002 a total of 71,217,195 shares of common stock,
par value $.01 per share, of the registrant were outstanding.
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
December 28, 2001
TABLE OF CONTENTS
PAGE
ITEM
Information Regarding Forward-Looking Statements.................................................. 3
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Balance Sheets - December 28, 2001 and March 30, 2001...................... 4
Condensed Consolidated Statements of Operations - for the Three and Nine Months Ended December 28,
2001 and December 29, 2000.................................................................... 5
Condensed Consolidated Statements of Cash Flows - for the Nine Months Ended December 28, 2001 and.
December 29, 2000............................................................................. 6
Notes to Condensed Consolidated Financial Statements - December 28, 2001 and December 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
Item 1 - Legal Proceedings............................................................................... 29
Item 2 - Change in Securities and Use of Proceeds........................................................ 29
Item 3 - Defaults Upon Senior Securities................................................................. 29
Item 4 - Submissions of Matters to a Vote of Security Holders............................................ 29
Item 5 - Other Information............................................................................... 29
Item 6 - Exhibits and Reports on Form 8-K................................................................ 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, 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,
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)
December 28, March 30,
2001 2001
------------------ -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents.................................................. $ 39,453 $ 34,374
Marketable securities...................................................... 753 314
Accounts receivable, net................................................... 226,473 236,846
Inventories, net........................................................... 171,381 154,725
Employee advances.......................................................... 452 478
Prepaid expenses and other................................................. 41,978 60,633
------------------ -----------------
Total current assets............................................... 480,490 487,370
Property and equipment, net................................................... 82,017 76,247
Other Assets:
Goodwill .................................................................. 60,644 163,879
Intangibles, net........................................................... 16,478 19,573
Employee advances.......................................................... 541 524
Other...................................................................... 30,020 25,041
------------------ -----------------
Total assets....................................................... $670,190 $772,634
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................... $148,376 $119,238
Accrued expenses........................................................... 37,752 39,234
Current maturities of long-term debt and capital lease obligations......... -- 1,752
Other...................................................................... 24,931 10,855
------------------ -----------------
Total current liabilities.......................................... 211,059 171,079
Long-term debt and capital lease obligations, net of current portion.......... 125,000 190,040
Other......................................................................... 9,353 7,213
------------------ -----------------
Total liabilities.................................................. 345,412 368,332
------------------ -----------------
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, 71,180,440 and
71,077,236 shares issued and outstanding at December 28, 2001 and March
30, 2001, respectively................................................. 712 711
Additional paid-in capital................................................. 349,378 348,701
(Accumulated deficit) retained earnings.................................... (25,650) 54,890
Cumulative other comprehensive income...................................... 338 --
------------------ -----------------
Total shareholders' equity......................................... 324,778 404,302
------------------ -----------------
Total liabilities and shareholders' equity......................... $670,190 $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 Nine Months Ended
---------------------------------------- ----------------------------------------
December 28, 2001 December 29, 2000 December 28, 2001 December 29, 2000
------------------- ------------------- ------------------- -------------------
Net sales $ 455,312 $ 449,394 $1,350,422 $1,367,192
Cost of goods sold 349,477 344,505 1,038,372 1,046,492
------------------- ------------------- ------------------- -------------------
Gross profit 105,835 104,889 312,050 320,700
General and administrative expenses 71,196 96,487 209,068 238,853
Selling expenses 27,671 28,479 81,309 86,505
International business exit charge - 14,917 (514) 14,917
------------------- ------------------- ------------------- -------------------
Income (loss) from operations 6,968 (34,994) 22,187 (19,575)
------------------- ------------------- ------------------- -------------------
Other income (expense):
Interest expense (2,566) (4,673) (9,759) (14,395)
Interest and investment income 48 547 326 1,808
Other income 572 567 1,980 2,094
------------------- ------------------- ------------------- -------------------
(1,946) (3,559) (7,453) (10,493)
------------------- ------------------- ------------------- -------------------
Income (loss) before provision for income
taxes and cumulative effect of accounting 5,022 (38,553) 14,734 (30,068)
change
Provision (benefit) for income taxes 1,608 (8,504) 5,229 (3,675)
------------------- ------------------- ------------------- -------------------
Income (loss) before cumulative effect of 3,414 (30,049) 9,505 (26,393)
accounting change
Cumulative effect of accounting change (net
of income taxes of $14,444) -- -- (90,045) --
------------------- ------------------- ------------------- -------------------
Net income (loss) $ 3,414 $ (30,049) $ (80,540) $ (26,393)
=================== =================== =================== ===================
Earnings per share - Basic:
Income (loss) before cumulative effect of
accounting change $0.05 $(0.42) $ 0.13 $(0.37)
Cumulative effect of accounting change -- -- (1.26) --
------------------- ------------------- ------------------- -------------------
Net income (loss) $0.05 $(0.42) $(1.13) $(0.37)
=================== =================== =================== ===================
Earnings per share - Diluted:
Income (loss) before cumulative effect of $0.05
accounting change $(0.42) $ 0.13 $(0.37)
Cumulative effect of accounting change -- -- (1.25) --
------------------- ------------------- ------------------- -------------------
Net income (loss) $0.05 $(0.42) $(1.12) $(0.37)
=================== =================== =================== ===================
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)
Nine Months Ended
--------------------------------------
December 28, 2001 December 29, 2000
------------------ ------------------
Cash Flows From Operating Activities:
Net loss................................................................... $ (80,540) $ (26,393)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Cumulative effect of accounting change................................. 90,045 --
Depreciation........................................................... 9,352 7,803
Amortization of goodwill and intangible assets......................... 4,449 9,386
Amortization of debt issuance costs.................................... 1,294 608
Provision for doubtful accounts........................................ 4,080 23,164
International Business exit charge .................................... (514) 14,917
ESOP amortization...................................................... -- 345
Loss on marketable securities.......................................... 114 --
Deferred compensation expense.......................................... 580 --
Gain on sale of fixed assets........................................... 33 1
Changes in operating assets and liabilities:
Accounts receivable................................................. 3,674 15,632
Inventories, net.................................................... (19,499) (3,416)
Prepaid expenses and other current assets........................... 18,426 (6,588)
Other assets........................................................ 7,499 (8,352)
Accounts payable, accrued expenses, and other liabilities........... 49,775 7,791
------------------ -------------------
Net cash provided by operating activities....................... 88,768 34,898
------------------ -------------------
Cash Flows From Investing Activities:
Proceeds from sales of property and equipment............................. 69 365
Proceeds from sales and maturities of marketable securities............... -- 3
Capital expenditures...................................................... (16,546) (16,494)
Proceeds from sale of International Business.............................. 221 --
Purchases of businesses, net of cash acquired............................. (1,254) (658)
Payments on noncompete agreements......................................... (1,120) (1,140)
------------------ -------------------
Net cash used in investing activities........................... (18,630) (17,924)
------------------ -------------------
Cash Flows From Financing Activities:
Proceeds from borrowings.................................................. 90,725 80,000
Repayment of borrowings................................................... (155,790) (119,302)
Principal payments under capital lease obligations........................ (92) (66)
Other..................................................................... 98 (1,085)
------------------ -------------------
Net cash used in financing activities........................... (65,059) (40,453)
------------------ -------------------
Net increase (decrease) in cash and cash equivalents.......................... 5,079 (23,479)
Cash and cash equivalents, beginning of period................................ 34,374 60,414
------------------ -------------------
Cash and cash equivalents, end of period...................................... $ 39,453 $ 36,935
================== ===================
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 AND NINE MONTHS ENDED DECEMBER 28, 2001 AND DECEMBER 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 87 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 pooling-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, the first day
of fiscal year 2002. 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, the first day of fiscal 2003. The
Company is in the process of evaluating the impact that the adoption of
SFAS 144 will have 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 statements of
operations:
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
------------- ------------ ------------- ------------
Merger costs and expenses.......... $ 802 $ 1,527 $ 2,099 $ 4,686
Restructuring costs and expenses... 354 5,333 1,444 7,586
Operational tax charge reversal.... (379) (269) (1,838) (269)
Acceleration of depreciation....... -- 1,504 -- 1,504
Long-Term Care business bad debt
charge......................... -- 19,991 -- 19,991
Other.............................. 426 170 437 2,590
------------- ------------ ------------- ------------
$ 1,203 $ 28,256 $ 2,142 $ 36,088
============= ============ ============= ============
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 December
28, 2001 and December 29, 2000, the Company recorded $26 and $264,
respectively, of merger charges expensed as incurred. For the nine months
ended December 28, 2001 and December 29, 2000, the Company recorded $42 and
$881, respectively, of merger charges expensed as incurred. At the end of
each quarter, management reevaluates its plans and adjusts previous
estimates. For the three months ended December 29, 2000, the Company
reversed $8 of merger costs and expenses. For the nine months ended
8
December 28, 2001 and December 29, 2000, the Company reversed $271 and $8,
respectively, of merger costs and expenses, primarily related to lease
termination expenses that were 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 December 28, 2001 and
December 29, 2000, the Company expensed $776 and $1,271, respectively,
related to the Retention Plans. During the nine months ended December 28,
2001 and December 29, 2000, the Company expensed $2,328 and $3,813,
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 December 28,
2001 and December 29, 2000, the Company recorded $354 and $543,
respectively, of restructuring costs as incurred. The costs for the three
months ended December 28, 2001, resulted from the involuntary termination
of 11 employees, branch shutdown costs and lease termination costs for the
merger into existing locations of four distribution centers in the
Company's Diagnostic Imaging, Inc. subsidiary. For the nine months ended
December 28, 2001 and December 29, 2000, the Company recorded $1,525 and
$2,796, respectively, of restructuring costs as incurred. The costs for the
nine months ended December 28, 2001, resulted from the involuntary
termination of 63 employees, branch shutdown costs and lease termination
costs for the merger into existing locations of three distribution centers
in the Company's Physician Sales & Service division and seven distribution
centers in the Company's Diagnostic Imaging, Inc. subsidiary. At the end of
each quarter, management reevaluates its plans and adjusts previous
estimates. For the three months ended December 29, 2000, the Company
reversed $269 of restructuring costs. For the nine months ended December
28, 2001 and December 29, 2000, the Company reversed $81 and $269,
respectively, of restructuring costs relating to lease termination, branch
shutdown, and severance costs.
During the three months ended December 29, 2000, management approved and
adopted a formal plan to restructure certain leadership positions within
the Company ("Plan E"). This plan includes costs related to the severance
of certain members of senior management including the Company's former
Chairman and Chief Executive Officer and costs to make permanently idle two
distribution centers - one in the Company's subsidiary, Diagnostic Imaging,
Inc., and one in the Company's Physician Sales & Service division.
Accordingly, the Company recorded restructuring costs and expenses of
$5,059 at the commitment date of the restructuring plan adopted by
management.
Operational Tax Charge
The Company performed an analysis of previously recorded operating tax
charge reserves and reversed $379 and $1,838 during the three and nine
months ended December 28, 2001, respectively. For the three and nine months
ended December 29, 2000, the Company reversed $269 of a previously recorded
operating tax charge reserve.
Acceleration of Depreciation
During the quarter ended December 29, 2000, the Company identified certain
assets to be replaced due to the implementation of its Enterprise Resource
Planning ("ERP") system. Pursuant to SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of, the Company evaluated
the recoverability of the assets. Based on the Company's analysis, the
impairment did not exist on the division level; therefore, management
reviewed the depreciation estimates in accordance with Accounting
Principles Board No. 20, Accounting Changes, and recorded $1,504 of
accelerated depreciation.
9
Long-Term Care Business Bad Debt Charge
During the quarter ended December 29, 2000, the Company recorded $19,991 of
bad debt expense to increase the accounts receivable reserves at the
Company's subsidiary, Gulf South Medical Supply, Inc. The increase to the
reserve balance was primarily attributed to changes in assumptions
concerning customers currently in bankruptcy based on information acquired
during the quarter, including the fact that the Company did not receive
critical vendor designation for certain customers as it had received for
other bankrupt customers in the past. In addition, the increase was also
attributed to (1) changes in reserve assumptions for non-performing
customers based on the change in assumptions discussed above, (2) changes
in management's credit policies and procedures, and (3) changes in credit
and collection department management. Based on information currently
available, the Company believes it has recorded appropriate reserves for
uncollectible receivables.
Other
During the three and nine months ended December 28, 2001 the Company
incurred $426 and $437, respectively, related to certain lease termination
costs for locations that were previously vacated in connection with prior
restructuring plans. During the three and nine months ended December 29,
2000 the Company incurred $170 and $2,590, respectively, primarily relating
to legal and professional fees and other costs pursuant to the Company's
consideration of strategic alternatives and severance costs.
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 $19 and $294 at
December 28, 2001 and March 30, 2001, respectively. The remaining accruals
at December 28, 2001 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
(the "Board") along with senior management evaluated the Company's
operating performance. During this process, the Board and management
decided to implement a long-range action plan that would stabilize the
workforce and business. As part of the new strategic plan, the Company
planned to reorganize several senior management positions and make
permanently idle two distribution centers - one in the 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 two previously
announced restructuring plans (Plans B and C) and Plan E classified as
accrued expenses in the accompanying consolidated balance sheets totaled
$1,930 and $3,715 at December 28, 2001 and March 30, 2001, respectively.
The following is a summary of the restructuring plan activity for the three
months ended December 28, 2001:
Involuntary
Employee Lease
Termination Termination
Costs Costs Total
---------------- --------------- ---------------
Balance at March 30, 2001................... $ 3,336 $ 379 $ 3,715
Adjustments............................ (21) (61) (82)
Utilized............................... (1,493) (210) (1,703)
----------------- -------------- ---------------
Balance at December 28, 2001................ $ 1,822 $ 108 $ 1,930
================= ============== ===============
10
Plans B and C
The $108 in remaining lease termination accruals at December 28, 2001
relate 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 certain Gulf South Medical Supply, Inc. facilities in fiscal
years 1999 and 2000.
Plan E
Accrued restructuring costs and expenses related to Plan E at December 28,
2001 were approximately $1,822, 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 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 $221 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 as of December 28, 2001 are as follows:
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 -- 1,254 -- 1,254
consideration................
Impairment loss................. -- (104,489) -- (104,489)
------------- ----------- ------------- -----------
Balance as of December 28, 2001. $ 9,788 $ 1,254 $ 49,602 $ 60,644
============= =========== ============= ===========
11
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 Business 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: (1) market multiple
approach; (2) discounted cash flow approach; and (3) 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. The majority of transactions involving companies
comparable to the reporting units were not publicly disclosed.
Consequently, the Company could not identify an adequate number of
comparable transactions prior to the valuation date to yield useful
acquisition values and relevant pricing evidence.
Because the carrying amount of the Imaging Business exceeded its fair
value, step two of the goodwill impairment test was completed. Under step
two 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.
The following table provides comparative disclosure of adjusted net income
excluding goodwill amortization expense, net of taxes, for the periods
presented:
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Income (loss) before cumulative $ 3,414 $ (30,049) $ 9,505 $ (26,393)
effect of accounting change, as
reported..........................
Cumulative effect of accounting -- -- (90,045) --
change............................
------------ ------------ ------------ ------------
Net income (loss), as reported....... $ 3,414 $ (30,049) $(80,540) $ (26,393)
Goodwill amortization, net of tax.... -- 1,416 -- 4,144
------------ ------------ ------------ ------------
Net income (loss), adjusted.......... $ 3,414 $ (28,633) $(80,540) $ (22,249)
============ ============ ============ ============
12
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Earnings per share - Basic:
Income (loss) before cumulative
effect of accounting change,
as reported...................... $0.05 $(0.42) $ 0.13 $(0.37)
Cumulative effect of accounting
change........................... -- -- (1.26) --
------------ ------------ ------------ ------------
Net income (loss), as reported...... $0.05 $(0.42) $(1.13) $(0.37)
Goodwill amortization, net of tax... -- 0.02 -- 0.06
------------ ------------ ------------ ------------
Basic earnings per share, adjusted..... $0.05 $(0.40) $(1.13) $(0.31)
============ ============ ============ ============
Earnings per share - Diluted:
Income (loss) before cumulative
effect of accounting change, as
reported.......................... $0.05 $(0.42) $ 0.13 $(0.37)
Cumulative effect of accounting
change ........................... -- -- (1.25) --
------------ ------------ ------------ ------------
Net income (loss), as reported....... $0.05 $(0.42) $(1.12) $(0.37)
Goodwill amortization, net of tax.... -- 0.02 -- 0.06
------------ ------------ ------------ ------------
Diluted earnings per share, adjusted.... $0.05 $(0.40) $(1.12) $(0.31)
============ ============ ============ ============
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. During the
three months December 28, 2001, the Company paid $1.2 million related to
earnout payments. These payments have satisfied 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 Nine Months Ended
---------------------------- ------------------------------
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
------------ ------------ -------------- ------------
Net income (loss)....................... $ 3,414 $ (30,049) $ (80,540) $ (26,393)
Other comprehensive expense, net of tax:
Foreign currency translation
adjustment.......................... -- -- -- 2,113
Unrealized gain (loss) on available
for sale security................... 338 (469) 338 (2,512)
------------ ------------ -------------- ------------
Other comprehensive income.............. $ 3,752 $ (30,518) $ (80,202) $ (26,792)
============ ============ ============== ============
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):
13
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Income (loss) before cumulative
effect of accounting change........ $ 3,414 $ (30,049) $ 9,505 $ (26,393)
Cumulative effect of accounting
change (net of income taxes of
$14,444)........................... -- -- (90,045) --
------------ ------------ ------------ ------------
Net income (loss)..................... $ 3,414 $ (30,049) $ (80,540) $ (26,393)
============ ============ ============ ============
Earnings per share - Basic:
Income (loss) before cumulative
effect of accounting change...... $0.05 $(0.42) $ 0.13 $(0.37)
Cumulative effect of accounting
change............................. -- -- (1.26) --
------------ ------------ ------------ ------------
Net income (loss)................. $0.05 $(0.42) $(1.13) $(0.37)
============ ============ ============ ============
Earnings per share - Diluted:
Income (loss) before cumulative
effect of accounting change...... $0.05 $(0.42) $ 0.13 $(0.37)
Cumulative effect of accounting
change............................. -- -- (1.25) --
------------ ------------ ------------ ------------
Net income (loss).............. $0.05 $(0.42) $(1.12) $(0.37)
============ ============ ============ ============
Weighted average shares outstanding:
Common shares...................... 71,168 71,077 71,166 71,077
Assumed exercise of stock options 1,033 183 667 194
------------ ------------ ------------ ------------
Diluted shares outstanding......... 72,201 71,260 71,833 71,271
============ ============ ============ ============
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 for the other segments. During the
quarter ended June 29, 2001, the Company sold its European operations.
Therefore, the Other segment includes only 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.
Amortization of Goodwill and Intangible Assets, as presented in the segment
table, decreased in fiscal 2002 primarily due to the adoption of SFAS 142,
which discontinued the amortization of goodwill (Refer to Note 5 - Goodwill
for further discussion).
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:
14
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
------------ ------------ ------------ ------------
NET SALES:
Physician Supply Business....................... $ 180,695 $ 168,717 $ 528,153 $ 516,822
Imaging Business................................ 176,165 180,831 532,317 560,240
Long-Term Care Business......................... 98,452 92,581 289,521 274,711
Other........................................... -- 7,265 431 15,419
------------ ------------ ------------ ------------
Total net sales............................. $ 455,312 $ 449,394 $ 1,350,422 $ 1,367,192
============ ============ ============ ============
CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE
EXPENSES:
Physician Supply Business....................... $ 223 $ 1,585 $ 769 $ 1,755
Imaging Business................................ 299 591 421 2,745
Long-Term Care Business......................... 284 19,600 438 20,225
Other........................................... 397 6,480 514 11,363
------------ ------------ ------------ ------------
Total charges included in general and
administrative expenses............. $ 1,203 $ 28,256 $ 2,142 $ 36,088
============ ============ ============ ============
INCOME (LOSS) FROM OPERATIONS:
Physician Supply Business....................... $ 6,172 $ 5,131 $ 18,305 $ 18,360
Imaging Business................................ (1,280) (182) (1,037) 3,400
Long-Term Care Business......................... 3,554 (19,867) 7,582 (16,282)
Other........................................... (1,478) (20,076) (2,663) (25,053)
------------ ------------ ------------ ------------
Total income (loss) from operations......... $ 6,968 $ (34,994) $ 22,187 $ (19,575)
============ ============ ============ ============
DEPRECIATION:
Physician Supply Business....................... $ 1,561 $ 1,267 $ 3,858 $ 3,394
Imaging Business................................ 1,251 903 3,511 2,583
Long-Term Care Business......................... 449 477 1,372 1,401
Other........................................... 248 206 611 425
------------ ------------ ------------ ------------
Total depreciation.......................... $ 3,509 $ 2,853 $ 9,352 $ 7,803
============ ============ ============ ============
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS:
Physician Supply Business....................... $ 323 $ 440 $ 835 $ 1,299
Imaging Business................................ 1,065 2,061 3,303 6,081
Long-Term Care Business......................... 104 610 311 1,736
Other........................................... -- 90 -- 270
------------ ------------ ------------ ------------
Total amortization of goodwill and intangible
assets.............................. $ 1,492 $ 3,201 $ 4,449 $ 9,386
============ ============ ============ ============
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business....................... $ 413 $ 389 $ 1,022 $ 592
Imaging Business................................ 255 47 868 187
Long-Term Care Business......................... 294 20,591 2,190 22,385
Other........................................... -- -- -- --
------------ ------------ ------------ ------------
Total provision for doubtful accounts....... $ 962 $ 21,027 $ 4,080 $ 23,164
============ ============ ============ ============
INTEREST EXPENSE:
Physician Supply Business....................... $ 19 $ 420 $ 486 $ 1,432
Imaging Business................................ 2,408 2,416 7,449 7,268
Long-Term Care Business......................... 1,208 1,321 3,853 3,971
Other........................................... (1,069) 516 (2,029) 1,724
------------ ------------ ------------ ------------
Total interest expense...................... $ 2,566 $ 4,673 $ 9,759 $ 14,395
============ ============ ============ ============
INTEREST AND INVESTMENT INCOME:
Physician Supply Business....................... $ 1 $ (5) $ 3 $ 102
Imaging Business................................ -- -- - --
Long-Term Care Business......................... -- - - 17
Other........................................... 47 552 323 1,689
------------ ------------ ------------ ------------
Total interest and investment income........ $ 48 $ 547 $ 326 $ 1,808
============ ============ ============ ============
15
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
------------- ------------- ------------- -----------
PROVISION (BENEFIT) FOR INCOME TAXES:
Physician Supply Business....................... $ 2,502 $ 2,207 $ 7,596 $ 7,436
Imaging Business................................ (1,353) (654) (2,933) (347)
Long-Term Care Business......................... 905 (8,007) 1,587 (7,253)
Other........................................... (446) (2,050) (1,021) (3,511)
------------ ------------ ------------ ------------
Total provision (benefit) for income taxes.. $ 1,608 $ (8,504) $ 5,229 $ (3,675)
============ ============ ============ ============
CAPITAL EXPENDITURES:
Physician Supply Business....................... $ 2,842 $ 4,838 $ 8,356 $ 11,284
Imaging Business................................ 1,106 1,188 2,677 3,729
Long-Term Care Business......................... 67 87 287 477
Other........................................... 696 575 5,226 1,004
------------ ------------ ------------ ------------
Total capital expenditures.................. $ 4,711 $ 6,688 $ 16,546 $ 16,494
============ ============ ============ ============
December 28, March 30,
2001 2001
------------ ------------
ASSETS:
Physician Supply Business....................... $ 235,650 $ 225,080
Imaging Business................................ 226,001 324,830
Long-Term Care Business......................... 158,923 156,581
Other............................................ 49,616 66,143
------------ ------------
Total assets................................ $ 670,190 $ 772,634
============ ============
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain executive officers which
provide that in the event of their termination or resignation, under
certain conditions, the Company may be required to continue salary payments
and provide insurance for a period ranging from 3 to 12 months for certain
executives and to repurchase a portion or all of the shares of common stock
held by the executives upon their demand at the fair market value at the
time of repurchase. The period of salary and insurance continuation and the
level of stock repurchases are based on the conditions of the termination
or resignation.
During fiscal 2000, the Board of Directors approved and adopted the PSS
World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical,
Inc. Corporate Office Employee Retention Bonus Plan. Refer to Note 2,
Charges included in General and Administrative Expenses for further
discussion.
The Company, through its Long-Term Care division, its 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
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
16
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 December 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 December 13, 2001, certain plaintiffs filed a motion for consolidation
of the above actions and for appointment of lead plaintiff and lead
counsel. That motion was granted on January 14, 2002. Plaintiffs are
required to serve and file a consolidated amended complaint by March 14,
2002. The Company and other defendants are required to answer, move or
otherwise respond to the consolidated amended complaint by April 29, 2002.
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, the Company, 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 87 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
the 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 706 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 27 imaging distribution
service centers with approximately 825 service specialists and 180 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. ("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. Gulf South currently operates 13
distribution service centers and 1 satellite center with approximately 121
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. 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
$45 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 $20 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
18
the physician office market. Also, as the cosmetic surgery and elective
surgery markets continue to grow, physicians are increasingly performing
more procedures in-office.
The health care industry is subject to extensive government regulation,
licensure, and operating procedures. National health care reform has been
the subject of a number of legislative initiatives by Congress.
Additionally, government and private insurance programs fund the cost of a
significant portion of medical care in the United States. In recent years,
government-imposed limits on reimbursement of hospitals, long-term care
facilities, and other health care providers have affected spending budgets
in certain markets within the medical products industry. In 1997, the
Balanced Budget Act passed by Congress made significant 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. The
Long-Term Care Business depends on a limited number of large customers for
a significant portion of its net sales, and approximately 34% of Long-Term
Care Business' revenues for the three months ended December 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 December 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 28, 2001 VERSUS THREE MONTHS ENDED DECEMBER 29, 2000
Net Sales. Net sales for the three months ended December 28, 2001 totaled
$455.3 million, an increase of $5.9 million, or 1.3%, from net sales of
$449.4 million for the three months ended December 29, 2000. Excluding $7.3
million in sales from the Company's divested International Business
recorded during the three months ended December 29, 2000, net sales
increased 3.0% compared with the same period in the prior fiscal year.
During this period, sales of consumable products grew by approximately $8
million in the Physician Supply Business and approximately $6 million in
the Long-Term Care Business. The launch of the Company's SRx and Answers
sales initiatives, implemented during the last twelve months, provided the
sales force with a solutions-based sales approach designed to meet customer
needs and increase consumable product sales. These increases were offset by
a decrease of approximately $7 million of consumable product sales in the
Imaging Business. The Imaging Business is beginning to experience customer
conversions from wet x-ray film handling to dry lasers that eliminate the
need for certain consumable products such as film chemistry. However, over
the long-term, the Company believes this trend will result in an increase
in equipment sales during the conversion period, increases in associated
service opportunities, and increases in dry film sales. Equipment sales in
the Physician Supply Business grew by approximately $3 million compared to
prior year period. In addition, equipment sales in the Imaging Business
grew by approximately $3 million and reflects progress under the strategic
business unit ("SBU") organization structure initiated in the fourth
quarter of fiscal 2001, despite the elimination of an under-performing
surgical SBU in the first quarter of fiscal 2002.
Gross Profit. Gross profit for the three months ended December 28, 2001
totaled $105.8 million, an increase of $0.9 million, or 0.9%, from gross
profit of $104.9 million for the three months ended December 29, 2000.
Excluding $1.9 million in gross profit from the Company's divested European
operations during the three months ended December 29, 2000, gross profit
increased 2.7% compared with the same period in the prior fiscal year.
Gross profit as a percentage of net sales remained comparable at 23.2% and
19
23.3% for the three months ended December 28, 2001 and December 29, 2000,
respectively. Within the operating segments, the Physician Supply Business
gross profit grew primarily due to the factors discussed above, the Imaging
Business gross profit decreased primarily due to the impact of changes in
consumables mix discussed above and the elimination of the under-performing
surgical SBU, and the Long-Term Care Business gross profit increased
despite continuing large chain customer pricing pressure.
General and Administrative Expenses. General and administrative expenses
for the three months ended December 28, 2001 totaled $71.2 million, a
decrease of $25.3 million, or 26.2%, from general and administrative
expenses of $96.5 million for the three months ended December 29, 2000.
Excluding $0.9 million in general and administrative expenses from the
Company's divested European operations recorded in the third quarter of
fiscal 2001, general and administrative expenses decreased 25.5% compared
with the same period in the prior fiscal year. General and administrative
expense as a percentage of net sales decreased to 15.6% from 21.5% for the
comparable three-month period.
During the three months ended December 29, 2000, the Company recorded a bad
debt charge of $19.9 million at its Gulf South Medical Supply, Inc.
subsidiary. In addition, general and administrative expenses 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:
Three Months Ended
------------------------------
December 28, December 29,
2001 2000
------------- --------------
Merger costs and expenses............ $ 802 $ 1,527
Restructuring costs and expenses..... 354 5,333
Operational tax charge reversal...... (379) (269)
Acceleration of depreciation......... -- 1,504
Long-Term Care business bad debt
charge.......................... -- 19,991
Other................................ 426 170
------------- --------------
$ 1,203 $ 28,256
============= ==============
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 December 29, 2000,
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 December 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 (including 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.
Refer to Note 2, Charges Included In General and Administrative Expenses in
the accompanying condensed consolidated financial statements for further
discussion.
Selling Expenses. Selling expenses for the three months ended December 28,
2001 totaled $27.7 million, a decrease of $0.8 million, or 2.8%, from
selling expenses of $28.5 million for the three months ended December 29,
2000. Selling expense as a percentage of net sales was approximately 6.1%
and 6.3% for the three months ended December 28, 2001 and December 29,
2000, respectively.
International Business Exit Charge. During the quarter ended December 29,
2000, the Company recorded $14.9 million as an International Business Exit
Charge for its disposal of its International Business.
20
Income (Loss) from Operations. Operating income for the three months ended
December 28, 2001 totaled $7.0 million, an increase of $42.0 million,
compared with an operating loss of $35.0 million during the three months
ended December 29, 2000.
Interest Expense. Interest expense for the three months ended December 28,
2001 totaled $2.6 million, a decrease of $2.1 million, or 44.7%, from
interest expense of $4.7 million for the three months ended December 29,
2000. The decrease is primarily attributable to lower outstanding debt
balances under the Company's revolving credit facility 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 December 28, 2001 decreased by $0.5 million from
interest and investment income of $0.5 million for the three months ended
December 29, 2000. The decrease results from lower invested cash balances
over the prior year period.
Other Income. Other income for the three months ended December 28, 2001 and
December 29, 2000 totaled $0.6 million. Other income primarily consists of
finance charges on customer accounts.
Provision for Income Taxes. Provision for income taxes was $1.6 million for
the three months ended December 28, 2001, a change of $10.1 million from a
benefit for income taxes of $8.5 million for the three months ended
December 29, 2000. The effective income tax rate was approximately 32.0%
for the three months ended December 28, 2001. The Company's effective tax
rate has benefited in fiscal 2002 from nonrecurring favorable permanent
items. In future fiscal years, the Company believes the effective rate will
return to its historical statutory rate.
Net Income. Net income for the three months ended December 28, 2001 totaled
$3.4 million compared to a net loss of $30.0 million for the three months
ended December 29, 2000, due to the factors discussed above.
NINE MONTHS ENDED DECEMBER 28, 2001 VERSUS NINE MONTHS ENDED DECEMBER 29, 2000
Net Sales. Net sales for the nine months ended December 28, 2001 totaled
$1,350.4 million, a decrease of $16.8 million, or 1.2%, from net sales of
$1,367.2 million for the nine months ended December 29, 2000. Excluding
$15.4 million in sales from the Company's divested International Business
recorded during the nine months ended December 29, 2000, net sales were
comparable with the same period in the prior fiscal year. During this
period, sales of consumable products grew by approximately $19 million in
the Physician Supply Business and approximately $15 million in the
Long-Term Care Business. The launch of the Company's SRx and Answers sales
initiatives, implemented during the last twelve months, provided the sales
force with a solutions-based sales approach designed to meet customer needs
and increase consumable product sales. These increases were offset by a
decrease of approximately $18 million of consumable product sales in the
Imaging Business. The Imaging Business is beginning to experience customer
conversions from wet x-ray film handling to dry lasers that eliminate the
need for certain consumable products such as film chemistry. However, over
the long-term, the Company believes this trend will result in an increase
in equipment sales during the conversion period, increases in associated
service opportunities, and increases in dry film sales. Equipment sales in
the Imaging Business decreased by approximately $3 million primarily due to
the elimination of an under-performing surgical SBU in the first quarter of
fiscal 2002. Furthermore, during the nine months ended December 29, 2000,
reported sales for the Company's Physician Supply Business and Imaging
Business each include approximately $7.0 million of equipment sales
recorded in the first quarter of fiscal 2001 as a result of the adoption of
Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101") in the
fourth quarter of fiscal 2000.
Gross Profit. Gross profit for the nine months ended December 28, 2001
totaled $312.1 million, a decrease of $8.6 million, or 2.7%, from gross
profit of $320.7 million for the nine months ended December 29, 2000.
Excluding $4.5 million in gross profit from the Company's divested
International Business recorded during the nine months ended December 29,
2000, gross profit decreased 1.3% compared with the same period in the
prior fiscal year. Gross profit as a percentage of net sales was 23.1% and
23.5% for the nine months ended December 28, 2001 and December 29, 2000,
respectively. Within the operating segments, the Physician Supply Business
21
gross profit grew primarily due to the factors discussed above, the Imaging
Business gross profit decreased primarily due to the impact of changes in
consumables mix discussed above and the elimination of the under-performing
surgical SBU, and the Long-Term Care Business gross profit was unchanged
despite continuing large chain customer pricing pressure. Furthermore,
during the nine months ended December 29, 2000, reported gross profit for
the Company includes approximately $4.0 million of gross profit in
equipment sales recorded in the first quarter of fiscal 2001 as a result of
the adoption of Staff Accounting Bulletin No. 101, Revenue Recognition
("SAB 101") in the fourth quarter of fiscal 2000.
General and Administrative Expenses. General and administrative expenses
for the nine months ended December 28, 2001 totaled $209.1 million, a
decrease of $29.8 million, or 12.5%, from general and administrative
expenses of $238.9 million for the nine months ended December 29, 2000.
Excluding $2.7 million in general and administrative expenses from the
Company's divested International Business recorded in the third quarter of
fiscal 2001, general and administrative expenses decreased 11.5% compared
with the same period in the prior fiscal year. General and administrative
expense as a percentage of net sales decreased to 15.5% from 17.5% for the
comparable nine-month period.
During the nine months ended December 29, 2000, the Company recorded a bad
debt charge of $19.9 million at its Gulf South Medical Supply, Inc.
subsidiary. In addition, general and administrative expenses 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:
Nine Months Ended
-----------------------------
December 28, December 29,
2001 2000
------------- -------------
Merger costs and expenses............ $ 2,099 $ 4,686
Restructuring costs and expenses..... 1,444 7,586
Operational tax charge reversal...... (1,838) (269)
Acceleration of depreciation......... -- 1,504
Long-Term Care business bad debt
charge.......................... -- 19,991
Other................................ 437 2,590
------------- -------------
$ 2,142 $ 36,088
============= =============
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 nine months ended December 29, 2000,
general and administrative expenses included $4.6 million of goodwill
amortization. Refer to Note 5, Goodwill in the accompanying condensed
consolidated financial statements for further discussion.
During the nine months ended December 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 (including 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.
Refer to Note 2, Charges Included In General and Administrative Expenses in
the accompanying condensed consolidated financial statements for further
discussion.
Selling Expenses. Selling expenses for the nine months ended December 28,
2001 totaled $81.3 million, a decrease of $5.2 million, or 6.0%, from
selling expenses of $86.5 million for the nine months ended December 29,
2000. Selling expense as a percentage of net sales was approximately 6.0%
and 6.3% for the nine months ended December 28, 2001 and December 29, 2000,
respectively. The decrease is primarily attributable to the decrease in
sales.
International Business Exit Charge. During the quarter ended June 29, 2001,
the Company completed the sale of its International Business 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.
22
Income (loss) from Operations . Operating income for the nine months ended
December 28, 2001 totaled $22.2 million, an increase of $41.8 million,
compared to the operating loss of $19.6 million during the nine months
ended December 29, 2000. The increase is due to the factors described
above.
Interest Expense. Interest expense for the nine months ended December 28,
2001 totaled $9.8 million, a decrease of $4.6 million, or 31.9%, from
interest expense of $14.4 million for the nine months ended December 29,
2000. The decrease is primarily attributable to lower outstanding debt
balances under the Company's revolving credit facility over the prior year
and a general reduction in interest rates, partially offset by the
accelerated amortization of approximately $0.4 million of debt issuance
costs as a result of refinancing the prior credit facility on May 24, 2001.
Interest and Investment Income. Interest and investment income for the nine
months ended December 28, 2001 totaled $0.3 million, a decrease of $1.5
million, or 83.3%, from interest and investment income of $1.8 million for
the nine months ended December 29, 2000. The decrease results from lower
invested cash balances over the prior year period.
Other Income. Other income for the nine months ended December 28, 2001 and
December 29, 2000 totaled approximately $2.0 million. Other income
primarily consists of finance charges on customer accounts.
Provision (Benefit) for Income Taxes. Provision for income taxes was $5.2
million for the nine months ended December 28, 2001, a change of $8.9
million from a benefit for income taxes of $3.7 million for the nine months
ended December 29, 2000. The effective income tax rate was approximately
35.5% for the nine months ended December 28, 2001. The Company's effective
tax rate has benefited in fiscal 2002 from nonrecurring favorable permanent
items. In future fiscal years, the Company believes the effective rate will
return to its historical statutory rate.
Net Income (Loss). The Company incurred a net loss for the nine months
ended December 28, 2001 of $80.5 million compared to net loss of $26.4
million for the nine months ended December 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 $88.7 million and $34.9
million for the nine months ended December 28, 2001 and December 29, 2000,
respectively. During the nine months ended December 28, 2001, the Company
reported income before the cumulative effect of an accounting change of
$9.5 million. In addition, to reconcile reported income to cash flows from
operating activities, operating cash flows were positively impacted by
$19.2 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 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 nine months ended December 28, 2001, accounts
payable increased by approximately $32 million, net accounts receivable
decreased by $4 million, and inventory increased by $19 million, resulting
in a net $17 million decrease in operating working capital which positively
impacted operating cash flows. In addition, the change in other assets, net
of other liabilities, provided $42 million in operating cash flow and
includes the collection of approximately $20 million in IRS refunds.
23
Net cash used in investing activities was $18.6 million and $17.9 million
for the nine months ended December 28, 2001 and December 29, 2000,
respectively. During the nine months ended December 28, 2001, approximately
$16.5 million was disbursed for capital expenditures primarily related to
the continued development of the Company's Enterprise Resource Planning
System, electronic commerce platforms, and supply chain integration. In
addition, the Company disbursed approximately $1.3 million to satisfy a
contingent earnout payment under a previously consummated business
acquisition and $1.1 million under scheduled non-compete payments.
Net cash used in financing activities was $65.1 million and $40.5 million
for the nine months ended December 28, 2001 and December 29, 2000,
respectively. During the nine months ended December 28, 2001, the Company
repaid a net $65.1 million in bank debt primarily with cash flows from
operating activities.
Operating Trends
The Company had working capital of $269.4 million and $316.3 million as of
December 28, 2001 and March 30, 2001, respectively. Accounts receivable,
net of allowances, were $226.5 million and $236.8 million at December 28,
2001 and March 30, 2001, respectively. The average number of days sales in
accounts receivable outstanding was approximately 45.7 and 51.7 days for
the three months ended December 28, 2001 and the year ended March 30, 2001,
respectively. For the three months ended December 28, 2001, the Company's
Physician Supply, Imaging, and Long-Term Care Businesses had days sales in
accounts receivable of approximately 45.7, 41.5, and 53.0 days,
respectively.
Inventories were $171.4 million and $154.7 million as of December 28, 2001
and March 30, 2001, respectively. The Company had inventory turnover of
8.4x for the three months ended December 28, 2001 and the year ended March
30, 2001, respectively. For the three months ended December 28, 2001, the
Company's Physician Supply, Imaging, and Long-Term Care Businesses had
inventory turnover of 8.7x, 7.6x, and 10.0x, respectively.
24
The following table presents EBITDA and other financial data for the three
and nine months ended December 28, 2001 and December 29, 2000:
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Dollars in thousands)
Other Financial Data:
Income (loss) from operations............... $ 6,968 $ (34,994) $ 22,187 $ (19,575)
Plus: other income...................... 572 567 1,980 2,094
Plus: depreciation and amortization..... 5,001 6,054 13,801 17,189
Plus: charges included in general and
administrative expenses......... 1,203 28,256 2,142 36,088
Plus: International Business exit charge -- 14,917 (514) 14,917
------------ ------------ ------------ ------------
EBITDA (a)............................... $ 13,744 $ 14,800 $ 39,596 $ 50,713
------------ ------------ ------------ ------------
Interest expense......................... $ 2,566 $ 4,673 $ 9,759 $ 14,395
Interest coverage (b).................... 5.4x 3.2x 4.1x 3.5x
EBITDA margin (c)........................ 3.0% 3.3% 2.9% 3.7%
Cash provided by operating activities.... $ 88,768 $ 34,898
Cash used in investing activities........ (18,630) (17,924)
Cash used in financing activities........ (65,059) (40,453)
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, plus amortization, charges included in general and
administrative expenses (refer to Note 2 in the accompanying consolidated
financial statements), and International Business Exit Charge (Refer to
Note 4 in the accompanying consolidated financial statements), and excludes
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.
25
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.
As of December 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.
26
In the normal course of business, the Company enters into obligations and
commitments that require future contractual payments. The commitments
primarily result from repayment obligations for borrowings under the Notes
and Credit Facility, as well as, contractual lease payments for facility,
vehicles and equipment leases. As of December 28, 2001, the Company had no
borrowings outstanding under the credit facility. The following presents,
in aggregate , scheduled payments under contractual obligations:
Fourth Fiscal Year
Quarter --------------------------------------------------
Fiscal 2002 2003 2004 2005 2006 Thereafter Total
------------ ---------- --------- ---------- --------- ---------- ----------
Long-term debt $ -- $ -- $ -- $ -- $ -- $125,000 $125,000
Operating leases 6,963 23,405 18,065 11,512 6,529 8,868 75,342
------------ ---------- --------- ---------- --------- ---------- ----------
Total $ 6,963 $ 23,405 $ 18,065 $ 11,512 $ 6,529 $ 8,868 $200,342
============ ========== ========= ========== ========= ========== ==========
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 December 28,
2001, the Company had no amounts outstanding under the Credit Facility. If
borrowings were outstanding, interest would be incurred 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 Company's investment portfolio consists of cash and cash equivalents
including deposits in banks, government securities, money market funds, and
short-term investments with maturities, when acquired, of 90 days or less.
The Company seeks to maximize capital preservation by investing these funds
in high-quality issuers.
As of December 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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this Quarterly Report
on Form 10-Q:
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation, dated as of March 15,
1994.(15) 3.1a Articles of Amendment to Articles of Incorporation,
dated as of December 24, 2001 (14).
3.1b Articles of Amendment to Articles of Incorporation, dated as of
November 9, 2001 (14).
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)
29
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.(16)
4.4a Amendment to Shareholder Protection Rights Agreement, dated as of June
21, 2000, between PSS World Medical, Inc. and Continental Stock
Transfer & Trust Company as Rights Agent.(11)
10.1 Incentive Stock Option Plan, dated as of May 14, 1986.(1)
10.2 Amended and Restated Directors Stock Plan.(8)
10.3 Amended and Restated 1994 Long-Term Incentive Plan.(8)
10.4 Amended and Restated 1994 Long-Term Stock Plan.(8)
10.5 1994 Employee Stock Purchase Plan.(2)
10.6 1994 Amended Incentive Stock Option Plan.(1)
10.7 PSS World Medical, Inc. 1999 Long-Term Incentive Plan.(10)
10.8 Distributorship Agreement between Abbott Laboratories and PSS World
Medical, Inc. (Portions omitted pursuant to a request for confidential
treatment - Separately filed with 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. (17)
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.(18)
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)
30
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)
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 Employment Agreement, dated as of January 7, 2002, by and between the
Company and David Bronson.
10.19 Severance Agreement, dated as of October 11, 2000, by and between the
Company and Frederick E. Dell.(7)
10.20 Severance Agreement, dated as of February 1, 2001, by and between the
Company and Kirk A. Zambetti.(7)
10.21 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 December 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 Quarterly Report on Form
10-Q for the quarterly period ended September 28, 2001.
(15) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 8, 1998.
(16) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 22, 1998.
(17) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed June 5, 2001.
(18) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed July 3, 2001.
31
(b) Reports on Form 8-K
The following current reports on Form 8-K were filed during the quarter
ended December 28, 2001:
Date of Report Items Reported
---------------- -----------------------------------------------------
November 2, 2001 Announcing the early adoption of the provisions of
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets and the results
of the required transitional impairment test.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Jacksonville, State
of Florida, on February 11, 2002.
PSS WORLD MEDICAL, INC.
By: /s/ David A. Smith
--------------------------------------------
David A. Smith,
Chief Executive Officer
(Duly Authorized Officer)
By: /s/ David Bronson
--------------------------------------------
David Bronson,
Chief Financial Officer
33