UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2002
-------------
[ ] 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
The number of shares of common stock, par value $.01 per share, of the
registrant outstanding as of August 9, 2002 was 71,281,065 shares.
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
June 28, 2002
TABLE OF CONTENTS
Item Page
Information Regarding Forward-Looking Statements............................................ 3
Part I--Financial Information
1. Financial Statements:
Consolidated Balance Sheets--June 28, 2002 and March 29, 2002........................... 4
Consolidated Statements of Operations for the Three Months Ended June 28, 2002 and
June 29, 2001........................................................................ 5
Consolidated Statements of Cash Flows for the Three Months Ended June 28, 2002 and
June 29, 2001........................................................................ 6
Notes to Consolidated Financial Statements--June 28, 2002 and June 29, 2001............. 7
Independent Accountants' Review Report.................................................. 22
2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 23
3. Quantitative and Qualitative Disclosures About Market Risk.................................. 32
Part II--Other Information
1. Legal Proceedings........................................................................... 32
2. Changes in Securities and Use of Proceeds................................................... 32
3. Defaults Upon Senior Securities............................................................. 32
4. Submission of Matters to a Vote of Security Holders......................................... 33
5. Other Information........................................................................... 33
6. Exhibits and Reports on Form 8-K............................................................ 33
Signatures.................................................................................. 37
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' (including subsidiaries that are limited liability companies
and limited partnerships) expected future financial position, results of
operations, cash flows, funds from operations, dividends and dividend
plans, financing plans, business strategy, budgets, projected costs,
capital expenditures, competitive positions, growth opportunities, plans
and objectives of management for future operations and statements that
include words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend," "may," "could," and other similar expressions are
forward-looking statements. Such forward-looking statements are inherently
uncertain, and stockholders must recognize that actual results may differ
from the Company's expectations.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in the Company's Annual Report
on Form 10-K for the year ended March 29, 2002, in this Form 10-Q, and
elsewhere in the Company's filings with the Securities and Exchange
Commission (the "Commission"). Factors that may affect the plans or
results of the Company include, without limitation, those listed in the
Company's Annual Report on Form 10-K for the year ended March 29, 2002
under the heading "Risk Factors," and (i) the ability of the Company to
successfully implement its strategic business plan; (ii) the availability
of sufficient capital to finance the Company's business plans on terms
satisfactory to the Company; (iii) competitive factors; (iv) the ability
of the Company to adequately defend or reach a settlement of outstanding
litigations and investigations involving the Company or its management;
(v) changes in labor, equipment and capital costs; (vi) changes in
regulations affecting the Company's business; (vii) future acquisitions or
strategic partnerships; and (viii) 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
CONSOLIDATED BALANCE SHEETS
June 28, 2002 and March 29, 2002
(Dollars in Thousands, Except Per Share Data)
ASSETS
June 28, March 29,
2002 2002
__________ __________
(Unaudited)
Current Assets:
Cash and cash equivalents.............................................................. $ 70,346 $ 53,574
Accounts receivable, net............................................................... 225,085 226,955
Inventories, net....................................................................... 162,602 152,923
Employee advances...................................................................... 231 168
Prepaid expenses and other............................................................. 34,440 38,700
__________ __________
Total current assets........................................................... 492,704 472,320
Property and equipment, net............................................................... 84,043 84,841
Other Assets:
Goodwill............................................................................... 60,644 60,644
Intangibles, net....................................................................... 14,407 15,195
Employee advances...................................................................... 181 281
Other.................................................................................. 30,954 30,127
__________ __________
Total assets................................................................... $682,933 $663,408
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................................................... $169,371 $146,694
Accrued expenses....................................................................... 32,372 35,790
Other.................................................................................. 13,180 14,981
__________ __________
Total current liabilities...................................................... 214,923 197,465
Long-term debt, net of current portion.................................................... 125,000 125,000
Other..................................................................................... 15,910 16,495
__________ __________
Total liabilities.............................................................. 355,833 338,960
__________ __________
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, 71,280,731 and 71,270,044
shares issued and outstanding at June 28, 2002 and March 29, 2002, respectively.... 712 712
Additional paid-in capital............................................................. 350,142 350,043
Accumulated deficit.................................................................... (23,754) (26,307)
__________ __________
Total shareholders' equity..................................................... 327,100 324,448
__________ __________
Total liabilities and shareholders' equity..................................... $682,933 $663,408
========== ==========
The accompanying notes are an integral part of these consolidated statements.
4
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 28, 2002 AND JUNE 29, 2001
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Three Months Ended
_____________________________
June 28, June 29,
2002 2001
_____________ ____________
Net sales........................................................................ $463,231 $446,740
Cost of goods sold............................................................... 353,690 344,996
_____________ ____________
Gross profit......................................................... 109,541 101,744
General and administrative expenses.............................................. 74,530 68,461
Selling expenses................................................................. 28,513 26,499
International business exit charge reversal...................................... -- (514)
_____________ ____________
Income from operations............................................... 6,498 7,298
_____________ ____________
Other (expense) income:
Interest expense.............................................................. (3,130) (4,251)
Interest and investment income................................................ 221 188
Other income.................................................................. 534 996
_____________ ____________
(2,375) (3,067)
_____________ ____________
Income before provision for income taxes
and cumulative effect of accounting change.................................... 4,123 4,231
Provision for income taxes....................................................... 1,570 1,541
_____________ ____________
Income before cumulative effect of accounting change............................. 2,553 2,690
Cumulative effect of accounting change (net of taxes of $14,444)................. -- (90,045)
_____________ ____________
Net income (loss)................................................................ $ 2,553 $(87,355)
============= ============
Earnings (loss) per share - Basic:
Income before cumulative effect of accounting change.......................... $0.04 $ 0.04
Cumulative effect of accounting change........................................ -- (1.26)
_____________ ____________
Net income (loss)............................................................. $0.04 $(1.22)
============= ============
Earnings (loss) per share - Diluted:
Income before cumulative effect of accounting change.......................... $0.04 $ 0.04
Cumulative effect of accounting change........................................ -- (1.25)
_____________ ____________
Net income (loss)............................................................. $0.04 $(1.21)
============= ============
The accompanying notes are an integral part of these consolidated statements.
5
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 28, 2002 AND JUNE 29, 2001
(Unaudited)
(Dollars in Thousands)
Three Months Ended
________________________
June 28, June 29,
2002 2001
___________ __________
Cash Flows From Operating Activities:
Net income (loss)................................................................... $ 2,553 $(87,355)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Cumulative effect of accounting change.......................................... -- 90,045
Depreciation.................................................................... 4,096 2,836
Amortization of intangible assets............................................... 1,496 1,455
Amortization of debt issuance costs............................................. 281 689
Provision for doubtful accounts................................................. 1,092 1,590
Benefit for deferred income taxes............................................... (937) --
Loss on sales of property and equipment......................................... -- 13
International Business exit charge reversal..................................... -- (514)
Changes in operating assets and liabilities::
Accounts receivable.......................................................... 778 3,039
Inventories, net............................................................. (9,679) (10,494)
Prepaid expenses and other current assets.................................... 4,197 9,051
Other assets................................................................. (527) 7,370
Accounts payable............................................................. 22,425 30,584
Accrued expenses and other liabilities....................................... (5,669) (5,765)
___________ __________
Net cash provided by operating activities................................. 20,106 42,544
___________ __________
Cash Flows From Investing Activities:
Capital expenditures............................................................... (3,309) (6,108)
Payments on noncompete agreements.................................................. (106) (138)
Proceeds from sales of property and equipment...................................... 11 46
Proceeds from sales and maturities of marketable securities........................ -- 50
Proceeds from sale of International Business....................................... -- 222
___________ __________
Net cash used in investing activities..................................... (3,404) (5,928)
___________ __________
Cash Flows From Financing Activities:
Proceeds from issuance of common stock............................................. 70 --
Net borrowings..................................................................... -- (42,650)
Other.............................................................................. -- (4)
___________ __________
Net cash provided by (used in) financing activities....................... 70 (42,654)
___________ __________
Net increase (decrease) in cash and cash equivalents................................... 16,772 (6,038)
Cash and cash equivalents, beginning of period......................................... 53,574 34,374
___________ __________
Cash and cash equivalents, end of period............................................... $70,346 $ 28,336
=========== ==========
The accompanying notes are an integral part of these consolidated statements.
6
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 2002 AND JUNE 29, 2001
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
PSS World Medical, Inc. (the "Company" or "PSSWM") is a specialty marketer
and distributor of medical products to physicians, alternate-site imaging
centers, long-term care providers, home healthcare providers, and hospital
radiology departments through 69 full-service centers to customers in all
50 states.
The Physician Sales & Service division ("PSS" or 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. At June 28, 2002, PSS operated 42 full-service centers
distributing to physician office sites in all 50 states.
The Diagnostic Imaging subsidiary ("DI" or the "Imaging Business") is a
distributor of medical diagnostic imaging supplies, chemicals, equipment,
and services to the acute and alternate-care markets in the United States.
At June 28, 2002, DI operated 14 full-service centers, 36 distribution
centers, and 16 break-freight locations distributing to customer sites in
42 states.
The Gulf South Medical Supply subsidiary ("Gulf South" or the "Long-Term
Care Business") is a distributor of medical supplies and related products
to nursing homes, home healthcare agencies, and other long-term care
facilities. At June 28, 2002, Gulf South operated 13 full-service centers
serving all 50 states.
The Company divides its operations into three reportable operating
segments: the Physician Supply Business, the Imaging Business, and the
Long-Term Care Business. A fourth segment, titled Other, includes
unallocated corporate overhead and the Company's European operations (the
"International Business") which were sold during fiscal year 2002.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the United States
Securities and Exchange Commission (the "SEC"). Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted pursuant to the SEC rules
and regulations. The 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 consolidated balance sheet as of March 29, 2002 has been derived from
the Company's audited consolidated financial statements for the year ended
March 29, 2002. 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 29, 2002.
The Company reports its quarter end financial position and results of
operations and cash flows on the Friday closest to June 30, September 30,
December 31, and March 31. The three months ended June 28, 2002 and June
29, 2001 each consist of 13 weeks.
7
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.
Reclassifications
Certain amounts for prior periods have been reclassified to conform to
current period presentation.
Recent Accounting Pronouncement
During June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
addresses the financial accounting and reporting for costs associated with
exit or disposal activities, and eliminates the definition and requirements
for recognition of exits costs in Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 will require that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. It also establishes that fair value is the objective
for initial measurement of the liability. The Company will apply the
provisions of SFAS 146 for exit or disposal activities that are initiated
after December 31, 2002, the effective date of this statement.
2. CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include charges related to
restructuring activity, merger activity, and other items. At the end of
each period, management reevaluates its restructuring and merger plans and
may adjust previous estimates. The following tables summarize charges that
are included in general and administrative expenses in the accompanying
consolidated statements of operations:
Three Months Ended June 28, 2002
_______________________________________________________________
Physician Long-
Supply Imaging Term Care
Business Business Business Other Total
__________ ___________ ___________ __________ ________
Restructuring costs and expenses....... $718 $224 $-- $ -- $942
Merger costs and expenses.............. -- (7) -- 429 422
Accelerated depreciation............... 84 -- -- -- 84
Reversal of operational tax charge..... -- -- -- (69) (69)
Other.................................. 82 -- -- -- 82
__________ ___________ ___________ __________ ________
$884 $217 $-- $360 $1,461
========== =========== =========== ========== ========
Three Months Ended June 29, 2001
_______________________________________________________________
Physician Long-
Supply Imaging Term Care
Business Business Business Other Total
__________ ___________ ___________ __________ ________
Restructuring costs and expenses....... $144 $ 261 $77 $ 12 $ 494
Merger costs and expenses.............. -- (247) 12 776 541
Reversal of operational tax charge..... -- -- -- (451) (451)
Other.................................. -- -- -- 8 8
__________ ___________ ___________ __________ ________
$144 $ 14 $89 $ 345 $ 592
========== =========== =========== ========== ========
Restructuring Costs and Expenses
Restructuring costs and expenses for the three months ended June 28, 2002
and June 29, 2001 primarily include (i) costs expensed as incurred related
to the Physician Supply Business' and the Imaging Business' restructuring
plans that were adopted during the fourth quarter of fiscal year 2002 and
(ii) costs expensed as incurred related to various restructuring plans that
were adopted in prior fiscal years.
8
Physician Supply Business Plan Adopted During the Fourth Quarter of Fiscal
Year 2002. During the three months ended June 28, 2002, the Physician
Supply Business recorded charges of $565, which include branch shut down
costs of $268, involuntary employee termination costs of $166, and employee
relocation costs of $131.
Imaging Business Plan Adopted During the Fourth Quarter of Fiscal Year
2002. During the three months ended June 28, 2002, the Imaging Business
recorded charges of $224, which include branch shutdown costs of $118,
employee relocation costs of $87, involuntary employee termination costs of
$16, and lease termination costs of $3.
Various Restructuring Plans Adopted in Prior Fiscal Years. During the three
months ended June 28, 2002 and June 29, 2001, the Company recorded $167 and
$505, respectively, of restructuring costs as incurred. These costs
primarily relate to costs to pack and move inventory, costs to set up new
facilities, employee relocation costs, and other related facility closure
costs. During the three months ended June 28, 2002 and June 29, 2001, the
Company reversed approximately $14 and $11, respectively, of restructuring
costs.
Merger Costs and Expenses
Merger costs and expenses for the three months ended June 28, 2002 and June
29, 2001 primarily include costs related to employee retention bonuses,
costs expensed as incurred related to various merger plans that were
adopted in prior fiscal years, and adjustments to previous estimates.
Effective February 1, 2000, the Board of Directors approved and adopted an
Officer Retention Bonus Plan and a 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. The total cash compensation costs related to these plans
is approximately $10,059, of which $8,628 was expensed in prior fiscal
years. Approximately $429 was recognized during the three months ended June
28, 2002 and an additional $1,002 is estimated to be expensed during the
remaining nine months of fiscal year 2003. During the three months ended
June 29, 2001, the Company expensed approximately $776.
During the three months ended June 28, 2002 and June 29, 2001, the Company
reversed approximately $7 and $271, respectively, which primarily related
to accrued lease termination costs. Merger costs and expenses for the three
months ended June 29, 2001 included $36 of charges for merger costs
expensed as incurred.
Accelerated Depreciation
The Physician Supply Business identified certain assets that would be
replaced or disposed of as a result of the restructuring plan that was
implemented during the fourth quarter of fiscal year 2002. 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 and determined
that impairment did not exist at the division level. Therefore, management
revised the estimated useful lives of certain assets in accordance with
Accounting Principles Board No. 20, "Accounting Changes." As a result of
shortening the useful lives during the fourth quarter of fiscal year 2002
to coincide with the disposal date, the Company recorded $84 of accelerated
depreciation during the three months ended June 28, 2002. The effect of
this change in estimate decreased basic and diluted earnings per share by
less than $0.01 for the three months ended June 28, 2002.
Reversal of Operational Tax Charge
During the three months ended June 28, 2002 and June 29, 2001, the Company
performed an analysis and reversed approximately $69 and $451,
respectively, of a previously recorded operating tax charge reserve.
9
Other
During the three months ended June 28, 2002 and June 29, 2001, the Company
incurred $82 and $8, respectively, primarily relating to certain lease
termination costs for locations that were previously vacated in connection
with prior restructuring plans.
3. ACCRUED RESTRUCTURING COSTS AND EXPENSES
During the quarter ended March 29, 2002, management and the Board of
Directors approved and committed to two separate plans to restructure the
Physician Supply Business and Imaging Business. These plans were
implemented in order to reduce overhead costs, improve customer
satisfaction, and improve the distribution infrastructure.
Physician Supply Business Plan Adopted During the Fourth Quarter of Fiscal
Year 2002. The total estimated costs related to this plan are approximately
$6,505 of which approximately $4,174 was recognized during fiscal year 2002
and approximately $2,331 will be expensed as incurred during fiscal year
2003. Management anticipates that this plan will be completed by the end of
the fourth quarter of fiscal year 2003. As a result of the plan,
approximately 161 employees, including operations leaders, administrative
and warehouse personnel, will be involuntarily terminated. As of June 28,
2002, 26 employees had been terminated.
To improve the distribution infrastructure, certain administrative
functions, such as accounts receivable billing and collections and
inventory management, at 13 service center locations will be consolidated
into larger existing facilities within a geographic location. The
operations in the affected facilities will be reduced to receiving and
distributing inventory, customer service, and sales support. Such locations
will be referred to as "break-freight" locations. As of June 28, 2002,
certain administrative functions at 4 of the 13 service center locations
were consolidated into existing facilities. To improve the inventory
purchasing structure and to leverage purchasing volumes, the purchasing
function for 33 service locations will be centralized to the corporate
office located in Jacksonville, Florida. As of June 28, 2002, the
purchasing function for 12 of the 33 service center locations was
centralized to Jacksonville, Florida.
Accrued restructuring costs and expenses related to the Physician Supply
Business plan, classified as accrued expenses in the accompanying
consolidated balance sheets, were $3,665 and $3,666 at June 28, 2002 and
March 29, 2002, respectively. The following is a summary of the
restructuring activity related to the plan described above:
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
_____________ ___________ __________ _________
Balance at March 29, 2002............ $ 783 $2,535 $348 $3,666
Additions......................... 174 -- -- 174
Utilized.......................... (106) (51) (18) (175)
_____________ ___________ __________ _________
Balance at June 28, 2002............. $851 $2,484 $330 $3,665
============= =========== ========== =========
The amount of severance that involuntarily terminated employees receive is
based on the number of months of service. Employees will earn additional
severance during the period from March 30, 2002 until the closure date of
the service center. This additional severance is being accrued when earned
throughout fiscal year 2003. The Physician Supply Business accrued an
additional $174 of involuntary employee termination costs during the three
months ended June 28, 2002.
Imaging Business Plan Adopted During the Fourth Quarter of Fiscal Year
2002. This plan consists of two phases. The total estimated costs related
to this plan are approximately $3,014, of which approximately $2,028 was
recognized during fiscal year 2002 and approximately $986 will be expensed
as incurred during fiscal year 2003. Management anticipates that this plan
will be completed by the end of fiscal year 2003. As a result of the plan,
approximately 123 employees, including operations leaders, administrative
and warehouse personnel, will be involuntarily terminated. As of June 28,
2002, 51 employees had been terminated.
10
During Phase I, certain administrative functions, such as accounts
receivable billing and collections and customer service, at 18 full-service
center locations will be consolidated into 7 regional centers and 2
operation centers. The operations in the affected facilities will be
significantly reduced and such locations will be referred to as
distribution centers or "break-freight" locations. Distribution centers
will receive inventory from the regional centers and vendors and distribute
directly to customers. Break-freight locations will receive inventory only
from full-service center locations or distribution centers and distribute
directly to customers. As of June 28, 2002, certain administrative
functions at 13 of 18 service locations were consolidated. In addition, the
call dispatch function for 27 service center locations will be centralized
to Jacksonville, Florida. As of June 28, 2002, the call dispatch function
for 16 of 27 service center locations was centralized to Jacksonville,
Florida.
During Phase II, the product and service distribution network will be
realigned. As of the adoption date of this plan, management had identified
two full-service centers to be closed. As of June 28, 2002, these service
centers were closed. Other full-service centers may be closed, converted to
a distribution center or break-freight location, or relocated after the
consolidation of the administrative functions is complete or as current
lease agreements expire.
Accrued restructuring costs and expenses related to the Imaging Business
plan, classified as accrued expenses in the accompanying consolidated
balance sheets, were $1,464 and $1,793 at June 28, 2002 and March 29, 2002,
respectively. The following is a summary of the restructuring activity
related to the plan described above:
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
_____________ ___________ __________ _________
Balance at March 29, 2002............ $ 690 $ 832 $ 271 $1,793
Additions......................... -- -- -- --
Utilized.......................... (256) (62) (11) (329)
_____________ ___________ __________ _________
Balance at June 28, 2002............. $434 $770 $260 $1,464
============= =========== ========== =========
Prior Fiscal Years
During the prior fiscal years, management and the Board of Directors
approved and committed to several plans to restructure the Physician Supply
Business, the Imaging Business, and the Long-Term Care Business. Accrued
restructuring costs and expenses related to plans adopted in the prior
fiscal years, classified as accrued expenses in the accompanying
consolidated balance sheets, totaled $1,160 and $1,439 at June 28, 2002 and
March 29, 2002, respectively. The following is a summary of the
restructuring activity related to the plans adopted in prior fiscal years:
Involuntary
Employee Lease
Termination Termination
Costs Costs Total
______________ ___________ __________
Balance at March 29, 2002............ $1,385 $ 54 $1,439
Adjustments....................... -- (14) (14)
Utilized.......................... (258) (7) (265)
______________ ___________ __________
Balance at June 28, 2002............. $1,127 $ 33 $1,160
============== =========== ==========
The accrued involuntary employee termination costs at June 28, 2002 and
March 29, 2002 relate to Plan E that was adopted during the third quarter
of fiscal year 2001. The remaining $1,127 will be paid to the terminated
employees in fiscal year 2003 in accordance with the severance agreements.
The accrued lease termination costs at June 28, 2002 relates to Plan C. The
remaining accrued lease termination payments will be made during fiscal
year 2003.
11
4. EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," the calculation of
basic earnings per common share and diluted earnings per common share is
presented below (share amounts in thousands, except per share data):
Three Months Ended
________________________
June 28, June 29,
2002 2001
__________ _________
Income before cumulative effect of accounting change................ $2,553 $ 2,690
Cumulative effect of accounting change (net of taxes of $14,444).... -- (90,045)
__________ _________
Net income (loss)................................................... $2,553 $(87,355)
========== =========
Earnings (loss) per share - Basic:
Income before cumulative effect of accounting change............. $0.04 $ 0.04
Cumulative effect of accounting change........................... -- (1.26)
__________ _________
Net income (loss)................................................ $0.04 $(1.22)
========== =========
Earnings (loss) per share - Dilutive:
Income before cumulative effect of accounting change............. $0.04 $ 0.04
Cumulative effect of accounting change........................... -- (1.25)
__________ _________
Net income (loss)................................................ $0.04 $(1.21)
========== =========
Weighted average shares outstanding:
Common shares.................................................... 71,272 71,201
Assumed exercise of stock options................................ 1,098 300
__________ _________
Diluted shares outstanding....................................... 72,370 71,501
========== =========
The treasury stock method was used in calculating the assumed exercise of
stock options. Options to purchase approximately 3,055 and 5,248 shares of
common stock that were outstanding during the three months ended June 28,
2002 and June 29, 2001, respectively, were not included in the computation
of diluted earnings per share for each of the respective periods because
the options' exercise prices exceeded the fair market value of the
Company's common stock.
5. INTANGIBLES
The following table summarizes, by business segment and major asset class,
the gross carrying amount and accumulated amortization for existing
intangible assets subject to amortization.
12
As of June 28, 2002 As of March 29, 2002
____________________________________ _________________________________
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
_________ ____________ __________ _________ ____________ _______
Noncompetition Agreements:
Physician Supply Business.......... $ 4,305 $ (3,217) $ 1,088 $ 4,053 $ (3,073) $ 980
Imaging Business................... 20,452 (10,684) 9,768 20,457 (9,939) 10,518
Long-Term Care Business............ 1,770 (786) 984 2,070 (876) 1,194
_________ ____________ __________ _________ ____________ _______
26,527 (14,687) 11,840 26,580 (13,888) 12,692
_________ ____________ __________ _________ ____________ _______
Signing Bonuses:
Physician Supply Business.......... 1,483 (613) 870 1,027 (426) 601
Imaging Business................... 1,850 (1,325) 525 1,954 (1,300) 654
Long-Term Care Business............ 200 (160) 40 200 (150) 50
_________ ____________ __________ _________ ____________ _______
3,533 (2,098) 1,435 3,181 (1,876) 1,305
_________ ____________ __________ _________ ____________ _______
Other Intangibles:
Physician Supply Business.......... 2,993 (1,861) 1,132 2,993 (1,795) 1,198
Imaging Business................... -- -- -- -- -- --
Long-Term Care Business............ -- -- -- -- -- --
_________ ____________ __________ _________ ____________ _______
2,993 (1,861) 1,132 2,993 (1,795) 1,198
_________ ____________ __________ _________ ____________ _______
Total....................
$33,053 $(18,646) $14,407 $32,754 $(17,559) $15,195
========= ============ ========== ========= ============ =======
The weighted-average amortization period, in total and by major intangible
asset class, is as follows:
June 28, March 29,
2002 2002
_________ _________
(in years)
Noncompetition Agreements........ 8.6 8.5
Signing Bonuses.................. 4.2 4.4
Other Intangibles................ 12.4 12.8
_________ _________
Total weighted-average period. 8.4 8.6
========= =========
Total amortization expense for intangible assets for the three months ended
June 28, 2002 was $1,496. The estimated amortization expense for the next
five fiscal years and thereafter is as follows:
Fiscal Year:
2003 (9 months)............................. $ 3,504
2004........................................ 3,590
2005........................................ 2,411
2006........................................ 1,092
2007........................................ 885
Thereafter.................................. 2,925
_______
Total.............................. $14,407
=======
Total payments made under noncompetition agreements during the three months
ended June 28, 2002 were $106. Future minimum payments required under
noncompetition agreements at June 28, 2002 are as follows:
Fiscal Year:
2003 (9 months)............................. $462
2004........................................ 59
2005........................................ 43
2006........................................ 36
2007........................................ 36
Thereafter.................................. 144
____
Total.............................. $780
====
6. SEGMENT INFORMATION
The Company's reportable segments are strategic businesses that offer
different products and services to different segments of the healthcare
industry, and are the basis for which management regularly evaluates the
Company. These segments are managed separately because of different
customers and products. 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:
Three Months Ended
________________________
June 28, June 29,
2002 2001
__________ _________
NET SALES:
Physician Supply Business............................................... $182,873 $171,343
Imaging Business........................................................ 176,765 179,608
Long-Term Care Business................................................. 103,593 95,358
Other -- 431
__________ _________
Total net sales..................................................... $463,231 $446,740
========== =========
13
Three Months Ended
________________________
June 28, June 29,
2002 2001
__________ _________
INCOME FROM OPERATIONS:
Physician Supply Business............................................... $ 5,521 $ 5,735
Imaging Business........................................................ (1,228) 107
Long-Term Care Business................................................. 3,823 1,773
Other................................................................... (1,618) (317)
__________ _________
Total income from operations........................................ $ 6,498 $ 7,298
========== =========
DEPRECIATION:
Physician Supply Business............................................... $ 2,048 $ 1,145
Imaging Business........................................................ 1,222 1,097
Long-Term Care Business................................................. 467 462
Other................................................................... 359 132
__________ _________
Total depreciation.................................................. $ 4,096 $ 2,836
========== =========
AMORTIZATION OF INTANGIBLE ASSETS:
Physician Supply Business............................................... $ 398 $ 234
Imaging Business........................................................ 878 1,117
Long-Term Care Business................................................. 220 104
Other................................................................... -- --
__________ _________
Total amortization of intangible assets............................. $ 1,496 $ 1,455
========== =========
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business............................................... $ 49 $ 320
Imaging Business........................................................ 370 325
Long-Term Care Business................................................. 673 945
Other................................................................... -- --
__________ _________
Total provision for doubtful accounts............................... $ 1,092 $ 1,590
========== =========
INTEREST EXPENSE:
Physician Supply Business............................................... $ 974 $ 278
Imaging Business........................................................ 2,207 2,592
Long-Term Care Business................................................. 1,232 1,377
Other................................................................... (1,283) 4
__________ _________
Total interest expense.............................................. $ 3,130 $ 4,251
========== =========
INTEREST AND INVESTMENT INCOME:
Physician Supply Business............................................... $ 23 $ 1
Imaging Business........................................................ -- --
Long-Term Care Business................................................. -- --
Other................................................................... 198 187
__________ _________
Total interest and investment income................................ $ 221 $ 188
========== =========
PROVISION FOR INCOME TAXES:
Physician Supply Business............................................... $ 1,858 $ 2,284
Imaging Business........................................................ (1,258) (840)
Long-Term Care Business................................................. 990 231
Other................................................................... (20) (134)
__________ _________
Total provision for income taxes................................... $ 1,570 $ 1,541
========== =========
CAPITAL EXPENDITURES:
Physician Supply Business............................................... $ 2,024 $ 3,292
Imaging Business........................................................ 457 878
Long-Term Care Business................................................. 206 183
Other................................................................... 622 1,755
__________ _________
Total capital expenditures.......................................... $ 3,309 $ 6,108
========== =========
14
June 28, March 29,
2002 2002
__________ _________
ASSETS:
Physician Supply Business............................................... $223,216 $231,757
Imaging Business........................................................ 221,939 223,374
Long-Term Care Business................................................. 157,331 154,929
Other................................................................... 80,447 53,348
__________ _________
Total assets....................................................... $682,933 $663,408
========== =========
7. COMMITMENTS AND CONTINGENCIES
Litigation
The Company, through its Long-Term Care Business, its Physician Supply
Business, 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 multidistrict
litigation are 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
regarding the Gulf South Merger which resulted in earnings below analyst's
expectations. The plaintiff seeks indeterminate damages, including costs
and expenses. The Company filed a motion to dismiss the first amended
complaint on January 25, 1999. The court granted that motion without
prejudice by order dated February 9, 2000. Plaintiffs filed their second
amended complaint on March 15, 2000. The Company filed a motion to dismiss
the second amended complaint on May 1, 2000, which is pending. The Company
believes that the allegations contained in the complaint are without merit
and intends to defend vigorously against the claims. There can be no
assurance that this litigation will be ultimately resolved on terms that
are favorable to the Company.
15
The Company has been named as a defendant in ten, related class action
complaints, the first of which was filed on July 13, 2001 and all of which
had been filed in the United States District Court for the Middle District
of Florida. By Order of the Court dated January 14, 2002, those ten actions
were consolidated into a single action under the caption "In Re PSS World
Medical Inc. Securities Litigation." Following that consolidation, on March
22, 2002, lead plaintiffs served their Amended Class Action Complaint for
Violation of Securities Laws. On May 14, 2002, defendants filed their
motion to dismiss the Amended Complaint, and, on August 1, 2002, the Court
entered an Order denying that motion and directing the Company to answer
the Amended Complaint by August 12, 2002. The Amended Complaint named the
Company along with certain present and former directors and officers. The
Amended Complaint was filed as a purported class action on behalf of
persons who purchased or acquired PSS World Medical, Inc. common stock at
various times during the period between October 26, 1999 and October 3,
2000. The Amended Complaint alleges, 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 seeks unspecified damages. The plaintiffs
allege that the Company 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 PSS World Medical, Inc. common stock was
artificially inflated during the class period. The Company believes that
the allegations contained in the Amended Complaint are without merit and
intends to defend vigorously against the claims. There can be no assurance
that this litigation will be ultimately resolved on terms that are
favorable to the Company.
The Company has been named as a defendant in a suit brought by three former
and present employees of the Company, entitled Angione, et al. v. PSS World
Medical Inc., which was filed on or about June 4, 2002 in the U.S. District
Court for the Central District of California, Santa Ana Division (Case No.
CV SA 02-533 AHS (ANx)). In response to the Motion to Transfer Venue filed
by the Company, the plaintiffs have agreed to stipulate that venue of the
case may be transferred to the United States District Court in
Jacksonville, Florida. The parties await Court approval of the motion to
transfer venue. The plaintiffs allege that the Company wrongfully
classifies its Purchasers, Operations Leader Trainees, and Accounts
Receivable Representatives as exempt from the overtime requirements imposed
by the Fair Labor Standards Act and the California Wage Orders. The
plaintiffs seek court approval to proceed as a collective action under the
Fair Labor Standards Act, a representative action under California's Unfair
Competition Act, and/or a class action on behalf of all persons in the
United States who have occupied any one of the three positions within the
pertinent limitations period. PSSWM will oppose this motion, though it is
likely that the Court will tentatively approve a collective action and
allow discovery on the issue of who is eligible to participate in the
collective action. The Plaintiffs seek to recover back pay, interest, costs
of suit, declaratory and injunctive relief, and applicable statutory
penalties. In addition, two of the three named plaintiffs bring individual
claims for gender discrimination and retaliation under Title VII of the
Civil Rights Act of 1964 and the Equal Pay Act of 1963. The Company is
vigorously defending against the claims and is working with human resource
personnel to collect personnel and payroll information necessary to
determine (i) the employees who are potentially eligible to participate in
the suit and (ii) the extent of overtime liability, if any. There can be no
assurance that this litigation will be ultimately resolved on terms that
are favorable to the Company.
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.
The Company has various insurance policies, including product liability
insurance, covering risks and in amounts it considers adequate. In many
cases in which the Company has been sued in connection with products
manufactured by others, the Company is provided indemnification by the
manufacturer. There can be no assurance that the insurance coverage
maintained by the Company is sufficient or will be available in adequate
amounts or at a reasonable cost, or that indemnification agreements will
provide adequate protection for the Company.
16
Commitments and Other 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.
8. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
During fiscal year 1998, the Company filed a registration statement with
the Securities and Exchange Commission to authorize the issuance of
$125,000 in debt securities ("Senior Subordinated Notes"). The following
tables present condensed consolidating financial information for the parent
or issuer of the debt, the guarantor subsidiaries, and the nonguarantor
subsidiaries of the Senior Subordinated Notes. The nonguarantor subsidiary
was the International Business, which was divested during the three months
ended June 29, 2001. Separate financial statements of the guarantor
subsidiaries are not presented because the guarantors are jointly,
severally and unconditionally liable under the guarantees and the Company
believes the condensed consolidating financial information is more
meaningful in understanding the financial position, results of operations,
and cash flows of the guarantor subsidiaries. In addition, the guarantor
subsidiaries are 100% owned subsidiaries of the Company.
17
Balance Sheets
June 28, 2002 and March 29, 2002
As of June 28, 2002
________________________________________________________
Guarantor
Parent Subsidiaries Eliminations Consolidated
_________ ____________ ____________ ____________
Current Assets:
Cash and cash equivalents............... $ 59,936 $ 10,410 -- $ 70,346
Accounts receivable, net................ 76,837 148,248 -- 225,085
Inventories, net........................ 52,044 110,558 -- 162,602
Intercompany receivables................ 136,958 (136,958) -- --
Other current assets.................... 7,823 26,848 -- 34,671
_________ ____________ ____________ ____________
Total current assets........... 333,598 159,106 -- 492,704
Property and equipment, net................ 55,680 28,363 -- 84,043
Other Assets:
Goodwill, net........................... 9,788 50,856 -- 60,644
Intangibles, net........................ 3,088 11,319 -- 14,407
Investment in subsidiary................ 286 28,083 $(28,369) --
Other noncurrent assets................. 11,752 19,383 -- 31,135
_________ ____________ ____________ ____________
Total assets................... $414,192 $ 297,110 $(28,369) $ 682,933
========= ============ ============ ============
Current Liabilities:
Accounts payable........................ $ 62,878 $106,493 -- $ 169,371
Other current liabilities............... 28,808 16,744 -- 45,552
_________ ____________ ____________ ____________
Total current liabilities...... 91,686 123,237 -- 214,923
Long-term debt, net of current portion..... 125,000 -- -- 125,000
Other...................................... 13,455 2,455 -- 15,910
_________ ____________ ____________ ____________
Total liabilities.............. 230,141 125,692 -- 355,833
_________ ____________ ____________ ____________
Shareholders' Equity:
Common stock............................ 713 329 $ (330) 712
Additional paid-in capital.............. 191,666 150,150 8,326 350,142
Accumulated (deficit) earnings.......... (8,328) 20,939 (36,365) (23,754)
_________ ____________ ____________ ____________
Total shareholders' equity..... 184,051 171,418 (28,369) 327,100
_________ ____________ ____________ ____________
Total liabilities and
shareholders' equity........ $414,192 $297,110 $(28,369) $ 682,933
========= ============ ============ ============
18
Balance Sheets (Continued):
As of March 29, 2002
________________________________________________________
Guarantor
Parent Subsidiaries Eliminations Consolidated
_________ ____________ ____________ ____________
Current Assets:
Cash and cash equivalents............... $ 39,531 $ 14,043 -- $ 53,574
Accounts receivable, net................ 78,911 148,044 -- 226,955
Inventories, net........................ 48,706 104,217 -- 152,923
Intercompany receivables................ 157,314 (157,314) -- --
Other current assets.................... 13,517 25,351 -- 38,868
_________ ____________ ____________ ____________
Total current assets........... 337,979 134,341 -- 472,320
Property and equipment, net................ 55,449 29,392 -- 84,841
Other Assets:
Goodwill, net........................... 9,788 50,856 -- 60,644
Intangibles, net........................ 2,777 12,418 -- 15,195
Investment in subsidiary................ 286 28,083 $(28,369) --
Other noncurrent assets................. 11,074 19,334 -- 30,408
_________ ____________ ____________ ____________
Total assets................... $417,353 $274,424 $(28,369) $663,408
========= ============ ============ ============
Current Liabilities:
Accounts payable........................ $ 62,181 $ 84,513 -- $146,694
Other current liabilities............... 33,038 17,733 -- 50,771
_________ ____________ ____________ ____________
Total current liabilities...... 95,219 102,246 -- 197,465
Long-term debt, net of current portion..... 125,000 -- -- 125,000
Other ..................................... 13,853 2,642 -- 16,495
_________ ____________ ____________ ____________
Total liabilities.............. 234,072 104,888 -- 338,960
_________ ____________ ____________ ____________
Shareholders' Equity:
Common stock............................ 713 329 $ (330) 712
Additional paid-in capital.............. 191,567 150,150 8,326 350,043
Accumulated (deficit) earnings.......... (8,999) 19,057 (36,365) (26,307)
_________ ____________ ____________ ____________
Total shareholders' equity..... 183,281 169,536 (28,369) 324,448
_________ ____________ ____________ ____________
Total liabilities and
shareholders' equity........ $417,353 $274,424 $(28,369) $663,408
========= ============ ============ ============
19
Statements of Operations
For the Three Months Ended June 28, 2002 and June 29, 2001
Three Months Ended June 28, 2002
______________________________________
Guarantor
Parent Subsidiaries Consolidated
________ ____________ ____________
Net sales............................................. $154,915 $308,316 $463,231
Cost of goods sold.................................... 107,738 245,952 353,690
________ ____________ ____________
Gross profit.............................. 47,177 62,364 109,541
General and administrative expenses................... 31,137 43,393 74,530
Selling expenses...................................... 14,647 13,866 28,513
________ ____________ ____________
Income from operations.................... 1,393 5,105 6,498
Other income (expense)................................ 1,116 (3,491) (2,375)
________ ____________ ____________
Income before provision for income taxes.............. 2,509 1,614 4,123
Provision (benefit) for income taxes.................. 1,838 (268) 1,570
________ ____________ ____________
Net income............................................ $ 671 $ 1,882 $ 2,553
======== ============ ============
Three Months Ended June 29, 2001
______________________________________________________
Guarantor Nonguarantor
Parent Subsidiaries Subsidiary Consolidated
________ ____________ ___________ ____________
Net sales............................................. $144,095 $302,214 $431 $446,740
Cost of goods sold.................................... 102,623 242,078 295 344,996
________ ____________ ___________ ____________
Gross profit.............................. 41,472 60,136 136 101,744
General and administrative expenses................... 26,621 41,787 53 68,461
Selling expenses...................................... 12,808 13,678 13 26,499
International Business exit charge.................... -- -- (514) (514)
________ ____________ ___________ ____________
Income from operations.................... 2,043 4,671 584 7,298
Other (expense) income ............................... 778 (3,831) (14) (3,067)
________ ____________ ___________ ____________
Income before provision (benefit) for income taxes
and cumulative effect of accounting change......... 2,821 840 570 4,231
Provision (benefit) for income taxes.................. 2,151 (610) -- 1,541
________ ____________ ___________ ____________
Income before cumulative effect of accounting change.. 670 1,450 570 2,690
Cumulative effect of accounting change................ -- (90,045) -- (90,045)
________ ____________ ___________ ____________
Net income (loss)..................................... $ 670 $(88,595) $570 $(87,355)
======== ============ =========== ============
20
Statements of Cash Flows
For the Three Months Ended June 28, 2002 and June 29, 2001
Three Months Ended June 28, 2002
_______________________________________
Guarantor
Parent Subsidiaries Consolidated
__________ ____________ ____________
Net income............................................. $ 671 $ 1,882 $ 2,553
__________ ____________ ____________
Net cash provided by operating activities.............. 2,584 17,522 20,106
__________ ____________ ____________
Cash Flows From Investing Activities:
Capital expenditures................................ (2,587) (722) (3,309)
Payments on noncompete agreements................... (12) (94) (106)
Proceeds from sales of property and equipment....... -- 11 11
__________ ____________ ____________
Net cash used in investing activities...... (2,599) (805) (3,404)
__________ ____________ ____________
Cash Flows From Financing Activities:
Proceeds from issuance of common stock.............. 70 -- 70
Inter-company borrowings............................ 20,350 (20,350) --
__________ ____________ ____________
Net cash provided by (used in) financing
activities.............................. 20,420 (20,350) 70
__________ ____________ ____________
Net increase (decrease) in cash and cash equivalents... 20,405 (3,633) 16,772
Cash and cash equivalents, beginning of year........... 39,531 14,043 53,574
__________ ____________ ____________
Cash and cash equivalents, end of year................. $59,936 $10,410 $70,346
========== ============ ============
Three Months Ended June 29, 2001
_______________________________________________________
Guarantor Nonguarantor
Parent Subsidiaries Subsidiary Consolidated
__________ ____________ ____________ ____________
Net income (loss)...................................... $ 670 $(88,595) $570 $(87,355)
__________ ____________ ____________ ____________
Net cash provided by operating activities.............. 24,940 17,549 55 42,544
__________ ____________ ____________ ____________
Cash Flows From Investing Activities:
Capital expenditures................................ (4,966) (1,142) -- (6,108)
Payments on noncompete agreements................... (29) (109) -- (138)
Proceeds from sale of property and equipment........ 35 11 -- 46
Proceeds from sale of marketable security........... 50 -- -- 50
Proceeds from sale of International Business........ 610 -- (388) 222
__________ ____________ ____________ ____________
Net cash used in investing activities...... (4,300) (1,240) (388) (5,928)
__________ ____________ ____________ ____________
Cash Flows From Financing Activities:
Net borrowings...................................... (42,640) (10) -- (42,650)
Inter-company borrowings............................ 5,873 (6,206) 333 --
Other............................................... (4) -- -- (4)
__________ ____________ ____________ ____________
Net cash (used in) provided by financing
activities.............................. (36,771) (6,216) 333 (42,654)
__________ ____________ ____________ ____________
Net (decrease) increase in cash and cash equivalents... (16,131) 10,093 -- (6,038)
Cash and cash equivalents, beginning of year........... 31,725 2,649 -- 34,374
__________ ____________ ____________ ____________
Cash and cash equivalents, end of year................. $ 15,594 $12,742 $ -- $ 28,336
========== ============ ============ ============
9. SUBSEQUENT EVENT
On July 30, 2002, the Company's Board of Directors approved a stock repurchase
program authorizing the Company, depending upon market conditions and other
factors, to repurchase up to a maximum of 5% of its common stock, or
approximately 3.6 million common shares, in the open market, in privately
negotiated transactions or otherwise. Such repurchases will be made in
compliance with applicable rules and regulations and the terms of the Company's
debt agreements, and may be discontinued at any time.
21
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
PSS World Medical, Inc.:
We have reviewed the consolidated balance sheet of PSS World Medical, Inc. and
subsidiaries as of June 28, 2002, and the related consolidated statements of
operations and cash flows for the three-month period ended June 28, 2002. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of PSS
World Medical, Inc. and subsidiaries as of March 29, 2002, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated May 22,
2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of March 29, 2002, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ KPMG LLP
Jacksonville, Florida
July 31, 2002
22
ITEM 2. Management's Discussion and Analysis Of Financial Condition
and Results of Operations
General
PSS World Medical, Inc. (the "Company" or "PSSWM"), a Florida corporation, is a
specialty marketer and distributor of medical products to physician offices,
alternate-site and acute imaging providers, long-term care and home care
providers through 69 full-service centers to customers in all 50 states. Since
its inception in 1983, the Company has become a leader in the three market
segments it serves as a result of a focused and differentiated approach to
customer service, a consultative sales force, unique arrangements with product
manufacturers, innovative information systems, and a culture of performance.
Physician Sales & Service ("PSS" or the "Physician Supply Business"), a division
of the Company, is a leading distributor of medical supplies, equipment, and
pharmaceuticals to primary care office-based physicians in the United States
based on revenues, number of physician-office customers, number and quality of
sales representatives, and number of products distributed under unique
arrangements. PSS currently operates 42 full-service centers with approximately
717 sales representatives serving physician offices in all 50 states.
Diagnostic Imaging, Inc. ("DI" or the "Imaging Business"), a wholly owned
subsidiary, is a leading distributor of medical diagnostic imaging supplies,
chemicals, equipment, and services to the acute and alternate-care markets in
the United States based on consumable revenues, number of service specialists,
and number of sales representatives. DI currently operates 14 full-service
centers, 36 distribution centers, and 16 break-freight locations with
approximately 765 service specialists and 196 sales representatives serving
customer sites in 42 states. The Imaging Business' primary markets are
acute-care radiology departments, free-standing imaging centers, private
practice physicians, veterinarians, and chiropractors.
Gulf South Medical Supply, Inc. ("Gulf South" or the "Long-Term Care Business"),
a wholly owned subsidiary, 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 full-service centers with approximately 122 sales representatives serving
long-term care accounts in all 50 states. The Long-Term Care Business' primary
markets are independent, regional, and national skilled nursing facilities,
assisted living centers, and home care providers.
INDUSTRY
According to industry estimates, the United States medical supply and equipment
segment of the healthcare industry represents approximately a $45 billion market
comprised of medical products and equipment which are distributed to acute care
facilities, home healthcare 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, alternate-site and acute
imaging providers, long-term care and home care providers. Approximately 60% of
products in this market come through the distributor channel, representing a $27
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 healthcare
awareness, the proliferation of medical technology and testing, and expanding
third-party insurance coverage. In addition, the physician market continues to
benefit from the shift of procedures and diagnostic testing from hospitals to
alternate sites, particularly physician offices, despite a migration of
significantly lower hospital medical product pricing into the physician office
market. Also, as the cosmetic surgery and elective procedure markets continue to
grow, physicians are increasingly performing more procedures in their offices.
23
The healthcare industry is subject to extensive government regulation,
licensure, and operating procedures. National healthcare 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 healthcare
providers have affected spending budgets in certain markets within the medical
products industry. During 1997, the Balanced Budget Act passed by Congress made
significant changes to reimbursements for nursing homes and home care providers.
The industry continues to be impacted by these changes.
Over the past few years, the healthcare 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. The majority of the market serviced by the
Company continues to include small customers, with no single customer exceeding
10% of the consolidated Company's net sales. However, 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 June 28, 2002 represented sales to its top
five customers.
NEW ACCOUNTING PRONOUNCEMENT
During June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses
the financial accounting and reporting for costs associated with exit or
disposal activities, and eliminates the definition and requirements for
recognition of exits costs in Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 will require that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. It also establishes that
fair value is the objective for initial measurement of the liability. The
Company will apply the provisions of SFAS 146 for exit or disposal activities
that are initiated after December 31, 2002, the effective date of this
statement.
THREE MONTHS ENDED JUNE 28, 2002 VERSUS THREE MONTHS ENDED JUNE 29, 2001
Net Sales.
Three Months Ended
____________________
(dollars in millions) June 28, June 29, Increase
2002 2001 (Decrease)
_________ ________ __________
Physician Supply Business... $182.9 $171.4 $11.5
Imaging Business............ 176.8 179.5 (2.7)
Long-Term Care Business..... 103.5 95.4 8.1
Other....................... -- 0.4 (0.4)
_________ ________ __________
Total Company... $463.2 $446.7 $16.5
========= ======== ==========
Physician Supply Business--The change in net sales is primarily attributable to
an increase in medical disposables sales of approximately $13.4 million, of
which private label and pharmaceuticals sales represented approximately 34% of
this growth, offset by a slight decrease in equipment sales. The launch of the
new pediatrics SRxSM module contributed to the increase in medical disposables
sales and the addition of 26 new sales representatives increased overall net
sales. The decrease in equipment sales primarily resulted from the
discontinuance of the marketing and distribution of a product line.
Imaging Business--The change in net sales is primarily attributable to a decline
in analog film and chemistry product sales of approximately $3.0 million as a
result of customer conversions from wet x-ray film handling to dry lasers that
eliminate the need for certain consumable products such as film chemistry. This
decrease was partially offset by an increase in total equipment sales of
approximately $0.6 million related to growth derived from the Women's Health
strategic business unit ("SBU").
24
Long-Term Care Business--The increase in net sales is primarily attributable to
the ANSWERS(TM) marketing program that aligns improved business processes ("best
practices"), typically in the ordering process of nursing home operations and
purchasing, with efficient distribution activities. To date, over 150 customers
have adopted the program, which generated approximately $3.3 million of
incremental revenue during the three months ended June 28, 2002. In addition,
net sales increased due to growth initiatives that are focusing on regional
accounts and expansion of product line.
Other--The Company's European operations (the "International Business"), which
were divested during the three months ended June 29, 2001, reported net sales of
$0.4 million during the three months ended June 29, 2001.
Gross Profit. Gross profit for the three months ended June 28, 2002 totaled
$109.5 million, an increase of $7.8 million, or 7.7%, from gross profit of
$101.7 million for the three months ended June 29, 2001. Gross profit as a
percentage of net sales was 23.6% and 22.8% for the three months ended June 28,
2002 and June 29, 2001, respectively. The increase in gross profit is
attributable to (i) the overall increase in net sales described above, (ii) a
change in sales mix to higher gross profit consumable products in the Physician
Supply Business and equipment in the Imaging Business, (iii) an increase in
manufacturer incentive rebates earned by the Company, and (iv) improved purchase
economies resulting from the centralization of the purchasing function and
consolidation of vendors.
General and Administrative Expenses.
Three Months Ended
________________________________________
June 28, 2002 June 29, 2001
________________ __________________
% of % of
Net Net Increase
(dollars in millions) Amount Sales Amount Sales (Decrease)
______ _____ ______ ______ __________
Physician Supply Business... $33.3 18.2% $29.0 16.9% $4.3
Imaging Business............ 22.0 12.4 21.2 11.8 0.8
Long-Term Care Business..... 17.6 17.0 17.3 18.1 0.3
Other....................... 1.6 -- 1.0 -- 0.6
______ _____ ______ ______ __________
Total Company... $74.5 16.1% $68.5 15.3% $6.0
====== ===== ====== ====== ==========
During fiscal year 2002, the Company initiated and invested in programs to
support future profitability and growth. The cost of these programs include (i)
additional depreciation expense for completed phases of its Enterprise Resource
Planning ("ERP") system, electronic commerce platforms (including myPSS.com and
myDIOnline.com), and supply chain integration, (ii) employee and consulting fees
incurred for the rollout of ERP and electronic commerce platforms, (iii)
consulting fees for assistance in the validation of its strategic plan and other
expenses for business process improvements, and (iv) investments in
enterprise-wide learning initiatives to increase employee competencies and
knowledge and conform to consistent business practices. The additional costs
associated with these programs are continuing into fiscal year 2003.
Physician Supply Business--The change in general and administrative expenses is
primarily attributable to (i) an increase in salary and travel expenses as a
result of the conversion to the new ERP system and the restructuring plan that
was adopted during the fourth quarter of fiscal year 2002 ("rationalization
programs"), (ii) an increase in employee incentive compensation as a result of
improved branch profitability, and (iii) additional depreciation for completed
phases of its ERP system, myPSS.com electronic commerce platform, and supply
chain initiatives.
Imaging Business--The change in general and administrative expenses is primarily
attributable to (i) an increase in salary and contract labor expenses as a
result of the centralization of the call dispatch function to Jacksonville,
Florida, (ii) an increase in expenses related to the Fiscal Year 2003 National
Sales Meeting as there was no such meeting in the prior fiscal period, and (iii)
an increase in depreciation expense related to the myDIOnline.com electronic
commerce platform and supply chain initiatives.
Long-Term Care Business--The change in general and administrative expenses is
primarily attributable to (i) an increase in salary expense and employee
incentive compensation as a result of improved profitability and (ii) an
increase in amortization expense for an impaired noncompete intangible asset,
offset by a decrease in warehouse expenses as a result of closing a satellite
service center.
25
Other--The increase in general and administrative expenses is primarily
attributable to (i) an increase in salary expense as a result of the supply
chain initiative and two executive positions filled during fiscal year 2002 and
(ii) an increase in depreciation expense for the supply chain initiative and
leasehold improvements related to the centralization of certain administrative
functions to the corporate headquarters located in Jacksonville, Florida.
General and administrative expenses also include charges related to
restructuring activity, merger activity, and other items. These charges
increased approximately $0.9 million during the three months ended June 28, 2002
compared to the same period of the prior fiscal period. The following table
summarizes special charges that are included in general and administrative
expenses in the accompanying consolidated statements of operations (in
millions):
Three Months Ended June 28, 2002
___________________________________________________________
Physician Long-
Supply Imaging Term Care
Business Business Business Other Total
_________ _________ _________ ________ ______
Restructuring costs and expenses.. $0.7 $0.2 $-- $ -- $0.9
Merger costs and expenses......... -- -- -- 0.5 0.5
Accelerated depreciation.......... 0.1 -- -- -- 0.1
Reversal of operational tax charge -- -- -- (0.1) (0.1)
Other............................. 0.1 -- -- -- 0.1
_________ _________ _________ ________ ______
Total................. $0.9 $0.2 $-- $0.4 $1.5
========= ========= ========= ======== ======
Percent of net sales.............. 0.5% 0.1% -- -- 0.3%
Three Months Ended June 29, 2001
___________________________________________________________
Physician Long-
Supply Imaging Term Care
Business Business Business Other Total
_________ _________ _________ ________ ______
Restructuring costs and expenses.. $0.1 $0.3 $0.1 $ -- $ 0.5
Merger costs and expenses......... -- (0.2) -- 0.8 0.6
Reversal of operational tax charge -- -- -- (0.5) (0.5)
_________ _________ _________ ________ ______
Total................. $0.1 $0.1 $0.1 $ 0.3 $ 0.6
========= ========= ========= ======== ======
Percent of net sales.............. 0.1% 0.1% 0.1% -- 0.1%
Restructuring Costs and Expenses
Restructuring costs and expenses for the three months ended June 28,
2002 and June 29, 2001 primarily include (i) costs expensed as incurred
related to the Physician Supply Business' and the Imaging Business'
restructuring plans that were adopted during the fourth quarter of
fiscal year 2002 and (ii) costs expensed as incurred related to various
restructuring plans that were adopted in prior fiscal years. Refer to
Note 3, Accrued Restructuring Costs and Expenses, for further details
regarding these plans.
Physician Supply Business Plan Adopted During the Fourth Quarter of
Fiscal Year 2002. The total estimated costs related to this plan are
approximately $6.5 million, of which approximately $4.1 million and
$0.6 million was recognized during fiscal year 2002 and the three
months ended June 28, 2002, respectively, and approximately $1.7
million will be expensed as incurred during the remaining nine months
of fiscal year 2003. Management anticipates that this plan will be
completed by the end of the fourth quarter of fiscal year 2003. During
the three months ended June 28, 2002, the Physician Supply Business
recorded charges of $0.6 million, which include branch shut down costs
of $0.3 million, involuntary employee termination costs of $0.2
million, and employee relocation costs of $0.1 million.
26
Imaging Business Plan Adopted During the Fourth Quarter of Fiscal Year
2002. The total estimated costs related to this plan are approximately
$3.0 million, of which approximately $2.0 million and $0.2 million was
recognized during fiscal year 2002 and the three months ended June 28,
2002, respectively, and approximately $0.8 million will be expensed as
incurred during the remaining nine months of fiscal year 2003.
Management anticipates that this plan will be completed by the end of
fiscal year 2003. During the three months ended June 28, 2002, the
Imaging Business recorded charges of $0.2 million, which include branch
shutdown costs of $0.1 million, and employee relocation costs of $0.1
million.
Various Restructuring Plans Adopted in Prior Fiscal Years. During the
three months ended June 28, 2002 and June 29, 2001, the Company
recorded $0.1 million and $0.5 million, respectively, of restructuring
costs as incurred. These costs primarily relate to costs to pack and
move inventory, costs to set up new facilities, employee relocation
costs, and other related facility closure costs.
Merger Costs and Expenses
Merger costs and expenses for the three months ended June 28, 2002 and
June 29, 2001 primarily include costs related to employee retention
bonuses, costs expensed as incurred related to various merger plans
that were adopted in prior fiscal years, and adjustments to previous
estimates.
Effective February 1, 2000, the Board of Directors approved and adopted
an Officer Retention Bonus Plan and a 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. The total cash compensation costs
related to these plans is approximately $10.1 million, of which $8.6
million was expensed in prior fiscal years. Approximately $0.5 million
was recognized during the three months ended June 28, 2002 and an
additional $1.0 million is estimated to be expensed during the
remaining nine months of fiscal year 2003. During the three months
ended June 29, 2001, the Company expensed approximately $0.8 million.
During the three months ended June 29, 2001, the Company reversed
approximately $0.2 million, which primarily related to accrued lease
termination costs.
Accelerated Depreciation
The Physician Supply Business identified certain assets that would be
replaced or disposed of as a result of the restructuring plan that was
implemented during the fourth quarter of fiscal year 2002. 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
and determined that impairment did not exist at the division level.
Therefore, management revised the estimated useful lives of certain
assets in accordance with Accounting Principles Board No. 20,
"Accounting Changes." As a result of shortening the useful lives during
the fourth quarter of fiscal year 2002 to coincide with the disposal
date, the Company recorded $0.1 million of accelerated depreciation
during the three months ended June 28, 2002. The effect of this change
in estimate decreased basic and diluted earnings per share by less than
$0.01 for the three months ended June 28, 2002.
Reversal of Operational Tax Charge
During the three months ended June 28, 2002 and June 29, 2001, the
Company performed an analysis and reversed approximately $0.1 million
and $0.5 million, respectively, of a previously recorded operating tax
charge reserve.
Other
During the three months ended June 28, 2002, the Company incurred $0.1
million primarily relating to certain lease termination costs for
locations that were previously vacated in connection with prior
restructuring plans.
27
Selling Expenses.
Three Months Ended
________________________________________
June 28, 2002 June 29, 2001
________________ __________________
% of % of
Net Net Increase
(dollars in millions) Amount Sales Amount Sales (Decrease)
______ _____ ______ ______ __________
Physician Supply Business... $17.3 9.5% $15.2 8.9% $2.1
Imaging Business............ 8.2 4.6 8.3 4.6 (0.1)
Long-Term Care Business..... 3.0 2.9 3.0 3.1 --
Other....................... -- -- -- -- --
______ _____ ______ ______ __________
Total Company... $28.5 6.2% $26.5 5.9% $2.0
====== ===== ====== ====== ==========
Physician Supply Business--The change in selling expenses is primarily
attributable to an increase in sales commission expense due to increased sales
volume and the addition of 26 new sales representatives. Commissions are
generally paid to sales representatives based on gross profit as a percentage of
net sales. Gross profit as a percent of net sales slightly increased period to
period.
Imaging Business--The change in selling expenses is primarily attributable to a
strong focus on controlling costs coupled with a decrease in training expense.
Selling expense as a percent of net sales remained relatively unchanged.
Long-Term Care Business--Although net sales increased, selling expenses remained
relatively constant from period to period. Commissions are generally paid to
sales representatives based on gross profit as a percentage of net sales. Gross
profit as a percent of net sales remained relatively unchanged from period to
period.
International Business Exit Charge Reversal. During fiscal year 2001, the
Company adopted a plan for divesting the International Business and recorded a
charge of approximately $14.9 million. The sale of the International Business
was completed during the three months ended June 29, 2001. Upon completion of
the sale, the Company recorded a reversal of $0.5 million of the previously
established charge due to lower than expected costs to exit the operations.
Income from Operations.
Three Months Ended
____________________
(dollars in millions) June 28, June 29, Increase
2002 2001 (Decrease)
____________________ __________
Physician Supply Business... $ 5.5 $ 5.7 $(0.2)
Imaging Business............ (1.2) 0.1 (1.3)
Long-Term Care Business..... 3.8 1.8 2.0
Other....................... (1.6) (0.3) (1.3)
________ _________ __________
Total Company... $ 6.5 $ 7.3 $(0.8)
======== ========= ==========
Income from operations for each business segment changed due to the factors
discussed above.
Interest Expense. Interest expense for the three months ended June 28, 2002
totaled $3.1 million, a decrease of $1.2 million, or 27.9%, from interest
expense of $4.3 million for the three months ended June 29, 2001. The decrease
is primarily attributable to lower outstanding debt balances under the Company's
revolving credit agreement over the prior period 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 totaled $0.2
million for each of the three month periods ended June 28, 2002 and June 29,
2001. Although cash and cash equivalents have increased significantly from
period to period, interest and investment income remained unchanged primarily
due to a general reduction in interest rates.
Other Income. Other income for the three months ended June 28, 2002 totaled $0.5
million, a decrease of $0.5 million, or 50.0%, from other income of $1.0 million
for the three months ended June 29, 2001. The decrease in other income is
primarily attributable to a decrease in finance charge income on customer
accounts and an increase in losses incurred on the sales of property and
equipment.
Provision for Income Taxes. Provision for income taxes was $1.6 million for the
three months ended June 28, 2002, a change of $0.1 million from the provision
for income taxes of $1.5 million for the three months ended June 29, 2001. The
effective income tax rate was approximately 38.1% and 36.4% for the three months
ended June 28, 2002 and June 29, 2001, respectively. The increase in the
effective rate is primarily attributable to (i) an increase in unfavorable
permanent items and (ii) an increase in the income before provision for income
taxes, excluding the effect of the International Business, offset by a valuation
allowance recorded during fiscal year 2002 against certain deferred tax assets
resulting from capital loss carryforwards generated from the sale of the
International Business.
28
Net Income (Loss). Net income for the three months ended June 28, 2002 totaled
$2.6 million compared to a net loss of $87.4 million. The net loss for the three
months ended June 29, 2001 primarily related 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, "Goodwill
and Other Intangible Assets." Excluding the charge for the cumulative effect of
accounting change, net income remained unchanged from period to period.
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 flows from
operating activities, revolving credit borrowings, and other financing
arrangements.
Statement of Cash Flows Discussion
Net cash provided by operating activities was $20.1 million and $42.5 million
for the three months ended June 28, 2002 and June 29, 2001, respectively. During
the three months ended June 29, 2002, cash flows from operating activities were
positively impacted by noncash items of $6.0 million related to depreciation,
amortization of intangible assets, amortization of debt issuance costs,
provision for doubtful accounts, and benefit for deferred income taxes. Cash
flows from operating activities were also positively impacted by the continued
implementation of working capital reduction initiatives that started in the last
half of fiscal year 2001 and continued into fiscal year 2003. During the three
months ended June 28, 2002, accounts payable increased approximately $22.4
million, accounts receivable decreased approximately $0.8 million, and
inventories increased approximately $9.7 million, resulting in a net $13.5
million decrease in operating working capital, which positively impacted
operating cash flows. Approximately $8.0 million of the accounts payable
increase resulted from the timing of vendor payments at quarter end. The Company
expects accounts payable levels to decrease in subsequent periods and return to
a normal level. In addition, inventories at the Physician Supply Business and
Imaging Business increased approximately $3.7 million and $6.4 million,
respectively. The Company believes these increases are the short-term result of
the rationalization programs (e.g., conversion to the new ERP system at the
Physician Supply Business and the centralization of the purchasing function at
the Physician Supply Business and Imaging Business) and the goal of minimizing
customer disruptions during these process changes. Management expects these
levels to decrease in future periods once standard stock levels are measured and
optimal service levels are achieved. The change in prepaid expenses and other
current assets and other assets, net of the change in accrued expenses and other
liabilities, resulted in a reduction of approximately $2.0 million of cash flows
from operations which included the collection of approximately $4.2 million in
refunds from the Internal Revenue Service and various states.
Net cash used in investing activities was $3.4 million and $5.9 million for the
three months ended June 28, 2002 and June 29, 2001, respectively. During the
three months ended June 28, 2002 and June 29, 2001, capital expenditures related
to the continued development of the Company's ERP system, electronic commerce
platforms, and supply chain integration were approximately $0.2 million and $3.6
million, respectively. During fiscal year 2003, the Company is focusing on
reducing overall capital expenditures and expects reduced levels of capital
expenditures with the planned completion of the ERP system conversions during
the first quarter of fiscal year 2004.
Net cash provided by financing activities was $0.1 million for the three months
ended June 28, 2002 compared to net cash used in financing activities of $42.7
million for the three months ended June 29, 2001. During the three months ended
June 28, 2002, no amounts were outstanding under the revolving credit agreement.
During fiscal year 2002, the Company repaid a significant amount of debt
outstanding under the agreement using cash flows from operating activities.
Operating Trends
The Company had working capital of $277.8 million and $274.9 million as of June
28, 2002 and March 29, 2002, respectively. Accounts receivable, net of
allowances, were $225.1 million and $227.0 million at June 28, 2002 and March
29, 2002, respectively. The average number of days sales in accounts receivable
outstanding was approximately 43.9 and 43.8 days for the three months ended June
28, 2002 and March 29, 2002, respectively. For the three months ended June 28,
2002, the Company's Physician Supply, Imaging, and Long-Term Care Businesses had
days sales in accounts receivable of approximately 44.5, 39.3, and 50.8 days,
respectively.
29
Inventories were $162.6 million and $152.9 million as of June 28, 2002 and March
29, 2002, respectively. The Company had inventory turnover of 9.0x and 9.1x for
the three months ended June 28, 2002 and March 29, 2002, respectively. For the
three months ended June 28, 2002, the Company's Physician Supply, Imaging, and
Long-Term Care Businesses had inventory turnover of 9.0x, 8.2x, and 10.8x,
respectively.
The following table presents Adjusted EBITDA and other financial data for the
three months ended June 28, 2002 and June 29, 2001 (in millions):
Other Financial Data: Three Months Ended
______________________
June 28, June 29,
2002 2001
_________ __________
Income from operations................................................ $ 6,498 $ 7,298
Plus: Other income................................................... 534 996
Plus: Depreciation and amortization of intangible assets............. 5,592 4,291
Plus: Charges included in general and administrative expenses (d).... 1,377 592
Plus: International Business exit charge reversal.................... -- (514)
_________ __________
Adjusted EBITDA (a)................................................... $ 14,001 $ 12,663
Interest expense...................................................... $ 3,130 $ 4,251
Interest coverage (b)................................................. 4.5x 3.0x
Adjusted EBITDA Margin (c)............................................ 3.0% 2.8%
Net cash provided by operating activities............................. $ 20,106 $ 42,544
Net cash used in investing activities................................. (3,404) (5,928)
Net cash provided by (used in) financing activities................... 70 (42,654)
As of
______________________
June 28, June 29,
2002 2001
_________ __________
Return on committed capital (e) (d) 12.6% 10.7%
Ratio of debt to capitalization (f) 27.6% 31.8%
(a) Adjusted EBITDA represents income from operations, plus other income,
depreciation and amortization of intangible assets, charges included in
general and administrative expenses (refer to Note 2, Charges Included
in General and Administrative Expenses, in the accompanying
consolidated financial statements), and International Business exit
charge reversal. Adjusted EBITDA excludes interest expense and
provision for income taxes. Adjusted EBITDA is not a measure of
performance or financial condition under generally accepted accounting
principles ("GAAP").
Adjusted EBITDA is not intended to represent cash flows 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 flows from operating activities, or as a measure of liquidity. In
addition, Adjusted 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 Adjusted 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 Adjusted EBITDA using the same method and the Adjusted EBITDA
numbers set forth above may not be comparable to Adjusted EBITDA
reported by other companies.
(b) Interest coverage represents the ratio of Adjusted EBITDA to interest
expense.
(c) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to net
sales.
(d) Charges included in general and administrative expenses for the three
months ended June 28, 2002 excludes $84 of accelerated depreciation.
Accelerated depreciation is included in depreciation and amortization
in the Adjusted EBITDA calculation.
30
(e) Return on committed capital equals Adjusted EBITDA less depreciation
divided by the average of the two most recent fiscal quarters of total
assets less the sum of cash and cash equivalents, goodwill, net
intangibles, accounts payable, accrued expenses, and other current and
noncurrent liabilities. The result of this calculation is then
annualized.
(f) Ratio of debt to capitalization is calculated as long-term debt plus
current portion of long-term debt divided by the sum of long-term debt,
current portion of long-term debt, and shareholders' equity.
Senior Subordinated Notes
The Company's Senior Subordinated 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 cash flows from
operating activities of the Company. The Notes mature on October 1, 2007, and
are callable beginning October 1, 2002, at the option of the Company. 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 to 1.
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 bears interest at the Bank's
prime rate plus a margin of between 0.25% and 1.0% 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 3.5% 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 amended 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 the 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 June 28, 2002, 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.
31
The Company may from time to time seek to retire its outstanding debt through
cash purchases and/or exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases or exchanges,
if any, will depend on prevailing market conditions, the Company's liquidity
requirements, contractual restrictions and other factors. The amounts involved
may be material.
On July 30, 2002, the Company's Board of Directors approved a stock repurchase
program authorizing the Company, depending upon market conditions and other
factors, to repurchase up to a maximum of 5% of its common stock, or
approximately 3.6 million common shares, in the open market, in privately
negotiated transactions or otherwise. Such repurchases will be made in
compliance with applicable rules and regulations and the terms of the Company's
debt agreements, and may be discontinued at any time.
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, and contractual payments under noncompetition agreements and
employment agreements. As of June 28, 2002, the Company had no borrowings
outstanding under the credit facility. The following table presents, in
aggregate, scheduled payments under contractual obligations (in thousands):
Fiscal Year
________________________________________________________
(9 months)
2003 2004 2005 2006 2007 Thereafter Total
__________ _________ _________ _________ ___________ __________ ________
Long-term debt......... $ -- $ -- $ -- $ -- $ -- $125,000 $125,000
Operating leases:
Restructuring....... 924 1,084 718 301 34 -- 3,061
Operating........... 20,840 20,869 14,200 7,594 5,191 5,255 73,949
Noncompetition
agreements......... 462 59 43 36 36 144 780
Employment agreements. 2,558 -- -- -- -- -- 2,558
__________ _________ _________ _________ ___________ __________ ________
Total......... $24,784 $22,012 $14,961 $7,931 $5,261 $130,399 $205,348
========== ========= ========= ========= =========== ========== ========
ITEM 3. Quantitative and qualitative disclosures about market risk
The Company believes there has been no material change in its exposure to market
risk from that discussed in Item 7A in the Annual Report on Form 10-K for the
fiscal year ended March 29, 2002.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7, Commitments and Contingencies, of this Form 10-Q and Item 3 of the
Company's Annual Report on Form 10-K for the year ended on March 29, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
32
ITEM 4. SUBMISSION OF MATTERS TO A VOATE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
Exhibit
Number Description
<c>
3.1 Amended and Restated Articles of Incorporation, dated as of March 15, 1994. (9)
3.1a Articles of Amendment to Articles of Incorporation, dated as of September 24, 2001. (18)
3.1b Articles of Amendment to Articles of Incorporation, dated as of November 9, 2001. (18)
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.
(7)
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. (13)
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. (7)
4.3 Form of 8 1/2% Senior Subordinated Notes due 2007, including Form of Guarantee (Exchange Notes). (7)
4.4 Shareholder Protection Rights Agreement, dated as of April 20, 1998, between the Company and
Continental Stock Transfer & Trust Company, as Rights Agent. (10)
4.4a Amendment to Shareholder Protection Rights Agreement, dated as of June 21, 2000, between the
Company and Continental Stock Transfer & Trust Company as Rights Agent. (12)
33
4.4b Amendment to Shareholder Protection Rights Agreement, dated as of April 12, 2002, between the
Company and First Union National Bank, as Successor Rights Agent. (20)
10.1 Incentive Stock Option Plan, dated as of May 14, 1986. (1)
10.2 Amended and Restated Directors Stock Plan. (5)
10.3 Amended and Restated 1994 Long-Term Incentive Plan. (5)
10.4 Amended and Restated 1994 Long-Term Stock Plan. (5)
10.5 1994 Employee Stock Purchase Plan. (4)
10.6 1994 Amended Incentive Stock Option Plan. (1)
10.7 1999 Long-term Incentive Plan. (11)
10.8 Distributorship Agreement between Abbott Laboratories and the Company (Portions omitted pursuant
to a request for confidential treatment - Separately filed with the SEC). (2)
10.9 Amended and Restated Employee Stock Ownership and Savings Plan.
10.9a Seventh Amendment to the Employee Stock Ownership and Savings Plan.
10.10 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. (8)
10.11 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. (14)
10.11a 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. (16)
10.12 Employment Agreement, dated as of March 4, 1998, by and between the Company and David A. Smith.
(15)
10.12a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
David A. Smith. (15)
10.13 Employment Agreement, dated as of April 1, 1998, by and between the Company and John F. Sasen,
Sr. (15)
10.13a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and John
F. Sasen, Sr. (15)
10.14 Consulting Agreement, dated as of June 13, 2002, by and between the Company and Douglas J.
Harper. (17)
10.15 Employment Agreement, dated as of April 1, 1998, by and between the Company and Gary A. Corless.
(17)
10.15a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
Gary A. Corless. (17)
34
10.16 Employment Agreement, dated as of April 1, 1998, by and between the Company and Kevin P. English.
(17)
10.16a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
Kevin P. English. (17)
10.17 Employment Agreement, dated as of January 7, 2002, by and between the Company and David M.
Bronson. (19)
10.18 Severance Agreement, dated as of October 11, 2000, by and between the Company and Frederick E.
Dell. (15)
10.19 Severance Agreement, dated as of February 1, 2001, by and between the Company and Kirk A.
Zambetti. (15)
10.20 Severance Agreement, dated as of March 21, 2001, by and between the Company and Patrick C. Kelly.
(15)
21 List of Subsidiaries of the Company. (20)
(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 Annual Report on Form 10-K for the year ended
March 30, 1995.
(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-8,
Registration No. 33-80657.
(5) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996.
(6) Not used.
(7) Incorporated by Reference to the Company's Registration Statement on Form S-4,
Registration No. 333-39679.
(8) Incorporated by Reference from Annex A to the Company's Registration Statement on
Form S-4, Registration No. 333-44323.
(9) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 8,
1998.
(10) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 22,
1998.
(11) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
(12) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000.
(13) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 29, 2000.
(14) Incorporated by Reference to the Company's Current Report on Form 8-K, filed June 5, 2001.
(15) Incorporated by Reference to the Company's Annual Report on Form 10-K for the year ended
March 30, 2001.
(16) Incorporated by Reference to the Company's Current Report on Form 8-K, filed July 3, 2001.
(17) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 29, 2001.
(18) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 28, 2001.
(19) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 28, 2001.
(20) Incorporated by Reference to the Company's Annual Report on Form 10-K for the year ended
March 29, 2002.
35
(b)Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended June
28, 2002.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Jacksonville, State of
Florida, on August 12, 2002.
PSS WORLD MEDICAL, INC
By: /s/ David M. Bronson
-----------------------------------
David M. Bronson
Senior Vice President and Chief Financial
Officer (Duly Authorized Officer and Principal
Financial and Accounting Officer)
37
EXHIBIT INDEX
Exhibit
10.9 Amended and Restated Employee Stock Ownership and Savings Plan.
10.9a Seventh Amendment to the Employee Stock Ownership and Savings Plan.
10.14 Consulting Agreement, dated as of June 13, 2002, by and between the
Company and Douglas J. Harper.
38