-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MHRzJWljnLOIeFpkyfsw0zNERu/xn+XVStJ3pMehfh9v2HvMpKnCzqUaTO2O+FqV MLeI/TxGNIRywSocs1iB1A== 0000920527-01-500019.txt : 20020410 0000920527-01-500019.hdr.sgml : 20020410 ACCESSION NUMBER: 0000920527-01-500019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010928 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSS WORLD MEDICAL INC CENTRAL INDEX KEY: 0000920527 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 592280364 STATE OF INCORPORATION: FL FISCAL YEAR END: 0329 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23832 FILM NUMBER: 1783818 BUSINESS ADDRESS: STREET 1: 4345 SOUTHPOINT BLVD STREET 2: STE 250 CITY: JACKSONVILLE STATE: FL ZIP: 32216 BUSINESS PHONE: 9043323000 MAIL ADDRESS: STREET 1: 4345 SOUTHPOINT BLVD STREET 2: STE 250 CITY: JACKSONVILLE STATE: FL ZIP: 32216 FORMER COMPANY: FORMER CONFORMED NAME: PHYSICIAN SALES & SERVICE INC /FL/ DATE OF NAME CHANGE: 19940318 10-Q 1 q210q.txt SECOND QUARTER 2002 FORM 10Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 28, 2001 ------------------ [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission File Number 0-23832 PSS WORLD MEDICAL, INC. (Exact name of registrant as specified in its charter) Florida 59-2280364 ------- ---------- (State or other jurisdiction (IRS employer of incorporation) Identification number) 4345 Southpoint Blvd. Jacksonville, Florida 32216 --------------------- ----- (Address of principal executive offices) (Zip code) Registrant's telephone number (904) 332-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of November 8, 2001 a total of 71,161,414 shares of common stock, par value $.01 per share, of the registrant were outstanding. PSS WORLD MEDICAL, INC. AND SUBSIDIARIES September 28, 2001 TABLE OF CONTENTS
[PAGE] ITEM Information Regarding Forward-Looking Statements.................................................. 3 PART I - FINANCIAL INFORMATION 1. Financial Statements Condensed Consolidated Balance Sheets - September 28, 2001 and March 30, 2001..................... 4 Condensed Consolidated Statements of Operations - for the Three and Six Months Ended September 28, 5 2001 and September 29, 2000................................................................... Condensed Consolidated Statements of Cash Flows - for the Six Months Ended September 28, 2001 and 6 September 29, 2000............................................................................ Notes to Condensed Consolidated Financial Statements - September 28, 2001 and September 29, 2000 7 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 18 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 28 PART II - OTHER INFORMATION Other Information........................................................................................ 29 Signatures............................................................................................... 33
2 CAUTIONARY STATEMENTS Forward-Looking Statements This Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements regarding the Company's and its subsidiaries' expected future financial position, results of operations, cash flows, funds from operations, dividends and dividend plans, financing plans, business strategy, budgets, projected costs, capital expenditures, competitive positions, growth opportunities, plans and objectives of management for future operations and statements that include words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "may," "could," and other similar expressions are forward-looking statements. Such forward-looking statements are inherently uncertain, and stockholders must recognize that actual results may differ from the Company's expectations. Actual future results and trends for the Company may differ materially depending on a variety of factors discussed in the Company's Annual Report on Form 10-K and in this Form 10-Q and elsewhere in the Company's filings with the Securities and Exchange Commission (the "SEC"). Factors that may affect the plans or results of the Company include (a) the ability of the Company to successfully implement its business plan; (b) the availability of sufficient capital to finance the Company's business plans on terms satisfactory to the Company; (c) competitive factors; (d) the ability of the Company to adequately defend or reach a settlement of outstanding litigations and investigations involving the Company or its management; (d) changes in labor, equipment and capital costs; (e) changes in regulations affecting the Company's business; (f) future acquisitions or strategic partnerships; and (g) general business and economic conditions. Many of these factors are outside the control of the Company and its management. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. The Company undertakes no duty to update such forward-looking statements. 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except Per Share Data)
September 28, March 30, 2001 2001 ------------------ ----------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents.................................................. $ 24,228 $ 34,374 Marketable securities...................................................... 200 314 Accounts receivable, net................................................... 235,468 236,846 Inventories, net........................................................... 161,469 154,725 Employee advances.......................................................... 675 478 Prepaid expenses and other................................................. 41,799 60,633 ------------------ ----------------- Total current assets............................................... 463,839 487,370 Property and equipment, net................................................... 80,840 76,247 Other Assets: Goodwill .................................................................. 60,644 163,879 Intangibles, net........................................................... 17,036 19,573 Employee advances.......................................................... 534 524 Other...................................................................... 28,880 25,041 ------------------ ----------------- Total assets....................................................... $651,773 $772,634 ================== ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Bank revolver.............................................................. $ 10,805 $ -- Accounts payable........................................................... 142,950 119,238 Accrued expenses........................................................... 34,556 39,234 Current maturities of long-term debt and capital lease obligations......... 98 1,752 Other...................................................................... 9,311 10,855 ------------------ ----------------- Total current liabilities.......................................... 197,720 171,079 Long-term debt and capital lease obligations, net of current portion.......... 125,000 190,040 Other......................................................................... 8,094 7,213 ------------------ ----------------- Total liabilities.................................................. 330,814 368,332 ------------------ ----------------- Shareholders' Equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued and outstanding................................................. -- -- Common stock, $.01 par value; 150,000,000 shares authorized, 71,161,086 and 71,077,236 shares issued and outstanding at September 28, 2001 and March 30, 2001, respectively................................................. 712 711 Additional paid-in capital................................................. 349,311 348,701 (Accumulated deficit) retained earnings.................................... (29,064) 54,890 ------------------ ----------------- Total shareholders' equity......................................... 320,959 404,302 ------------------ ----------------- Total liabilities and shareholders' equity......................... $651,773 $772,634 ================== ================= The accompanying notes are an integral part of these condensed consolidated balance sheets.
4 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in Thousands, Except Per Share Data)
Three Months Ended Six Months Ended ---------------------------------------- ---------------------------------------- September 28, 2001 September 29, 2000 September 28, 2001 September 29, 2000 ------------------- ------------------- ------------------- ------------------- Net sales $448,370 $446,150 $895,110 $917,798 Cost of goods sold 343,898 344,625 688,895 701,987 ------------------- ------------------- ------------------- ------------------- Gross profit 104,472 101,525 206,215 215,811 General and administrative expenses 69,411 69,726 137,872 142,366 Selling expenses 27,139 28,648 53,638 58,026 International business exit charge reversal -- -- (514) -- ------------------- ------------------- ------------------- ------------------- Income from operations 7,922 3,151 15,219 15,419 ------------------- ------------------- ------------------- ------------------- Other income (expense): Interest expense (2,942) (4,687) (7,193) (9,722) Interest and investment income 40 561 278 1,261 Other income 462 715 1,408 1,527 ------------------- ------------------- ------------------- ------------------- (2,440) (3,411) (5,507) (6,934) ------------------- ------------------- ------------------- ------------------- Income (loss) before provision for income taxes and cumulative effect of accounting change 5,482 (260) 9,712 8,485 Provision for income taxes 2,080 704 3,621 4,829 ------------------- ------------------- ------------------- ------------------- Income (loss) before cumulative effect of 3,402 (964) 6,091 3,656 accounting change Cumulative effect of accounting change (net of income taxes of $14,444) -- -- (90,045) -- ------------------- ------------------- ------------------- ------------------- Net income (loss) $ 3,402 $ (964) $(83,954) $ 3,656 =================== =================== =================== =================== Earnings per share - Basic: Income (loss) before cumulative effect of accounting change $ 0.05 $ (0.01) $ 0.09 $ 0.05 Cumulative effect of accounting change -- -- (1.27) -- ------------------- ------------------- ------------------- ------------------- Net income (loss) $ 0.05 $ (0.01) $ (1.18) $ 0.05 =================== =================== =================== =================== Earnings per share - Diluted: Income (loss) before cumulative effect of accounting change $ 0.05 $ (0.01) $ 0.09 $ 0.05 Cumulative effect of accounting change -- -- (1.26) -- ------------------- ------------------- ------------------- ------------------- Net income (loss) $ 0.05 $ (0.01) $ (1.17) $ 0.05 =================== =================== =================== =================== The accompanying notes are an integral part of these condensed consolidated statements.
5 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands)
Six Months Ended -------------------------------------- September 28, September 29, 2001 2000 ------------------ ------------------ Cash Flows From Operating Activities: Net (loss) income.......................................................... $ (83,954) $ 3,656 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting change................................. 90,045 -- Depreciation........................................................... 5,843 4,950 Amortization of goodwill and intangible assets......................... 2,957 6,185 Amortization of debt issuance costs.................................... 993 403 Provision for doubtful accounts........................................ 3,118 2,137 International Business exit charge reversal............................ (514) -- ESOP amortization...................................................... -- 345 Loss on marketable securities.......................................... 114 -- Gain on sale of fixed assets........................................... 21 7 Changes in operating assets and liabilities: Accounts receivable................................................. (4,359) 1,594 Inventories, net.................................................... (9,587) 9,278 Prepaid expenses and other current assets........................... 18,523 2,965 Other assets........................................................ 7,324 (8,326) Accounts payable, accrued expenses, and other liabilities........... 26,063 (10,205) ------------------ ------------------- Net cash provided by operating activities....................... 56,587 12,989 ------------------ ------------------- Cash Flows From Investing Activities: Proceeds from sales of property and equipment............................. 59 11 Capital expenditures...................................................... (11,835) (9,806) Proceeds from sale of International Business.............................. 222 -- Payments on noncompete agreements......................................... (925) (657) ------------------ ------------------- Net cash used in investing activities........................... (12,479) (10,452) ------------------ ------------------- Cash Flows From Financing Activities: Proceeds from borrowings.................................................. 67,995 60,000 Repayment of borrowings................................................... (122,226) (80,408) Principal payments under capital lease obligations........................ (23) (49) Other..................................................................... -- (343) Net cash used in financing activities........................... (54,254) (20,800) ------------------ ------------------- Net decrease in cash and cash equivalents..................................... (10,146) (18,263) Cash and cash equivalents, beginning of period................................ 34,374 60,414 ------------------ ------------------- Cash and cash equivalents, end of period...................................... $ 24,228 $ 42,151 ================== =================== The accompanying notes are an integral part of these condensed consolidated statements.
6 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2001 AND SEPTEMBER 29, 2000 (Unaudited) (Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted) NOTE 1 - BASIS OF PRESENTATION PSS World Medical, Inc. (the "Company" or "PSS") is a specialty marketer and distributor of medical products to physicians, alternate-site imaging centers, long-term care providers, home care providers, and hospitals through 91 service centers to customers in all 50 states. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to the SEC rules and regulations. The condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations for the periods indicated. The condensed consolidated balance sheet as of March 30, 2001 has been derived from the Company's audited consolidated financial statements for the year ended March 30, 2001. The financial statements and related notes included in this report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended March 30, 2001. The Company operates on a thirteen week quarter which ends on the Friday closest to each calendar quarter end. The results of operations for the interim periods covered by this report may not necessarily be indicative of operating results for the full fiscal year. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations ("SFAS 141"). SFAS 141 requires the purchase method of accounting for business combinations consummated after June 30, 2001 and eliminates the poolings-of-interests method. The Company will apply the provisions of SFAS 141 to acquisitions initiated after June 30, 2001. In June 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangibles ("SFAS 142"). SFAS 142 requires, among other things, the discontinuance of goodwill amortization and includes provisions for the reassessment of the useful lives of existing intangibles and assessing potential impairments of goodwill. SFAS 142 also requires that the Company complete a two-step goodwill impairment test. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step is not required. SFAS 142 requires completion of this first step within the first six months of initial adoption and annually thereafter. If the carrying amount of a reporting unit exceeds its fair value, the second step is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of goodwill to the carrying value of a reporting unit's goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. In the initial year of 7 adoption, any impairment loss identified is presented as a change in accounting principal and recorded as of the beginning of that fiscal year. In years subsequent to the initial year of adoption, any impairment loss recognized is recorded as a charge to income from operations. The Company elected to adopt SFAS 142 as of March 31, 2001. During the quarter ended September 28, 2001, the Company completed both steps of the transitional goodwill impairment tests which resulted in an impairment charge of $90,045, net of income taxes of $14,444. Refer to Note 5, Goodwill for further discussion of the impact of SFAS 142 on the Company's financial position and results of operations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. The Company will apply the provisions of SFAS 144 beginning March 30, 2002. Management believes that the adoption of SFAS 144 will not have a material impact on its results of operations. NOTE 2 - CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses may include charges related to merger activity, restructuring activity, and other special items. The following table summarizes unusual charges included as components of general and administrative expenses in the accompanying consolidated income statements:
Three Months Ended Six Months Ended ------------------------------ -------------------------------- September 28, September 29, September 28, September 29, 2001 2000 2001 2000 -------------- ------------- -------------- -------------- Merger costs and expenses....... $ 757 $ 1,584 $ 1,297 $ 3,159 Restructuring costs and expenses 596 1,013 1,090 2,253 Operational tax charge reversal. (1,008) -- (1,459) -- Other......................... 2 1,634 11 2,420 -------------- ------------- -------------- -------------- Merger Costs and Expenses $ 347 $ 4,231 $ 939 $ 7,832 ============== ============= ============== ==============
The Company's policy is to accrue merger costs and expenses at the commitment date of an integration plan if certain criteria under EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity ("EITF 94-3") or EITF 95-14, Recognition of Liabilities in Anticipation of a Business Combination ("EITF 95-14"), are met. Merger costs and expenses recorded at the commitment date primarily include charges for involuntary employee termination costs, branch shut-down costs, lease termination costs, and other exit costs. If the criteria described in EITF 94-3 or EITF 95-14 are not met, the Company records merger costs and expenses as incurred. Merger costs expensed as incurred include the following: (1) costs to pack and move inventory from one facility to another or within a facility in a consolidation of facilities, (2) relocation costs paid to employees in relation to an acquisition accounted for under the pooling-of-interests method of accounting, (3) systems or training costs to convert the acquired companies to the Company's existing information system, and (4) training costs related to conforming the acquired companies' operational policies to that of the Company's operational policies. In addition, amounts incurred in excess of the original amount accrued at the commitment date are expensed as incurred. The Company has recorded merger costs and expenses related to branch shutdown and lease termination costs. For the three months ended September 29, 2000, the Company recorded $313 of merger charges expensed as incurred. For the six months ended September 28, 2001 and September 29, 2000, the Company recorded $35 and $617, respectively, of merger charges expensed as incurred. At the end of each quarter, management reevaluates its plans and adjusts previous estimates. For the three and six months ended September 28, 2001, the Company reversed $19 and $290, respectively, of merger costs and expenses, which primarily related to lease termination expenses not incurred as previously expected. Refer to Note 3, Accrued Merger and Restructuring Costs and Expenses, for further discussion regarding merger plans. 8 In addition, effective February 1, 2000, the Board of Directors approved and adopted the PSS World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical, Inc. Corporate Office Employee Retention Bonus Plan (collectively the "Retention Plans"). As part of the Company's strategic alternatives process, management adopted these plans to retain certain officers and key employees during the strategic alternatives transition period. Accordingly, during the three months ended September 28, 2001 and September 29, 2000, the Company expensed $776 and $1,271 respectively, related to the Retention Plans. During the six months ended September 28, 2001 and September 29, 2000, the Company expensed $1,552 and $2,542 respectively, related to the Retention Plans. Restructuring Costs and Expenses The Company has recorded restructuring costs and expenses related to other exit costs as incurred, which include costs to pack and move inventory, costs to set up new facilities, employee relocation costs, and other related facility closure costs. For the three months ended September 28, 2001 and September 29, 2000, the Company recorded $667 and $1,013, respectively, of restructuring costs as incurred. The costs for the three months ended September 28, 2001, resulted from the involuntary termination of 14 employees, branch shutdown costs and lease termination costs for the merger of two Physician Supply Business and two Imaging Business distribution centers into existing locations. For six months ended September 28, 2001 and September 29, 2000, the Company recorded $1,172 and $2,253, respectively, of restructuring costs as incurred. The costs for the six month period ended September 28, 2001, resulted from the involuntary termination of 52 employees, branch shutdown costs and lease termination costs for the merger of three Physician Supply Business and three Imaging Business distribution centers into existing locations. At the end of each quarter, management reevaluates its plans and adjusts previous estimates. For the three and six months ended September 28, 2001, the Company reversed $71 and $82, respectively, of restructuring costs relating to lease termination and severance costs. Operational Tax Charge The Company performed an analysis of previously recorded operating tax charge reserves and reversed $1,008 and $1,459 during the three and six months ended September 28, 2001. Other During the three months ended September 28, 2001 and September 29, 2000, the Company incurred $2 and $1,634, respectively, primarily relating to legal and professional fees and other costs pursuant to the Company's strategic alternatives process and severance costs. During the six months ended September 28, 2001 and September 29, 2000, the Company incurred $11 and $2,326, respectively, relating to the same. In addition, during the six months ended September 29, 2000, the Imaging Business incurred $94 of professional fees for acquisitions not consummated. NOTE 3 - ACCRUED MERGER AND RESTRUCTURING COSTS AND EXPENSES Summary of Accrued Merger Costs and Expenses Accrued merger costs and expenses, classified as accrued expenses in the accompanying condensed consolidated balance sheets, were $23 and $294 at September 28, 2001 and March 30, 2001, respectively. The remaining accruals at September 28, 2001 primarily relate to lease termination costs and are scheduled to be paid through the end of fiscal year 2002. Summary of Accrued Restructuring Costs and Expenses During the third quarter of fiscal 2001, the Company's Board of Directors along with senior management evaluated the Company's operating performance. During this process, the Board and management decided to implement a long-range action plan that would stabilize the workforce and business. As part of the new strategic plan, the Company planned to reorganize several senior management positions and make permanently idle two distribution 9 centers - one in the Company's subsidiary, Diagnostic Imaging, Inc., and one in the Company's Physician Sales & Service division ("Plan E"). The total number of employees to be terminated in Plan E is 29. Accrued restructuring costs and expenses related to Plans B, C and E classified as an accrued expense in the accompanying consolidated balance sheets totaled $2,095 and $3,715 at September 28, 2001 and March 30, 2001, respectively. The following is a summary of the restructuring plan activity for the three months ended September 28, 2001:
Involuntary Employee Lease Termination Termination Costs Costs Total ---------------- --------------- --------------- Balance at June 29, 2001.................... $ 2,203 $ 281 $ 2,484 Adjustments............................ (10) (61) (71) Utilized............................... (241) (77) (318) ----------------- -------------- --------------- Balance at September 28, 2001............... $ 1,952 $ 143 $ 2,095 ================= ============== ===============
Plans B and C Approximately $143 of lease termination payments remain accrued at September 28, 2001 related to Plans B and C, for which payments will extend through fiscal 2002. These amounts were originally accrued under restructuring plans for the closure of the Company's subsidiary, Gulf South Medical Supply, Inc. in fiscal years 1999 and 2000. Plan E Accrued restructuring costs and expenses related to Plan E at September 28, 2001 were approximately $1,952, all of which relates to involuntary employee terminations. As of September 28, 2001, all employees had been terminated under the plan. Payments related to Plan E will extend through fiscal 2004. NOTE 4 - INTERNATIONAL BUSINESS EXIT CHARGE During the quarter ended December 29, 2000, management adopted, and the Board of Directors approved, a plan for divesting the Company's European operations. Management's primary consideration for this decision was that the European operations were outside the core United States business segments, making effective management difficult and resulting in lower than expected operating performance for the past several years. The net assets held for disposal consisted of the operating assets of the European operations less outstanding liabilities, and were valued at the aggregate fair value less costs incurred for sale. During the quarter ended December 29, 2000, the Company recorded $14,917 million as an International Business exit charge. The Company consummated the sale of the German operations on April 6, 2001 and the Belgium operations on May 20, 2001. Proceeds received consisted of approximately $222 and a note receivable of $400 from the sale of the common stock of these entities. Upon completion of the transactions, the Company recorded a reversal of $514 of the previously established charge due to lower than expected costs to exit the operations. No further expenses relating to the disposal of the International Business were incurred subsequent to June 29, 2001. NOTE 5 - GOODWILL The Company adopted SFAS 142, Goodwill and Other Intangibles, effective March 31, 2001. In connection with the adoption of SFAS 142, the Company discontinued amortizing goodwill. The changes in the carrying amount of goodwill for the six months ended September 28, 2001, are as follows: 10
Physician Supply Imaging Long-Term Business Business Care Business Total ------------- ------------ --------------- --------------- Balance as of March 30, 2001.... $ 9,788 $ 104,489 $ 49,602 $ 163,879 Settlement of contingent consideration................ -- 1,254 -- 1,254 Impairment loss................. -- (104,489) -- (104,489) ------------- ------------ --------------- --------------- Balance as of September 28, 2001 $ 9,788 $ 1,254 $ 49,602 $ 60,644 ============= ============ =============== ===============
In accordance with SFAS 142, the Company performed transitional goodwill impairment tests at each of its operating segments - the Physician Sales & Service division (the "Physician Supply Business"), Diagnostic Imaging, Inc. ("DI" or the "Imaging Business"), and Gulf South Medical Supply, Inc.("Gulf South" or the "Long-Term Care Business"). These operating segments meet the reporting unit requirements as defined in SFAS 142. The Company engaged independent valuation consultants to assist with the transitional goodwill impairment tests. Based on the results of these tests, goodwill was deemed not to be impaired at the Physician Supply Business or the Long-Term Care Business as the fair value of each of these reporting units exceeded their carrying values. Therefore, the second step of the goodwill impairment test was not required to be performed. However, the carrying amount of the Imaging division exceeded its fair value, indicating a potential impairment of the respective goodwill. The Imaging Business' operating results have been impacted by a decline in actual and projected operating margins and these factors affect the fair value calculation, which were considered in calculating the enterprise value of the reporting unit. The fair value of each of the operating segments was calculated on an enterprise value basis using the following approaches: (i) market multiple approach; (ii) discounted cash flow approach; and (iii) comparable transaction approach. o Under the market multiple approach, market ratios and performance fundamentals relating to similar public companies' stock prices or enterprise values were applied to the reporting units to determine their enterprise value. o Under the discounted cash flow ("DCF") approach, the indicated enterprise value was determined using the present value of the projected future cash flows to be generated considering appropriate discount rates. The discount rates used in the calculation reflected all associated risks of realizing the projected future cash flows. o Under the comparable transaction approach, recent transactions between companies in the same or similar lines of business to the reporting units were examined to determine the indicated enterprise value. Acquisition values and pricing evidence were used in much the same manner as the Market Multiple Approach for the determination of the reporting units' enterprise value. The fair value conclusion of the operating segments reflects an equally blended value of the market multiple approach and the DCF approach discussed above. Because the carrying amount of the Imaging Business exceeded its fair value, step 2 of the goodwill impairment test was completed. Under step 2 of the test, the implied fair value of the Imaging Business's goodwill was compared to its carrying amount of goodwill to measure the amount of impairment loss. As a result, a loss of $90,045 (net of taxes of $14,444) was recognized and recorded as a cumulative effect of accounting change in the accompanying consolidated statements of income. As required by SFAS 142, the impairment loss was recognized as of March 31, 2001; therefore, the Company has restated its historical consolidated financial information for the three months ended June 29, 2001 as follows: 11 Three Months Ended June 29, 2001 ---------------- (Restated) Net sales.......................................... $ 446,740 Cost of goods sold................................. 344,996 ---------------- Gross profit................................. 101,744 General and administrative expenses................ 68,461 Selling expenses................................... 26,499 International business exit charge reversal........ (514) ---------------- Income from operations....................... 7,298 ---------------- Other income (expense): Interest expense............................. (4,251) Interest and investment income............... 238 Other income................................. 946 ---------------- (3,067) ---------------- Income before provision for income taxes and cumulative effect of accounting change.......... 4,231 Provision for income taxes......................... 1,541 ---------------- Income before cumulative effect of accounting change 2,690 Cumulative effect of accounting change (net of taxes of $14,444)........................................ (90,045) ---------------- Net loss........................................... $ (87,355) ================ Earnings per share - Basic and Diluted: Income before cumulative effect of accounting $ 0.04 change....................................... Cumulative effect of accounting change ......... (1.26) ---------------- Net loss........................................ $ (1.22) ================ The following table provides comparative disclosure of adjusted net income excluding goodwill amortization expense, net of taxes, for the periods presented:
Three Months Ended Six Months Ended ----------------------------- ------------------------------ September 28, September 29, September 28, September 29, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Income (loss) before cumulative effect of accounting change, as reported.......................... $ 3,402 $ (964) $ 6,091 $ 3,656 Cumulative effect of accounting change............................ -- -- (90,045) -- ------------- ------------- ------------- ------------- Net income (loss), as reported....... 3,402 (964) (83,954) 3,656 Goodwill amortization, net of tax.... -- 1,269 -- 2,729 ------------- ------------- ------------- ------------- Net income (loss), adjusted.......... $ 3,402 $ 305 $ (83,954) $ 6,385 ============= ============= ============= ============= Earnings per share - Basic: Income (loss) before cumulative effect of accounting change.... $0.05 $(0.01) $ 0.09 $0.05 Cumulative effect of accounting change......................... -- -- (1.27) -- ------------- ------------- ------------- ------------- Net income (loss), as reported.... $0.05 (0.01) $(1.18) $0.05 Goodwill amortization, net of tax. -- 0.02 -- 0.05 ------------- ------------- ------------- ------------- Basic earnings per share, adjusted... $0.05 $ 0.01 $(1.18) $0.10 ============= ============= ============= =============
12
Earnings per share - Basic: Income (loss) before cumulative effect of accounting change.... $0.05 $(0.01) $ 0.09 $0.05 Cumulative effect of accounting change......................... -- -- (1.26) -- ------------- ------------- ------------- ------------- Net income (loss), as reported.... $0.05 (0.01) $(1.17) $0.05 Goodwill amortization, net of tax. -- 0.02 -- 0.05 ------------- ------------- ------------- ------------- Basic earnings per share, adjusted... $0.05 $ 0.01 $(1.17) $0.10 ============= ============= ============= =============
The terms of certain of the Company's past acquisition agreements provided for additional consideration to be paid (earnout payments) if the acquired entity's results of operations exceed certain targeted levels. As of September 28, 2001, the Company accrued $1.2 million included in other current liabilities related to earnout payments and will pay them in the quarter ended December 28, 2001. These final payments will satisfy all remaining contingent earnout obligations. NOTE 6 - COMPREHENSIVE INCOME Comprehensive income is defined as net income plus or minus direct adjustments to shareholders' equity. The following details the components of comprehensive income for the periods presented:
Three Months Ended Six Months Ended ----------------------- ----------------------- September September September September 28, 2001 29, 2000 28, 2001 29, 2000 ----------- --------- ---------- --------- Net income (loss)......................... $ 3,402 $ (964) $(83,954) $ 3,656 Other comprehensive expense, net of tax: Foreign currency translation adjustment................ -- (504) -- (343) Unrealized loss on available for sale security.............................. -- (534) -- (2,041) ----------- --------- ---------- --------- Comprehensive income...................... $ 3,402 $(2,002) $(83,954) $ 1,272 =========== ========= ========== =========
NOTE 7 - EARNINGS PER SHARE In accordance with SFAS No. 128, Earnings Per Share, the calculation of basic net earnings per common share and diluted earnings per common share is presented below (share amounts in thousands, except per share data):
Three Months Ended Six Months Ended ---------------------------------------- ---------------------------------------- September 28, September 29, September 28, September 29, 2001 2000 2001 2000 ------------------- ------------------- ------------------- ------------------- Income (loss) before cumulative effect of 3,402 (964) 6,091 3,656 accounting change Cumulative effect of accounting change (net of income taxes of $14,444) -- -- (90,045) -- ------------------- ------------------- ------------------- ------------------- Net income (loss) $ 3,402 $ (964) $(83,954) $ 3,656 =================== =================== =================== =================== Earnings per share - Basic: Income (loss) before cumulative effect of accounting change $ 0.05 $ (0.01) $ 0.09 $ 0.05 Cumulative effect of accounting change -- -- (1.27) -- ------------------- ------------------- ------------------- ------------------- Net income (loss) $ 0.05 $ (0.01) $ (1.18) $ 0.05 =================== =================== =================== =================== Earnings per share - Diluted: Income (loss) before cumulative effect of accounting change $ 0.05 $ (0.01) $ 0.09 $ 0.05 Cumulative effect of accounting change -- -- (1.26) -- ------------------- ------------------- ------------------- ------------------- Net income (loss) $ 0.05 $ (0.01) $ (1.17) $ 0.05 =================== =================== =================== =================== Weighted average shares outstanding: Common shares.................... 71,165 71,187 71,165 71,187 Assumed exercise of stock options 667 -- 483 71 ------------------- ------------------- ------------------- ------------------- Diluted shares outstanding.... 71,832 71,187 71,648 71,258 =================== =================== =================== ===================
13 NOTE 8 - SEGMENT INFORMATION SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information, requires segment reporting in interim periods and disclosures regarding products and services, geographic areas, and major customers. The Company's reportable segments are strategic businesses that offer different products and services to different segments of the health care industry, and are based upon how management regularly evaluates the Company. These segments are managed separately because of different customers and products. These segments include the Physician Supply Business, the Imaging Business, the Long-Term Care Business, and the Other segment that combines WorldMed International, Inc. ("WorldMed Int'l") with corporate and back office operations. During the quarter ended June 29, 2001, the Company sold its European operations. Therefore, the Other segment only includes corporate and back office activity subsequent to June 29, 2001. The Physician Supply Business is a distributor of medical supplies, equipment, and pharmaceuticals to primary care and other office-based physicians in the United States. DI is a distributor of medical diagnostic imaging supplies, chemicals, equipment, and service to the acute and alternate-care markets in the United States. Gulf South is a distributor of medical supplies and other related products to the long-term care market in the United States. WorldMed Int'l managed and developed the Company's European medical equipment and supply distribution market. The Company primarily evaluates the operating performance of its segments based on net sales and income from operations. The following table presents financial information about the Company's business segments (in thousands): 14
Three Months Ended Six Months Ended ---------------------------- ----------------------------- September 28, September 29, September 28, September 29, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- NET SALES: Physician Supply Business....................... $176,115 $170,167 $347,458 $348,104 Imaging Business................................ 176,544 182,983 356,152 379,409 Long-Term Care Business......................... 95,711 89,896 191,069 182,130 Other........................................... -- 3,104 431 8,155 ------------- ------------- ------------- ------------- Total net sales............................. $448,370 $446,150 $895,110 $917,798 ============= ============= ============= ============= CHARGES INCLUDED IN GENERAL AND ADMINISTRATIVE EXPENSES: Physician Supply Business....................... $ 401 $ 95 $ 546 $ 170 Imaging Business................................ 109 984 122 2,154 Long-Term Care Business......................... 65 238 154 625 Other........................................... (228) 2,914 117 4,883 ------------- ------------- ------------- ------------- Total charges included in general and administrative expenses............. $ 347 $ 4,231 $ 939 $ 7,832 ============= ============= ============= ============= INCOME (LOSS) FROM OPERATIONS: Physician Supply Business....................... $ 6,398 $ 1,896 $ 12,133 $ 13,229 Imaging Business................................ 136 1,475 243 3,582 Long-Term Care Business......................... 2,256 1,796 4,028 3,585 Other........................................... (868) (2,016) (1,185) (4,977) ------------- ------------- ------------- ------------- Total income (loss) from operations......... $ 7,922 $ 3,151 $ 15,219 $ 15,419 ============= ============= ============= ============= DEPRECIATION Physician Supply Business....................... $ 1,152 $ 1,118 $ 2,297 $ 2,127 Imaging Business................................ 1,163 867 2,260 1,680 Long-Term Care Business......................... 461 463 923 924 Other........................................... 231 112 363 219 ------------- ------------- ------------- ------------- Total depreciation.......................... $ 3,007 $ 2,560 $ 5,843 $ 4,950 ============= ============= ============= ============= AMORTIZATION OF gOODWILL AND INTANGIBLE ASSETS: Physician Supply Business....................... $ 278 $ 431 $ 512 $ 859 Imaging Business................................ 1,121 2,015 2,238 4,020 Long-Term Care Business......................... 103 566 207 1,126 Other........................................... -- 289 -- 180 ------------- ------------- ------------- ------------- Total amortization of goodwill and intangible $ 1,502 $ 3,301 $ 2,957 $ 6,185 assets.............................. ============= ============= ============= ============= PROVISION FOR DOUBTFUL ACCOUNTS: Physician Supply Business....................... $ 289 $ 280 $ 609 $ 203 Imaging Business................................ 288 (227) 613 140 Long-Term Care Business......................... 951 600 1,896 1,794 Other........................................... -- -- -- -- ------------- ------------- ------------- ------------- Total provision for doubtful accounts....... $ 1,528 $ 653 $ 3,118 $ 2,137 ============= ============= ============= ============= INTEREST EXPENSE: Physician Supply Business....................... $ 189 $ 491 $ 467 $ 1,012 Imaging Business................................ 2,449 2,425 5,041 4,852 Long-Term Care Business......................... 1,268 1,322 2,645 2,650 Other........................................... (964) 449 (960) 1,208 ------------- ------------- ------------- ------------- Total interest expense...................... $ 2,942 $ 4,687 $ 7,193 $ 9,722 ============= ============= ============= =============
15
Three Months Ended Six Months Ended September 28, September 29, September 28, September 28, 2001 2000 2001 2001 ------------- ------------- ------------- ------------- INTEREST AND INVESTMENT INCOME: Physician Supply Business....................... $ 1 $ 60 $ 2 $ 107 Imaging Business................................ -- -- -- -- Long-Term Care Business......................... -- 4 -- 17 Other........................................... 39 497 276 1,137 ------------- ------------- ------------- ------------- Total interest and investment income........ $ 40 $ 561 $ 278 $ 1,261 ============= ============= ============= ============= PROVISION (BENEFIT) FOR INCOME TAXES: Physician Supply Business....................... $ 2,810 $ 770 $ 5,094 $ 5,229 Imaging Business................................ (740) (29) (1,580) 307 Long-Term Care Business......................... 451 754 682 754 Other........................................... (441) (791) (575) (1,461) ------------- ------------- ------------- ------------- Total provision (benefit) for income taxes.. $ 2,080 $ 704 $ 3,621 $ 4,829 ============= ============= ============= ============= CAPITAL EXPENDITURES: Physician Supply Business....................... $ 2,222 $ 3,690 $ 5,514 $ 6,446 Imaging Business................................ 693 1,314 1,571 2,541 Long-Term Care Business......................... 37 190 220 390 Other........................................... 2,775 205 4,530 429 ------------- ------------- ------------- ------------- Total capital expenditures.................. $ 5,727 $ 5,399 $ 11,835 $ 9,806 ============= ============= ============= ============= September 28, March 30, 2001 2001 ------------- ------------- ASSETS: Physician Supply Business....................... $ 235,836 $ 225,080 Imaging Business................................ 234,110 324,830 Long-Term Care Business......................... 153,925 156,581 Other........................................... 27,902 66,143 ------------- ------------- Total assets............................... $ 651,773 $ 772,634 ============= =============
NOTE 9 - COMMITMENTS AND CONTINGENCIES The Company has employment agreements with certain executive officers which provide that in the event of their termination or resignation, under certain conditions, the Company may be required to continue salary payments and provide insurance for a period ranging from 3 to 12 months for certain executives and to repurchase a portion or all of the shares of common stock held by the executives upon their demand at the fair market value at the time of repurchase. The period of salary and insurance continuation and the level of stock repurchases are based on the conditions of the termination or resignation. During fiscal 2000, the Board of Directors approved and adopted the PSS World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical, Inc. Corporate Office Employee Retention Bonus Plan. Refer to Note 2, Charges included in General and Administrative Expenses for further discussion. The Company, through Gulf South, it's Physician Sales & Service division and/or predecessor companies, has been named as one of many defendants in latex glove product liability claims in various Federal and state courts. The defendants are primarily distributors of certain brands of latex gloves. Currently, state litigation exists in New Hampshire, Massachusetts and California, while Federal and/or Federal multi-district litigation is present in Washington, Georgia, Pennsylvania and Ohio. Defense costs are currently allocated by agreement between a consortium of insurers on a pro rata basis for each case depending upon policy years and alleged years of exposure. All of the insurance carriers are defending subject to a reservation of rights. Ultimately, the manufacturers from which the gloves were purchased may assume the defense and liability obligations. The Company intends to vigorously defend the proceedings; however, there can be no assurance that this litigation will be ultimately resolved on terms that are favorable to the Company. The Company and certain of its current officers and directors are named as defendants in a purported securities class action lawsuit entitled Jack Hirsch v. PSS World Medical, Inc., et al., Civil Action No. 3:98-cv-502-J-21TEM. The action, which was filed on or about May 28, 1998, is pending in the United States District Court for the Middle District of Florida, Jacksonville Division. An amended complaint was filed on December 11, 1998. The plaintiff alleges, for himself and for a purported class of similarly situated stockholders who allegedly purchased the Company's stock between December 23, 1997 and May 8, 1998, that the defendants engaged in 16 violations of certain provisions of the Exchange Act, and Rule 10b-5 promulgated thereunder. The allegations are based upon a decline in the Company's stock price following announcement by the Company in May 1998 regarding the Gulf South Merger which resulted in earnings below analyst's expectations. The plaintiff seeks indeterminate damages, including costs and expenses. The Company filed a motion to dismiss the first amended complaint on January 25, 1999. The court granted that motion without prejudice by order dated February 9, 2000. Plaintiffs filed their second amended complaint on March 15, 2000. The Company filed a motion to dismiss the second amended complaint on May 1, 2000, which is pending. The Company believes that the allegations contained in the complaint are without merit and intends to defend vigorously against the claims. There can be no assurance that this litigation will be ultimately resolved on terms that are favorable to the Company. On September 30, 1999, DI entered into a three year distributorship agreement with an imaging supply vendor. The agreement stipulates that, among other things, in the event of termination of the agreement due to a change in control of DI, the Company will pay liquidated damages to the vendor in the amount of $250,000 multiplied by the number of months remaining under the agreement. Subsequent to the quarter ended June 29, 2001, the Company was named in the following 10 class action complaints: (1) Bordeaux v. PSS World Medical, Inc. et al.; (2) Gold v. PSS World Medical, Inc., et al; (3) McIntosh v. PSS World Medical, Inc. et al. ; (4) Rothbart v. PSS World Medical, Inc. et al.; (5) Schaechter v. PSS World Medical, Inc. et al.; (6) Van Den Haag v. PSS World Medical, Inc. et al. ; (7) Rodighiero v. PSS World Medical, Inc. et al.; (8) Foster v. PSS World Medical, Inc. et al.; (9) Weiler v. PSS World Medical, Inc. et al.; and (10) Adams v. PSS World Medical, Inc. et al. Certain present and former directors and officers of the Company have also been named as defendants. The complaints have all been filed in the United States District Court for the Middle District of Florida. They were filed as purported class actions on behalf of persons who purchased or acquired the Company's common stock at various times during the period between October 26, 1999 and October 3, 2000. The complaints allege, among other things, violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seek unspecified damages. The plaintiffs allege that the defendants issued false and misleading statements and failed to disclose material facts concerning, among other things, the Company's financial condition. The plaintiffs further allege that because of the issuance of false and misleading statements and/or failure to disclose material facts, the price of the Company's common stock was artificially inflated during the class period. On September 13, 2001, certain plaintiffs filed a motion for consolidation of the above actions and for appointment of lead plaintiff and lead counsel. That motion remains pending. The Company believes that the allegations contained in the complaints are without merit and intends to defend vigorously against the claims. There can be no assurance that this litigation will be ultimately resolved on terms favorable to the Company. Although the Company does not manufacture products, the distribution of medical supplies and equipment entails inherent risks of product liability, for which the Company maintains product liability insurance coverage. The Company is also a party to various other legal and administrative proceedings and claims arising in the normal course of business. While any litigation contains an element of uncertainty, management, after consultation with outside legal counsel, believes that the outcome of such other proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations. 17 ITEM 2 PSS WORLD MEDICAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL PSS World Medical, Inc., a Florida corporation (the "Company", "PSS World Medical", or "PSS") is a specialty marketer and distributor of medical products to physicians, alternate-site imaging centers, long-term care providers, home care providers, and hospitals through 91 service centers to customers in all 50 states. Since its inception in 1983, the Company, through strategic acquisitions and internal growth, has become a leader in three market segments it serves. The company's strategic advantages include a focused and differentiated approach to customer service, a consultative sales force, unique arrangements with product manufacturers, innovative systems, and a culture of performance. The Company's Physician Sales & Service division is a leading distributor of medical supplies, equipment and pharmaceuticals to office-based physicians in the United States based on revenues, number of physician-office customers, number and quality of sales representatives, number of service centers, and exclusively distributed products. Physician Sales & Service currently operates 46 medical supply distribution service centers with approximately 701 sales representatives ("Physician Supply Business") serving physician offices in all 50 states. The Physician Supply Business' primary market is office-based physicians throughout the United States. The Company's subsidiary Diagnostic Imaging, Inc. ("DI") is a leading distributor of medical diagnostic imaging supplies, chemicals, equipment, and service to the acute care and alternate-care markets in the United States based on revenues, number of service specialists, and number of sales representatives. DI currently operates 31 imaging distribution service centers with approximately 857 service specialists and 196 sales representatives ("Imaging Business") serving customer sites in 42 states. The Imaging Business' primary markets are acute-care hospitals, imaging centers, and private practice physicians, veterinarians and chiropractors. The Company's subsidiary Gulf South Medical Supply, Inc. ("GSMS", or "Gulf South") is a leading national distributor of medical supplies and related products to the long-term care industry in the United States based on revenues and number of sales representatives. GSMS currently operates 13 distribution service centers and 1 satellite center with approximately 107 sales representatives ("Long-Term Care Business") serving long-term care accounts in all 50 states. The Long-Term Care Business' primary market is comprised of a large number of independent operators, small to mid-sized local and regional chains, and several national chains. Previously, the Company's subsidiary WorldMed International, Inc. ("WorldMed") operated two European service centers ("International Business") distributing medical products to the physician office and hospital markets in Belgium and Germany. During the quarter ended June 29, 2001, the Company sold its European operations. INDUSTRY According to industry estimates, the United States medical supply and equipment segment of the health care industry represents approximately a $43 billion market comprised of distribution of medical products to hospitals, home health care agencies, imaging centers, physician offices, dental offices, and long-term care facilities. The Company's primary focus is the distribution of medical products to physician offices, providers of imaging services, and long-term care facilities. Approximately 60% of products in this market come through the distributor channel, representing an approximate $25 billion market potential for the Company. Revenues of the medical products distribution industry are estimated to be growing as a result of a growing and aging population, increased health care awareness, proliferation of medical technology and testing, and expanding third-party insurance coverage. In addition, the physician market continues to benefit from the shift of procedures and diagnostic testing from hospitals to alternate sites, particularly physician offices, despite a migration of significantly lower hospital medical product pricing into the physician office market. Also, as the cosmetic surgery and elective surgery markets continue to grow, physicians are increasingly performing more procedures in-office. 18 The health care industry is subject to extensive government regulation, licensure, and operating procedures. National health care reform has been the subject of a number of legislative initiatives by Congress. Additionally, government and private insurance programs fund the cost of a significant portion of medical care in the United States. In recent years, government-imposed limits on reimbursement of hospitals, long-term care facilities, and other health care providers have affected spending budgets in certain markets within the medical products industry. In 1997, the Balanced Budget Act passed by Congress made radical changes to reimbursements for nursing homes and home care providers. The healthcare industry has struggled with these changes and the ability of providers, distributors and manufacturers to adapt to the changes is not yet determined. These changes also affect some distributors who directly bill the government for these providers. The industry estimates that approximately 11% of Long-Term Care facilities have filed for bankruptcy protection. Over 100 of the Company's customers filed for bankruptcy in the last two years. Over the past few years, the health care industry has undergone significant consolidation. Physician provider groups, long-term care facilities, and other alternate-site providers, along with hospitals, continue to consolidate, creating new and larger customers. However, the majority of the market serviced by the Company remains small customers, with no single customer exceeding 10% of the consolidated Company's revenues. However, the Long-Term Care Business depends on a limited number of large customers for a significant portion of its net sales, and approximately 35% of Long-Term Care Business' revenues for the three months ended September 28, 2001 represented sales to its top five customers. One of these top five customers is currently in Chapter 11 bankruptcy reorganization, and sales to this customer represents approximately 8% of Long-Term Care Business revenues, and less than 2% of the Company's consolidated sales, for the quarter ended September 28, 2001. Growth in the Long-Term Care Business, as well as consolidation of the health care industry, may increase the Company's dependence on large customers. 19 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 28, 2001 VERSUS THREE MONTHS ENDED SEPTEMBER 29, 2000 Net Sales. Net sales for the three months ended September 28, 2001 totaled $448.4 million, an increase of $2.2 million, or 0.5%, from net sales of $446.2 million for the three months ended September 29, 2000. During this period, sales of consumable products grew by approximately $6 million in the Physician Supply Business and $6 million in the Long-Term Care Business. The launch of the SRx and Answers sales initiatives, implemented during the last nine months, provided our sales force with a solutions based sales approach designed to meet customer needs and increase consumable product sales. In addition, the Company's Imaging Business experienced growth of approximately $4 million in its Women's Health Care strategic business unit ("SBU") on a comparable prior period basis. This growth was offset by the loss of revenues associated with i) the elimination of low profitability business in the Imaging Business, ii) the elimination of the underperforming Surgical SBU under a revised Imaging Business SBU structure, iii) vendor supply interruptions affecting the Imaging Business, and iv) the elimination of $3.1 million of International Business revenues due to the sale of the European operations. Gross Profit. Gross profit for the three months ended September 28, 2001 totaled $104.5 million, an increase of $3.0 million, or 3.0%, from gross profit of $101.5 million for the three months ended September 29, 2000. Gross profit as a percentage of net sales was 23.3% and 22.8% for the three months ended September 28, 2001 and September 29, 2000, respectively. The overall gross profit increase over the prior year quarter was primarily attributable to the sales growth discussed above. Within the operating segments, the Physician Supply Business realized improved gross profit from increased sales of higher margin consumable products, the Imaging Business was impacted by the revenue decreases discussed above, and the Long-Term Care Business maintained gross profit while continuing to experience large chain customer pricing pressure. General and Administrative Expenses. General and administrative expenses for the three months ended September 28, 2001 totaled $69.4 million, a decrease of $0.3 million, or 0.4%, from general and administrative expenses of $69.7 million for the three months ended September 29, 2000. General and administrative expense as a percentage of net sales decreased to 15.5% from 15.6% for the comparable three-month period. On March 31, 2001, the Company elected to early adopt Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles ("SFAS 142"). SFAS 142 requires, among other things, the discontinuance of goodwill amortization. During the three months ended September 28, 2001, general and administrative expenses included $1.6 million of goodwill amortization. Refer to Note 5, Goodwill in the accompanying condensed consolidated financial statements for further discussion. During the three months ended September 28, 2001, the Company recognized additional depreciation expense over the prior comparative period for completed phases of its Enterprise Resource Planning System, electronic commerce platforms (MyPSS.com and MyDIOnline.com), and supply chain integration. In addition, the Company incurred additional consulting fees for assistance in the validation of its strategic plan and other expenses for business process improvements. However, general and administrative expenses in the Company's Other Segment decreased over the prior year period by $0.3 million due to the sale of the European operations. General and administrative expenses may include charges related to merger activity, restructuring activity, and other special items. The following table summarizes charges included as a component of general and administrative expenses in the accompanying consolidated statements of operations: 20 Three Months Ended ----------------------------- September 28, September 29, 2001 2000 ------------- ------------- Merger costs and expenses....... $ 757 $ 1,584 Restructuring costs and expenses 596 1,013 Operational tax charge.......... (1,008) -- Other........................... 2 1,634 ------------- ------------- $ 347 $ 4,231 ============= ============= Merger Costs and Expenses The Company's policy is to accrue merger costs and expenses at the commitment date of an integration plan if certain criteria under EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity ("EITF 94-3") or EITF 95-14, Recognition of Liabilities in Anticipation of a Business Combination ("EITF 95-14"), are met. Merger costs and expenses recorded at the commitment date primarily include charges for involuntary employee termination costs, branch shut-down costs, lease termination costs, and other exit costs. If the criteria described in EITF 94-3 or EITF 95-14 are not met, the Company records merger costs and expenses as incurred. Merger costs expensed as incurred include the following: (1) costs to pack and move inventory from one facility to another or within a facility in a consolidation of facilities, (2) relocation costs paid to employees in relation to an acquisition accounted for under the pooling-of-interests method of accounting, (3) systems or training costs to convert the acquired companies to the Company's existing information system, and (4) training costs related to conforming the acquired companies' operational policies to that of the Company's operational policies. In addition, amounts incurred in excess of the original amount accrued at the commitment date are expensed as incurred. The Company has recorded merger costs and expenses related to branch shutdown and lease termination costs. For the three months ended September 29, 2000, the Company recorded $0.3 million of merger charges expensed as incurred. At the end of each quarter, management reevaluates its plans and adjusts previous estimates. For the three months ended September 28, 2001, the Company reversed $19,000 of merger costs and expenses, which primarily related to lease termination expenses not incurred as previously expected. Refer to Note 3, Accrued Merger and Restructuring Costs and Expenses, for further discussion regarding merger plans. In addition, effective February 1, 2000, the Board of Directors approved and adopted the PSS World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical, Inc. Corporate Office Employee Retention Bonus Plan (collectively the "Retention Plans"). As part of the Company's strategic alternatives process, management adopted these plans to retain certain officers and key employees during the strategic alternatives transition period. Accordingly, during the three months ended September 28, 2001 and September 29, 2000, the Company expensed $0.8 million and $1.3 million respectively, related to the Retention Plans. Restructuring Costs and Expenses The Company has recorded restructuring costs and expenses related to other exit costs as incurred, which include costs to pack and move inventory, costs to set up new facilities, employee relocation costs, and other related facility closure costs. For the three months ended September 28, 2001 and September 29, 2000, the Company recorded $0.7 million and $1.0 million, respectively, of restructuring costs as incurred. These costs for the three months ended September 28, 2001, resulted from the involuntary termination of 14 employees and branch shutdown and lease termination costs incurred for the merger of two distribution centers into existing locations. At the end of each quarter, management reevaluates its plans and adjusts previous estimates. For the three months ended September 28, 2001, the Company reversed $71,000 of restructuring costs. 21 Operational Tax Charge The Company performed an analysis of previously recorded operating tax charge reserves and reversed $1.0 million during the three months ended September 28, 2001. Other During the three months ended September 28, 2001 and September 29, 2000, the Company incurred $2,000 and $1.6 million, respectively, primarily relating to legal and professional fees and other costs pursuant to the Company's strategic alternatives process and severance costs. Selling Expenses. Selling expenses for the three months ended September 28, 2001 totaled $27.1 million, a decrease of $1.5 million, or 5.2%, from selling expenses of $28.6 million for the three months ended September 29, 2000. Selling expense as a percentage of net sales was approximately 6.1% and 6.4% for the three months ended September 28, 2001 and September 29, 2000, respectively Operating Income. Operating income for the three months ended September 28, 2001 totaled $7.9 million, an increase of $4.8 million, compared to the three months ended September 29, 2000 total of $3.1 million due to the factors discussed above. Interest Expense. Interest expense for the three months ended September 28, 2001 totaled $3.0 million, a decrease of $1.7 million, or 36.2%, from interest expense of $4.7 million for the three months ended September 29, 2000. The decrease is primarily attributable to lower outstanding debt balances under the revolving Credit Agreement over the prior year period and a general reduction in interest rates. Interest and Investment Income. Interest and investment income for the three months ended September 28, 2001 totaled $0.1 million, a decrease of $0.5 million, or 83.3%, from interest and investment income of $0.6 million for the three months ended September 29, 2000. The decrease results from lower invested cash balances over the prior year period. Other Income. Other income for the three months ended September 28, 2001 totaled $0.5 million, a decrease of $0.2 million, or 28.6%, from other income of $0.7 million for the three months ended September 29, 2000. Other income primarily consists of finance charges on customer accounts. Provision for Income Taxes. Provision for income taxes was $2.1 million for the three months ended September 28, 2001, a change of $1.4 million from the provision for income taxes of $0.7 million for the three months ended September 29, 2000. The effective income tax rate was approximately 37.9% for the three months ended September 28, 2001. Historically, the effective tax rate has been higher than the Company's statutory rate due to the non-deductibility of a portion of goodwill amortization expense resulting from the tax-free nature of certain acquisitions. The elimination of goodwill amortization during the quarter ended September 28, 2001 due to the adoption of SFAS 142 has resulted in increased pretax earnings with minimal incremental effect on the provision of income taxes. Net Income. Net income for the three months ended September 28, 2001 totaled $3.4 million compared to net loss of $1.0 million for the three months ended September 29, 2000 due to the factors discussed above. SIX MONTHS ENDED SEPTEMBER 28, 2001 VERSUS SIX MONTHS ENDED SEPTEMBER 29, 2000 Net Sales. Net sales for the six months ended September 28, 2001 totaled $895.1 million, a decrease of $22.7 million, or 2.5%, from net sales of $917.8 million for the six months ended September 29, 2000. During this period, sales of consumable products grew by approximately $11 million in the Physician Supply Business and $9 million in the Long-Term Care Business. The launch of the SRx and Answers sales initiatives, implemented during the last nine months, provided our sales force with a solutions based sales approach designed to meet customer needs and increase consumable product sales. In addition, the Company's Imaging Business experienced growth of approximately $4 million in its Women's Health Care SBU on a comparable prior period basis. This growth was offset by the loss 22 of revenues associated with i) the elimination of low profitability business in the Imaging Business, ii) the elimination of the underperforming Surgical SBU under a revised Imaging Business SBU structure, iii) vendor supply interruptions affecting the Imaging Business, iv) the termination of certain equipment vendor relationships in the Physician Supply Business, and v) the elimination of $8 million of International Business revenues due to the sale of the European operations. Gross Profit. Gross profit for the six months ended September 28, 2001 totaled $206.2 million, a decrease of $9.6 million, or 4.4%, from gross profit of $215.8 million for the six months ended September 29, 2000. Gross profit as a percentage of net sales was 23.0% and 23.5% for the six months ended September 28, 2001 and September 29, 2000, respectively. The overall gross profit decrease over the prior year quarter was primarily attributable to the sales decrease discussed above. Within the operating segments, the Physician Supply Business realized improved gross profit from increased sales of higher margin consumable products, the Imaging Business was impacted by the revenue decreases discussed above, and the Long-Term Care Business maintained gross profit while experiencing continued large chain customer pricing pressure. General and Administrative Expenses. General and administrative expenses for the six months ended September 28, 2001 totaled $137.9 million, a decrease of $4.5 million, or 3.2%, from general and administrative expenses of $142.4 million for the six months ended September 29, 2000. General and administrative expense as a percentage of net sales decreased to 15.4% from 15.5% for the comparable six-month period. On March 31, 2001, the Company elected to early adopt Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles ("SFAS 142"). SFAS 142 requires, among other things, the discontinuance of goodwill amortization. During the six months ended September 28, 2001, general and administrative expenses included $3.2 million of goodwill amortization. Refer to Note 5, Goodwill in the accompanying condensed consolidated financial statements for further discussion. During the six months ended September 28, 2001, the Company recognized additional depreciation expense over the prior comparative period for completed phases of its Enterprise Resource Planning System, electronic commerce platforms (MyPSS.com and MyDIOnline.com), and supply chain integration. In addition, the Company incurred additional consulting fees for assistance in the validation of its strategic plan and other expenses for business process improvements. However, general and administrative expenses in the Company's Other Segment decreased over the prior year six month period by $1.7 million due to the sale of the European operations. General and administrative expenses may include charges related to merger activity, restructuring activity, and other special items. The following table summarizes unusual charges included as components of general and administrative expenses in the accompanying consolidated income statements: Six Months Ended ------------------------------ September 28, September 29, 2001 2000 ------------- ------------- Merger costs and expenses....... $ 1,297 $ 3,159 Restructuring costs and expenses 1,090 2,253 Operational tax charge.......... (1,459) -- Other........................... 11 2,420 ------------- ------------- $ 939 $ 7,832 ============= ============= Merger Costs and Expenses The Company has recorded merger costs and expenses related to branch shutdown and lease termination costs. For the six months ended September 28, 2001 and September 29, 2000, the Company recorded $35,000 and $0.6 million, respectively, of merger charges expensed as incurred. At the end of each quarter, management reevaluates its plans and adjusts previous estimates. For the six months ended September 28, 2001, the Company reversed $0.3 million of merger costs and expenses, which primarily related to lease termination expenses not incurred as previously expected. Refer to Note 3, Accrued Merger and Restructuring Costs and Expenses, for further discussion regarding merger plans. 23 In addition, effective February 1, 2000, the Board of Directors approved and adopted the PSS World Medical, Inc. Officer Retention Bonus Plan and the PSS World Medical, Inc. Corporate Office Employee Retention Bonus Plan (collectively the "Retention Plans"). As part of the Company's strategic alternatives process, management adopted these plans to retain certain officers and key employees during the strategic alternatives transition period. During the six months ended September 28, 2001 and September 29, 2000, the Company expensed $1.6 million and $2.5 million respectively, related to the Retention Plans. Restructuring Costs and Expenses The Company has recorded restructuring costs and expenses related to other exit costs as incurred, which include costs to pack and move inventory, costs to set up new facilities, employee relocation costs, and other related facility closure costs. For six months ended September 28, 2001 and September 29, 2000, the Company recorded $1.2 million and $2.3 million, respectively, of restructuring costs as incurred. These costs for the six month period end September 28, 2001, resulted from the involuntary termination of 52 employees and branch shutdown and lease termination costs incurred for the merger of five distribution centers into existing locations. At the end of each quarter, management reevaluates its plans and adjusts previous estimates. For the six months ended September 28, 2001, the Company reversed $0.1 million of restructuring costs. Operational Tax Charge The Company performed an analysis of previously recorded operating tax charge reserves and reversed $1.5 million during the six months ended September 28, 2001. Other During the six months ended September 28, 2001 and September 29, 2000, the Company incurred $11,000 and $2.3 million, respectively, primarily relating to legal and professional fees and other costs pursuant to the Company's strategic alternatives process and severance costs. In addition, during the six months ended September 29, 2000, the Imaging Business incurred $0.1 million of professional fees for acquisitions not consummated. Selling Expenses. Selling expenses for the six months ended September 28, 2001 totaled $53.6 million, a decrease of $4.4 million, or 7.6%, from selling expenses of $58.0 million for the six months ended September 29, 2000. Selling expense as a percentage of net sales was approximately 6.0% and 6.3% for the six months ended September 28, 2001 and September 29, 2000, respectively. International Business Exit Charge. During the quarter ended June 29, 2001, the Company completed the sale of its European operations and recorded a reversal of $0.5 million of the previously established International Business exit charge due to lower than expected costs to exit the operations. Operating Income. Operating income for the six months ended September 28, 2001 totaled $15.2 million, a decrease of $0.2 million, compared to the six months ended September 29, 2000 total of $15.4 million due to the factors discussed above. Interest Expense. Interest expense for the six months ended September 28, 2001 totaled $7.2 million, a decrease of $2.5 million, or 25.8%, from interest expense of $9.7 million for the six months ended September 29, 2000. The decrease is primarily attributable to lower outstanding debt balances under the revolving Credit Agreement over the prior year and a general reduction in interest rates, partially offset by the accelerated amortization of approximately $400 of debt issuance costs upon refinancing the prior credit facility on May 24, 2001. Interest and Investment Income. Interest and investment income for the six months ended September 28, 2001 totaled $0.3 million, a decrease of $1.0 million, or 76.9%, from interest and investment income of $1.3 million for the six months ended September 29, 2000. The decrease results from lower invested cash balances over the prior year period. 24 Other Income. Other income for the six months ended September 28, 2001 totaled $1.4 million, a decrease of $0.1 million, or 6.7%, from other income of $1.5 million for the six months ended September 29, 2000. Other income primarily consists of finance charges on customer accounts. Provision for Income Taxes. Provision for income taxes was $3.6 million for the six months ended September 28, 2001, a change of $1.2 million from the provision for income taxes of $4.8 million for the six months ended September 29, 2000. The effective income tax rate was approximately 37.3% for the six months ended September 28, 2001. Historically, the effective tax rate has been higher than the Company's statutory rate due to the non-deductibility of a portion of goodwill amortization expense resulting from the tax-free nature of certain acquisitions. The elimination of goodwill amortization during the quarter ended September 28, 2001 due to the adoption of SFAS 142 has resulted in increased pretax earnings with minimal incremental effect on the provision of income taxes. Net Income (Loss). The Company incurred a net loss for the six months ended September 28, 2001 of $84.0 million compared to net income of $3.7 million for the six months ended September 29, 2000. The increase in the loss primarily relates to a goodwill impairment charge of $90.0 million, net of income taxes of $14.4 million, recorded as a cumulative effect of an accounting change due to the implementation of SFAS 142. Refer to Note 5, Goodwill for further discussion. Otherwise, variances are due to the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES As the Company's business grows, its cash and working capital requirements will also continue to increase as a result of the anticipated growth of the Company's operations. This growth will be funded through a combination of cash flow from operations and revolving credit borrowings. Statement of Cash Flows Discussion Net cash provided by operating activities was $56.6 million and $13.0 million for the six months ended September 28, 2001 and September 29, 2000, respectively. During the six months ended September 28, 2001, the Company reported income before the cumulative effect of an accounting change of $6.1 million. In addition, to reconcile reported income to cash flows from operating activities, operating cash flows were positively impacted by $12.9 million, in aggregate, of non-cash items related to depreciation, intangibles amortization, debt issuance cost amortization, and provisions for doubtful accounts. Operating cash flows were also positively impacted by the continued implementation of working capital reduction initiatives that started in the last half of fiscal 2001 and continued into the first half of fiscal 2002. During the six months ended September 28, 2001, accounts payable increased by approximately $27 million, accounts receivable increased $5 million, and inventory increased $10 million, resulting in a net $12 million decrease in operating working capital which positively impacted operating cash flows. In addition, other assets, net of other liabilities, decreased by $25.0 million and include the collection of a $7.0 million IRS refund receivable. Net cash used in investing activities was $12.5 million and $10.5 million for the six months ended September 28, 2001 and September 29, 2000, respectively. During the six months ended September 28, 2001, net cash used in investing activities resulted from approximately $11.8 million of capital expenditures primarily related to the continued development of the Company's Enterprise Resource Planning System, electronic commerce platforms, and supply chain integration. Net cash used in financing activities was $54.3 million and $20.8 million for the six months ended September 28, 2001 and September 29, 2000, respectively. During the six months ended September 28, 2001, the Company repaid a net $54 million in bank debt. Sources of the repayment included approximately $10 million of cash balances and $44 of cash flows from operating activities. Operating Trends The Company had working capital of $266.1 million and $316.3 million as of September 28, 2001 and March 30, 2001, respectively. Accounts receivable, net of allowances, were $235.5 million and $236.8 million at September 28, 25 2001 and March 30, 2001, respectively. The average number of days sales in accounts receivable outstanding was approximately 46.7 and 51.7 days for the three months ended September 28, 2001 and the year ended March 30, 2001, respectively. For the three months ended September 28, 2001, the Company's Physician Supply, Imaging, and Long-Term Care Businesses had days sales in accounts receivable of approximately 46.2, 41.8, and 56.5 days, respectively. Inventories were $161.5 million and $154.7 million as of September 28, 2001 and March 30, 2001, respectively. The Company had inventory turnover of 8.5x and 8.4x for the three months ended September 28, 2001 and the year ended March 30, 2001, respectively. For the three months ended September 28, 2001, the Company's Physician Supply, Imaging, and Long-Term Care Businesses had inventory turnover of 8.7x, 7.7x, and 10.2x, respectively. The following table presents EBITDA and other financial data for the three and six months ended September 28, 2001 and September 29, 2000:
Three Months Ended Six Months Ended ---------------------------- ----------------------------- September 28, September 29, September 28, September 29, 2001 2000 2001 2000 -------------- ------------- ------------- ------------- (Dollars in thousands) Other Financial Data: Income from operations................... $ 7,922 $ 3,151 $ 15,219 $ 15,419 Plus: other income...................... 462 71 1,408 1,527 Plus: depreciation and amortization..... 4,509 5,661 8,800 11,135 -------------- ------------- ------------- ------------- EBITDA (a) ........................... $ 12,893 $ 9,527 $ 25,427 $ 28,081 -------------- ------------- ------------- ------------- Interest expense......................... $ 2,942 $ 4,687 $ 7,193 $ 9,722 Interest coverage (b).................... 4.4x 2.0x 3.6x 2.9x EBITDA margin (c)........................ 2.9% 2.1% 2.8% 3.1% Cash provided by operating activities.... $ 56,587 $ 12,989 Cash used in investing activities........ $ (12,479) $ (10,452) Cash used in financing activities........ $ (54,254) $ (20,800)
Refer to the Liquidity and Capital Resources section above of Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of cash flows from operating, investing and financing activities. (a) EBITDA represents income from operations, plus other income, plus depreciation and amortization, and excludes net interest expense and provision for income taxes. EBITDA is not a measure of performance or financial condition under generally accepted accounting principles ("GAAP"). EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative measure to income from operations or net income computed in accordance with GAAP, as an indicator of the Company's operating performance, as an alternative to cash flow from operating activities, or as a measure of liquidity. In addition, EBITDA does not provide information regarding cash flows from investing and financing activities which are integral to assessing the effects on the Company's financial position and liquidity as well as understanding the Company's historical growth. The Company believes that EBITDA is a standard measure of liquidity commonly reported and widely used by analysts, investors, and other interested parties in the financial markets. However, not all companies calculate EBITDA using the same method and the EBITDA numbers set forth above may not be comparable to EBITDA reported by other companies. (b) Interest coverage represents the Ratio of EBITDA to interest expense. (c) EBITDA margin represents the ratio of EBITDA to net sales. 26 Senior Subordinated Notes The Company has issued $125.0 million aggregate principal amount of 8.5% senior subordinated notes due in 2007 (the "Notes"). The Notes are unconditionally guaranteed on a senior subordinated basis by all of the Company's domestic subsidiaries. Interest on the Notes accrues from the date of original issuance and is payable semiannually on April 1 and October 1 of each year, commencing on April 1, 1998, at a rate of 8.5% per annum. The semiannual payments of approximately $5.3 million are expected to be funded by the operating cash flow of the Company. No principal payments on the Notes are required over the next five years. The Notes contain certain restrictive covenants that, among other things, limit the Company's ability to incur additional indebtedness. The Company may incur indebtedness up to certain specified levels and, provided that no event of default exists, additional indebtedness may be incurred if the Company maintains a consolidated fixed charge coverage ratio, after giving effect to such additional indebtedness, of greater than 2.0 to 1.0. Revolving Credit Agreement On May 24, 2001, the Company entered into a credit agreement (the "Credit Agreement"), by and among the Company, as borrower thereunder (the "Borrower"), the subsidiaries of the Borrower party thereto, the lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as Agent for the Lenders (in such capacity, the "Agent", or the "Bank") and Banc of America Securities LLC, as Arranger. The Credit Agreement provides for a four-year credit facility consisting of an aggregate $120 million revolving line of credit and letters of credit (the "Credit Facility"). Availability of borrowings under the Credit Facility depends upon (a) the amount of a borrowing base consisting of accounts receivable and, upon satisfaction of certain requirements, inventory and (b) compliance with certain debt incurrence tests under the Company's Indenture, dated as of October 7, 1997, relating to the Notes. The Credit Facility will bear interest at the Bank's prime rate plus a margin of between 0.25% and 1.00% based on the Company's ratio of funded debt to EBITDA (as defined in the Agreement) or at LIBOR plus a margin of between 1.75% and 3.50% based on the Company's ratio of funded debt to EBITDA. Under the Credit Agreement, the Company and its subsidiaries are subject to certain covenants, including but not limited to, limitations on (a) paying dividends and repurchasing stock, (b) repurchasing its Notes, (c) selling or transferring assets, (d) making certain investments (including acquisitions) and (e) incurring additional indebtedness and liens. Initial proceeds from the Credit Facility were used to refinance existing indebtedness outstanding under the Company's prior credit agreement, and future proceeds will be used to issue letters of credit, finance ongoing working capital requirements and general corporate purposes of the Company. The Credit Facility matures on May 24, 2005. On June 28, 2001, the Company entered into a First Amendment to the Credit Agreement (the "Amendment"), by and among the Company, as borrower thereunder, the subsidiaries of the Company party thereto, the Lenders and the Agent for the Lenders. The Amendment amends the Credit Agreement to increase the maximum available borrowings under the Credit Agreement from $120 million to $150 million. The Amendment also, among other things, increased the percentage of Lenders whose consent was required for an amendment of Credit Agreement from more than 50% to more than 55% and amended certain provisions relating to protective advances, limitations on issuances of letters of credit, indemnification, and landlord consents. The conditions to the effectiveness of the Amendment were satisfied on September 28, 2001. As of September 28, 2001, the Company has not entered into any material working capital commitments that require funding. The Company believes that the expected cash flows from operations, borrowing availability under the credit facility, and capital markets are sufficient to meet the Company's anticipated future requirements for working capital, capital expenditures, and acquisitions for the foreseeable future. 27 ITEM 3. PSS WORLD MEDICAL, INC. AND SUBSIDIARIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following assessment of the Company's market risks does not include uncertainties that are either nonfinancial or nonquantifiable, such as political, economic, tax and credit risks. Interest Rates. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's Credit Facility and investments. The Company's long-term debt obligations are primarily comprised of the $125.0 million senior subordinated notes, which bear interest at a fixed rate of 8.5%, and borrowings under the Credit Facility. As of September 28, 2001, the Company had $11.0 million outstanding under the Credit Facility at variable interest rates, at the Company's option, at either the bank's prime rate plus a margin of between 0.25% and 1.00% or at LIBOR plus a margin of between 1.75% and 3.50%. The weighted-average interest rate of borrowings under the Credit Agreement was 6.25% as of September 28, 2001. The Company's investment portfolio consists of cash and cash equivalents including deposits in banks, government securities, money market funds, and short-term investments with maturities, when acquired, of 90 days or less. The Company seeks to maximize capital preservation by investing these funds in high-quality issuers. As of September 28, 2001, the Company did not hold any derivative financial or commodity instruments. 28 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 9 of this Form 10-Q and Item 3 of the Company's Form 10-K for the fiscal year ended on March 30, 2001. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) Not applicable. (b) Not applicable. (c) Not applicable. (d) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES (a) Not applicable. (b) Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Company was held on August 23, 2001. The following items were presented for the vote of the shareholders, with the results indicated below: 1. The following directors were elected to serve a three-year term of office to expire at the annual meeting in 2004 or until their successors have been elected and qualified.
Directors Votes For Votes Against Abstentions Broker Non-Votes ------------------ ------------- -------------- -------------- ---------------- Melvin L. Hecktman 64,087,163 -- 1,545,667 -- Delores P. Kesler 64,086,211 -- 1,546,619 -- David A. Smith 63,642,848 -- 1,989,982 --
Immediately following the meeting, the directors of the Company consisted of the following individuals: Clark A. Johnson T. O'Neal Douglas Melvin L. Hecktman Delores P. Kesler David A. Smith Hugh M. Brown Charles R. Scott Donna C.E. Williamson 29 2. The Company's Amended and Restated Directors' Stock Plan was amended to increase the number of shares of the Company's common stock available under the plan from 400,000 to 800,000 shares. Votes For Votes Against Abstentions Broker Non-Votes ---------- ------------- ----------- ---------------- 42,170,260 23,205,223 257,347 -- 3. The Company's 1999 Long-Term Incentive Plan was amended to (i) increase the number of shares of the Company's common stock available under the plan from 2,270,000 to 4,370,000 shares, (ii) to expand the class of individuals eligible to participate under the plan, and (iii) to limit the term of any option granted under the plan to no more than ten years. Votes For Votes Against Abstentions Broker Non-Votes ---------- ------------- ----------- ---------------- 58,813,347 6,665,817 153,666 -- ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)The following exhibits are filed as a part of this Quarterly Report on Form 10-Q: Exhibit Number Description - --------- -------------------------- 3.1 Amended and Restated Articles of Incorporation, dated as of March 15, 1994.(14) 3.1a Articles of Amendment to Articles of Incorporation, dated as of September 24, 2001. 3.1b Articles of Amendment to Articles of Incorporation, dated as of November 9, 2001]. 3.2 Amended and Restated Bylaws, dated as of March 15, 1994.(3) 4.1 Form of Indenture, dated as of October 7, 1997, by and among the Company, the Subsidiary Guarantors named therein, and SunTrust Bank, Central Florida, National Association, as Trustee.(4) 4.1a Supplemental Indenture, dated as of February 15, 2001, by and among the New Subsidiary Guarantors named therein and SunTrust Bank (formerly known as SunTrust Bank, Central Florida, National Association), as Trustee. (12) 4.2 Registration Rights Agreement, dated as of October 7, 1997, by and among the Company, the Subsidiary Guarantors named therein, BT Alex. Brown Incorporated, Salomon Brothers Inc. and NationsBanc Montgomery Securities, Inc.(4) 4.3 Form of 81/2% Senior Subordinated Note due 2007, including Form of Guarantee (Exchange Notes).(4) 4.4 Shareholder Protection Rights Agreement, dated as of April 20, 1998, between PSS World Medical, Inc. and Continental Stock Transfer & Trust Company, as Rights Agent.(15) 4.4a Amendment to Shareholder Protection Rights Agreement, dated as of June 21, 2000, between PSS World Medical, Inc. and Continental Stock Transfer & Trust Company as Rights Agent.(11) 30
10.1 Incentive Stock Option Plan, dated as of May 14, 1986.(1) 10.2 Amended and Restated Directors Stock Plan.(8) 10.3 Amended and Restated 1994 Long-Term Incentive Plan.(8) 10.4 Amended and Restated 1994 Long-Term Stock Plan.(8) 10.5 1994 Employee Stock Purchase Plan.(2) 10.6 1994 Amended Incentive Stock Option Plan.(1) 10.7 PSS World Medical, Inc. 1999 Long-Term Incentive Plan.(10) 10.8 Distributorship Agreement between Abbott Laboratories and PSS World Medical, Inc. (Portions omitted pursuant to a request for confidential treatment - Separately filed with the SEC).(6) 10.9 Stock Purchase Agreement between Abbott Laboratories and Physician Sales & Service, Inc.(6) 10.10 Amended and Restated Physician Sales and Service, Inc. Employee Stock Ownership and Savings Plan.(9) 10.10a First Amendment to the Physician Sales and Service, Inc. Employee Stock Ownership and Savings Plan.(9) 10.11 Agreement and Plan of Merger, dated as of December 14, 1997, by and among the Company, PSS Merger Corp. and Gulf South Medical Supply, Inc.(5) 10.12 Credit Agreement, dated as of May 24, 2001, by and among the Company, each of the Company's subsidiaries therein named, the Lenders from time to time party thereto, Bank of America,, N.A., as Agent, and Banc of America Securities LLC, as Arranger. (16) 10.12a Amendment No. 1 to Credit Agreement, dated as of June 28, 2001, by and among the Company, each of the Company's subsidiaries therein named, the Lenders from time to time party thereto, Bank of America,, N.A., as Agent, and Banc of America Securities LLC, as Arranger.(17) 10.13 Employment Agreement, dated as of March 4, 1998, by and between the Company and David A. Smith.(7) 10.13a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and David A. Smith.(7) 10.14 Employment Agreement, dated as of April 1, 1998, by and between the Company and John F. Sasen, Sr.(7) 10.14a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and John F. Sasen, Sr.(7) 10.15 Employment Agreement, dated as of April 1, 1998, by and between the Company and Douglas J. Harper.(13) 10.15a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and Douglas J. Harper.(13) 10.16 Employment Agreement, dated as of April 1, 1998, by and between the Company and Gary A. Corless.(13)
31
10.16a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and Gary A. Corless.(13) 10.17 Employment Agreement, dated as of April 1, 1998, by and between the Company and Kevin P. English.(13) 10.17a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and Kevin P. English.(13) 10.18 Severance Agreement, dated as of October 11, 2000, by and between the Company and Frederick E. Dell.(7) 10.19 Severance Agreement, dated as of February 1, 2001, by and between the Company and Kirk A. Zambetti.(7) 10.20 Severance Agreement, dated as of March 21, 2001, by and between the Company and Patrick C. Kelly.(7) 21.1 List of Subsidiaries of the Company.(7) (1) Incorporated by Reference to the Company's Registration Statement on Form S-1, Registration No. 33-76580. (2) Incorporated by Reference to the Company's Registration Statement on Form S-8, Registration No. 33-80657. (3) Incorporated by Reference to the Company's Registration Statement on Form S-3, Registration No. 33-97524. (4) Incorporated by Reference to the Company's Registration Statement on Form S-4, Registration No. 333-39679. (5) Incorporated by Reference from Annex A to the Company's Registration Statement on Form S-4, Registration No. 333-44323. (6) Incorporated by Reference to the Company's Annual Report on Form 10-K for the year ended March 30, 1995. (7) Incorporated by Reference to the Company's Annual Report on Form 10-K for the year ended March 30, 2001. (8) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996. (9) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (10) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999. (11) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. (12) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2000. (13) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 29, 2001. (14) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 8, 1998. (15) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 22, 1998. (16) Incorporated by Reference to the Company's Current Report on Form 8-K, filed June 5, 2001. (17) Incorporated by Reference to the Company's Current Report on Form 8-K, filed July 3, 2001.
(b) Reports on Form 8-K The following current reports on Form 8-K were filed during the quarter ended September 28, 2001: Date of Report Items Reported ---------------- ------------------------------------------------------ July 3, 2001 Announcing the terms of an amendment, dated as of June 28, 2001, to the Company's Credit Agreement. ---------------- ------------------------------------------------------ 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jacksonville, State of Florida, on November 12, 2001. PSS WORLD MEDICAL, INC. By: /s/ David A. Smith -------------------------------------------- David A. Smith, President and Chief Financial Officer 33 EX-3.(I) 3 exhibit3_1a.txt EXHIBIT3.1A Exhibit 3.1a ARTICLES OF AMENDMENT TO AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PSS WORLD MEDICAL, INC. 1. The name of the corporation is PSS WORLD MEDICAL, INC. 2. Article I of the Amended and Restated Articles of Incorporation, as amended, of PSS WORLD MEDICAL, INC., a Florida corporation, is hereby amended in its entirety to read as follows: ARTICLE I - NAME "The name of this corporation is PSS MEDICAL, INC." 3. The foregoing amendment did not require shareholder approval. The foregoing amendment was duly approved and adopted by the Board of Directors of the corporation on July 13, 2001. 4. The foregoing amendment shall become effective upon filing with the Secretary of State of the state of Florida. IN WITNESS WHEREOF, the undersigned Director of the corporation has executed these Articles of Amendment this 24th day of September, 2001. PSS MEDICAL, INC. By: /s/ David A. Smith ------------------------ Print: David A. Smith Its: Director EX-3.(I) 4 exhibit3_1b.txt EXHIBIT3.1B Exhibit 3.1b ARTICLES OF AMENDMENT TO AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PSS MEDICAL, INC. 1. The name of the corporation is PSS MEDICAL, INC. 2. Article I of the Amended and Restated Articles of Incorporation, as amended, of PSS MEDICAL, INC., a Florida corporation, is hereby amended in its entirety to read as follows: ARTICLE I - NAME "The name of this corporation is PSS WORLD MEDICAL, INC." 3. The foregoing amendment did not require shareholder approval. The foregoing amendment was duly approved and adopted by the Board of Directors of the corporation on November 7, 2001. 4. The foregoing amendment shall become effective upon filing with the Secretary of State of the state of Florida. IN WITNESS WHEREOF, the undersigned Director of the corporation has executed these Articles of Amendment this 7th day of November, 2001. PSS MEDICAL, INC. By: /s/ David A. Smith --------------------- Print: David A. Smith Its: Director -----END PRIVACY-ENHANCED MESSAGE-----