UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2002
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-23832
PSS WORLD MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2280364
------- ----------
(State or other jurisdiction (IRS employer
of incorporation) Identification number)
4345 Southpoint Blvd.
Jacksonville, Florida 32216
--------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number (904) 332-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Securities Exchange Act of 1934).
[X] Yes [ ] No
The number of shares of common stock, par value $.01 per share, of the
registrant outstanding as of November 4, 2002 was 68,489,585 shares.
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
SEPTEMBER 27 , 2002
TABLE OF CONTENTS
Item Page
Information Regarding Forward-Looking Statements................................................ 3
Part I--Financial Information
1. Financial Statements:
Consolidated Balance Sheets -- September 27, 2002 and March 29, 2002.................... 4
Consolidated Statements of Operations for the Three and Six Months Ended
September 27, 2002 and September 28, 2001............................................ 5
Consolidated Statements of Cash Flows for the Six Months Ended September 27, 2002 and
September 28, 2001................................................................... 6
Notes to Consolidated Financial Statements.............................................. 8
Independent Accountants' Review Report.................................................. 25
2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 26
3. Quantitative and Qualitative Disclosures About Market Risk.................................. 43
4. Disclosure Controls and Procedures.......................................................... 43
Part II--Other Information
1. Legal Proceedings........................................................................... 43
2. Changes in Securities and Use of Proceeds................................................... 43
3. Defaults Upon Senior Securities............................................................. 43
4. Submission of Matters to a Vote of Security Holders......................................... 43
5. Other Information........................................................................... 44
6. Exhibits and Reports on Form 8-K............................................................ 44
Signatures.................................................................................. 48
Certifications.............................................................................. 49
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, business divestiture plans, plans and objectives of management
for future operations, and statements that include words such as "anticipate,"
"believe," "plan," "estimate," "expect," "intend," "may," "could," and other
similar expressions are forward-looking statements. Such forward-looking
statements are inherently uncertain, and stockholders must recognize that actual
results may differ from the Company's expectations.
Actual future results and trends for the Company may differ materially depending
on a variety of factors discussed in the Company's Annual Report on Form 10-K
for the year ended March 29, 2002, in this Form 10-Q, and elsewhere in the
Company's filings with the Securities and Exchange Commission. Factors that may
affect the plans or results of the Company include, without limitation, those
listed in the Company's Annual Report on Form 10-K for the year ended March 29,
2002 under the heading "Risk Factors," and (i) the ability of the Company to
successfully implement its strategic business plan; (ii) the availability of
sufficient capital to finance the Company's business plans on terms satisfactory
to the Company; (iii) competitive factors; (iv) the ability of the Company to
adequately defend or reach a settlement of outstanding litigations and
investigations involving the Company or its management; (v) changes in labor,
equipment and capital costs; (vi) changes in regulations affecting the Company's
business; (vii) changes in Medicare supplemental reimbursements for services
provided by long-term care providers; (viii) future acquisitions or strategic
partnerships; (ix) the disposition of the Company's Imaging Business; and (x)
general business and economic conditions. Many of these factors are outside the
control of the Company and its management. The Company wishes to caution readers
not to place undue reliance on any such forward-looking statements, which are
made pursuant to the private Securities Litigation Reform Act of 1995 and, as
such, speak only as of the date made. The Company undertakes no duty to update
such forward-looking statements.
3
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 2002 AND MARCH 29, 2002
(Dollars in Thousands, Except Share and Per Share Data)
ASSETS
September 27, March 29,
2002 2002
------------ -----------
(Unaudited)
Current Assets:
Cash and cash equivalents.............................................................. $ 33,006 $ 53,574
Accounts receivable, net............................................................... 154,804 148,340
Inventories, net....................................................................... 89,215 83,854
Employee advances...................................................................... 58 118
Prepaid expenses and other............................................................. 26,941 31,096
Assets of discontinued operations...................................................... 179,348 193,141
------------ -----------
Total current assets........................................................... 483,372 510,123
Property and equipment, net............................................................... 61,998 61,691
Other Assets:
Goodwill............................................................................... 61,283 59,390
Intangibles, net....................................................................... 5,847 4,023
Employee advances...................................................................... 184 282
Deferred tax assets.................................................................... 42,574 7,034
Other.................................................................................. 18,754 20,865
------------ -----------
Total assets................................................................... $674,012 $663,408
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................................................... $ 104,923 $ 94,383
Accrued expenses....................................................................... 33,081 29,976
Other.................................................................................. 5,429 4,616
Liabilities of discontinued operations and accrued loss on disposal.................... 147,068 68,490
------------ -----------
Total current liabilities...................................................... 290,501 197,465
Long-term debt............................................................................ 106,000 125,000
Other..................................................................................... 15,843 16,495
------------ -----------
Total liabilities.............................................................. 412,344 338,960
------------ -----------
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued and
outstanding........................................................................ -- --
Common stock, $.01 par value; 150,000,000 shares authorized, 69,958,816 and 71,270,044
shares issued and outstanding at September 27, 2002 and March 29, 2002, respectively 699 712
Additional paid-in capital............................................................. 339,894 350,043
Accumulated deficit.................................................................... (78,925) (26,307)
------------ -----------
Total shareholders' equity..................................................... 261,668 324,448
------------ -----------
Total liabilities and shareholders' equity..................................... $674,012 $663,408
============ ===========
The accompanying notes are an integral part of these consolidated statements.
4
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 27, 2002 AND SEPTEMBER 28, 2001
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
--------------------------------- ----------------------------------
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
---------------- --------------- ---------------- ----------------
Net sales.......................................... $288,819 $271,826 $575,285 $538,958
Cost of goods sold................................. 206,659 197,708 412,569 392,685
---------------- --------------- ---------------- ----------------
Gross profit........................ 82,160 74,118 162,716 146,273
General and administrative expenses................ 56,166 48,197 109,322 96,123
Selling expenses................................... 20,871 18,765 41,211 36,956
International business exit charge reversal........ -- -- -- (514)
---------------- --------------- ---------------- ----------------
Income from operations.............. 5,123 7,156 12,183 13,708
---------------- --------------- ---------------- ----------------
Other (expense) income:
Interest expense............................. (2,167) (1,845) (4,466) (4,614)
Interest and investment income (loss)........ 176 (24) 397 164
Other income................................. 408 356 810 1,135
---------------- --------------- ---------------- ----------------
(1,583) (1,513) (3,259) (3,315)
---------------- --------------- ---------------- ----------------
Income from continuing operations before provision
for income taxes............................. 3,540 5,643 8,924 10,393
Provision for income taxes......................... 1,293 2,049 3,327 3,750
---------------- --------------- ---------------- ----------------
Income from continuing operations before
extraordinary loss........................... 2,247 3,594 5,597 6,643
---------------- --------------- ---------------- ----------------
Discontinued operations:
Loss from discontinued operations (net of
benefit (provision) for income taxes of
$745, ($31), $1,209, and $129,
respectively)............................. (1,109) (191) (1,907) (552)
Loss on disposal of discontinued operations
(net of benefit for income taxes of
$34,654).................................. (55,642) -- (55,642) --
Cumulative effect of accounting change (net
of benefit for income taxes of $14,444)... -- -- -- (90,045)
---------------- --------------- ---------------- ----------------
Total loss from discontinued
operations.......................... (56,751) (191) (57,549) (90,597)
---------------- --------------- ---------------- ----------------
Extraordinary loss (net of benefit for income taxes
of $424)..................................... (666) -- (666) --
---------------- --------------- ---------------- ----------------
Net (loss) income.................................. $ (55,170) $ 3,403 $ (52,618) $ (83,954)
================ =============== ================ ================
Earnings (loss) per share - Basic:
Income from continuing operations before
extraordinary loss........................ $ 0.03 $0.05 $ 0.08 $ 0.09
Total loss from discontinued operations...... (0.80) -- (0.81) (1.27)
Extraordinary loss........................... (0.01) -- (0.01) --
---------------- --------------- ---------------- ----------------
Net (loss) income............................ $(0.78) $0.05 $(0.74) $(1.18)
================ =============== ================ ================
Earnings (loss) per share - Diluted:
Income from continuing operations before
extraordinary loss........................ $ 0.03 $0.05 $ 0.08 $ 0.09
Total loss from discontinued operations...... (0.79) -- (0.80) (1.26)
Extraordinary loss........................... (0.01) -- (0.01) --
---------------- --------------- ---------------- ----------------
Net (loss) income............................ $(0.77) $0.05 $(0.73) $(1.17)
================ =============== ================ ================
The accompanying notes are an integral part of these consolidated statements.
5
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2002 AND SEPTEMBER 28, 2001
(Unaudited)
(Dollars in Thousands)
Six Months Ended
--------------------------------
September 27, September 28,
2002 2001
---------------- --------------
Cash Flows From Operating Activities:
Net loss....................................................................... $(52,618) $(83,954)
Adjustments to reconcile net loss to net cash provided by operating activities:
Total loss from discontinued operations.................................... 57,549 90,597
Extraordinary loss......................................................... 666 --
Depreciation............................................................... 5,827 3,583
Amortization of intangible assets.......................................... 1,188 719
Amortization of debt issuance costs........................................ 558 993
Provision for doubtful accounts............................................ 1,712 2,505
Provision for notes receivables............................................ 2,939 --
(Benefit) provision for deferred income taxes.............................. (1,518) 11,635
Loss on sales of property and equipment.................................... 17 25
Noncash compensation expense............................................... -- 325
Loss on marketable securities.............................................. -- 114
International Business exit charge reversal................................ -- (514)
Changes in operating assets and liabilities, net of effect of business
combination and discontinued operations:
Accounts receivable, net................................................ (6,947) (2,579)
Inventories, net........................................................ (4,690) 837
Prepaid expenses and other current assets............................... 5,349 2,721
Other assets............................................................ (3,846) (16,430)
Accounts payable........................................................ 9,412 24,369
Accrued expenses and other liabilities.................................. 3,328 (4,085)
Net cash provided by discontinued operations............................ 1,639 25,162
---------------- --------------
Net cash provided by operating activities........................... 20,565 56,023
---------------- --------------
Cash Flows From Investing Activities:
Capital expenditures.......................................................... (6,160) (10,266)
Payments on noncompete agreements............................................. (423) (370)
Payment for business combination.............................................. (4,464) --
Proceeds from sales of property and equipment................................. 10 42
Proceeds from sale of International Business.................................. -- 221
Net cash used in discontinued operations...................................... (1,113) (1,553)
---------------- --------------
Net cash used in investing activities............................... (12,150) (11,926)
---------------- --------------
6
Six Months Ended
--------------------------------
September 27, September 28,
2002 2001
---------------- --------------
Cash Flows From Financing Activities:
Repayment of Senior Subordinated Notes........................................ (19,000) --
Payment of premiums for retirement of Senior Subordinated Notes............... (665) --
Purchase of treasury stock shares............................................. (9,518) --
Proceeds from issuance of common stock........................................ 200 11
Net payments under revolving line of credit................................... -- (54,195)
Net cash used in discontinued operations...................................... -- (59)
---------------- --------------
Net cash used in financing activities............................... (28,983) (54,243)
---------------- --------------
Net decrease in cash and cash equivalents......................................... (20,568) (10,146)
Cash and cash equivalents, beginning of period.................................... 53,574 34,374
---------------- --------------
Cash and cash equivalents, end of period.......................................... $ 33,006 $ 24,228
================ ==============
The accompanying notes are an integral part of these consolidated statements.
7
PSS WORLD MEDICAL, INC. SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in Thousands, Except Per Share Data, Unless Otherwise Noted)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
PSS World Medical, Inc. (the "Company" or "PSSWM") is a specialty marketer
and distributor of medical products to physicians, alternate-site imaging
centers, long-term care providers, home healthcare providers, and hospital
radiology departments through 63 full-service centers to customers in all
50 states.
The Physician Sales & Service division ("PSS" or the "Physician Supply
Business") is a distributor of medical supplies, equipment, and
pharmaceuticals to primary care and other office-based physicians in the
United States. At September 27, 2002, PSS operated 39 full-service centers
distributing to physician office sites in all 50 states.
The Gulf South Medical Supply, Inc. subsidiary ("Gulf South" or the
"Long-Term Care Business") is a distributor of medical supplies and related
products to nursing homes, home healthcare agencies, and other long-term
care facilities. At September 27, 2002, Gulf South operated 13 full-service
centers serving all 50 states.
The Diagnostic Imaging, Inc. subsidiary ("DI" or the "Imaging Business") is
a distributor of medical diagnostic imaging supplies, chemicals, equipment,
and services to the acute and alternate-care markets in the United States.
At September 27, 2002, DI operated 11 full-service centers, 32 distribution
centers, and 16 break-freight locations distributing to customer sites in
42 states. During the three months ended September 27, 2002, the Company's
Board of Directors adopted a plan to dispose of the Imaging Business. As a
result, DI's results of operations have been classified as discontinued
operations for all periods presented. Refer to Note 2, Discontinued
Operations, for a further discussion.
After giving effect to the discontinuation of the Imaging Business, the
Company divides its operations into two reportable operating segments: the
Physician Supply Business and the Long-Term Care Business. A third segment,
titled Other, includes unallocated corporate overhead and the Company's
European operations (the "International Business"), which were sold during
fiscal year 2002.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the United States
Securities and Exchange Commission (the "SEC"). Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted pursuant to SEC rules and
regulations. The consolidated financial statements reflect, in the opinion
of management, all adjustments necessary to present fairly the financial
position and results of operations for the periods indicated.
The consolidated balance sheet as of March 29, 2002 has been derived from
the Company's audited consolidated financial statements for the fiscal year
ended March 29, 2002. The financial statements and related notes included
in this report should be read in conjunction with the Company's Annual
Report on Form 10-K for the fiscal year ended March 29, 2002.
8
The Company reports its quarter end financial position and results of
operations and cash flows on the last Friday on or before June 30,
September 30, December 31, and March 31. The three months ended September
27, 2002 and September 28, 2001 each consist of 13 weeks.
The results of operations for the interim periods covered by this report
may not necessarily be indicative of operating results for the full fiscal
year.
Reclassifications
Certain amounts for prior periods have been reclassified to conform to the
current period presentation.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections ("SFAS 145"). Among other things, SFAS 145 rescinds
SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt. As
such, gains and losses from extinguishment of debt shall not be reported as
extraordinary items unless the extinguishment qualifies as an extraordinary
item under the criteria of Accounting Principles Board ("APB") Opinion No.
30, Reporting the Results of Operation-Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions ("APB 30"). Gains or losses from
extinguishment of debt that do not meet the criteria of APB 30 should be
reclassified to income from continuing operations for all prior periods
presented. The Company will adopt the provisions of SFAS 145 on March 29,
2003, the first day of fiscal year 2004. Upon adoption, the Company will
reclassify any gains or losses on early extinguishment of debt and related
taxes recorded as an extraordinary loss during fiscal year 2003 to other
(expense) income and provision for income taxes in the consolidated
statements of operations.
During June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146
addresses the financial accounting and reporting for costs associated with
exit or disposal activities, and eliminates the definition and requirements
for recognition of exits costs in Emerging Issues Task Force ("EITF") Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 will require that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred and that fair value is the objective for initial
measurement of a liability. The Company will apply the provisions of SFAS
146 for exit or disposal activities that are initiated after December 31,
2002, the effective date of this statement.
2. DISCONTINUED OPERATIONS
On September 26, 2002, the Company's Board of Directors adopted a plan to
dispose of the Imaging Business. The plan to dispose of the Imaging
Business reflects a strategic decision by management to focus the Company's
efforts on its Physician Supply and Long-Term Care Businesses, which offer
attractive opportunities for growth and profitability. On October 28, 2002,
the Company announced a definitive agreement to sell the Imaging Business
to a subsidiary of Platinum Equity, LLC in a capital stock transaction for
approximately $45.0 million in cash and the assumption of approximately
$67.9 million of liabilities. The purchase price is subject to adjustment
based on the net assets sold and net cash held by DI as of the closing
date. The closing of the transaction is subject to the satisfaction of
customary closing conditions, including the execution of a transition
services agreement. The transaction is expected to close no later than the
end of February 2003.
The results of operations of the Imaging Business and the estimated loss on
disposal have been classified as "discontinued operations" in accordance
with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets. The
estimated loss on disposal is subject to change based on the final purchase
price and any adjustments will be recorded in the period in which they
become known. The accompanying financial statements have been reclassified
to conform to discontinued operations treatment for all historical periods
presented.
9
Net sales and total loss from discontinued operations of the Imaging
Business are as follows:
Three Months Ended Six Months Ended
---------------------------- -----------------------------
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales............................ $175,704 $176,544 $352,469 $356,152
Pretax loss from operations.......... (1,854) (160) (3,116) (681)
Pretax loss on disposal of
discontinued operations........... (90,296) -- (90,296) --
Benefit (provision) for income taxes. 35,399 (31) 35,863 129
Cumulative effect of accounting
change (net of income tax benefit
of $14,444) ...................... -- -- -- (90,045)
------------- ------------- ------------- -------------
Total loss from discontinued
operations........................ $(56,751) $ (191) $(57,549) $(90,597)
============= ============= ============= =============
In accordance with EITF Issue No. 87-24, Allocation of Interest to
Discontinued Operations ("EITF 87-24"), a portion of the Company's interest
expense that is not directly attributable to or related to other operations
of the Company has been allocated to discontinued operations based upon the
ratio of net assets to be sold to the sum of consolidated net assets plus
consolidated debt. In addition, in accordance with EITF 87-24, general
corporate overhead was not allocated to discontinued operations. Interest
expense allocated to discontinued operations was $873 and $1,091 for the
three months ended September 27, 2002 and September 28, 2001, respectively,
and $1,703 and $2,569 for the six months ended September 27, 2002 and
September 28, 2001, respectively. Income taxes related to continuing
operations have been calculated for each of the periods presented. The
difference between this amount and the total tax provision, as previously
reported, has been allocated to discontinued operations.
The cumulative effect of accounting change for the six months ended
September 28, 2001 primarily related to a goodwill impairment charge of
$90,045, net of a benefit for income taxes of $14,444, recorded as a result
of adopting SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS
142").
The following table summarizes the carrying amounts of the major classes of
assets and liabilities classified as discontinued operations in the
accompanying balance sheets.
As of
--------------------------
September 27, March 29,
2002 2002
------------- -----------
Accounts receivable, net....................................... $ 83,120 $ 78,615
Inventories, net............................................... 63,880 69,069
Prepaid expenses and other current assets...................... 8,355 7,655
Property and equipment, net.................................... 21,716 23,149
Goodwill and intangibles....................................... -- 12,425
Other noncurrent assets........................................ 2,277 2,228
------------- -----------
Assets of discontinued operations.......................... $179,348 $193,141
Accounts payable............................................... $ 52,281 $52,311
Accrued expenses............................................... 6,200 5,815
Other current liabilities...................................... 9,399 10,364
------------- -----------
Liabilities of discontinued operations..................... 67,880 68,490
Accrued loss on disposal....................................... 79,188 --
------------- -----------
Liabilities of discontinued operations and accrued loss on
disposal................................................ $147,068 $ 68,490
============= ===========
10
3. ACCRUED RESTRUCTURING COSTS AND EXPENSES
Physician Supply Business Plan Adopted During the Fourth Quarter of Fiscal
Year 2002.
During the quarter ended March 29, 2002, management and the Board of
Directors approved and committed to a plan to restructure the Physician
Supply Business. This plan was implemented in order to reduce overhead
costs, improve customer satisfaction, and improve the distribution
infrastructure.
During the three months ended September 27, 2002, management reevaluated
its estimates of the total costs related to this plan and made necessary
adjustments. The original total estimated costs of $6,505 related to this
plan have been revised to be approximately $5,753, of which approximately
$4,174 and $1,042 was recognized during fiscal year 2002 and the six months
ended September 27, 2002, respectively. Approximately $537 will be expensed
as incurred during the remaining six months of fiscal year 2003. Management
anticipates that this plan will be completed by the end of the fourth
quarter of fiscal year 2003. As a result of the plan, approximately 75
employees, including operations leaders, administrative and warehouse
personnel, will be involuntarily terminated. As of September 27, 2002, 43
employees had been terminated.
To improve the distribution infrastructure, certain administrative
functions, such as accounts receivable billing and collections and
inventory management, at 13 service center locations will be consolidated
into larger existing facilities within a geographic location. The
operations in the affected facilities will be reduced to receiving and
distributing inventory, customer service, and sales support. Such locations
will be referred to as "break-freight" locations. As of September 27, 2002,
certain administrative functions at 7 of the 13 service center locations
were consolidated into existing facilities. To improve the inventory
purchasing structure and to leverage purchasing volumes, the purchasing
function for 33 service locations will be centralized to the corporate
office located in Jacksonville, Florida. As of September 27, 2002, the
purchasing function for 19 of the 33 service center locations was
centralized to Jacksonville, Florida.
Accrued restructuring costs and expenses related to the Physician Supply
Business plan, classified as accrued expenses in the accompanying
consolidated balance sheets, were $2,730 and $3,666 at September 27, 2002
and March 29, 2002, respectively. The following is a summary of the
restructuring activity related to the plan described above:
Involuntary
Employee Lease Branch
Termination Termination Shutdown
Costs Costs Costs Total
----------- ----------- -------- --------
Balance at March 29, 2002............. $783 $2,535 $348 $3,666
Additions....................... 174 -- -- 174
Utilized........................ (106) (51) (18) (175)
----------- ----------- -------- --------
Balance at June 28, 2002.............. 851 2,484 330 3,665
Adjustments..................... (464) -- (317) (781)
Additions....................... 29 15 -- 44
Utilized........................ (103) (98) 3 (198)
----------- ----------- -------- --------
Balance at September 27, 2002......... $313 $2,401 $16 $2,730
=========== =========== ======== ========
During the three months ended September 27, 2002, management reevaluated
the plan and adjusted certain estimates related to involuntary employee
termination costs and branch shutdown costs. Certain employees, who were
previously identified to be involuntarily terminated, either ceased
employment prior to the distribution center closure or were transferred
within the Company. Therefore, these employees were not entitled to
severance. In addition, accrued branch shutdown costs are estimated to be
less than previous estimates as the Company was able to sell the warehouse
racking for more than what was originally estimated. As a result, the
Company reversed approximately $781 of restructuring costs and expenses
during the three months ended September 27, 2002.
The amount of severance that involuntarily terminated employees receive is
based on the number of months of service. Employees earn additional
severance during the period from March 30, 2002 until closure of their
service center. This additional severance is being accrued when earned
11
throughout fiscal year 2003. The Physician Supply Business accrued an
additional $29 and $203 of involuntary employee termination costs during
the three and six months ended September 27, 2002, respectively.
Prior Fiscal Years
During the prior fiscal years, management and the Board of Directors
approved and committed to several plans to restructure the Physician Supply
and the Long-Term Care Businesses. Accrued restructuring costs and expenses
related to plans adopted in the prior fiscal years, classified as accrued
expenses in the accompanying consolidated balance sheets, totaled $857 and
$1,399 at September 27, 2002 and March 29, 2002, respectively. The
following is a summary of the restructuring activity related to the plans
adopted in prior fiscal years:
Involuntary
Employee Lease
Termination Termination
Costs Costs Total
----------- ----------- ---------
Balance at March 29, 2002............ $1,385 $ 14 $1,399
Adjustments.................... -- (14) (14)
Utilized....................... (258) -- (258)
----------- ----------- ---------
Balance at June 28, 2002............. 1,127 -- 1,127
Utilized....................... (270) -- (270)
----------- ----------- ---------
Balance at September 27, 2002........ $ 857 $ -- $ 857
=========== =========== =========
The accrued involuntary employee termination costs at September 27, 2002
and March 29, 2002 relate to Plan E that was adopted during the third
quarter of fiscal year 2001. The remaining $857 will be paid to the
terminated employees in fiscal year 2003 in accordance with the severance
agreements.
4. PURCHASE BUSINESS COMBINATION
On September 16, 2002, the Company acquired certain assets and assumed
certain liabilities of a long-term care medical supply distributor. The
acquisition was accounted for under the purchase method of accounting in
accordance with SFAS No. 141, Business Acquisitions, and accordingly the
operations of the acquired company have been included in the Company's
results of operations subsequent to the date of acquisition. The assets
acquired and liabilities assumed were recorded at their estimated fair
values at the date of the acquisition as determined by management based on
information currently available. Supplemental unaudited pro forma
information, assuming this acquisition was made at the beginning of the
immediate preceding period, is not presented as the results would not
differ materially from the amounts reported in the accompanying
consolidated statements of operations.
The aggregate purchase price was $4,464. The Company is in the process of
obtaining independent valuations of certain intangible assets; thus, the
allocation of the purchase price is subject to revision. The following
table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition.
Accounts receivable.......................................$1,230
Inventory................................................. 671
Goodwill ................................................. 1,893
Intangibles............................................... 1,694
------
Total assets acquired................................ 5,488
Current liabilities....................................... 1,024
------
Net assets acquired..................................$4,464
======
The $1,893 of goodwill was assigned to the Long-Term Care Business and is
expected to be deductible for tax purposes. Of the $1,694 of acquired
intangible assets, $265, $538, and $891 was assigned to noncompete
agreements, customer contracts, and customer relationships, respectively.
The acquired intangible assets have a weighted-average useful life of
approximately 5.6 years.
12
5. GOODWILL
In accordance with SFAS 142 the changes in the carrying value of goodwill
for the six months ended September 27, 2002 are as follows:
Physician Long-Term
Supply Care
Business Business Total
--------- --------- ---------
Balance as of March 29, 2002................ $ 9,788 $49,602 $ 59,390
Purchase business combination.......... -- 1,893 1,893
--------- --------- ---------
Balance as of September 27, 2002............ $ 9,788 $51,495 $ 61,283
========= ========= =========
The Company performs its annual impairment test for each reporting unit on
the last day of each fiscal year.
6. INTANGIBLES
The following table summarizes the gross carrying amount and accumulated
amortization for existing intangible assets subject to amortization, by
business segment and major asset class.
As of September 27, 2002 As of March 29, 2002
---------------------------------- ---------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
--------- ------------ ------- -------- ------------ -------
Noncompetition Agreements:
Physician Supply Business.......... $ 4,628 $(3,374) $1,254 $ 4,053 $ (3,073) $ 980
Long-Term Care Business............ 2,035 (892) 1,143 2,070 (876) 1,194
--------- ------------ ------- -------- ------------ -------
6,663 (4,266) 2,397 6,123 (3,949) 2,174
--------- ------------ ------- -------- ------------ -------
Signing Bonuses:
Physician Supply Business.......... 1,770 (836) 934 1,027 (426) 601
Long-Term Care Business............ 200 (170) 30 200 (150) 50
--------- ------------ ------- -------- ------------ -------
1,970 (1,006) 964 1,227 (576) 651
--------- ------------ ------- -------- ------------ -------
Other Intangibles:
Physician Supply Business.......... 2,993 (1,916) 1,077 2,993 (1,795) 1,198
Long-Term Care Business............ 1,429 (20) 1,409 -- -- --
--------- ------------ ------- -------- ------------ -------
4,422 (1,936) 2,486 2,993 (1,795) 1,198
--------- ------------ ------- -------- ------------ -------
Total.................. $13,055 $(7,208) $5,847 $10,343 $(6,320) $4,023
========= ============ ======= ======== ============ =======
The weighted-average amortization period, in total and by major intangible
asset class, is as follows:
September 27, March 29,
2002 2002
------------- -----------
(in years)
Noncompetition Agreements............ 6.8 7.1
Signing Bonuses...................... 3.2 3.5
Other Intangibles.................... 10.4 12.4
------------- -----------
Total Weighted-Average Period..... 7.5 8.2
============= ===========
13
Total amortization expense for intangible assets for the three months ended
September 27, 2002 and September 28, 2001 was $570 and $381, respectively.
Total amortization expense for intangible assets for the six months ended
September 27, 2002 and September 28, 2001 was $1,188 and $719,
respectively. The estimated amortization expense for the next five fiscal
years and thereafter is as follows:
Fiscal Year:
2003 (remaining 6 months)................... $ 1,078
2004........................................ 1,511
2005........................................ 1,107
2006........................................ 778
2007........................................ 648
Thereafter.................................. 725
---------
Total.............................. $ 5,847
=========
Total payments made under noncompetition agreements during the six months
ended September 27, 2002 were $423. Future minimum payments required under
noncompetition agreements at September 27, 2002 are as follows:
Fiscal Year:
2003 (remaining 6 months)................... $215
2004........................................ 245
2005........................................ 100
2006........................................ 36
2007........................................ 35
Thereafter.................................. 142
--------
Total.............................. $773
========
7. NOTES RECEIVABLE
The Company has three notes receivables (the "Loans") outstanding from its
former Chairman and Chief Executive Officer, which bear interest at the
applicable Federal rate for long-term obligations. These Loans were issued
to the former Chairman and Chief Executive Officer in order to consolidate
debt incurred in relation to certain real estate activities, as well as to
provide the cash needed to pay-off personal debt. One of the Loans is
unsecured and the other two Loans are secured by common stock of the
Company and a split-dollar life insurance policy. As part of the Company's
ongoing review of the realization of the Loans, the Company determined that
an allowance for doubtful accounts was required for the unsecured loan. As
a result, during the three months ended September 27, 2002, the Company
recorded an allowance for doubtful accounts of $2,939 against the unsecured
Loan. This allowance does not represent a forgiveness of debt.
14
8. EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, the calculation of
basic earnings per common share and diluted earnings per common share is
presented below (amounts in thousands, except per share data):
Three Months Ended Six Months Ended
------------------------------ ------------------------------
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
-------------- ------------- ------------- -------------
Income from continuing operations before
extraordinary loss...................... $ 2,247 $3,594 $ 5,597 $ 6,643
Total loss from discontinued operations
(net of benefit (provision) for income
taxes of $35,399, $(31), $35,863, and
$129) (56,751) (191) (57,549) (90,597)
Extraordinary loss (net of benefit for
income taxes of $424)................... (666) -- (666) --
-------------- ------------- ------------- -------------
Net (loss) income.......................... $(55,170) $3,403 $(52,618) $(83,954)
============== ============= ============= =============
Earnings (loss) per share - Basic:
Income from continuing operations
before extraordinary loss.............. $0.03 $0.05 $0.08 $0.09
Total loss from discontinued operations. (0.80) -- (0.81) (1.27)
Extraordinary loss...................... (0.01) -- (0.01) --
-------------- ------------- ------------- -------------
Net (loss) income....................... $(0.78) $0.05 $(0.74) $(1.18)
============== ============= ============= =============
Earnings (loss) per share - Diluted:
Income from continuing operations
before extraordinary loss.............. $0.03 $0.05 $0.08 $0.09
Total loss from discontinued operations. (0.79) -- (0.80) (1.26)
Extraordinary loss...................... (0.01) -- (0.01) --
-------------- ------------- ------------- -------------
Net (loss) income....................... $(0.77) $0.05 $(0.73) $(1.17)
============== ============= ============= =============
Weighted average shares outstanding:
Common shares........................... 70,913 71,165 71,092 71,165
Assumed exercise of stock options....... 623 667 861 483
-------------- ------------- ------------- -------------
Diluted shares outstanding.............. 71,536 71,832 71,953 71,648
============== ============= ============= =============
Diluted earning per share assumes options to purchase shares of common
stock have been exercised using the treasury stock method. Options to
purchase approximately 5.1 million and 4.5 million shares of common stock
that were outstanding during the three and six months ended September 27,
2002 were not included in the computation of diluted earnings per share for
each of the respective periods because the options' exercise prices
exceeded the fair market value of the Company's common stock.
On July 30, 2002, the Company's Board of Directors approved a stock
repurchase program authorizing the Company, depending upon market
conditions and other factors, to repurchase up to a maximum of 5% of its
common stock, or approximately 3.6 million common shares, in the open
market, in privately negotiated transactions, or otherwise. As of September
27, 2002, the Company repurchased approximately 1.3 million shares under
this program. Such repurchases are expected to continue over the next 9
months and will be made in compliance with applicable rules and regulations
and the terms of the Company's debt agreements. However, the stock
repurchase program may be discontinued at any time.
9. SEGMENT INFORMATION
The Company's reportable segments are strategic businesses that offer
different products and services to different segments of the healthcare
industry, and are the basis for which management regularly evaluates the
Company. These segments are managed separately because of different
customers and products. The Company primarily evaluates the operating
performance of its segments based on net sales and income from operations.
The following table presents financial information about the Company's
business segments:
15
Three Months Ended Six Months Ended
---------------------------- -----------------------------
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
NET SALES:
Physician Supply Business.................... $ 184,118 $ 176,115 $ 366,991 $ 347,458
Long-Term Care Business...................... 104,701 95,711 208,294 191,069
Other........................................ -- -- -- 431
------------- ------------- ------------- -------------
Total net sales......................... $288,819 $ 271,826 $ 575,285 $ 538,958
============= ============= ============= =============
INCOME FROM OPERATIONS:
Physician Supply Business.................... $ 5,697 $ 6,399 $ 11,219 $ 12,133
Long-Term Care Business...................... 4,749 2,255 8,572 4,029
Other........................................ (5,323) (1,498) (7,608) (2,454)
------------- ------------- ------------- -------------
Total income from operations............ $ 5,123 $ 7,156 $ 12,183 $ 13,708
============= ============= ============= =============
DEPRECIATION:
Physician Supply Business.................... $ 2,191 $ 1,152 $ 4,240 $ 2,297
Long-Term Care Business...................... 392 461 858 923
Other........................................ 369 231 729 363
------------- ------------- ------------- -------------
Total depreciation...................... $ 2,952 $ 1,844 $ 5,827 $ 3,583
============= ============= ============= =============
AMORTIZATION OF INTANGIBLE ASSETS:
Physician Supply Business.................... $ 434 $ 277 $ 832 $ 512
Long-Term Care Business...................... 136 104 356 207
------------- ------------- ------------- -------------
Total amortization of intangible assets. $ 570 $ 381 $ 1,188 $ 719
============= ============= ============= =============
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business.................... $ 402 $ 289 $ 451 $ 609
Long-Term Care Business...................... 588 951 1,261 1,896
------------- ------------- ------------- -------------
Total provision for doubtful accounts... $ 990 $ 1,240 $ 1,712 $ 2,505
============= ============= ============= =============
INTEREST EXPENSE:
Physician Supply Business.................... $ 996 $ 189 $ 1,970 $ 467
Long-Term Care Business...................... 1,226 1,268 2,458 2,645
Other........................................ (55) 388 38 1,502
------------- ------------- ------------- -------------
Total interest expense.................. $ 2,167 $ 1,845 $ 4,466 $ 4,614
============= ============= ============= =============
INTEREST AND INVESTMENT INCOME (LOSS):
Physician Supply Business.................... $ -- $ 1 $ 24 $ 2
Long-Term Care Business...................... 1 -- 1 --
Other........................................ 175 (25) 372 162
------------- ------------- ------------- -------------
Total interest and investment income.... $ 176 $ (24) $ 397 $ 164
============= ============= ============= =============
PROVISION FOR INCOME TAXES:
Physician Supply Business.................... $ 1,972 $ 2,809 $ 3,829 $ 5,094
Long-Term Care Business...................... 1,389 451 2,379 682
Other........................................ (2,068) (1,211) (2,881) (2,026)
------------- ------------- ------------- -------------
Total provision for income taxes........ $ 1,293 $ 2,049 $ 3,327 $ 3,750
============= ============= ============= =============
CAPITAL EXPENDITURES:
Physician Supply Business.................... $ 2,843 $ 2,222 $ 4,867 $ 5,514
Long-Term Care Business...................... 107 37 313 220
Other........................................ 358 2,778 980 4,532
------------- ------------- ------------- -------------
Total capital expenditures.............. $ 3,308 $ 5,037 $ 6,160 $ 10,266
============= ============= ============= =============
16
September 27, March 29,
2002 2002
------------- ----------
ASSETS:
Physician Supply Business......... $232,120 $223,216
Long-Term Care Business........... 161,728 155,038
Other............................. 100,816 92,013
Discontinued Operations........... 179,348 193,141
------------- ----------
Total assets................. $674,012 $663,408
============= ==========
As of September 27, 2002, the federal income tax receivable or payable is
now recorded on the balance sheet of the Other segment; therefore, for
comparability purposes, certain reclassification entries are reflected in
the March 29, 2002 amounts above.
10. COMMITMENTS AND CONTINGENCIES
Litigation
The Company, through its Long-Term Care Business, its Physician Supply
Business, and/or predecessor companies, has been named as one of many
defendants in latex glove product liability claims in various Federal and
state courts. The defendants are primarily distributors of certain brands
of latex gloves. Currently, state litigation exists in New Hampshire,
Massachusetts, and California, while Federal and/or Federal multidistrict
litigation are present in Washington, Georgia, Pennsylvania, and Ohio.
Defense costs are currently allocated by agreement between a consortium of
insurers on a pro rata basis for each case depending upon policy years and
alleged years of exposure. All of the insurance carriers are defending
subject to a reservation of rights. Ultimately, the manufacturers from
which the gloves were purchased may assume the defense and liability
obligations. The Company intends to vigorously defend the proceedings;
however, there can be no assurance that this litigation will be ultimately
resolved on terms that are favorable to the Company.
The Company and certain of its current officers and directors are named as
defendants in a purported securities class action lawsuit entitled Jack
Hirsch v. PSS World Medical, Inc., et al., Civil Action No. 3:98-CV
502-J-21TEM. The action, which was filed on or about May 28, 1998, is
pending in the United States District Court for the Middle District of
Florida, Jacksonville Division. An amended complaint was filed on December
11, 1998. The plaintiff alleges, for himself and for a purported class of
similarly situated stockholders who allegedly purchased the Company's stock
between December 23, 1997 and May 8, 1998 that the defendants engaged in
violations of certain provisions of the Exchange Act, and Rule 10b-5
promulgated thereunder. The allegations are based upon a decline in the
Company's stock price following announcement by the Company in May 1998
regarding the Gulf South Merger, which resulted in earnings below analyst's
expectations. The plaintiff seeks indeterminate damages, including costs
and expenses. The Company filed a motion to dismiss the first amended
complaint on January 25, 1999. The court granted that motion without
prejudice by order dated February 9, 2000. Plaintiffs filed their second
amended complaint on March 15, 2000. The Company filed a motion to dismiss
the second amended complaint on May 1, 2000, which is pending. Oral
arguments on the Company's motion to dismiss are scheduled to take place on
November 15, 2002. 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.
The Company has been named as a defendant in ten, related class action
complaints, the first of which was filed on July 13, 2001 and all of which
had been filed in the United States District Court for the Middle District
of Florida. By Order of the Court dated January 14, 2002, those ten actions
were consolidated into a single action under the caption "In Re PSS World
Medical Inc. Securities Litigation." Following that consolidation, on March
22, 2002, lead plaintiffs served their Amended Class Action Complaint for
Violation of Securities Laws. On May 14, 2002, defendants filed their
motion to dismiss the Amended Complaint, and, on August 1, 2002, the Court
entered an Order denying that motion and directing the Company to answer
the Amended Complaint by August 12, 2002. The Company and the other
defendants served their answer to the Amended Complaint on August 12, 2002,
and the parties are now engaged in discovery. The Amended Complaint named
the Company along with certain present and former directors and officers.
17
The Amended Complaint was filed as a purported class action on behalf of
persons who purchased or acquired PSS World Medical, Inc. common stock at
various times during the period between October 26, 1999 and October 3,
2000. The Amended Complaint alleges, among other things, violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder, and seeks unspecified damages. The plaintiffs
allege that the Company issued false and misleading statements and failed
to disclose material facts concerning, among other things, the Company's
financial condition. The plaintiffs further allege that because of the
issuance of false and misleading statements and/or failure to disclose
material facts, the price of PSS World Medical, Inc. common stock was
artificially inflated during the class period. The Company believes that
the allegations contained in the Amended Complaint are without merit and
intends to defend vigorously against the claims. There can be no assurance
that this litigation will be ultimately resolved on terms that are
favorable to the Company.
The Company has been named as a defendant in a suit brought by three former
and present employees of the Company, entitled Angione, et al. v. PSS World
Medical Inc., which was filed on or about June 4, 2002 in the U.S. District
Court for the Central District of California, Santa Ana Division (Case No.
CV SA 02-533 AHS (ANx)). In response to the Motion to Transfer Venue filed
by the Company, the plaintiffs stipulated that venue of the case is proper
in the United States District Court in Jacksonville, Florida. The Court
approved the transfer and the case is now pending in the United States
Court for the Middle District of Florida, Jacksonville Division, Case
Number 02-CV-854. The plaintiffs allege that the Company wrongfully
classifies its Purchasers, Operations Leader Trainees, and Accounts
Receivable Representatives as exempt from the overtime requirements imposed
by the Fair Labor Standards Act and the California Wage Orders. The
plaintiffs seek court approval to proceed as a collective action under the
Fair Labor Standards Act, a representative action under California's Unfair
Competition Act, and/or a class action on behalf of all persons in the
United States who have occupied any one of the three positions within the
pertinent limitations period. PSSWM opposed this motion. It is unknown
whether the Court will tentatively approve a collective action and allow
discovery on the issue of who is eligible to participate in the collective
action. The Plaintiffs seek to recover back pay, interest, costs of suit,
declaratory and injunctive relief, and applicable statutory penalties. In
addition, two of the three named plaintiffs bring individual claims for
gender discrimination and retaliation under Title VII of the Civil Rights
Act of 1964 and the Equal Pay Act of 1963. The Company is vigorously
defending against the claims and is working with human resource personnel
to collect personnel and payroll information necessary to determine (i) the
employees who are potentially eligible to participate in the suit and (ii)
the extent of overtime liability, if any. There can be no assurance that
this litigation will be ultimately resolved on terms that are favorable to
the Company.
On December 7, 2001, the Company has filed an arbitration proceeding with
the American Arbitration Association against Candela Corporation (PSS World
Medical, Inc. d/b/a Physician Sales & Service, Claimant, v. Candela
Corporation, Respondent) for breach of contract, promissory estoppel,
intentional interference with contractual/advantageous relations, and
violation of the Massachusetts Unfair Business Practices Act, arising out
of Candela's termination of the distribution agreement between the two
companies. Candela has filed counterclaims in the arbitration for breach of
contract, seeking payment of $2,350 in outstanding invoices and alleged
trademark infringement and violation of the Massachusetts Unfair Business
Practices Act. Final ruling by the arbitration panel is presently expected
to be rendered by January 31, 2003. The Company believes that Candela's
counterclaims are without merit and intends to defend vigorously against
the claims, however, there can be no assurance that this litigation will be
ultimately resolved on terms that are favorable to the Company. The
accompanying consolidated balance sheets include the inventory and
associated liability for the $2,350 of outstanding invoices.
The Company is also a party to various other legal and administrative
proceedings and claims arising in the normal course of business. While any
litigation contains an element of uncertainty, the Company, after
consultation with outside legal counsel, believes that the outcome of such
other proceedings or claims which are pending or known to be threatened
will not have a material adverse effect on the Company's consolidated
financial position, liquidity, or results of operations.
The Company has various insurance policies, including product liability
insurance, covering risks and in amounts it considers adequate. In many
cases in which the Company has been sued in connection with products
manufactured by others, the Company is provided indemnification by the
manufacturer. There can be no assurance that the insurance coverage
maintained by the Company is sufficient or will be available in adequate
amounts or at a reasonable cost, or that indemnification agreements will
provide adequate protection for the Company.
18
Commitments and Other Contingencies
The Company has employment agreements with certain executive officers which
provide that in the event of their termination or resignation, under
certain conditions, the Company may be required to continue salary payments
and provide insurance for a period ranging from 3 to 12 months for certain
executives and to repurchase a portion or all of the shares of common stock
held by the executives upon their demand at the fair market value at the
time of repurchase. The period of salary and insurance continuation and the
level of stock repurchases are based on the conditions of the termination
or resignation.
During fiscal 2000, the Board of Directors approved and adopted the PSS
World Medical, Inc. Officer Retention Bonus Plan and a Corporate Office
Employee Retention Bonus Plan. As part of the Company's strategic
alternatives process, management adopted these plans to retain certain
officers and key employees during the strategic alternatives transition
period. The total cash compensation costs related to these plans is
approximately $7,996, of which $6,807 was expensed in prior fiscal years
and $737 was expensed during the six months ended September 27, 2002. An
additional $452 will be expensed during the remaining six months of fiscal
year 2003.
11. LONG-TERM DEBT
During fiscal year 1998, the Company issued $125,000 in debt securities
("Senior Subordinated Notes") under a registration statement filed with the
Securities and Exchange Commission. During the three months ended September
27, 2002, the Company retired $19,000 principal amount of its Senior
Subordinated Notes. An extraordinary loss of $666 was incurred as a result
of the early extinguishment of debt, consisting of $665 of redemption
premiums, $425 of accelerated amortization of debt issuance costs, net of a
benefit for income taxes of $424.
The following tables present condensed consolidating financial information
for the parent or issuer of the debt, the guarantor subsidiaries, and the
nonguarantor subsidiaries of the Senior Subordinated Notes. The
nonguarantor subsidiary was the International Business, which was divested
during the three months ended June 29, 2001. Separate financial statements
of the guarantor subsidiaries are not presented because the guarantors are
jointly, severally and unconditionally liable under the guarantees and the
Company believes the condensed consolidating financial information is more
meaningful in understanding the financial position, results of operations,
and cash flows of the guarantor subsidiaries. In addition, the guarantor
subsidiaries are 100% owned subsidiaries of the Company.
19
Condensed Balance Sheets
September 27, 2002 and March 29, 2002
As of September 27, 2002
--------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------
Current Assets:
Cash and cash equivalents............ $ 23,654 $ 9,352 -- $ 33,006
Accounts receivable, net............. 79,739 75,065 -- 154,804
Inventories, net..................... 54,000 35,215 -- 89,215
Intercompany receivables............. 84,275 (84,275) -- --
Other current assets................. 9,687 17,312 -- 26,999
Assets of discontinued operations.... -- 179,348 -- 179,348
---------- ------------ ------------ ------------
Total current assets........ 251,355 232,017 -- 483,372
Property and equipment, net................ 56,346 5,652 -- 61,998
Other Assets:
Goodwill............................. 9,788 51,495 -- 61,283
Intangibles, net..................... 3,264 2,583 -- 5,847
Investment in subsidiary............. 286 28,083 $(28,369) --
Deferred tax assets.................. 40,601 1,973 -- 42,574
Other................................ 1,052 17,886 -- 18,938
---------- ------------ ------------ ------------
Total assets................ $362,692 $339,689 $(28,369) $674,012
========== ============ ============ ============
Current Liabilities:
Accounts payable..................... $ 63,545 $ 41,378 $ -- $104,923
Other current liabilities............ 25,137 13,373 -- 38,510
Liabilities of discontinued operations
and accrued loss on disposal...... -- 147,068 -- 147,068
---------- ------------ ------------ ------------
Total current liabilities... 88,682 201,819 -- 290,501
Long-term debt............................. 106,000 -- -- 106,000
Other...................................... 13,450 2,393 -- 15,843
---------- ------------ ------------ ------------
Total liabilities........... 208,132 204,212 -- 412,344
Shareholders' Equity:
Common stock......................... 699 330 (330) 699
Additional paid-in capital........... 181,417 150,151 8,326 339,894
Accumulated deficit.................. (27,556) (15,004) (36,365) (78,925)
---------- ------------ ------------ ------------
Total shareholders' equity.. 154,560 135,477 (28,369) 261,668
---------- ------------ ------------ ------------
Total liabilities and
shareholders' equity........ $362,692 $339,689 $(28,369) $674,012
========== ============ ============ ============
20
Condensed Balance Sheets (Continued):
As of March 29, 2002
--------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------
Current Assets:
Cash and cash equivalents............ $ 39,531 $ 14,043 -- $ 53,574
Accounts receivable, net............. 78,911 69,429 -- 148,340
Inventories, net..................... 48,706 35,148 -- 83,854
Intercompany receivables............. 134,418 (134,418) -- --
Other current assets................. 14,242 16,972 -- 31,214
Assets of discontinued operations.... -- 193,141 -- 193,141
---------- ------------ ------------ ------------
Total current assets........ 315,808 194,315 -- 510,123
Property and equipment, net................ 55,449 6,242 -- 61,691
Other Assets:
Goodwill............................. 9,788 49,602 -- 59,390
Intangibles, net..................... 2,777 1,246 -- 4,023
Investment in subsidiary............. 286 28,083 $(28,369) --
Deferred tax assets.................. 5,326 1,708 -- 7,034
Other................................ 4,039 17,108 -- 21,147
---------- ------------ ------------ ------------
Total assets................ $393,473 $298,304 $(28,369) $663,408
========== ============ ============ ============
Current Liabilities:
Accounts payable..................... $ 62,181 $ 32,202 $ -- $ 94,383
Other current liabilities............ 24,439 10,153 -- 34,592
Liabilities of discontinued operations
and accrued loss on disposal...... -- 68,490 -- 68,490
---------- ------------ ------------ ------------
Total current liabilities... 86,620 110,845 -- 197,465
Long-term debt............................. 125,000 -- -- 125,000
Other...................................... 13,845 2,650 -- 16,495
---------- ------------ ------------ ------------
Total liabilities........... 225,465 113,495 -- 338,960
Shareholders' Equity:
Common stock......................... 713 329 (330) 712
Additional paid-in capital........... 191,568 150,149 8,326 350,043
Accumulated (deficit) earnings....... (24,273) 34,331 (36,365) (26,307)
Total shareholders' equity.. 168,008 184,809 (28,369) 324,448
---------- ------------ ------------ ------------
Total liabilities and
shareholders' equity........ $393,473 $298,304 $(28,369) $663,408
========== ============ ============ ============
21
Condensed Statements of Operations
For the Three and Six Months Ended September 27, 2002 and September 28, 2001
Three Months Ended September 27, 2002
--------------------------------------
Guarantor
Parent Subsidiaries Consolidated
--------- ------------ ------------
Net sales.............................................. $156,739 $132,080 $288,819
Cost of goods sold..................................... 108,702 97,957 206,659
--------- ------------ ------------
Gross profit............................ 48,037 34,123 82,160
General and administrative expenses.................... 34,827 21,339 56,166
Selling expenses....................................... 15,196 5,675 20,871
--------- ------------ ------------
(Loss) income from operations........... (1,986) 7,109 5,123
Other expense.......................................... (150) (1,433) (1,583)
--------- ------------ ------------
(Loss) income from continuing operations before
provision for income taxes.......................... (2,136) 5,676 3,540
(Benefit) provision for income taxes................... (96) 1,389 1,293
--------- ------------ ------------
(Loss) income from continuing operations before
extraordinary loss.................................. (2,040) 4,287 2,247
Total loss from discontinued operations................ -- (56,751) (56,751)
--------- ------------ ------------
Extraordinary loss..................................... (666) -- (666)
--------- ------------ ------------
Net loss............................................... $ (2,706) $(52,464) $(55,170)
========= ============ ============
Three Months Ended September 28, 2001
--------------------------------------
Guarantor
Parent Subsidiaries Consolidated
-------- ------------ ------------
Net sales.............................................. $148,193 $123,633 $271,826
Cost of goods sold..................................... 104,840 92,868 197,708
--------- ------------ ------------
Gross profit............................ 43,353 30,765 74,118
General and administrative expenses.................... 28,040 20,157 48,197
Selling expenses....................................... 13,340 5,425 18,765
--------- ------------ ------------
Income from operations.................. 1,973 5,183 7,156
Other expense.......................................... (65) (1,448) (1,513)
--------- ------------ ------------
Income from continuing operations before provision for
income taxes........................................ 1,908 3,735 5,643
Provision for income taxes............................. 1,597 452 2,049
--------- ------------ ------------
Income from continuing operations...................... 311 3,283 3,594
Total loss from discontinued operations................ -- (191) (191)
--------- ------------ ------------
Net income............................................. $ 311 $ 3,092 $ 3,403
========= ============ ============
22
Condensed Statements of Operations (continued)
Six Months Ended September 27, 2002
---------------------------------------
Guarantor
Parent Subsidiaries Consolidated
--------- ------------ ------------
Net sales.............................................. $311,654 $263,631 $575,285
Cost of goods sold..................................... 216,440 196,129 412,569
--------- ------------ ------------
Gross profit............................ 95,214 67,502 162,716
General and administrative expenses.................... 66,629 42,693 109,322
Selling expenses....................................... 29,844 11,367 41,211
--------- ------------ ------------
(Loss) income from operations........... (1,259) 13,442 12,183
Other expense.......................................... (410) (2,849) (3,259)
--------- ------------ ------------
(Loss) income from continuing operations before
provision for income taxes.......................... (1,669) 10,593 8,924
Provision for income taxes............................. 948 2,379 3,327
--------- ------------ ------------
(Loss) income from continuing operations before
extraordinary loss.................................. (2,617) 8,214 5,597
Total loss from discontinued operations................ -- (57,549) (57,549)
Extraordinary loss..................................... (666) -- (666)
--------- ------------ ------------
Net loss............................................... $ (3,283) $(49,335) $(52,618)
========= ============ ============
Six Months Ended September 28, 2001
------------------------------------------------------
Guarantor Nonguarantor
Parent Subsidiaries Subsidiary Consolidated
-------- ------------ ------------ ------------
Net sales.............................................. $292,288 $246,239 $ 431 $538,958
Cost of goods sold..................................... 207,463 184,927 295 392,685
-------- ------------ ------------ ------------
Gross profit............................ 84,825 61,312 136 146,273
General and administrative expenses.................... 55,247 40,823 53 96,123
Selling expenses....................................... 26,148 10,795 13 36,956
International Business exit charge..................... -- -- (514) (514)
-------- ------------ ------------ ------------
Income from operations.................. 3,430 9,694 584 13,708
Other expense.......................................... (398) (2,903) (14) (3,315)
-------- ------------ ------------ ------------
Income from continuing operations before provision for
income taxes........................................ 3,032 6,791 570 10,393
Provision for income taxes............................. 3,067 683 -- 3,750
-------- ------------ ------------ ------------
(Loss) income from continuing operations............... (35) 6,108 570 6,643
Total loss from discontinued operations................ -- (90,597) -- (90,597)
-------- ------------ ------------ ------------
Net (loss) income...................................... $ (35) $(84,489) $ 570 $(83,954)
======== ============ ============ ============
23
Condensed Statements of Cash Flows
For the Six Months Ended September 27, 2002 and September 28, 2001
Six Months Ended September 27, 2002
---------------------------------------
Guarantor
Parent Subsidiaries Consolidated
---------- ------------ ------------
Net loss............................................... $(3,283) $(49,335) $(52,618)
---------- ------------ ------------
Net cash provided by operating activities.............. 8,107 12,458 20,565
---------- ------------ ------------
Cash Flows From Investing Activities:
Capital expenditures............................. (5,773) (387) (6,160)
Payments on noncompete agreements................ (410) (13) (423)
Payment for business combination................. -- (4,464) (4,464)
Proceeds from sales of property and equipment.... 13 (3) 10
Net cash used in discontinued operations......... -- (1,113) (1,113)
---------- ------------ ------------
Net cash used in investing activities... (6,170) (5,980) (12,150)
---------- ------------ ------------
Cash Flows From Financing Activities:
Repayment of Senior Subordinated Notes........... (19,000) -- (19,000)
Payment of premiums for retirement of Senior
Subordinated Notes............................ (665) -- (665)
Purchase of treasury stock shares................ (9,518) -- (9,518)
Proceeds from issuance of common stock........... 200 -- 200
Inter-company borrowings......................... 11,169 (11,169) --
Net cash used in discontinued operations......... -- -- --
---------- ------------ ------------
Net cash used in financing activities... (17,814) (11,169) (28,983)
---------- ------------ ------------
Net decrease in cash and cash equivalents.............. (15,877) (4,691) (20,568)
Cash and cash equivalents, beginning of period......... 39,531 14,043 53,574
---------- ------------ ------------
Cash and cash equivalents, end of period............... $23,654 $ 9,352 $ 33,006
========== ============ ============
Six Months Ended September 28, 2001
-------------------------------------------------------
Guarantor Nonguarantor
Parent Subsidiaries Subsidiary Consolidated
---------- ------------ ------------ ------------
Net (loss) income...................................... $ (35) $(84,489) $570 $(83,954)
---------- ------------ ------------ ------------
Net cash provided by (used in) operating activities.... 17,026 39,551 (554) 56,023
---------- ------------ ------------ ------------
Cash Flows From Investing Activities:
Capital expenditures............................. (9,887) (379) -- (10,266)
Payments on noncompete agreements................ (332) (38) -- (370)
Proceeds from sale of property and equipment..... 1,888 (1,846) -- 42
Proceeds from sale of International Business..... -- -- 221 221
Net cash used in discontinued operations......... -- (1,553) -- (1,553)
---------- ------------ ------------ ------------
Net cash used in (provided by) investing
activities.............................. (8,331) (3,816) 221 (11,926)
---------- ------------ ------------ ------------
Cash Flows From Financing Activities:
Net borrowings................................... (54,195) -- -- (54,195)
Inter-company borrowings......................... 34,356 (24,690) (9,666) --
Investment in Sub................................ (9,999) -- 9,999 --
Transfer of equity............................... 611 (611) -- --
Proceeds from issuance of common stock........... -- 11 -- 11
Net cash used in discontinued operations......... -- (59) -- (59)
---------- ------------ ------------ ------------
Net cash (used in) provided by financing
activities.............................. (29,227) (25,349) 333 (54,243)
---------- ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents... (20,532) 10,386 -- (10,146)
Cash and cash equivalents, beginning of period......... 31,725 2,649 -- 34,374
---------- ------------ ------------ ------------
Cash and cash equivalents, end of period............... $ 11,193 $ 13,035 -- $ 24,228
========== ============ ============ ============
24
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
PSS World Medical, Inc.:
We have reviewed the consolidated balance sheet of PSS World Medical, Inc. and
subsidiaries as of September 27, 2002, and the related consolidated statements
of operations and cash flows for the three and six-month periods ended September
27, 2002. These consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of PSS
World Medical, Inc. and subsidiaries as of March 29, 2002, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated May 22,
2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of March 29, 2002, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ KPMG LLP
Jacksonville, Florida
November 8, 2002
25
ITEM 2. Management's Discussion and Analysis Of Financial Condition and
Results of Operations
GENERAL
PSS World Medical, Inc. (the "Company" or "PSSWM"), a Florida corporation, is a
specialty marketer and distributor of medical products to physician offices,
alternate-site and acute imaging providers, and long-term care and home care
providers through 63 full-service centers to customers in all 50 states. Since
its inception in 1983, the Company has become a leader in the three market
segments it serves as a result of a focused and differentiated approach to
customer service, a consultative sales force, unique arrangements with product
manufacturers, innovative information systems, and a culture of performance.
Physician Sales & Service ("PSS" or the "Physician Supply Business"), a division
of the Company, is a leading distributor of medical supplies, equipment, and
pharmaceuticals to primary care office-based physicians in the United States
based on revenues, number of physician-office customers, number and quality of
sales representatives, and number of products distributed under unique
arrangements. PSS currently operates 39 full-service centers with 708 sales
representatives serving physician offices in all 50 states.
Gulf South Medical Supply, Inc. ("Gulf South" or the "Long-Term Care Business"),
a wholly owned subsidiary, is a leading national distributor of medical supplies
and related products to the long-term care industry in the United States based
on revenues and number of sales representatives. Gulf South currently operates
13 full-service centers with approximately 115 sales representatives serving
long-term care accounts in all 50 states. The Long-Term Care Business' primary
markets are independent, regional, and national skilled nursing facilities,
assisted living centers, and home care providers.
Diagnostic Imaging, Inc. ("DI" or the "Imaging Business"), a wholly owned
subsidiary, is a leading distributor of medical diagnostic imaging supplies,
chemicals, equipment, and services to the acute and alternate-care markets in
the United States based on consumable revenues, number of service specialists,
and number of sales representatives. DI currently operates 11 full-service
centers, 32 distribution centers, and 16 break-freight locations with
approximately 800 service specialists and approximately 200 sales
representatives serving customer sites in 42 states. The Imaging Business'
primary markets are acute-care radiology departments, free-standing imaging
centers, private practice physicians, veterinarians, and chiropractors. During
the three months ended September 27, 2002, the Company's Board of Directors
adopted a plan to dispose of the Imaging Business. As a result, its results of
operations have been classified as discontinued operations for all periods
presented. Refer to Note 2, Discontinued Operations, of the consolidated
financial statements for a further discussion.
INDUSTRY
According to industry estimates, the United States medical supply and equipment
segment of the healthcare industry represents approximately a $34 billion market
comprised of medical products and equipment which are distributed to alternate
site healthcare providers, including physician offices, long-term care and
assisted living facilities, home healthcare agencies, dental offices, and other
alternate site providers, such as outpatient surgery and care centers,
podiatrists, and veterinarians. The Company's primary focus is the distribution
of medical products to physician offices, long-term care, assisted living, and
home care providers as well as other alternate site healthcare providers.
Approximately 65% of the products in this market come through the distributor
channel, representing a $22 billion market potential for the Company.
Revenues of the medical products distribution industry are estimated to be
growing as a result of a growing and aging population, increased healthcare
awareness, the proliferation of medical technology and testing, and expanding
third-party insurance coverage. In addition, the physician market continues to
benefit from the shift of procedures and diagnostic testing from hospitals to
alternate sites, particularly physician offices, despite a migration of
significantly lower hospital medical product pricing into the physician office
market. Also, as the cosmetic surgery and elective procedure markets continue to
grow, physicians are increasingly performing more procedures in their offices.
26
The healthcare industry is subject to extensive government regulation,
licensure, and operating procedures. National healthcare reform has been the
subject of a number of legislative initiatives by Congress. Additionally,
government and private insurance programs fund the cost of a significant portion
of medical care in the United States. In recent years, government-imposed limits
on reimbursement of hospitals, long-term care facilities, and other healthcare
providers have affected spending budgets in certain markets within the medical
products industry. During 1997, the Balanced Budget Act passed by Congress made
significant changes to reimbursements for nursing homes and home care providers.
The industry continues to be impacted by these changes. Currently, the industry
is being impacted by the October 1, 2002 expiration of certain Medicare
supplemental reimbursements for services provided by operators of long-term care
facilities. There are no assurances that such Medicare reimbursement relief will
be provided by Congress, which may have a financial impact on the Company's
customers that provide long-term care healthcare services.
Over the past few years, the healthcare industry has undergone significant
consolidation. Physician provider groups, long-term care facilities, and other
alternate-site providers, along with hospitals, continue to consolidate,
creating new and larger customers. The majority of the market serviced by the
Company continues to include small customers, with no single customer exceeding
10% of the consolidated Company's net sales. However, the Long-Term Care
Business depends on a limited number of large customers for a significant
portion of its net sales, and approximately 32% of Long-Term Care Business'
revenues for the six months ended September 27, 2002 represented sales to its
top five customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS 145"). Among other things, SFAS 145 rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt. As such, gains and
losses from extinguishment of debt shall not be reported as extraordinary items
unless the extinguishment qualifies as an extraordinary item under the criteria
of Accounting Principles Board ("APB") Opinion No. 30, Reporting the Results of
Operation-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB
30"). Gains or losses from extinguishment of debt that do not meet the criteria
of APB 30 should be reclassified to income from continuing operations for all
prior periods presented. The Company will adopt the provisions of SFAS 145 on
March 29, 2003, the first day of fiscal year 2004. Upon adoption, the Company
will reclassify any gains or losses on early extinguishment of debt and related
taxes recorded as an extraordinary loss during fiscal year 2003 to other
(expense) income and provision for income taxes in the consolidated statements
of operations.
During June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses the financial
accounting and reporting for costs associated with exit or disposal activities,
and eliminates the definition and requirements for recognition of exits costs in
Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146 will require
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred and that fair value is the objective
for initial measurement of a liability. The Company will apply the provisions of
SFAS 146 for exit or disposal activities that are initiated after December 31,
2002, the effective date of this statement.
27
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The consolidated financial statements require us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosure of contingent assets and liabilities. Management evaluates
the estimates, judgments and the policies underlying these estimates on a
periodic basis as situations change, and regularly discusses financial events,
policies, and issues with members of our audit committee and our independent
accountants. The significant accounting policies, which management and the audit
committee believe are the most critical to fully understand and evaluate the
Company's financial position and results of operations, include those detailed
in the Company's Annual Report on Form 10-K for the year ended March 29, 2002
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations". During the three months ended September 27, 2002,
management determined that accounting for discontinued operations is also a
critical accounting policy.
Accounting for Discontinued Operations. On September 26, 2002, the Company's
Board of Directors adopted a plan to dispose of the Imaging Business. The plan
to dispose of the Imaging Business reflects a strategic decision by management
to focus the Company's efforts on its Physician Supply and Long-Term Care
Businesses, which offer attractive opportunities for growth and profitability.
On October 28, 2002, the Company announced a definitive agreement to sell the
Imaging Business to a subsidiary of Platinum Equity, LLC in a capital stock
transaction for approximately $45.0 million in cash and the assumption of
approximately $67.9 million of liabilities. The purchase price is subject to
adjustment based on the net assets sold and net cash held by DI as of the
closing date. The closing of the transaction is subject to the satisfaction of
customary closing conditions, including the execution of a transition services
agreement. The transaction is expected to close no later than the end of
February 2003.
The results of operations of the Imaging Business and the estimated loss on
disposal have been classified as "discontinued operations" in accordance with
SFAS No. 144, Accounting for the Impairment of Long-Lived Assets. The estimated
loss on disposal is subject to change based on the final purchase price and any
adjustments will be recorded in the period in which they become known. The
accompanying financial statements have been reclassified to conform to
discontinued operations treatment for all historical periods presented.
THREE MONTHS ENDED SEPTEMBER 27, 2002 VERSUS THREE MONTHS ENDED
SEPTEMBER 28, 2001
Net Sales.
Three Months Ended
-----------------------------
September 27, September 28, Increase Percent
(dollars in millions) 2002 2001 (Decrease) Change
------------- ------------- ----------- ---------
Physician Supply Business.............. $184.1 $176.1 $ 8.0 4.5%
Long-Term Care Business................ 104.7 95.7 9.0 9.4%
------------- ------------- ----------- ---------
Total Company........... $288.8 $271.8 $17.0 6.3%
============= ============= =========== =========
Physician Supply Business--The change in net sales is primarily attributable to
an increase in medical disposables sales of approximately $10.6 million, of
which private label and pharmaceuticals sales represented approximately 40% of
this growth, offset by a $2.6 million decrease in equipment sales. The launch of
the new pediatrics and surgeon SRxSM modules contributed to the increase in
medical disposables sales and the discontinuance of the marketing and
distribution of a product line was the primary reason for the decrease in
equipment sales. Net sales also decreased approximately $1.1 million as a result
of a manufacturer product recall. The Physician Supply Business added 7 new
sales representatives, which also contributed to the growth in overall net
sales.
Long-Term Care Business--The increase in net sales is primarily attributable to
the success of the ANSWERS(TM) marketing program that aligns improved business
processes ("best practices"), typically in the ordering process of nursing home
operations and purchasing, with efficient distribution activities. To date, over
230 customers have adopted the program, which generated approximately $3.5
million of incremental revenue during the three months ended September 27, 2002.
In addition, net sales increased due to (i) growth initiatives focused on
28
regional accounts and product line expansion and (ii) growth associated with the
overall increase in prices. During the three months ended September 27, 2002,
the Long-Term Care Business completed an acquisition, which had negligible
impact on net sales for the three months ended September 27, 2002.
Gross Profit. Gross profit for the three months ended September 27, 2002 totaled
$82.2 million, an increase of $8.1 million, or 10.9%, from gross profit of $74.1
million for the three months ended September 28, 2001. Gross profit as a
percentage of net sales was 28.4% and 27.3% for the three months ended September
27, 2002 and September 28, 2001, respectively. The increase in gross profit is
attributable to (i) the overall increase in net sales described above, (ii) a
change in sales mix to higher gross profit consumable products in the Physician
Supply Business, (iii) a strong focus from the sales representatives to enhance
margins, (iv) an increase in manufacturer incentive rebates earned by the
Long-Term Care Business due to the increase in sales levels and positive changes
to the vendor incentive agreements, (v) an increase in purchasing incentive
rebates earned by the Physician Supply Business, and (vi) improved purchase
economies resulting from the centralization of the purchasing function and the
consolidation of vendors in the Physician Supply and Long-Term Care Businesses.
General and Administrative Expenses.
Three Months Ended
September 27, 2002 September 28, 2001
% of Net % of Net
(dollars in millions) Amount Sales Amount Sales Increase
------- -------- ------- -------- --------
Physician Supply Business.......... $33.3 18.1% $29.8 16.9% $3.5
Long-Term Care Business............ 17.5 16.8% 16.9 17.7% 0.6
Other.............................. 5.4 -- 1.5 -- 3.9
------- -------- ------- -------- --------
Total Company....... $56.2 19.4% $48.2 17.7% $8.0
======= ======== ======= ======== ========
During fiscal year 2002, the Company initiated and invested in programs to
support future profitability and growth. The cost associated with these programs
include (i) additional depreciation expense for completed phases of its
Enterprise Resource Planning ("ERP") system, electronic commerce platforms
(including myPSS.com), and supply chain integration, (ii) employee and
consulting fees incurred for the rollout of ERP and electronic commerce
platforms, (iii) consulting fees for assistance in the validation of its
strategic plan and other expenses for business process improvements, and (iv)
investments in enterprise-wide learning initiatives to increase employee
competencies and knowledge and to ensure consistent business practices. The
additional costs associated with these programs are continuing into fiscal year
2003.
Physician Supply Business--The change in general and administrative expenses is
primarily attributable to (i) an increase in salary and travel expenses as a
result of the conversion to the new ERP system and the restructuring plan that
was adopted during the fourth quarter of fiscal year 2002 ("Rationalization
Programs"), (ii) an increase in warehouse salary expenses at consolidated
full-service centers during the transition period, offset by the savings from
closed centers, (iii) additional depreciation for completed phases of its ERP
system, myPSS.com electronic commerce platform, and supply chain initiatives,
and (iv) temporarily increased freight expenses as a result of the
Rationalization Programs.
Long-Term Care Business--The change in general and administrative expenses is
primarily attributable to an overall increase in expenses due to the growth in
net sales and a corresponding increase in salary expense from the regional
accounts team and employee incentive compensation, offset by a decrease in the
provision for doubtful accounts due to improved accounts receivable collections.
The decrease in general and administrative expenses as a percent of net sales is
due to Gulf South's focus on leveraging its existing capacity to effectively
service the increase in net sales.
Other--General and administrative expenses that could not be directly
attributable to discontinued operations were $0.7 million and $0.8 million for
the three months ended September 27, 2002 and September 28, 2001, respectively,
and were allocated to this segment. Otherwise, the increase in general and
administrative expenses is primarily attributable to (i) an increase in salary
expense as a result of the supply chain initiative and two executive positions
filled during fiscal year 2002, (ii) an increase in depreciation expense for the
supply chain initiative and leasehold improvements related to the centralization
of certain administrative functions to the corporate headquarters located in
29
Jacksonville, Florida, and (iii) an increase in business insurance expense due
to rate increases on the corporate umbrella and director and officer policies.
General and administrative expenses also include charges related to
restructuring activity, merger activity, and other items. These charges
increased approximately $3.2 million during the three months ended September 27,
2002 compared to the same period of the prior fiscal year. The following table
summarizes charges that are included in general and administrative expenses in
the accompanying consolidated statements of operations (in millions):
Three Months Ended September 27, 2002
---------------------------------------------------
Physician Long-
Supply Term Care
Business Business Other Total
--------- --------- -------- --------
Restructuring costs and expenses.. $(0.2) $ -- $ -- $(0.2)
Merger costs and expenses......... -- -- 0.4 0.4
Reversal of operational tax charge -- -- (0.1) (0.1)
Other............................. 0.2 -- 2.9 3.1
--------- --------- -------- --------
Total................ $ -- $ -- $ 3.2 $3.2
========= ========= ======== ========
Three Months Ended September 28, 2001
---------------------------------------------------
Physician Long-
Supply Term Care
Business Business Other Total
--------- --------- -------- --------
Restructuring costs and expenses.. $0.4 $-- $ -- $0.4
Merger costs and expenses......... -- -- 0.6 0.6
Reversal of operational tax charge -- -- (1.0) (1.0)
--------- --------- -------- --------
Total................ $0.4 $-- $(0.4) $ --
========= ========= ======== ========
Restructuring Costs and Expenses
Restructuring costs and expenses for the three months ended September
27, 2002 and September 28, 2001 primarily include (i) costs expensed as
incurred related to the Physician Supply Business restructuring plan
that was adopted during the fourth quarter of fiscal year 2002 and (ii)
costs expensed as incurred related to various restructuring plans that
were adopted in prior fiscal years.
Physician Supply Business Plan Adopted During the Fourth Quarter of
Fiscal Year 2002. During the three months ended September 27, 2002,
management reevaluated its estimates of the total costs related to this
plan and made necessary adjustments. The original total estimated costs
of $6.5 million have been revised to be approximately $5.7 million, of
which approximately $4.2 million and $1.0 million was recognized during
fiscal year 2002 and the six months ended September 27, 2002,
respectively. Approximately $0.5 million will be expensed as incurred
during the remaining six months of fiscal year 2003. The revision to
the estimated total costs related to involuntary employee termination
costs and branch shutdown costs. Certain employees, who were previously
identified to be involuntarily terminated, either ceased employment
prior to the distribution center closure or were transferred within the
Company. Therefore, these employees were not entitled to severance. In
addition, accrued branch shutdown costs are estimated to be less than
previous estimates as the Company was able to sell the warehouse
racking for more than what was originally estimated.
Management anticipates that this plan will be completed by the end of
the fourth quarter of fiscal year 2003. Management is also currently
evaluating whether to extend its branch rationalization program, which
may result in recording additional restructuring charges during the
fourth quarter of fiscal year 2003. If a restructuring plan is adopted
subsequent to December 31, 2002, such charges will be recorded in
accordance with SFAS 146.
30
During the three months ended September 27, 2002, the Physician Supply
Business recorded charges of $0.5 million, which includes branch shut
down costs of $0.2 million, employee relocation costs of $0.2 million,
and other costs of $0.1 million. Management revaluated its previous
estimates and reversed approximately $0.7 million, which includes
involuntary employee termination costs of $0.4 million and branch
shutdown costs of $0.3 million. Refer to Note 3, Accrued Restructuring
Costs and Expenses, for a discussion of the status of this plan.
Various Restructuring Plans Adopted in Prior Fiscal Years. During the
three months ended September 28, 2001, the Company recorded $0.5
million of restructuring costs as incurred. These costs resulted from
the involuntary termination of 26 employees, branch shutdown costs and
lease termination costs for the merger of two Physician Supply
Businesses into existing locations. During the three months ended
September 28, 2001, the Company reversed approximately $0.1 million of
restructuring costs, which primarily relate to lease termination costs.
Merger Costs and Expenses
Merger costs and expenses for the three months ended September 27, 2002
and September 28, 2001 include costs related to employee retention
bonuses. Effective February 1, 2000, the Board of Directors approved
and adopted an Officer Retention Bonus Plan and a Corporate Office
Employee Retention Bonus Plan (collectively the "Retention Plans"). As
part of the Company's strategic alternatives process, management
adopted these plans to retain certain officers and key employees during
the strategic alternatives transition period. The total cash
compensation costs related to these plans is approximately $8.0
million, of which $6.8 million was expensed in prior fiscal years and
$0.4 million was expensed during the three months ended June 28, 2002.
Approximately $0.4 million and $0.6 million were recognized during the
three months ended September 27, 2002 and September 28, 2001,
respectively. An additional $0.4 million will be expensed during the
remaining six months of fiscal year 2003.
Reversal of Operational Tax Charge
During the three months ended September 27, 2002 and September 28,
2001, the Company performed an analysis and reversed approximately $0.1
million and $1.0 million, respectively, of a previously recorded
operating tax charge reserve.
Other
As part of the Company's ongoing review of the realization of the
three notes receivables outstanding from the Company's former Chairman
and Chief Executive Officer, the Company determined that an allowance
for doubtful accounts was required for the unsecured note receivable.
As a result, during the three months ended September 27, 2002, the
Company recorded an allowance for doubtful accounts of $2.9 million
against the unsecured note receivable. This allowance does not
represent a forgiveness of debt.
The Physician Supply Business incurred $0.2 million of lease
termination costs during the three months ended September 27, 2002 for
locations that were previously vacated in connection with prior
restructuring plans.
Selling Expenses.
Three Months Ended
------------------------------------------
September 27, 2002 September 28, 2001
------------------ -------------------
% of Net % of Net
(dollars in millions) Amount Sales Amount Sales Increase
------- -------- ------- -------- --------
Physician Supply Business..... $17.8 9.7% $15.9 9.0% $1.9
Long-Term Care Business....... 3.1 2.9% 2.9 3.0% 0.2
------- -------- ------- -------- --------
Total Company.. $20.9 7.2% $18.8 6.9% $2.1
======= ======== ======= ======== ========
31
Physician Supply Business--The change in selling expenses is primarily
attributable to an increase in commission expense due to (i) the increased sales
volume discussed above, (ii) the addition of 7 new sales representatives, and
(iii) the sales representatives' strong focus on enhancing overall margins.
Commissions are generally paid to sales representatives based on gross profit as
a percentage of net sales.
Long-Term Care Business--Although net sales increased, selling expenses remained
relatively constant from period to period. Commissions are generally paid to
sales representatives based on gross profit as a percentage of net sales.
Income from Operations.
Three Months Ended
--------------------------------
September 27, September 28, Increase
(dollars in millions) 2002 2001 (Decrease)
---------------- --------------- -----------------
Physician Supply Business................. $5.7 $6.4 $(0.7)
Long-Term Care Business................... 4.7 2.3 2.4
Other..................................... (5.3) (1.5) (3.8)
---------------- --------------- -----------------
Total Company.............. $5.1 $7.2 $(2.1)
================ ============== =================
Income from operations for the three months ended September 27, 2002 for the
Other segment was negatively impacted by (i) the allowance of $2.9 million that
was recorded against the note receivable from the former Chairman and Chief
Executive Officer of the Company and (ii) general and administrative expenses of
approximately $0.7 million that was not allocated to discontinued operations.
General and administrative expenses that was not allocated to discontinued
operations during the three months ended September 28, 2001 was approximately
$0.8 million. Otherwise, income from operations for each business segment
changed due to the factors discussed above.
Interest Expense. Interest expense for the three months ended September 27, 2002
totaled $2.2 million, a decrease of $0.4 million, or 17.5%, from interest
expense of $1.8 million for the three months ended September 28, 2001. In
accordance with EITF Issue No. 87-24, Allocation of Interest to Discontinued
Operations, a portion of the Company's interest expense that is not directly
attributable to or related to other operations of the Company has been allocated
to discontinued operations based upon the ratio of net assets to be sold to the
sum of consolidated net assets plus consolidated debt. Interest expense
allocated to discontinued operations was $0.9 million and $1.1 million for the
three months ended September 27, 2002 and September 28, 2001, respectively. In
addition, during the three months ended September 28, 2001, approximately $0.5
million was capitalized in connection with the Company's purchase and
development of its ERP systems. Excluding the effects of the allocation of
interest to discontinued operations and the capitalized interest, the decrease
in interest expense is primarily attributable to lower outstanding debt balances
under the Company's revolving credit agreement and Senior Subordinated Notes
over the prior period.
Interest and Investment Income. Interest and investment income totaled $0.2
million for the three-month period ended September 27, 2002. Although cash and
cash equivalents have increased slightly from period to period, interest and
investment income remained unchanged primarily due to a general reduction in
interest rates.
Other Income. Other income for the three months ended September 27, 2002 and
September 28, 2002 totaled $0.4 million.
Provision for Income Taxes. Provision for income taxes was $1.3 million for the
three months ended September 27, 2002, a change of $0.7 million from the
provision for income taxes of $2.0 million for the three months ended September
28, 2001. The effective income tax rate was approximately 36.5% and 36.3% for
the three months ended September 27, 2002 and September 28, 2001, respectively.
The increase in the effective rate is primarily attributable to (i) an increase
in unfavorable permanent items and (ii) a decrease in the income from continuing
operations before provision for income taxes, excluding the effect of the
International Business, offset by a valuation allowance recorded during fiscal
year 2002 against certain deferred tax assets resulting from capital loss
carryforwards generated from the sale of the International Business.
32
The Company is currently under an Internal Revenue Service audit for the fiscal
years ended March 31, 2000 and March 30, 2001. Fieldwork is anticipated to be
completed during the fourth quarter of fiscal year 2003, with anticipated final
audit results by the first quarter of fiscal year 2004. Management does not
anticipate the results of the audit to have a material impact on the financial
condition or consolidated results of operations of the Company.
Total Loss from Discontinued Operations.
Net sales for the Imaging Business were $175.7 million for the three months
ended September 27, 2002, a decrease of $0.8 million from net sales of $176.5
million for the three months ended September 28, 2001. The change in net sales
is primarily attributable to a decline in analog film and chemistry product
sales as a result of customer conversions from wet x-ray film handling to dry
lasers that eliminate the need for certain consumable products such as film
chemistry. Equipment sales were relatively consistent from period to period.
General radiographic and advanced technology equipment sales declined, however,
equipment sales from the Women's Health strategic business unit ("SBU")
increased.
The pretax loss from operations was $1.9 million for the three months ended
September 27, 2002, an increase of $1.7 million from a pretax loss from
operations of $0.2 million for the three months ended September 28, 2001. This
increase in the loss from operations is primarily related to a reduction in
gross profit as a result of the continued impact of analog to digital customer
conversions, partially offset by a reduction in general and administrative
expenses due to DI's focus on operating efficiencies and cost minimization
within the distribution network.
The Company expects to generate an approximate $40.0 million income tax benefit
and a corresponding income tax net operating loss ("NOL") carry forward related
to the disposal of the Imaging Business and its operations for fiscal year 2003.
During the three months ended September 27, 2002, approximately $35.4 million of
the $40.0 million income tax benefit has been recorded. Management anticipates
that this NOL will be carried forward and applied against taxable income for
fiscal years 2004, 2005, and 2006. The NOL carry forward is classified as a
deferred tax asset in other noncurrent assets in the Other segment's
accompanying balance sheet. In future periods, the provision for income taxes
will be recorded in the statements of operations at the appropriate effective
tax rate based on income generated by the Company. However, the Company does not
expect to make any cash payments for income taxes during the years that the NOL
is available to offset any taxable income.
In addition, the Company also expects to record a restructuring charge related
to the exit of the Imaging Business. If the details of the plan are finalized
and adopted by management prior to December 31, 2002, any charges will be
recorded in accordance with EITF 94-3. If the details of the plan are not
finalized and adopted by management until subsequent to December 31, 2002, any
charges will be recorded in accordance with SFAS 146.
Extraordinary Loss. During the three months ended September 27, 2002, the
Company retired $19.0 million principal amount of its $125.0 million Senior
Subordinated Notes. An extraordinary loss of $0.7 million was incurred as a
result of the early extinguishment of debt, consisting of $0.7 million
redemption premiums and the accelerated amortization of associated debt issuance
costs of $0.4 million, net of an income tax benefit of $0.4 million.
Net Income. Net loss for the three months ended September 27, 2002 totaled $55.2
million compared to net income of $3.4 million for the three months ended
September 28, 2001. The net loss for the three months ended September 27, 2002
included a charge of $56.8 million for the total loss from discontinued
operations and $0.7 extraordinary loss on early extinguishment of debt.
Otherwise, variances are due to the factors discussed above.
33
SIX MONTHS ENDED SEPTEMBER 27, 2002 VERSUS SIX MONTHS ENDED SEPTEMBER 28, 2001
Net Sales.
Six Months Ended
-----------------------------
September 27, September 28, Increase Percent
(dollars in millions) 2002 2001 (Decrease) Change
------------- ------------- ----------- --------
Physician Supply Business.............. $367.0 $347.5 $19.5 5.6%
Long-Term Care Business................ 208.3 191.1 17.2 9.0%
Other.................................. -- 0.4 (0.4) 100.0%
------------- ------------- ----------- --------
Total Company........... $575.3 $539.0 $36.3 6.7%
============= ============= =========== ========
Physician Supply Business--The change in net sales is primarily attributable to
an increase in medical disposables sales of approximately $22.4 million, of
which private label and pharmaceuticals sales represented approximately 30% of
this growth, offset by a $2.9 million decrease in equipment sales. The launch of
the new pediatrics and surgeon SRxSM modules contributed to the increase in
medical disposables sales and the discontinuance of the marketing and
distribution of a product line was the primary reason for the decrease in
equipment sales. Net sales also decreased approximately $1.1 million as a result
of a product recall. The Physician Supply Business added 33 new sales
representatives, which also contributed to the growth in overall net sales.
Long-Term Care Business--The increase in net sales is primarily attributable to
the growth generated by the ANSWERS(TM) marketing program. To date, over 230
customers have adopted the program, which generated approximately $6.8 million
of incremental revenue during the six months ended September 27, 2002. In
addition, net sales increased due to (i) growth initiatives focused on regional
accounts and product line expansion and (ii) growth associated with the overall
increase in prices.
Gross Profit. Gross profit for the six months ended September 27, 2002 totaled
$162.7 million, an increase of $16.4 million, or 11.2%, from gross profit of
$146.3 million for the six months ended September 28, 2001. Gross profit as a
percentage of net sales was 28.3% and 27.1% for the six months ended September
27, 2002 and September 28, 2001, respectively. The increase in gross profit is
attributable to (i) the overall increase in net sales described above, (ii) a
change in sales mix to higher gross profit consumable products in the Physician
Supply Business, (iii) a strong focus from the sales representatives to enhance
margins, (iv) an increase in manufacturer incentive rebates earned by the
Long-Term Care Business due to the increase in sales levels and positive changes
to the vendor incentive agreements, (v) an increase in purchasing incentive
rebates earned by the Physician Supply Business, and (vi) improved purchase
economies resulting from the centralization of the purchasing function and the
consolidation of vendors in the Physician Supply and Long-Term Care Businesses.
General and Administrative Expenses.
Six Months Ended
September 27, 2002 September 28, 2001
---------------------------------------------
% of Net % of Net
(dollars in millions) Amount Sales Amount Sales Increase
---------- ----------- ---------- ----------- ------------
Physician Supply Business.......... $66.6 18.1% $58.8 16.9% $7.8
Long-Term Care Business............ 35.1 16.9% 34.3 17.9% 0.8
Other.............................. 7.6 -- 3.0 -- 4.6
---------- ----------- ---------- ----------- ------------
Total Company....... $109.3 19.0% $96.1 17.8% $13.2
========== =========== ========== =========== ============
Physician Supply Business--The change in general and administrative expenses is
primarily attributable to (i) an increase in salary and travel expenses as a
result of the Rationalization Programs, (ii) an increase in warehouse salary
expenses at consolidated full-service centers during the transition period,
offset by the savings from closed centers, (iii) additional depreciation for
completed phases of its ERP system, myPSS.com electronic commerce platform, and
supply chain initiatives, (iv) additional amortization expense as a result of
the signing bonuses given to new sales representatives, and (v) temporarily
increased freight expenses as a result of the Rationalization Programs.
34
Long-Term Care Business--The change in general and administrative expenses is
primarily attributable to (i) an overall increase in expenses due to the growth
in net sales, (ii) a corresponding increase in salary expense and employee
incentive compensation, (iii) an increase in amortization expense for an
impaired noncompete intangible asset, and (iv) an increase in fees charged by
Direct Supply Systems, Inc ("DSSI") as a result of more customers using the DSSI
network to purchase products, offset by a decrease in the provision for doubtful
accounts due to improved accounts receivable collections. The decrease in
general and administrative expenses as a percent of net sales is due Gulf
South's focus on leveraging its existing capacity to effectively service the
increase in net sales.
Other--General and administrative expenses that could not be directly
attributable to discontinued operations were $1.4 million and $1.7 million for
the six months ended September 27, 2002 and September 28, 2001, respectively,
and were allocated to this segment. Otherwise, the increase in general and
administrative expenses is primarily attributable to (i) an increase in salary
expense as a result of the supply chain initiative and two executive positions
filled during fiscal year 2002 and (ii) an increase in depreciation expense for
the supply chain initiative and leasehold improvements related to the
centralization of certain administrative functions to the corporate headquarters
located in Jacksonville, Florida, and (iii) an increase in business insurance
expense due to rate increases on the corporate umbrella and director and officer
policies.
General and administrative expenses also include charges related to
restructuring activity, merger activity, and other items. These charges
increased approximately $4.0 million during the six months ended September 27,
2002 compared to the same period of the prior fiscal year. The following table
summarizes charges that are included in general and administrative expenses in
the accompanying consolidated statements of operations (in millions):
Six Months Ended September 27, 2002
------------------------------------------------
Physician Long-
Supply Term Care
Business Business Other Total
--------- --------- ---------- -------
Restructuring costs and expenses.. $0.5 $-- $ -- $ 0.5
Merger costs and expenses......... -- -- 0.7 0.7
Accelerated depreciation.......... 0.1 -- -- 0.1
Reversal of operational tax charge -- -- (0.1) (0.1)
Other............................. 0.3 -- 2.9 3.2
--------- --------- ---------- -------
Total................ $0.9 $-- $3.5 $4.4
========= ========= ========== =======
Six Months Ended September 28, 2001
------------------------------------------------
Physician Long-
Supply Term Care
Business Business Other Total
--------- --------- ---------- -------
Restructuring costs and expenses.. $0.5 $0.2 $ -- $ 0.7
Merger costs and expenses......... -- -- 1.1 1.1
Reversal of operational tax charge -- -- (1.4) (1.4)
--------- --------- ---------- -------
Total................ $0.5 $0.2 $(0.3) $ 0.4
========= ========= ========== =======
Restructuring Costs and Expenses
Physician Supply Business Plan Adopted During the Fourth Quarter of
Fiscal Year 2002. During the six months ended September 27, 2002, the
Physician Supply Business recorded charges of $1.0 million, which
include branch shut down costs of $0.5 million, involuntary employee
termination costs of $0.1 million, employee relocation costs of $0.3
million, and other costs of $0.1 million. Management revaluated its
previous estimates and reversed approximately $0.7 million, which
includes involuntary employee termination costs of $0.4 million and
branch shutdown costs of $0.3 million. (Refer to Note 3, Accrued
Restructuring Costs and Expenses, for a discussion of the status of
this plan.)
35
Various Restructuring Plans Adopted in Prior Fiscal Years. During the
six months ended September 27, 2002 and September 28, 2001, the Company
recorded $0.2 million and $0.8 million, respectively, of restructuring
costs as incurred. These costs primarily resulted from the involuntary
termination of 26 employees, branch shutdown costs and lease
termination costs for the merger of three Physician Supply Businesses
into existing locations. During the six months ended September 28,
2001, the Company reversed approximately $0.1 million of restructuring
costs, which primarily relate to lease termination costs.
Merger Costs and Expenses
As a result of the Retention Plans, approximately $0.7 million and $1.1
million was recognized during the six months ended September 27, 2002
and September 28, 2001, respectively.
Accelerated Depreciation
The Physician Supply Business identified certain assets that would be
replaced or disposed of as a result of the restructuring plan that was
implemented during the fourth quarter of fiscal year 2002. Pursuant to
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of, the Company evaluated the recoverability of the assets and
determined that impairment did not exist at the division level.
Therefore, management revised the estimated useful lives of certain
assets in accordance with APB No. 20, Accounting Changes. As a result
of shortening the useful lives during the fourth quarter of fiscal year
2002 to coincide with the planned disposal date, the Company recorded
$0.1 million of accelerated depreciation during the six months ended
September 27, 2002. This change in estimate decreased basic and diluted
earnings per share by less than $0.01 for the six months ended
September 27, 2002.
Reversal of Operational Tax Charge
During the six months ended September 27, 2002 and September 28, 2001,
the Company performed an analysis and reversed approximately $0.1
million and $1.4 million, respectively, of a previously recorded
operating tax charge reserve.
Other
As part of the Company's ongoing review of the realization of the
three notes receivables outstanding from the Company's former Chairman
and Chief Executive Officer, the Company determined that an allowance
for doubtful accounts was required for the unsecured note receivable.
As a result, during the six months ended September 27, 2002, the
Company recorded an allowance for doubtful accounts of $2.9 million
against the unsecured note receivable. This allowance does not
represent a forgiveness of debt.
During the six months ended September 27, 2002, the Physician Supply
Business incurred $0.3 million of lease termination costs for
locations that were previously vacated in connection with prior
restructuring plans.
Selling Expenses.
Six Months Ended
------------------------------------------
September 27, 2002 September 28, 2001
------------------- -------------------
% of Net % of Net
(dollars in millions) Amount Sales Amount Sales Increase
------- -------- ------- -------- --------
Physician Supply Business..... $35.1 9.6% $31.1 8.9% $4.0
Long-Term Care Business....... 6.1 2.9% 5.9 3.1% 0.2
------- -------- ------- -------- --------
Total Company.. $41.2 7.2% $37.0 6.9% $4.2
======= ======== ======= ========= ========
36
Physician Supply Business--The change in selling expenses is primarily
attributable to an increase in commission expense due to (i) the increased sales
volume discussed above, (ii) the addition of 33 new sales representatives, and
(iii) the sales representatives' strong focus on enhancing overall margins.
Commissions are generally paid to sales representatives based on gross profit as
a percentage of net sales.
Long-Term Care Business--Although net sales increased, selling expenses remained
relatively constant from period to period. Commissions are generally paid to
sales representatives based on gross profit as a percentage of net sales.
International Business Exit Charge Reversal. During fiscal year 2001, the
Company adopted a plan for divesting the International Business and recorded a
charge of approximately $14.9 million. The sale of the International Business
was completed during the three months ended June 29, 2001. Upon completion of
the sale, the Company recorded a reversal of $0.5 million of the previously
established charge due to lower than expected costs to exit the operations.
Income from Operations.
Six Months Ended
--------------------------------
September 27, September 28, Increase
(dollars in millions) 2002 2001 (Decrease)
---------------- --------------- -----------------
Physician Supply Business................. $11.2 $12.1 $(0.9)
Long-Term Care Business................... 8.6 4.0 4.6
Other..................................... (7.6) (2.4) (5.2)
---------------- --------------- -----------------
Total Company.............. $12.2 $13.7 $(1.5)
---------------- --------------- -----------------
Income from operations for the six months ended September 27, 2002 for the Other
segment was negatively impacted by (i) the allowance of $2.9 million that was
recorded against the note receivable from the former Chairman and Chief
Executive Officer of the Company and (ii) general and administrative expenses of
approximately $1.4 million that was not allocated to discontinued operations.
General and administrative expenses that was not allocated to discontinued
operations during the six months ended September 28, 2001 was approximately $1.7
million. Otherwise, income from operations for each business segment changed due
to the factors discussed above.
Interest Expense. Interest expense for the six months ended September 27, 2002
totaled $4.5 million, a decrease of $0.1 million, or 3.2%, from interest expense
of $4.6 million for the six months ended September 28, 2001. Interest expense
allocated to discontinued operations was $1.7 million and $2.6 million for the
six months ended September 27, 2002 and September 28, 2001, respectively. In
addition, during the six months ended September 28, 2001, approximately $1.0
million was capitalized in connection with the Company's purchase and
development of its ERP systems. Excluding the effects of the allocation of
interest to discontinued operations and the capitalized interest, the decrease
in interest expense is primarily attributable to lower outstanding debt balances
under the Company's revolving credit agreement and Senior Subordinated Notes
over the prior period partially offset by the accelerated amortization of
approximately $0.4 million of debt issuance costs as a result of refinancing the
prior credit facility on May 24, 2001.
Interest and Investment Income. Interest and investment income for the six
months ended September 27, 2002 totaled $0.4 million, an increase of $0.2
million, or 142.1%, from interest and investment income of $0.2 for the six
months ended September 28, 2001. The change is attributable to an increase in
the amount of invested cash and cash equivalents over the prior period.
Other Income. Other income for the six months ended September 27, 2002 totaled
$0.8 million, a decrease of $0.3 million, or 28.6%, from other income of $1.1
million for the six months ended September 28, 2001. The decrease in other
income is primarily attributable to a decrease in finance charge income on
Long-Term Care customer accounts.
Provision for Income Taxes. Provision for income taxes was $3.3 million for the
six months ended September 27, 2002, a change of $0.5 million from the provision
37
for income taxes of $3.8 million for the six months ended September 28, 2001.
The effective income tax rate was approximately 37.3% and 36.1% for the six
months ended September 27, 2002 and September 28, 2001, respectively. The
increase in the effective rate is primarily attributable to (i) an increase in
unfavorable permanent items and (ii) an decrease in the income before provision
for income taxes, excluding the effect of the International Business, offset by
a valuation allowance recorded during fiscal year 2002 against certain deferred
tax assets resulting from capital loss carryforwards generated from the sale of
the International Business.
Total Loss from Discontinued Operations.
Net sales for the Imaging Business were $352.5 million for the six months ended
September 27, 2002, a decrease of $3.7 million from net sales of $356.2 million
for the six months ended September 28, 2001. The change in net sales is
primarily attributable to a decline in analog film and chemistry product sales
as a result of customer conversions from wet x-ray film handling to dry lasers
that eliminate the need for certain consumable products such as film chemistry.
General radiographic and advanced technology equipment sales have declined. This
decline has been offset by an increase in equipment sales from the Women's
Health SBU.
The pretax loss from operations was $3.1 million for the six months ended
September 27, 2002, an increase of $2.4 million from a pretax loss from
operations of $0.7 million for the six months ended September 28, 2001. This
increase in the loss from operations is primarily related to a reduction in
gross profit as a result of the continued impact of analog to digital customer
conversions, partially offset by a reduction in general and administrative
expenses due DI's focus on operating efficiencies and cost minimization within
the distribution network.
The Company expects to generate an approximate $40.0 million income tax benefit
and a corresponding income tax NOL carry forward related to the disposal of the
Imaging Business and its operations for fiscal year 2003. During the six months
ended September 27, 2002, approximately $35.4 million of the $40.0 million
income tax benefit has been recorded. Management anticipates that this NOL will
be carried forward and applied against taxable income for fiscal years 2004,
2005, and 2006. The NOL carry forward is classified as a deferred tax asset in
other noncurrent assets in the Other segment's accompanying balance sheet.
Extraordinary Loss. During the six months ended September 27, 2002, the Company
retired $19.0 million principal amount of its $125.0 million Senior Subordinated
Notes. An extraordinary loss of $0.7 million was incurred as a result of the
early extinguishment of debt, consisting of $0.7 million redemption premiums and
the accelerated amortization of associated debt issuance costs of $0.4 million,
net of an income tax benefit of $0.4 million.
Net Loss. Net loss for the six months ended September 27, 2002 totaled $52.6
million compared to a net loss of $84.0 million for the six months ended
September 28, 2001. The net loss for the six months ended September 27, 2002
included a charge of $56.8 million for the total loss from discontinued
operations and $0.7 extraordinary loss on early extinguishment of debt. The net
loss for the six months ended September 28, 2001 primarily related to a goodwill
impairment charge of $90.0 million, net of a benefit for income taxes of $14.4
million, recorded as a cumulative effect of an accounting change due to the
implementation of SFAS 142. 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 flows from
operating activities, revolving credit borrowings, and other financing
arrangements.
Statement of Cash Flows Discussion
Net cash provided by operating activities was $20.6 million and $56.0 million
for the six months ended September 27, 2002 and September 28, 2001,
respectively. During the six months ended September 27, 2002, cash flows from
operating activities were positively impacted by noncash items of $10.6 million
related to depreciation, amortization of intangible assets, amortization of debt
issuance costs, provision for doubtful accounts, and benefit for deferred income
taxes. Cash flows from operating activities were also positively impacted by the
continued implementation of working capital reduction initiatives that started
38
in the last half of fiscal year 2001 and continued into fiscal year 2003. During
the six months ended September 27, 2002, accounts payable increased
approximately $9.4 million, accounts receivable increased approximately $6.9
million, and inventories decreased approximately $4.7 million, resulting in a
net $7.2 million decrease in operating working capital, which positively
impacted operating cash flows. The decrease in net cash provided by operating
activities from period to period was primarily attributable to the decrease in
net cash provided by discontinued operations. During the six months ended
September 28, 2001, the Imaging Business reduced working capital employed in the
business through supply chain initiatives that reduced inventory balances while
extending the timing of accounts payable disbursements. During the six months
ended September 27, 2002, the Imaging Business maintained inventory and accounts
payable balances at normalized levels and did not experience the same reduction
in working capital.
Net cash used in investing activities was $12.2 million and $11.9 million for
the six months ended September 27, 2002 and September 28, 2001, respectively.
During the six months ended September 27, 2002 and September 28, 2001, capital
expenditures totaled $6.2 million and $10.3 million, respectively. Capital
expenditures related to the continued development of the Company's ERP system,
electronic commerce platforms, and supply chain integration were approximately
$0.6 million and $7.0 million during the six months ended September 27, 2002 and
September 28, 2001. During the six months ended September 27, 2002,
approximately $3.5 million of the capital expenditures relate to the
distribution center expansions and software development for centralizing the
purchasing function as a result of the Rationalization Programs. In addition,
during the three months ended September 27, 2002, the Long-Term Care Business
purchased a business for approximately $4.5 million. During fiscal year 2003,
the Company is focusing on reducing overall capital expenditures and expects
reduced levels of capital expenditures with the planned completion of the ERP
system conversions at the Physician Supply Business during the first quarter of
fiscal year 2004.
Net cash used in financing activities was $29.0 million for the six months ended
September 27, 2002 compared to net cash used in financing activities of $54.2
million for the six months ended September 28, 2001. During the three months
ended September 27, 2002, the Company paid $19.7 million to retire a portion of
the Company's $125.0 million Senior Subordinated Notes (the "Notes") and $9.5
million to repurchase 1.3 million shares of the Company's common stock under an
approved stock repurchase program. During fiscal year 2002, the Company repaid a
significant amount of debt outstanding under the revolving line of credit
agreement using cash flows from operating activities.
Operating Trends
Excluding the assets and liabilities of discontinued operations, the Company had
working capital of $160.6 million and $188.0 million as of September 27, 2002
and March 29, 2002, respectively. Accounts receivable, net of allowances, were
$154.8 million and $148.3 million at September 27, 2002 and March 29, 2002,
respectively. The average number of days sales in accounts receivable
outstanding was approximately 47.4 and 46.8 days for the three months ended
September 27, 2002 and March 29, 2002, respectively. For the three months ended
September 27, 2002, the Company's Physician Supply and Long-Term Care Businesses
had days sales in accounts receivable outstanding of approximately 44.6 and 52.4
days, respectively.
Inventories were $89.2 million and $83.9 million as of September 27, 2002 and
March 29, 2002, respectively. The Company had inventory turnover of 9.5x for the
three months ended September 27, 2002 and March 29, 2002. For the three months
ended September 27, 2002, the Company's Physician Supply and Long-Term Care
Businesses had inventory turnover of 8.7x and 11.2x, respectively.
The following table presents Adjusted EBITDA and other financial data for the
three and six months ended September 27, 2002 and September 28, 2001 (in
thousands):
39
Other Financial Data:
Three Months Ended Six Months Ended
------------------------------ -----------------------------
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Income from operations........................ $5,123 $7,156 $12,183 $13,708
Plus: Other income........................... 408 356 810 1,135
Plus: Depreciation and amortization of
intangible assets.......................... 3,522 2,225 7,015 4,302
Plus: Charges included in general and
administrative expenses (d)................ 3,160 30 4,259 400
Plus: International Business exit charge -- --
reversal -- (514)
------------- ------------- ------------- -------------
Adjusted EBITDA (a)........................... $12,213 $9,767 $24,267 $19,031
Interest expense.............................. $ 2,167 $1,845 $ 4,466 $ 4,614
Interest coverage (b)......................... 5.6x 5.3x 5.4x 4.1x
Adjusted EBITDA Margin (c).................... 4.2% 3.6% 4.2% 3.5%
Net cash provided by operating activities..... $ 20,565 $ 56,023
Net cash used in investing activities......... $(12,150) $(11,926)
Net cash used in financing activities......... $(28,983) $(54,243)
As of
------------------------------
September 27, September 28,
2002 2001
------------- -------------
Return on committed capital (e) (d)........................... 18.6% 14.1%
Ratio of debt to capitalization (f)........................... 28.8% 29.7%
(a) Adjusted EBITDA represents income from operations, plus other income,
depreciation and amortization of intangible assets, charges included in
general and administrative expenses, and International Business exit
charge reversal. Adjusted EBITDA excludes interest expense and
provision for income taxes. Adjusted EBITDA is not a measure of
performance or financial condition under generally accepted accounting
principles ("GAAP").
Adjusted EBITDA is not intended to represent cash flows from operations
and should not be considered as an alternative measure to income from
operations or net income computed in accordance with GAAP, as an
indicator of the Company's operating performance, as an alternative to
cash flows from operating activities, or as a measure of liquidity. In
addition, Adjusted EBITDA does not provide information regarding cash
flows from investing and financing activities which are integral to
assessing the effects on the Company's financial position and liquidity
as well as understanding the Company's historical growth. The Company
believes that Adjusted EBITDA is a standard measure of liquidity
commonly reported and widely used by analysts, investors, and other
interested parties in the financial markets. However, not all companies
calculate Adjusted EBITDA using the same method and the Adjusted EBITDA
numbers set forth above may not be comparable to Adjusted EBITDA
reported by other companies.
(b) Interest coverage represents the ratio of Adjusted EBITDA to interest
expense.
(c) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to net
sales.
(d) Charges included in general and administrative expenses for the three
and six months ended September 27, 2002 excludes $54 and $138 of
accelerated depreciation, respectively. Accelerated depreciation is
included in depreciation and amortization in the Adjusted EBITDA
calculation.
(e) Return on committed capital equals Adjusted EBITDA less depreciation
divided by the average of the two most recent fiscal quarters of total
assets less the sum of cash and cash equivalents, goodwill, net
intangibles, accounts payable, accrued expenses, and other current and
noncurrent liabilities. The deferred tax asset of $34,654 generated
40
from the estimated loss on disposal of the Imaging Business is excluded
from this calculation. The result of this calculation is then
annualized.
(f) Ratio of debt to capitalization is calculated as long-term debt plus
current portion of long-term debt divided by the sum of long-term debt,
current portion of long-term debt, and shareholders' equity.
Senior Subordinated Notes
The Company's Notes are unconditionally guaranteed on a senior subordinated
basis by all of the Company's domestic subsidiaries. Interest on the Notes
accrues from the date of original issuance and is payable semiannually on April
1 and October 1 of each year, commencing on April 1, 1998, at a rate of 8.5% per
annum. The semiannual payments of approximately $5.3 million are expected to be
funded by the cash flows from operating activities of the Company. The Notes
mature on October 1, 2007, and contain certain restrictive covenants that, among
other things, limit the Company's ability to incur additional indebtedness. The
Company may incur indebtedness up to certain specified levels and, provided that
no event of default exists, additional indebtedness may be incurred if the
Company maintains a consolidated fixed charge coverage ratio, after giving
effect to such additional indebtedness, of greater than 2 to 1.
During the three months ended September 27, 2002, the Company retired $19.0
million principal amount of its Notes in a privately negotiated transaction. An
extraordinary loss of $0.7 million was incurred as a result of the early
extinguishment of debt, consisting of $0.7 million of redemption premiums, $0.4
million of accelerated amortization of debt issuance costs, net of a benefit for
income taxes of $0.4 million.
Under the Notes Indenture, beginning October 1, 2002, the Company has the right
to call the Notes at a call premium of 4.25% of face value. The Company is
currently evaluating the economic feasibility of calling the Notes using a
combination of cash flows from operations, availability under the Revolving
Credit Agreement, or cash from obtaining an alternate financing facility.
Revolving Credit Agreement
On May 24, 2001, the Company entered into a credit agreement (the "Credit
Agreement"), by and among the Company, as borrower thereunder (the "Borrower"),
the subsidiaries of the Borrower party thereto, the lenders from time to time
party thereto (the "Lenders"), Bank of America, N.A., as Agent for the Lenders
(in such capacity, the "Agent", or the "Bank") and Banc of America Securities
LLC, as Arranger.
The Credit Agreement provides for a four-year credit facility consisting of an
aggregate $120 million revolving line of credit and letters of credit (the
"Credit Facility"). Availability of borrowings under the Credit Facility depends
upon (a) the amount of a borrowing base consisting of accounts receivable and,
upon satisfaction of certain requirements, inventory and (b) compliance with
certain debt incurrence tests under the Company's Indenture, dated as of October
7, 1997, relating to the Notes. The Credit Facility bears interest at the Bank's
prime rate plus a margin of between 0.25% and 1.0% based on the Company's ratio
of funded debt to EBITDA (as defined in the Agreement) or at LIBOR plus a margin
of between 1.75% and 3.5% based on the Company's ratio of funded debt to EBITDA.
Under the Credit Agreement, the Company and its subsidiaries are subject to
certain covenants, including but not limited to, limitations on (a) paying
dividends and repurchasing stock, (b) repurchasing its Notes, (c) selling or
transferring assets, (d) making certain investments (including acquisitions) and
(e) incurring additional indebtedness and liens. Initial proceeds from the
Credit Facility were used to refinance existing indebtedness outstanding under
the Company's prior credit agreement, and future proceeds will be used to issue
letters of credit, finance ongoing working capital requirements and general
corporate purposes of the Company. The Credit Facility matures on May 24, 2005.
On June 28, 2001, the Company entered into a First Amendment to the Credit
Agreement (the "Amendment"), by and among the Company, as borrower thereunder,
the subsidiaries of the Company party thereto, the Lenders and the Agent for the
Lenders. The Amendment amended the Credit Agreement to increase the maximum
available borrowings under the Credit Agreement from $120 million to $150
million. The Amendment also, among other things, increased the percentage of
Lenders whose consent was required for an amendment of the Credit Agreement from
more than 50% to more than 55% and amended certain provisions relating to
41
protective advances, limitations on issuances of letters of credit,
indemnification, and landlord consents.
Effective August 12, 2002, the Company received a consent from the Lenders and
the Agent for the Lenders for the repurchase of up to $35.0 million of its
common stock through June 30, 2003.
Effective October 24, 2002, the Company received a consent from the Lenders and
the Agent for the Lenders for the sale of all the outstanding capital stock of
DI.
As of September 27, 2002, the Company has not entered into any material working
capital commitments that require funding. The Company believes that the expected
cash flows from operations, borrowing availability under the credit facility,
and capital markets are sufficient to meet the Company's anticipated future
requirements for working capital, capital expenditures, and acquisitions for the
foreseeable future.
The Company may from time to time seek to retire its outstanding debt through
cash purchases and/or exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases or exchanges,
if any, will depend on prevailing market conditions, the Company's liquidity
requirements, contractual restrictions and other factors. The amounts involved
may be material.
Future Minimum Obligations
In the normal course of business, the Company enters into obligations and
commitments that require future contractual payments. The commitments primarily
result from repayment obligations for borrowings under the Notes and Credit
Facility, as well as contractual lease payments for facility, vehicle, and
equipment leases, and contractual payments under noncompetition agreements and
employment agreements. As of September 27, 2002, the Company had no borrowings
outstanding under the credit facility. The following table presents, in
aggregate, scheduled payments under contractual obligations for the Physician
Supply Business, the Long-Term Care Business, and Other (in thousands):
Fiscal Years
---------------------------------------------------------
(remaining
6 months)
2003 2004 2005 2006 2007 Thereafter Total
---------- --------- ---------- ---------- ---------- ---------- ---------
Long-term debt................ $ -- $ -- $ -- $ -- $ -- $106,000 $106,000
Operating leases:
Restructuring............. 287 485 325 186 19 -- 1,302
Operating................. 9,652 16,445 11,985 7,682 5,493 6,290 57,547
Noncompetition agreements..... 215 245 100 36 35 142 773
Employment agreements......... 2,288 -- -- -- -- -- 2,288
---------- --------- ---------- ---------- ---------- ---------- ---------
Total................ $12,442 $17,175 $12,410 $7,904 $5,547 $112,432 $167,910
========== ========= ========== ========== ========== =========== =========
Other
On July 30, 2002, the Company's Board of Directors approved a stock repurchase
program authorizing the Company, depending upon market conditions and other
factors, to repurchase up to a maximum of 5% of its common stock, or
approximately 3.6 million common shares, in the open market, in privately
negotiated transactions, or otherwise. As of September 27, 2002, the Company
repurchased approximately 1.3 million shares under this program. Such
repurchases are expected to continue over the next 9 months and will be made in
compliance with applicable rules and regulations and the terms of the Company's
debt agreements. However, the stock repurchase program may be discontinued at
any time.
42
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there has been no material change in its exposure to market
risk from that discussed in Item 7A in the Annual Report on Form 10-K for the
fiscal year ended March 29, 2002.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's Principal
Executive Officer and Principal Financial Officer have reviewed and
evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c))
as of a date within ninety days before the filing date of this quarterly
report (the "Evaluation Date"). Based on that evaluation, the Principal
Executive Officer and the Principal Financial Officer have concluded that
the Company's current disclosure controls and procedures are effective,
providing them with material information relating to the Company, including
its consolidated subsidiaries, as required to be disclosed in the reports
the Company files or submits under the Exchange Act on a timely basis.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect those controls subsequent to the Evaluation Date.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to Note 10, Commitments and Contingencies, of this Form 10-Q and Item 3 of
the Company's Annual Report on Form 10-K for the year ended on March 29, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 2002 Annual Meeting of Stockholders was held on August 21, 2002.
(b) The following directors were elected to serve a three-year term of office
until the 2005 Annual Meeting of Stockholders or until their successors
have been duly elected and qualified. Of the 65,911,155 shares (1 vote per
share) of common stock represented at the meeting, the directors were
elected by the following votes:
Number of Votes Received
------------------------- Broker
Name For Against Abstentions Non-votes
---------- --------- ----------- ---------
Charles E. Adair................... 64,849,407 1,061,748 -- --
Hugh M. Brown...................... 64,141,461 1,769,694 -- --
Charles R. Scott................... 64,163,074 1,748,081 -- --
43
Immediately following the meeting, the directors of the Company consisted
of the following:
Name
T. O'Neal Douglas
Clark A. Johnson
Melvin L. Hecktman
Delores P. Kesler
David A. Smith
Charles E. Adair
Hugh M. Brown
Charles R. Scott
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation, dated as of March 15, 1994. (8)
3.1a Articles of Amendment to Articles of Incorporation, dated as of September 24, 2001. (17)
3.1b Articles of Amendment to Articles of Incorporation, dated as of November 9, 2001. (17)
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.
(6)
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. (6)
4.3 Form of 8 1/2% Senior Subordinated Notes due 2007, including Form of Guarantee (Exchange Notes). (6)
4.4 Shareholder Protection Rights Agreement, dated as of April 20, 1998, between the Company and
Continental Stock Transfer & Trust Company, as Rights Agent. (9)
4.4a Amendment to Shareholder Protection Rights Agreement, dated as of June 21, 2000, between the
Company and Continental Stock Transfer & Trust Company as Rights Agent. (11)
4.4b Amendment to Shareholder Protection Rights Agreement, dated as of April 12, 2002, between the
Company and First Union National Bank, as Successor Rights Agent. (19)
44
10.1 Incentive Stock Option Plan, dated as of May 14, 1986. (1)
10.2 Amended and Restated Directors Stock Plan. (5)
10.3 Amended and Restated 1994 Long-Term Incentive Plan. (5)
10.4 Amended and Restated 1994 Long-Term Stock Plan. (5)
10.5 1994 Employee Stock Purchase Plan. (4)
10.6 1994 Amended Incentive Stock Option Plan. (1)
10.7 1999 Long-term Incentive Plan. (10)
10.8 Distributorship Agreement between Abbott Laboratories and the Company (Portions omitted pursuant
to a request for confidential treatment - Separately filed with the SEC). (2)
10.9 Amended and Restated Savings Plan. (20)
10.9a First Amendment to the Amended and Restated Savings Plan.
10.10 Agreement and Plan of Merger, dated as of December 14, 1997, by and among the Company, PSS Merger
Corp. and Gulf South Medical Supply, Inc. (7)
10.11 Credit Agreement, dated as of May 24, 2001, by and among the Company, each of the Company's
subsidiaries therein named, the Lenders from time to time party thereto, Bank of America, N.A., as
Agent, and Banc of America Securities LLC, as Arranger. (13)
10.11a Amendment No. 1 to Credit Agreement, dated as of June 28, 2001,
by and among the Company, each of the Company's subsidiaries
therein named, the Lenders from time to time party thereto, Bank
of America, N.A., as Agent, and Banc of America Securities LLC,
as Arranger. (15)
10.12 Employment Agreement, dated as of March 4, 1998, by and between the Company and David A. Smith.
(14)
10.12a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
David A. Smith. (14)
10.13 Employment Agreement, dated as of April 1, 1998, by and between the Company and John F. Sasen,
Sr. (14)
10.13a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and John
F. Sasen, Sr. (14)
10.14 Consulting Agreement, dated as of June 13, 2002, by and between the Company and Douglas J.
Harper. (20)
10.15 Employment Agreement, dated as of April 1, 1998, by and between the Company and Gary A. Corless.
(16)
10.15a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
Gary A. Corless. (16)
10.16 Employment Agreement, dated as of April 1, 1998, by and between the Company and Kevin P. English.
(16)
10.16a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
Kevin P. English. (16)
45
10.17 Employment Agreement, dated as of January 7, 2002, by and between the Company and David M.
Bronson. (18)
10.18 Severance Agreement, dated as of October 11, 2000, by and between the Company and Frederick E.
Dell. (14)
10.19 Severance Agreement, dated as of February 1, 2001, by and between the Company and Kirk A.
Zambetti. (14)
10.20 Severance Agreement, dated as of March 21, 2001, by and between the Company and Patrick C. Kelly.
(14)
10.21 Stock Purchase Agreement, dated as of October 28, 2002, among PSS World Medical, Inc., Imaging
Acquisition Corporation, and Platinum Equity, LLC. (21)
15 Awareness Letter from KPMG LLP
21 List of Subsidiaries of the Company. (19)
(1) Incorporated by Reference to the Company's Registration Statement on Form S-1,
Registration No. 33-76580.
(2) Incorporated by Reference to the Company's Annual Report on Form 10-K for the year ended
March 30, 1995.
(3) Incorporated by Reference to the Company's Registration Statement on Form S-3,
Registration No. 33-97524.
(4) Incorporated by Reference to the Company's Registration Statement on Form S-8,
Registration No. 33-80657.
(5) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996.
(6) Incorporated by Reference to the Company's Registration Statement on Form S-4,
Registration No. 333-39679.
(7) Incorporated by Reference from Annex A to the Company's Registration Statement on
Form S-4, Registration No. 333-44323.
(8) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 8,
1998.
(9) Incorporated by Reference to the Company's Current Report on Form 8-K, filed April 22,
1998.
(10) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999.
(11) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000.
(12) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 29, 2000.
(13) Incorporated by Reference to the Company's Current Report on Form 8-K, filed June 5, 2001.
(14) Incorporated by Reference to the Company's Annual Report on Form 10-K for the year ended
March 30, 2001.
(15) Incorporated by Reference to the Company's Current Report on Form 8-K, filed July 3, 2001.
(16) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 29, 2001.
(17) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 28, 2001.
(18) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 28, 2001.
(19) Incorporated by Reference to the Company's Annual Report on Form 10-K for the year ended
March 29, 2002.
(20) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 28, 2002.
(21) Incorporated by Reference to the Company's Current Report on Form 8-K, filed October 30,
2002.
46
(b) Reports on Form 8-K:
The following current reports on Form 8-K were filed during the quarter
ended September 27, 2002:
Date of Report Items Reported
----------------------------- --------------------------------------------------------
August 12, 2002 Filing of the written certifications of the Chief
Executive Officer and Chief Financial Officer
regarding the Quarterly Report on Form 10-Q for
the quarter ended June 28, 2002.
----------------------------- --------------------------------------------------------
August 14, 2002 Filing of the Chief Executive Officer and Chief
Financial Officer's sworn statements as required
by the Securities and Exchange Commission
Order 4-460.
----------------------------- --------------------------------------------------------
August 26, 2002 Filing announcing that the Company had entered
into an amendment to the distribution agreement
with Abbott Laboratories entered into in December
2000.
----------------------------- --------------------------------------------------------
September 3, 2002 Filing announcing that the Company's Board of
Directors has authorized the Company, depending
upon market conditions and other factors, to
repurchase up to 5% of the Company's outstanding
common stock.
47
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, 2002.
PSS WORLD MEDICAL, INC
By: /s/ David M. Bronson
-----------------------------------
David M. Bronson
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
and Accounting Officer)
48
CERTIFICATION
I, David A. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PSS World Medical
, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being presented;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 8, 2002
/s/ David A. Smith
-----------------------------------
David A. Smith
President and Chief Executive Officer
49
CERTIFICATION
I, David M. Bronson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PSS World Medical
, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being presented;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent):
d. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
e. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 8, 2002
/s/ David M. Bronson
-----------------------------------
David M. Bronson
Senior Vice President and
Chief Financial Officer