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 December 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 January 31, 2003 was 67,802,717 shares.
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
December 27, 2002
TABLE OF CONTENTS
Item Page
Information Regarding Forward-Looking Statements............................................ 3
Part I--Financial Information
1. Financial Statements:
Consolidated Balance Sheets -- December 27, 2002 and March 29, 2002..................... 4
Consolidated Statements of Operations for the Three and Nine Months Ended
December 27, 2002 and December 28, 2001.............................................. 5
Consolidated Statements of Cash Flows for the Nine Months Ended
December 27, 2002 and December 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......................................... 44
5. Other Information........................................................................... 44
6. Exhibits and Reports on Form 8-K............................................................ 45
Signatures.................................................................................. 49
Certifications.............................................................................. 50
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, financing plans, business strategy, budgets, projected costs,
capital expenditures, competitive positions, current and pending Medicare and
Medicaid reimbursement levels and legislation, 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 and physicians; (viii) future acquisitions
or strategic partnerships; and (ix) 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
DECEMBER 27, 2002 AND MARCH 29, 2002
(Dollars in Thousands, Except Share and Per Share Data)
ASSETS
December 27, March 29,
2002 2002
----------- -----------
(Unaudited)
Current Assets:
Cash and cash equivalents.............................................................. $ 35,792 $ 53,574
Accounts receivable, net............................................................... 156,951 148,340
Inventories, net....................................................................... 84,022 83,854
Employee advances...................................................................... 80 118
Prepaid expenses and other............................................................. 26,502 31,096
Assets of discontinued operations...................................................... -- 193,141
----------- -----------
Total current assets........................................................... 303,347 510,123
Property and equipment, net............................................................... 61,181 61,691
Other Assets:
Goodwill............................................................................... 61,283 59,390
Intangibles, net....................................................................... 5,543 4,023
Employee advances...................................................................... 187 282
Deferred tax assets.................................................................... 48,928 7,034
Other.................................................................................. 20,096 20,865
----------- -----------
Total assets................................................................... $ 500,565 $ 663,408
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................................................... $ 87,642 $ 94,383
Accrued expenses....................................................................... 33,517 29,976
Other.................................................................................. 6,806 4,616
Liabilities of discontinued operations and accrued loss on disposal.................... 2,654 68,490
----------- -----------
Total current liabilities...................................................... 130,619 197,465
Long-term debt............................................................................ 106,000 125,000
Other..................................................................................... 16,589 16,495
----------- -----------
Total liabilities.............................................................. 253,208 338,960
----------- -----------
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, 67,763,440 and 71,270,044
shares issued and outstanding at December 27, 2002 and March 29, 2002, respectively 678 712
Additional paid-in capital............................................................. 325,026 350,043
Accumulated deficit.................................................................... (78,347) (26,307)
----------- -----------
Total shareholders' equity..................................................... 247,357 324,448
----------- -----------
Total liabilities and shareholders' equity..................................... $ 500,565 $ 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 NINE MONTHS ENDED DECEMBER 27, 2002 AND DECEMBER 28, 2001
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
--------------------------------- ----------------------------------
December 27, December 28, December 27, December 28,
2002 2001 2002 2001
---------------- --------------- ---------------- ----------------
Net sales.......................................... $ 303,893 $ 279,148 $879,178 $818,105
Cost of goods sold................................. 218,701 201,949 631,271 594,634
---------------- --------------- ---------------- ----------------
Gross profit........................ 85,192 77,199 247,907 223,471
General and administrative expenses................ 57,348 49,886 166,670 146,008
Selling expenses................................... 21,255 19,572 62,465 56,529
International business exit charge reversal........ -- -- -- (514)
---------------- --------------- ---------------- ----------------
Income from operations.............. 6,589 7,741 18,772 21,448
---------------- --------------- ---------------- ----------------
Other (expense) income:
Interest expense............................. (2,268) (1,544) (6,732) (6,158)
Interest and investment income............... 47 48 441 212
Other income................................. 1,944 397 2,753 1,532
---------------- --------------- ---------------- ----------------
(277) (1,099) (3,538) (4,414)
---------------- --------------- ---------------- ----------------
Income from continuing operations before provision
for income taxes............................. 6,312 6,642 15,234 17,034
Provision for income taxes......................... 2,370 2,224 5,697 5,974
Income from continuing operations before
---------------- --------------- ---------------- ----------------
extraordinary loss........................... 3,942 4,418 9,537 11,060
---------------- --------------- ---------------- ----------------
Discontinued operations:
Loss from discontinued operations (net of
benefit for income taxes of $1,366, $617,
$2,575, and $745, respectively)........... (2,194) (1,004) (4,101) (1,555)
Loss on disposal of discontinued operations
(net of benefit for income taxes of $1,021
and $35,675).............................. (1,168) -- (56,810) --
Cumulative effect of accounting change (net
of benefit for income taxes of $14,444)... -- -- -- (90,045)
---------------- --------------- ---------------- ----------------
Total loss from discontinued
operations.......................... (3,362) (1,004) (60,911) (91,600)
---------------- --------------- ---------------- ----------------
Extraordinary loss (net of benefit for income taxes
of $424)..................................... -- -- (666) --
---------------- --------------- ---------------- ----------------
Net income (loss).................................. $ 580 $ 3,414 $(52,040) $(80,540)
================ =============== ================ ================
Earnings (loss) per share - Basic:
Income from continuing operations before
extraordinary loss........................ $ 0.06 $ 0.06 $ 0.14 $ 0.16
Total loss from discontinued operations...... (0.05) (0.01) (0.87) (1.29)
Extraordinary loss........................... -- -- (0.01) --
---------------- --------------- ---------------- ----------------
Net income (loss)............................ $ 0.01 $ 0.05 $(0.74) $(1.13)
================ =============== ================ ================
Earnings (loss) per share - Diluted:
Income from continuing operations before
extraordinary loss........................ $ 0.06 $ 0.06 $ 0.14 $ 0.15
Total loss from discontinued operations...... (0.05) (0.01) (0.86) (1.27)
Extraordinary loss........................... -- -- (0.01) --
---------------- --------------- ---------------- ----------------
Net income (loss)............................ $ 0.01 $ 0.05 $(0.73) $(1.12)
================ =============== ================ ================
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 NINE MONTHS ENDED DECEMBER 27, 2002 AND DECEMBER 28, 2001
(Unaudited)
(Dollars in Thousands)
Nine Months Ended
--------------------------------
December 27, December 28,
2002 2001
---------------- --------------
Cash Flows From Operating Activities:
Net loss....................................................................... $(52,040) $(80,540)
Adjustments to reconcile net loss to net cash provided by operating activities:
Total loss from discontinued operations.................................... 60,911 91,600
Extraordinary loss......................................................... 666 --
Depreciation............................................................... 8,917 5,841
Amortization of intangible assets.......................................... 1,758 1,146
Amortization of debt issuance costs........................................ 818 1,294
Provision for doubtful accounts............................................ 2,634 3,212
Provision for notes receivables............................................ 2,939 --
Benefit for deferred income taxes.......................................... 875 12,083
Loss on sales of property and equipment.................................... 106 25
Noncash compensation expense............................................... -- 268
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................................................ (10,015) (606)
Inventories, net........................................................ 503 (5,768)
Prepaid expenses and other current assets............................... 3,683 2,078
Other assets............................................................ (10,390) (18,521)
Accounts payable........................................................ 10,495 34,916
Accrued expenses and other liabilities.................................. 6,212 14,674
Net cash (used in) provided by discontinued operations.................. (356) 27,508
---------------- --------------
Net cash provided by operating activities........................... 27,716 88,810
---------------- --------------
Cash Flows From Investing Activities:
Capital expenditures.......................................................... (8,526) (13,869)
Payments on noncompete agreements............................................. (453) (1,157)
Payment for business combination.............................................. (4,464) --
Proceeds from sale of Imaging Business, net of transaction costs of $1,309.... 14,075 --
Proceeds from sales of property and equipment................................. 14 42
Proceeds from sale of International Business.................................. -- 221
Net cash used in discontinued operations...................................... (1,555) (3,903)
---------------- --------------
Net cash used in investing activities............................... (909) (18,666)
---------------- --------------
6
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE NINE MONTHS ENDED DECEMBER 27, 2002 AND DECEMBER 28, 2001
(Unaudited)
(Dollars in Thousands)
Nine Months Ended
--------------------------------
December 27, December 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............................................. (25,182) --
Proceeds from issuance of common stock........................................ 258 92
Net payments under revolving line of credit................................... -- (65,000)
Net cash used in discontinued operations...................................... -- (157)
---------------- --------------
Net cash used in financing activities............................... (44,589) (65,065)
---------------- --------------
Net (decrease) increase in cash and cash equivalents.............................. (17,782) 5,079
Cash and cash equivalents, beginning of period.................................... 53,574 34,374
---------------- --------------
Cash and cash equivalents, end of period.......................................... $ 35,792 $ 39,453
================ ==============
The accompanying notes are an integral part of these consolidated statements.
7
PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
NOTES TO 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") is a specialty marketer and
distributor of medical products to physicians, long-term care providers,
home healthcare providers, and other alternate-site healthcare providers
through 49 full-service centers to customers in all 50 states.
The Physician Sales & Service division (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
December 27, 2002, the Physician Supply Business operated 36 full-service
centers distributing to physician office sites in all 50 states.
The Gulf South Medical Supply, Inc. subsidiary (the "Long-Term Care
Business") is a distributor of medical supplies and related products to
nursing homes, home healthcare agencies, elder care providers, and other
long-term care facilities. At December 27, 2002, the Long-Term Care
Business operated 13 full-service centers serving all 50 states.
During the three months ended December 27, 2002, the Company completed the
sale of the Diagnostic Imaging, Inc. subsidiary ("DI" or the "Imaging
Business"), a distributor of medical diagnostic imaging supplies,
chemicals, equipment, and services to the acute and alternate-care markets
in the United States. 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 sale 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 of America 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.
The Company reports its quarter-end financial position and results of
operations and cash flows on the Friday closest to June 30, September 30,
December 31, and March 31. The three and nine months ended December 27,
2002 and December 28, 2001 each consisted of 13 weeks and 39 weeks,
respectively.
8
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.
In 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.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees ("FIN 45"). FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. FIN 45 does not prescribe a specific approach for subsequently
measuring the guarantor's recognized liability over the term of the related
guarantee. It also incorporates, without change, the guidance in FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others, which is being superseded. The Company will apply the recognition
and measurement provisions of FIN 45 on a prospective basis to guarantees
issued or modified after December 31, 2002. Refer to Note 11, Long-Term
Debt, where the Company complied with the additional disclosure
requirements under FIN 45.
In November 2002, the EITF reached a consensus on Issue 00-21,
Multiple-Deliverable Revenue Arrangements ("EITF 00-21"). EITF 00-21
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services, and/or rights to use assets.
The consensus mandates how to identify whether goods or services or both
that are to be delivered separately in a bundled sales arrangement should
be accounted for separately because they are separate units of accounting.
EITF 00-21 can affect the timing of revenue recognition for such
arrangements, even though it does not change rules governing the timing or
pattern of revenue recognition of individual items accounted for
separately. The final consensus will be applicable to agreements entered
into beginning fiscal year 2005 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance
to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, Accounting
Changes. The Company is currently evaluating the impact, if any, of the
adoption of EITF 00-21 on its financial condition and results of
operations.
9
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure ("SFAS 148"). SFAS 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), to provide
alternative methods of transition for an entity that voluntarily changes to
the fair value based method of accounting for stock-based employee
compensation. In addition, it also amends the disclosure provisions of SFAS
123 to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to
stock-based employee compensation. SFAS 148 also amends APB Opinion No. 28,
Interim Financial Reporting, to require disclosure about the effect in
interim financial information. The Company is currently in the process of
evaluating the impact of SFAS 148 on its financial condition and results of
operations. However, additional disclosures will be included in the
Company's annual financial statements for the fiscal year ended 2003 and
interim financial statements for the first quarter of fiscal year 2004.
2. DISCONTINUED OPERATIONS
On September 26, 2002, the Company's Board of Directors adopted a plan to
dispose of the Imaging Business, reflecting 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 November 18, 2002, the Company completed the sale of DI to Imaging
Acquisition Corporation (the "Buyer"), a wholly owned subsidiary of
Platinum Equity, LLC, a private equity firm ("Platinum"). The sale was
completed pursuant to a Stock Purchase Agreement, dated as of October 28,
2002, among the Company, the Buyer, and Platinum, as amended on November
18, 2002 (the "Stock Purchase Agreement"). Under the Stock Purchase
Agreement, the purchase price was $45,000 less (i) an adjustment for any
change in net asset value from the initial net asset value target date and
(ii) an adjustment for any change in the net cash from the initial net cash
target date (the "Purchase Price"). The cash proceeds received during the
nine months ended December 27, 2002 were reduced by approximately $1,309
for transaction costs. Approximately $2,654 of additional transaction
costs, which are accrued in the accompanying balance sheet as an accrued
loss on disposal, will be paid subsequent to December 27, 2002. Cash
proceeds, net of these adjustments, received from the transaction were
approximately $14,075. In connection with the closing of the transaction,
the Company and the Buyer entered into a transitional services agreement,
pursuant to which the Company will provide certain reimbursable services to
the Buyer for a period not to exceed one year. The costs incurred related
to providing services under the transition services agreement are included
in general and administrative expenses and the reimbursement for these
expenses are included in other income in the accompanying statements of
operations.
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 or Disposal of Long-Lived
Assets. The estimated loss on disposal is subject to change based on the
final Purchase Price adjustments that will be recorded in the period in
which they become known. The accompanying financial statements have been
restated to conform to discontinued operations treatment for all historical
periods presented.
10
Net sales and total loss from discontinued operations of the Imaging
Business are as follows:
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
December 27, December 28, December 27, December 28,
2002 2001 2002 2001
------------- -------------- ------------- -------------
Net sales............................ $93,162 $176,165 $445,630 $532,317
Pretax loss from operations.......... (3,560) (1,621) (6,676) (2,300)
Pretax loss on disposal of
discontinued operations........... (2,189) -- (92,485) --
Benefit for income taxes............. 2,387 617 38,250 745
Cumulative effect of accounting
change (net of income tax benefit
of $14,444) ...................... -- -- -- (90,045)
Total loss from discontinued
operations ------------- -------------- ------------- -------------
$(3,362) $ (1,004) $(60,911) $(91,600)
============= ============== ============= =============
As a result of the sale of DI on November 18, 2002, net sales for the three
months ended December 27, 2002 included 35 days of sales compared to 62
days of sales during the three months ended December 28, 2001. Net sales
for the nine months ended December 27, 2002 included 162 days of sales
compared to 189 days of sales during the nine months ended December 28,
2001.
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 $454 and $1,022 for the
three months ended December 27, 2002 and December 28, 2001, respectively,
and $2,157 and $3,591 for the nine months ended December 27, 2002 and
December 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 nine months ended
December 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
---------------------------
December 27, March 29,
2002 2002
------------ ------------
Accounts receivable, net.......................................... $ -- $ 78,615
Inventories, net.................................................. -- 69,069
Prepaid expenses and other current assets......................... -- 7,655
Property and equipment, net....................................... -- 23,149
Goodwill and intangibles.......................................... -- 12,425
Other noncurrent assets........................................... -- 2,228
------------ ------------
Assets of discontinued operations............................. $ -- $193,141
============ ============
Accounts payable.................................................. $ -- $ 52,311
Accrued expenses.................................................. -- 5,815
Other current liabilities......................................... -- 10,364
------------ ------------
Liabilities of discontinued operations........................ -- 68,490
Accrued loss on disposal.......................................... 2,654 --
------------ ------------
Liabilities of discontinued operations and accrued loss on
disposal................................................... $2,654 $ 68,490
============ ============
11
3. ACCRUED RESTRUCTURING COSTS AND EXPENSES
Plan Adopted During the Third Quarter of Fiscal Year 2003--Other Segment.
As a result of the sale of the Imaging Business, management and the Board
of Directors approved and adopted a formal plan to restructure certain
positions within the Company during the three months ended December 27,
2002. As a result of the plan, approximately 21 employees, including
leaders and administrative personnel, will be involuntarily terminated. As
of December 27, 2002, 7 employees had been terminated.
Accrued restructuring costs and expenses related to the Other segment's
plan, classified as accrued expenses in the accompanying consolidated
balance sheets, was $342 at December 27, 2002. The following is a summary
of the restructuring activity related to the plan described above:
Involuntary
Employee
Termination
Costs
--------------
Balance at September 27, 2002......... $ --
Additions....................... 382
Utilized........................ (40)
--------------
Balance at December 27, 2002.......... $342
==============
Plan Adopted During the Fourth Quarter of Fiscal Year 2002--Physician
Supply Business.
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. To improve the distribution infrastructure, certain
administrative functions, such as accounts receivable billing and
collections and inventory management, at 13 service center locations are
being 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
December 27, 2002, certain administrative functions at 10 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 is being centralized to the
corporate office located in Jacksonville, Florida. As of December 27, 2002,
the purchasing function for 25 of the 33 service center locations was
centralized to Jacksonville, Florida. Management anticipates that this plan
will be substantially 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 December 27, 2002, 61 employees had been
terminated.
12
Accrued restructuring costs and expenses related to the Physician Supply
Business plan, classified as accrued expenses in the accompanying
consolidated balance sheets, were $2,381 and $3,666 at December 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
Adjustments..................... (32) (20) 24 (28)
Additions....................... 22 -- -- 22
Utilized........................ (113) (219) (11) (343)
------------ ----------- ----------- -----------
Balance at December 27, 2002.......... $ 190 $2,162 $ 29 $2,381
============ =========== =========== ===========
Management reevaluates its estimates of the total costs related to this
plan and makes any necessary adjustments on a quarterly basis. During the
three months ended September 27, 2002, the original total estimated costs
of $6,505 related to this plan were revised to be approximately $5,753, of
which approximately $4,174 and $773 was recognized during fiscal year 2002
and the nine months ended December 27, 2002, respectively. Approximately
$806 will be expensed as incurred during the remaining three months of
fiscal year 2003.
The revision to the total estimated costs of the plan 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 rather than incur the removal and disposal
expenses. 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
throughout fiscal year 2003. The Physician Supply Business accrued an
additional $22 and $225 of involuntary employee termination costs during
the three and nine months ended December 27, 2002, respectively.
13
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 $672 and
$1,399 at December 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
Utilized....................... (185) -- (185)
----------- ----------- -----------
Balance at December 27, 2002......... $ 672 $ -- $ 672
=========== =========== ===========
The accrued involuntary employee termination costs at December 27, 2002 and
March 29, 2002 relate to a restructuring plan that was adopted during the
third quarter of fiscal year 2001. The remaining $672 will be paid to the
terminated employees through fiscal year 2005 in accordance with their
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 obtained independent
valuations of certain intangible assets and finalized the allocation of the
purchase price during the three months ended December 27, 2002. 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 at the
time of acquisition of approximately 5.6 years.
14
5. GOODWILL
In accordance with SFAS 142, the changes in the carrying value of goodwill
for the nine months ended December 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 December 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 December 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 $(3,512) $1,116 $ 4,053 $(3,073) $ 980
Long-Term Care Business........ 2,035 (1,021) 1,014 2,070 (876) 1,194
---------- ------------ --------- -------- ------------- -------
6,663 (4,533) 2,130 6,123 (3,949) 2,174
---------- ------------ --------- -------- ------------- -------
Signing Bonuses:
Physician Supply Business...... 1,985 (1,020) 965 1,027 (426) 601
Long-Term Care Business........ 250 (183) 67 200 (150) 50
---------- ------------ --------- -------- ------------- -------
2,235 (1,203) 1,032 1,227 (576) 651
---------- ------------ --------- -------- ------------- -------
Other Intangibles:
Physician Supply Business...... 2,993 (1,964) 1,029 2,993 (1,795) 1,198
Long-Term Care Business........ 1,429 (77) 1,352 -- -- --
---------- ------------ --------- -------- ------------- -------
4,422 (2,041) 2,381 2,993 (1,795) 1,198
---------- ------------ --------- -------- ------------- -------
Total................... $13,320 $(7,777) $5,543 $10,343 $(6,320) $4,023
========== ============ ========= ======== ============= =======
The remaining weighted-average amortization period, in total and by major
intangible asset class, is as follows:
December 27, March 29,
2002 2002
(in years) ------------ ------------
Noncompetition agreements............ 6.8 7.1
Signing bonuses....................... 3.4 3.5
Other intangibles..................... 10.4 12.4
------------ ------------
Total weighted-average period...... 7.4 8.2
============ ============
15
Total amortization expense for intangible assets for the three months ended
December 27, 2002 and December 28, 2001 was $570 and $427, respectively.
Total amortization expense for intangible assets for the nine months ended
December 27, 2002 and December 28, 2001 was $1,758 and $1,146,
respectively. The estimated amortization expense for the next five fiscal
years and thereafter is as follows:
Fiscal Year:
2003 (remaining 3 months)................... $ 550
2004........................................ 1,569
2005........................................ 1,167
2006........................................ 830
2007........................................ 691
Thereafter.................................. 736
------
Total.............................. $5,543
======
Total payments made under noncompetition agreements during the nine months
ended December 27, 2002 were $453. Future minimum payments required under
noncompetition agreements at December 27, 2002 are as follows:
Fiscal Year:
2003 (remaining 3 months)................... $ 193
2004........................................ 238
2005........................................ 93
2006........................................ 35
2007........................................ 34
Thereafter.................................. 115
------
Total.............................. $ 708
======
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 repay 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 nine months ended December 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.
16
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 Nine Months Ended
----------------------------- ----------------------------
December 27, December 28, December 27, December 28,
2002 2001 2002 2001
-------------- -------------- ------------- ------------
Income from continuing operations
before extraordinary loss............ $3,942 $ 4,418 $ 9,537 $ 11,060
Total loss from discontinued operations
(net of benefit for income taxes of
$2,387 $617, $38,250, and $15,189)... (3,362) (1,004) (60,911) (91,600)
Extraordinary loss (net of benefit for
income taxes of $424)................ -- -- (666) --
-------------- -------------- ------------- ------------
Net income (loss)....................... $ 580 $ 3,414 $(52,040) $(80,540)
============== ============== ============= ============
Earnings (loss) per share - Basic:
Income from continuing operations
before extraordinary loss........... $0.06 $0.06 $ 0.14 $ 0.16
Total loss from discontinued
operations.......................... (0.05) (0.01) (0.87) (1.29)
Extraordinary loss................... -- -- (0.01) --
-------------- -------------- ------------- ------------
Net (loss) income.................... $0.01 $0.05 $(0.74) $(1.13)
============== ============== ============= ============
Earnings (loss) per share - Diluted:
Income from continuing operations
before extraordinary loss........... $0.06 $0.06 $0.14 $ 0.15
Total loss from discontinued
operations.......................... (0.05) (0.01) (0.86) (1.27)
Extraordinary loss................... -- -- (0.01) --
-------------- -------------- ------------- ------------
Net (loss) income.................... $0.01 $0.05 $(0.73) $(1.12)
============== ============== ============= ============
Weighted average shares outstanding:
Common shares........................ 68,698 71,168 70,294 71,166
Assumed exercise of stock options.... 586 1,033 770 667
-------------- -------------- ------------- ------------
Diluted shares outstanding........... 69,284 72,201 71,064 71,833
============== ============== ============= ============
Diluted earnings per share assume options to purchase shares of common
stock have been exercised using the treasury stock method. Options to
purchase approximately 5.2 million and 4.6 million shares of common stock
that were outstanding during the three and nine months ended December 27,
2002, respectively, were not included in the computation of diluted
earnings per share for each of the respective periods because the options'
exercise prices exceeded the fair market value of the Company's common
stock.
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 December
27, 2002, the Company had completed the repurchase of the 3.6 million
common shares under this program at an average price of $7.12 per common
share. On December 17, 2002, the Company's Board of Directors authorized an
additional purchase of up to 5% of its common stock, or approximately 3.4
million common shares, in the open market, in privately negotiated
transactions, or otherwise. As of December 27, 2002, no shares have been
purchased under this program.
17
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:
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
December 27, December 28, December 27, December 28,
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES:
Physician Supply Business............. $195,191 $180,696 $562,182 $528,153
Long-Term Care Business............... 108,702 98,452 316,996 289,521
Other................................. -- -- -- 431
------------ ------------ ------------ ------------
Total net sales.................. $303,893 $279,148 $879,178 $818,105
============ ============ ============ ============
INCOME FROM OPERATIONS:
Physician Supply Business............. $ 5,851 $ 6,172 $ 17,070 $ 18,305
Long-Term Care Business............... 4,583 3,554 13,155 7,582
Other................................. (3,845) (1,985) (11,453) (4,439)
------------ ------------ ------------ ------------
Total income from operations..... $ 6,589 $ 7,741 $ 18,772 $ 21,448
============ ============ ============ ============
DEPRECIATION:
Physician Supply Business............. $ 2,292 $ 1,561 $ 6,532 $ 3,858
Long-Term Care Business............... 397 449 1,255 1,372
Other................................. 401 248 1,130 611
------------ ------------ ------------ ------------
Total depreciation............... $ 3,090 $ 2,258 $ 8,917 $ 5,841
============ ============ ============ ============
AMORTIZATION OF INTANGIBLE ASSETS:
Physician Supply Business............. $ 370 $ 323 $ 1,202 $ 835
Long-Term Care Business............... 200 104 556 311
------------ ------------ ------------ ------------
Total amortization of intangible
assets...................... $ 570 $ 427 $ 1,758 $ 1,146
============ ============ ============ ============
PROVISION FOR DOUBTFUL ACCOUNTS:
Physician Supply Business............. $ 370 $ 412 $ 822 $ 1,022
Long-Term Care Business............... 551 294 1,812 2,190
------------ ------------ ------------ ------------
Total provision for doubtful
accounts.................... $ 921 $ 706 $ 2,634 $ 3,212
============ ============ ============ ============
INTEREST EXPENSE:
Physician Supply Business............. $ 1,000 $ 19 $ 2,970 $ 486
Long-Term Care Business............... 1,225 1,208 3,683 3,853
Other................................. 43 317 79 1,819
------------ ------------ ------------ ------------
Total interest expense........... $ 2,268 $ 1,544 $ 6,732 $ 6,158
============ ============ ============ ============
INTEREST AND INVESTMENT INCOME:
Physician Supply Business............. $ -- $ 1 $ 23 $ 3
Long-Term Care Business............... -- -- 1 --
Other................................. 47 47 417 209
------------ ------------ ------------ ------------
Total interest and investment
income...................... $ 47 $ 48 $ 441 $ 212
============ ============ ============ ============
18
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
December 27, December 28, December 27, December 28,
2002 2001 2002 2001
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES:
Physician Supply Business............. $ 1,766 $ 2,502 $ 5,595 $ 7,596
Long-Term Care Business............... 1,157 905 3,537 1,587
Other................................. (553) (1,183) (3,435) (3,209)
------------ ------------ ------------ ------------
Total provision for income taxes. $ 2,370 $ 2,224 $ 5,697 $ 5,974
============ ============ ============ ============
CAPITAL EXPENDITURES:
Physician Supply Business............. $ 2,075 $ 2,842 $ 6,942 $ 8,356
Long-Term Care Business............... 158 67 471 287
Other................................. 133 696 1,113 5,226
------------ ------------ ------------ ------------
Total capital expenditures....... $ 2,366 $ 3,605 $ 8,526 $ 13,869
============ ============ ============ ============
December 27, March 29,
2002 2002
------------ ---------
ASSETS:
Physician Supply Business............. $230,822 $ 223,216
Long-Term Care Business............... 162,426 155,038
Other................................. 107,317 92,013
Discontinued Operations............... -- 193,141
------------ ---------
Total assets.................. $500,565 $ 663,408
============ =========
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 and
California, while Federal litigation is present in California, Washington,
Georgia, New Hampshire, 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. 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-32TEM. 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, and the Company filed a motion to
dismiss the second amended complaint on May 1, 2000. By order dated
December 18, 2002, the Court granted the motion to dismiss the second
amended complaint with prejudice with respect to the Section 10(b) claims.
The Order granted the motion to dismiss the second amended complaint
without prejudice as to the Section 14(a) and 20(a) claims and gave the
plaintiffs leave to file a third amended complaint. The plaintiffs filed
their third amended complaint on January 17, 2003 alleging claims under
Sections 14(a) and 20(a) of the Exchange Act on behalf of a putative class
of all persons who were shareholders of the Company as of March 26, 1998.
The Company intends to move to dismiss the third amended complaint. There
can be no assurance that this litigation will be ultimately resolved on
terms that are favorable to the Company.
19
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.
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. By order of the Court dated
November 14, 2002, Plaintiff's Motion for Class Certification was granted.
On December 10, 2002, the Court entered an Order approving Plaintiff's
Method of Notifying Class Members That A Class Has Been Certified and
further set a schedule of dates for such notice. On December 10, 2002, the
Court also entered an Order setting forth a schedule of dates for pre-trial
procedures and trial. Pursuant to that Order, a jury trial in the case is
scheduled for the trial term commencing October 18, 2004. 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. The Company 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 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 February 28, 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 liability for the
$2,350 of outstanding invoices.
20
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.
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 $8,238, of which $6,807 was expensed in prior fiscal years
and $1,288 was expensed during the nine months ended December 27, 2002.
Approximately $143 will be expensed during the remaining three 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. Interest on the Notes accrues from the
date of original issuance and is payable semiannually on April 1 and
October 1 of each year, at a rate of 8.5% per annum. Gulf South Medical
Supply, Inc., Physician Sales & Service Limited Partnership, PSS Service,
Inc., and PSS Holding, Inc., (collectively, "Subsidiary Guarantors")
guarantee the payment of principal and accrued interest due under the
Senior Subordinated Notes issued by PSS World Medical, Inc. ("Parent")
through October 1, 2007, the maturity date. If the Parent defaulted under
the Senior Subordinated Note obligation, the Subsidiary Guarantors would be
required to make such payments in accordance with the Indenture. However,
the obligations of the Subsidiary Guarantors are expressly subordinated to
all guarantor senior indebtedness. The maximum potential amount of future
payments under the guarantee as of December 27, 2002 would be approximately
$108,253, which represents outstanding principal and accrued interest of
approximately $106,000 and $2,253, respectively. The Subsidiary Guarantors
have not recorded a liability in their financial statements related to this
obligation.
During the nine months ended December 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
principal amount and accrued interest outstanding at December 27, 2002, was
approximately $106,000 and $2,253, respectively.
21
The following tables present condensed consolidating financial information
for the Parent or issuer of the debt, the Subsidiary Guarantors, and the
nonguarantor subsidiary 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
Subsidiary Guarantors 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 Subsidiary Guarantors. In addition, the Subsidiary
Guarantors are 100% owned subsidiaries of the Company.
Condensed Balance Sheets
December 27, 2002 and March 29, 2002
As of December 27, 2002
(Unaudited)
------------------------------------------------------------
Guarantor
Parent Subsidiaries Eliminations Consolidated
------------ ------------- ------------ ------------
Current Assets:
Cash and cash equivalents............ $ 32,819 $ 2,973 -- $ 35,792
Accounts receivable, net............. 78,223 78,728 -- 156,951
Inventories, net..................... 50,420 33,602 -- 84,022
Intercompany receivables............. 31,821 (31,821) -- --
Other current assets................. 12,938 13,644 -- 26,582
------------ ------------- ------------ ------------
Total current assets........ 206,221 97,126 -- 303,347
Property and equipment, net................ 55,833 5,348 -- 61,181
Other Assets:
Goodwill............................. 9,787 51,496 -- 61,283
Intangibles, net..................... 3,109 2,434 -- 5,543
Investment in subsidiaries........... 285 28,084 (28,369) --
Deferred tax assets.................. 47,065 1,863 -- 48,928
Other................................ 18,697 1,586 -- 20,283
------------ ------------- ------------ ------------
Total assets................ $340,997 $187,937 $(28,369) $500,565
============ ============= ============ ============
Current Liabilities:
Accounts payable..................... $ 54,862 $ 32,780 $ -- $ 87,642
Other current liabilities............ 33,783 6,540 -- 40,323
Liabilities of discontinued operations
and accrued loss on disposal...... 2,654 -- -- 2,654
------------ ------------- ------------ ------------
Total current liabilities... 91,299 39,320 -- 130,619
Long-term debt............................. 106,000 -- -- 106,000
Other...................................... 15,256 1,333 -- 16,589
------------ ------------- ------------ ------------
Total liabilities........... 212,555 40,653 -- 253,208
------------ ------------- ------------ ------------
Shareholders' Equity:
Common stock......................... 678 166 (166) 678
Additional paid-in capital........... 168,199 148,665 8,162 325,026
Accumulated deficit.................. (40,435) (1,547) (36,365) (78,347)
------------ ------------- ------------ ------------
Total shareholders' equity.. 128,442 147,284 (28,369) 247,357
------------ ------------- ------------ ------------
Total liabilities and
shareholders' equity........ $340,997 $187,937 $(28,369) $500,565
============ ============= ============ ============
22
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 subsidiaries............ 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
============ ============= ============ ============
23
Unaudited Condensed Statements of Operations
For the Three and Nine Months Ended December 27, 2002 and December 28, 2001
Three Months Ended December 27, 2002
--------------------------------------------
Guarantor
Parent Subsidiaries Consolidated
------------ ------------ ------------
Net sales.............................................. $166,440 $137,453 $303,893
Cost of goods sold..................................... 116,139 102,562 218,701
------------ ------------ ------------
Gross profit............................ 50,301 34,891 85,192
General and administrative expenses.................... 35,446 21,902 57,348
Selling expenses....................................... 15,350 5,905 21,255
------------ ------------ ------------
(Loss) income from operations........... (495) 7,084 6,589
Other (expense) income ................................ (11,174) 10,897 (277)
------------ ------------ ------------
(Loss) income from continuing operations before provision
for income taxes.................................... (11,669) 17,981 6,312
Provision for income taxes............................. 1,212 1,158 2,370
------------ ------------ ------------
(Loss) income from continuing operations before
extraordinary loss.................................. (12,881) 16,823 3,942
Total loss from discontinued operations................ -- (3,362) (3,362)
------------ ------------ ------------
Net (loss) income...................................... $(12,881) $13,461 $ 580
============ ============ ============
Three Months Ended December 28, 2001
--------------------------------------------
Guarantor
Parent Subsidiaries Consolidated
------------ ------------ ------------
Net sales.............................................. $152,287 $126,861 $279,148
Cost of goods sold..................................... 107,068 94,881 201,949
------------ ------------ ------------
Gross profit............................ 45,219 31,980 77,199
General and administrative expenses.................... 30,042 19,844 49,886
Selling expenses....................................... 13,977 5,595 19,572
------------ ------------ ------------
Income from operations.................. 1,200 6,541 7,741
Other income (expense)................................. 341 (1,440) (1,099)
------------ ------------ ------------
Income from continuing operations before provision for
income taxes........................................ 1,541 5,101 6,642
Provision for income taxes............................. 1,319 905 2,224
------------ ------------ ------------
Income from continuing operations...................... 222 4,196 4,418
Total loss from discontinued operations................ -- (1,004) (1,004)
------------ ------------ ------------
Net income............................................. $ 222 $ 3,192 $ 3,414
============ ============ ============
24
Unaudited Condensed Statements of Operations (continued)
Nine Months Ended December 27, 2002
-------------------------------------------
Guarantor
Parent Subsidiaries Consolidated
------------ ------------ ------------
Net sales.............................................. $478,094 $401,084 $879,178
Cost of goods sold..................................... 332,578 298,693 631,271
------------ ------------ ------------
Gross profit............................ 145,516 102,391 247,907
General and administrative expenses.................... 102,075 64,595 166,670
Selling expenses....................................... 45,193 17,272 62,465
------------ ------------ ------------
(Loss) income from operations........... (1,752) 20,524 18,772
Other (expense) income................................. (11,584) 8,046 (3,538)
------------ ------------ ------------
(Loss) income from continuing operations before provision
for income taxes.................................... (13,336) 28,570 15,234
Provision for income taxes............................. 2,160 3,537 5,697
------------ ------------ ------------
(Loss) income from continuing operations before
extraordinary loss.................................. (15,496) 25,033 9,537
Total loss from discontinued operations................ -- (60,911) (60,911)
Extraordinary loss..................................... (666) -- (666)
------------ ------------ ------------
Net loss............................................... $(16,162) $(35,878) $(52,040)
============ ============ ============
Nine Months Ended December 28, 2001
-----------------------------------------------------
Guarantor Nonguarantor
Parent Subsidiaries Subsidiary Consolidated
-------- ------------ ------------ ------------
Net sales......................................... $444,575 $373,099 $ 431 $818,105
Cost of goods sold................................ 314,531 279,808 295 594,634
-------- ------------ ------------ ------------
Gross profit....................... 130,044 93,291 136 223,471
General and administrative expenses............... 85,289 60,666 53 146,008
Selling expenses.................................. 40,125 16,391 13 56,529
International Business exit charge................ -- -- (514) (514)
-------- ------------ ------------ ------------
Income from operations............. 4,630 16,234 584 21,448
Other expense..................................... (56) (4,344) (14) (4,414)
-------- ------------ ------------ ------------
Income from continuing operations before provision
for income taxes............................... 4,574 11,890 570 17,034
Provision for income taxes........................ 4,387 1,587 -- 5,974
-------- ------------ ------------ ------------
Income from continuing operations................. 187 10,303 570 11,060
Total loss from discontinued operations........... -- (91,600) -- (91,600)
-------- ------------ ------------ ------------
Net income (loss)................................. $ 187 $(81,297) $ 570 $(80,540)
======== ============ ============ ============
25
Unaudited Condensed Statements of Cash Flows
For the Nine Months Ended December 27, 2002 and December 28, 2001
Nine Months Ended December 27, 2002
----------------------------------------------
Guarantor
Parent Subsidiaries Consolidated
--------- ------------- -------------
Net loss............................................... $(16,162) $(35,878) $(52,040)
--------- ------------- -------------
Net cash provided by operating activities.............. 116 27,600 27,716
--------- ------------- -------------
Cash Flows From Investing Activities:
Capital expenditures............................. (7,930) (596) (8,526)
Payments on noncompete agreements................ (303) (150) (453)
Payment for business combination................. -- (4,464) (4,464)
Proceeds from sale of Imaging Business........... 36,055 (21,980) 14,075
Proceeds from sales of property and equipment.... 1 13 14
Net cash used in discontinued operations......... -- (1,555) (1,555)
--------- ------------- -------------
Net cash provided by (used in) investing
activities.............................. 27,823 (28,732) (909)
--------- ------------- -------------
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................ (25,182) -- (25,182)
Intercompany borrowings.......................... 9,938 (9,938) --
Proceeds from issuance of common stock........... 258 -- 258
--------- ------------- -------------
Net cash used in financing activities... (34,651) (9,938) (44,589)
--------- ------------- -------------
Net decrease in cash and cash equivalents.............. (6,712) (11,070) (17,782)
Cash and cash equivalents, beginning of period......... 39,531 14,043 53,574
--------- ------------- -------------
Cash and cash equivalents, end of period............... $ 32,819 $ 2,973 $ 35,792
========= ============= =============
Unaudited Condensed Statements of Cash Flows (continued)
Nine Months Ended December 28, 2001
-----------------------------------------------------
Guarantor Nonguarantor
Parent Subsidiaries Subsidiary Consolidated
--------- ------------ ------------ ------------
Net income (loss)................................... $ 187 $(81,297) $ 570 $(80,540)
--------- ------------ ------------ ------------
Net cash provided by (used in) operating activities 41,502 47,862 (554) 88,810
--------- ------------ ------------ ------------
Cash Flows From Investing Activities:
Capital expenditures......................... (13,418) (451) -- (13,869)
Payments on noncompete agreements............ (420) (737) -- (1,157)
Proceeds from sale of property and equipment. 1,905 (1,863) -- 42
Proceeds from sale of International Business. -- -- 221 221
Net cash used in discontinued operations..... -- (3,903) -- (3,903)
--------- ------------ ------------ ------------
Net cash (used in) provided by
investing activities................ (11,933) (6,954) 221 (18,666)
--------- ------------ ------------ ------------
Cash Flows From Financing Activities:
Net borrowings............................... (65,000) -- -- (65,000)
Intercompany borrowings...................... 45,117 (35,451) (9,666) --
Investment in Sub............................ (9,999) -- 9,999 --
Transfer of equity........................... 611 (611) -- --
Proceeds from issuance of common stock....... 81 11 -- 92
Net cash used in discontinued operations..... -- (157) -- (157)
--------- ------------ ------------ ------------
Net cash (used in) provided by
financing activities................ (29,190) (36,208) 333 (65,065)
--------- ------------ ------------ ------------
Net increase in cash and cash equivalents.......... 379 4,700 -- 5,079
Cash and cash equivalents, beginning of period..... 31,725 2,649 -- 34,374
--------- ------------ ------------ ------------
Cash and cash equivalents, end of period........... $ 32,104 $ 7,349 $ -- $ 39,453
========= ============ ============ ============
26
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 December 27, 2002, and the related consolidated statements of
operations and cash flows for the three and nine-month periods ended December
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
February 6, 2003
27
ITEM 2. Management's Discussion and Analysis Of Financial Condition and Results
of Operations
General
PSS World Medical, Inc. (the "Company"), a Florida corporation, is a specialty
marketer and distributor of medical products to physician offices, long-term
care and home care providers, and other alternate-site healthcare providers
through 49 full-service centers to customers in all 50 states. Since its
inception in 1983, the Company has become a leader in the two 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 (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 of
America based on revenues, number of physician-office customers, number and
quality of sales representatives, and number of products distributed under
unique arrangements. The Physician Supply Business currently operates 36
full-service centers with 716 sales representatives serving physician offices in
all 50 states.
Gulf South Medical Supply, Inc. (the "Long-Term Care Business"), a wholly owned
subsidiary, is a leading national distributor of medical supplies and related
products to the long-term and elder care industry in the United States of
America based on revenues and number of sales representatives. The Long-Term
Care Business currently operates 13 full-service centers with 129 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.
During the three months ended December 27, 2002, the Company completed the sale
of the Diagnostic Imaging, Inc. subsidiary ("DI" or the "Imaging Business"), a
distributor of medical diagnostic imaging supplies, chemicals, equipment, and
services to the acute and alternate-care markets in the United States. 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.
INDUSTRY
According to industry estimates, the United States of America medical supply and
equipment segment of the healthcare industry represents approximately a $22
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. The
Company's served market is approximately $9 billion, focused on the physicians
and long-term care markets.
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.
28
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 any 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 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 31% of Long-Term Care Business' revenues for the nine
months ended December 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.
In 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.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees ("FIN 45"). FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. FIN 45 does
not prescribe a specific approach for subsequently measuring the guarantor's
recognized liability over the term of the related guarantee. It also
incorporates, without change, the guidance in FASB Interpretation No. 34,
Disclosure of Indirect Guarantees of Indebtedness of Others, which is being
superseded. The Company will apply the recognition and measurement provisions of
FIN 45 on a prospective basis to guarantees issued or modified after December
31, 2002. Refer to Note 11, Long-Term Debt, where the Company complied with the
additional disclosure requirements under FIN 45.
29
In November 2002, the EITF reached a consensus on Issue 00-21,
Multiple-Deliverable Revenue Arrangements ("EITF 00-21"). EITF 00-21 addresses
how to account for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The consensus mandates
how to identify whether goods or services or both that are to be delivered
separately in a bundled sales arrangement should be accounted for separately
because they are separate units of accounting. EITF 00-21 can affect the timing
of revenue recognition for such arrangements, even though it does not change
rules governing the timing or pattern of revenue recognition of individual items
accounted for separately. The final consensus will be applicable to agreements
entered into beginning fiscal year 2005 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance to all
existing arrangements as the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes. The Company
is currently evaluating the impact, if any, of the adoption of EITF 00-21 on its
financial condition and results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure ("SFAS 148"). SFAS 148 amends SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. In
addition, it also amends the disclosure provisions of SFAS 123 to require
prominent disclosure about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
SFAS 148 also amends APB Opinion No. 28, Interim Financial Reporting, to require
disclosure about the effect in interim financial information. The Company is
currently in the process of evaluating the impact of SFAS 148 on its financial
condition and results of operations. However, additional disclosures will be
included in the Company's annual financial statements for the fiscal year ended
2003 and interim financial statements for the first quarter of fiscal year 2004.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The consolidated financial statements require management 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 the audit committee and the
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 nine months ended
December 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, reflecting
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 November 18, 2002, the Company
completed the sale of DI to Imaging Acquisition Corporation (the "Buyer"), a
wholly owned subsidiary of Platinum Equity, LLC, a private equity firm
("Platinum"). The sale was completed pursuant to a Stock Purchase Agreement,
dated as of October 28, 2002, among the Company, the Buyer, and Platinum, as
amended on November 18, 2002 (the "Stock Purchase Agreement"). Under the Stock
Purchase Agreement, the purchase price was $45.0 million less (i) an adjustment
for any change in net asset value from the initial net asset value target date
and (ii) an adjustment for any change in the net cash from the initial net cash
target date ("Purchase Price"). Cash proceeds, net of these adjustments,
received from the transaction were approximately $14.1 million. The Purchase
Price is subject to further adjustment based on the net assets and net cash held
by DI as of the closing date.
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 or Disposal of Long-Lived Assets.
The estimated loss on disposal is subject to change based on the final Purchase
Price adjustments that will be recorded in the period in which they become
known. The accompanying financial statements have been restated to conform to
discontinued operations treatment for all historical periods presented.
30
THREE MONTHS ENDED DECEMBER 27, 2002 VERSUS THREE MONTHS ENDED DECEMBER 28, 2001
Net Sales.
Three Months Ended
---------------------------
December 27, December 28, Percent
(dollars in millions) 2002 2001 Increase Change
------------ ------------ -------- -------
Physician Supply Business............. $195.2 $180.7 $14.5 8.0%
Long-Term Care Business............... 108.7 98.4 10.3 10.4%
------------ ------------ -------- -------
Total Company.......... $303.9 $279.1 $24.8 8.9%
============ ============ ======== =======
Physician Supply Business--The change in net sales is primarily attributable to
an increase in medical disposable sales of approximately $20.0 million, of which
branded consumables, private label consumables, and pharmaceuticals increased
$12.0 million, $2.0 million, and $6.0 million, respectively. This increase was
offset by a decrease in equipment and Immunoassay sales of approximately $5.0
million. Medical disposable sales were positively impacted by (i) the continued
success of the SRxSM modules, (ii) an increase in the sale of flu vaccines
compared to the prior period, and (iii) expanded focus on pharmaceuticals.
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 of the
Long-Term Care Business. During the three months ended December 27, 2002, 37
customers adopted the program, which generated approximately $3.6 million of
incremental revenue during the period. In addition, net sales increased due to
growth initiatives focused on regional accounts and product line expansion. The
acquisition that was completed during the three months ended September 27, 2002
provided approximately $2.5 million of net sales during the three months ended
December 27, 2002.
Gross Profit. Gross profit for the three months ended December 27, 2002 totaled
$85.2 million, an increase of $8.0 million, or 10.4%, from gross profit of $77.2
million for the three months ended December 28, 2001. Gross profit as a
percentage of net sales was 28.0% and 27.7% for the three months ended December
27, 2002 and December 28, 2001, respectively. The increase in gross profit is
primarily attributable to the overall increase in net sales described above and
(i) a change in sales mix to higher gross profit consumable products in the
Physician Supply Business, (ii) enhanced margins in the Physician Supply
Business on certain Abbott products, and (iii) an increase in vendor incentive
rebates earned by the Physician Supply and Long-Term Care Businesses, offset by
the impact of a charge recorded by the Physician Supply Business related to
discontinuing a product line.
General and Administrative Expenses.
Three Months Ended
------------------------------------------------
December 27, 2002 December 28, 2001
------------------------------------------------
% of Net % of Net
(dollars in millions) Amount Sales Amount Sales Increase
---------- --------- -------- ----------- ---------
Physician Supply Business.................... $35.4 18.1% $31.4 17.4% $4.0
Long-Term Care Business...................... 18.1 16.7% 16.5 16.8% 1.6
Other........................................ 3.8 -- 2.0 -- 1.8
---------- --------- -------- ----------- ---------
Total Company................. $57.3 18.9% $49.9 17.9% $7.4
========== ========= ======== =========== =========
Physician Supply Business--The increase in general and administrative expenses
is primarily attributable to (i) an overall increase in expenses due to the
growth in net sales, (ii) additional salary and travel expenses as a result of
the conversion to the new Enterprise Resource Planning ("ERP") system,
centralized purchasing, and the restructuring plan that was adopted during the
fourth quarter of fiscal year 2002 ("Rationalization Programs" or "Transition
Period"), (iii) additional warehouse salary expenses at consolidated
full-service centers during the Transition Period, offset by the savings from
closed centers, (iv) additional depreciation for completed phases of its ERP
system, myPSS.com electronic commerce platform, and supply chain initiatives,
(v) temporarily increased freight expenses as a result of the Rationalization
Programs, and (vi) an increase in business and medical insurance premiums.
31
Long-Term Care Business--The increase in general and administrative expenses is
primarily attributable to (i) an overall increase in expenses due to the growth
in net sales, (ii) an increase in expenses and resources focused on expanding
regional accounts and housekeeping product sales, (iii) an increase in business
and medical insurance rates, and (iv) an increase in the provision for doubtful
accounts. The decrease in general and administrative expenses as a percent of
net sales is due to the focus on leveraging its existing capacity to effectively
service the increase in net sales.
Other--The increase in general and administrative expenses is primarily
attributable to (i) 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, (ii) an increase in business insurance expense due to rate increases on
the corporate umbrella and director and officer policies, and (iii) an increase
in medical insurance premiums. Furthermore, during the three months ended
December 27, 2002, general and administrative expenses of approximately $2.8
million, which include both direct and indirect overhead expenses, normally
would have been allocated to the Imaging Business. However, in accordance with
EITF No. 87-24, Allocation of Interest to Discontinued Operations ("EITF
87-24"), the Company was only permitted to allocate approximately $1.2 million
of these expenses to discontinued operations, which represent overhead expenses
directly attributable to the Imaging Business for the period from September 28,
2002 to November 818, 2002. As a result of a transition services agreement
executed upon the sale of the Imaging Business, a portion of the remaining $1.6
million of general administrative expenses were reimbursed by the Buyer. The
reimbursement of these expenses is recorded in other income in the accompanying
Statements of Operations. During the three months ended December 28, 2001,
approximately $2.6 million of expenses normally allocated to the Imaging
Business were included in general and administrative expenses of which
approximately $1.9 million was directly attributable to the Imaging Business and
allocated to discontinued operations. The timing of the closing of the
transaction impacted the amount allocated to discontinued operations period to
period.
General and administrative expenses also include charges related to
restructuring activity, merger activity, and other items. These charges
increased approximately $0.7 million during the three months ended December 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 December 27, 2002
----------------------------------------------------
Physician Long-
Supply Term Care
Business Business Other Total
--------- --------- ----------- ---------
Restructuring costs and expenses.... $0.5 $ -- $0.5 $1.0
Merger costs and expenses........... -- -- 0.5 0.5
Reversal of operational tax charge.. -- -- (0.1) (0.1)
Other............................... -- -- -- --
--------- --------- ----------- ---------
Total................. $0.5 $ -- $0.9 $1.4
========= ========= =========== =========
Three Months Ended December 28, 2001
----------------------------------------------------
Physician Long-
Supply Term Care
Business Business Other Total
--------- --------- ----------- ---------
Restructuring costs and expenses.... $ -- $0.1 $ -- $0.1
Merger costs and expenses........... -- -- 0.6 0.6
Reversal of operational tax charge.. -- -- (0.4) (0.4)
Other............................... 0.2 0.2 -- 0.4
--------- --------- ----------- ---------
Total................. $0.2 $0.3 $0.2 $0.7
========= ========= =========== =========
32
Restructuring Costs and Expenses
Restructuring costs and expenses for the three months ended December
27, 2002 and December 28, 2001 primarily include (i) costs expensed
related to the restructuring plan that was adopted as a result of the
sale of the Imaging Business and (ii) costs expensed as incurred
related to the Physician Supply Business restructuring plan that was
adopted during the fourth quarter of fiscal year 2002.
Plan Adopted During the Third Quarter of Fiscal Year 2003--Other
Segment. As a result of the sale of the Imaging Business, management
and the Board of Directors approved and adopted a formal plan to
restructure certain positions within the Company during the three
months ended December 27, 2002. As a result of the plan, approximately
21 employees, including leaders and administrative personnel, will be
involuntarily terminated. As of December 27, 2002, 7 employees had been
terminated. During the three months ended December 27, 2002, the
Company expensed $0.5 million related to this plan, which includes
approximately $0.4 million of involuntary employee termination costs
and $0.1 million of direct transaction costs.
Plan Adopted During the Fourth Quarter of Fiscal Year 2002--Physician
Supply Business. During the three months ended December 27, 2002, the
Physician Supply Business recorded charges of $0.5 million, which
includes branch shut down costs of $0.3 million, $0.1 million of lease
termination costs, and $0.1 million of involuntary employee benefit
costs. Refer to Note 3, Accrued Restructuring Costs and Expenses, for a
discussion of the status of this plan.
Management reevaluates its estimates of the total costs related to this
plan and makes any necessary adjustments on a quarterly basis. During
the three months ended September 27, 2002, 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 $0.7 million was
recognized during fiscal year 2002 and the nine months ended December
27, 2002, respectively. Approximately $0.8 million will be expensed as
incurred during the remaining three months of fiscal year 2003. The
revision to the total estimated costs of the plan 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 rather than incur the
removal and disposal expenses.
Management anticipates that this plan will be substantially 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.
Various Restructuring Plans Adopted in Prior Fiscal Years. During the
three months ended December 28, 2001, the Long-Term Care Business
recorded $0.1 million of restructuring costs as incurred for lease
termination costs.
Merger Costs and Expenses
Merger costs and expenses for the three months ended December 27, 2002
and December 28, 2001 include costs related to employee retention
bonuses. On 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 $8.2 million, of which $6.8
million was expensed in prior fiscal years and $0.7 million was
expensed during the six months ended September 27, 2002. Approximately
$0.5 million and $0.6 million was recognized during the three months
ended December 27, 2002 and December 28, 2001, respectively. An
additional $0.2 million will be expensed during the remaining three
months of fiscal year 2003.
33
Reversal of Operational Tax Charge
During the three months ended December 27, 2002 and December 28, 2001,
the Company performed an analysis and reversed approximately $0.1
million and $0.4 million, respectively, of a previously recorded
operating tax charge reserve.
Other
During the three months ended December 28, 2001, the Company incurred
$0.4 million related to certain lease termination costs for locations
that were previously vacated in connection with prior restructuring
plans.
Selling Expenses.
Three Months Ended
------------------------------------------------
December 27, 2002 December 28, 2001
---------------------- ----------------------
% of Net % of Net
(dollars in millions) Amount Sales Amount Sales Increase
-------- --------- -------- ---------- --------
Physician Supply Business.............. $18.1 9.3% $16.5 9.1% $1.6
Long-Term Care Business................ 3.2 2.9% 3.1 3.2% 0.1
-------- --------- -------- ---------- --------
Total Company........... $21.3 7.0% $19.6 7.0% $1.7
======== ========= ======== ========== ========
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' 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 and on
total gross profit dollars versus established quotas.
Income from Operations.
Three Months Ended
------------------------------
December 27, December 28, Increase
(dollars in millions) 2002 2001 (Decrease)
------------ ------------- ------------
Physician Supply Business............................ $5.9 $ 6.2 $(0.3)
Long-Term Care Business.............................. 4.6 3.6 1.0
Other................................................ (3.9) (2.1) (1.8)
------------ ------------- ------------
Total Company......................... $6.6 $ 7.7 $(1.1)
============ ============= ============
Income from operations for each business segment changed due to the factors
discussed above.
Interest Expense. Interest expense for the three months ended December 27, 2002
totaled $2.3 million, an increase of $0.8 million, or 46.9%, from interest
expense of $1.5 million for the three months ended December 28, 2001. In
accordance with 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. Interest
expense allocated to discontinued operations was $0.5 million and $1.0 million
for the three months ended December 27, 2002 and December 28, 2001,
respectively. In addition, during the three months ended December 28, 2001,
approximately $0.6 million of interest was capitalized, which reduced interest
expense, 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, interest expense decreased
approximately $0.3 million. This decrease in interest expense is primarily
attributable to lower outstanding debt balances under the Company's revolving
credit agreement and the Company's $125 million Senior Subordinated Notes (the
"Notes") over the prior period and an overall reduction in interest rates.
34
Interest and Investment Income. Interest and investment income remained constant
from period to period.
Other Income. Other income for the three months ended December 27, 2002 totaled
$1.9 million, an increase of $1.5 million from other income of $0.4 million for
the three months ended December 28, 2001. During the three months ended December
27, 2002, approximately $1.6 million of other income was recorded as a result of
the transition services agreement associated with the sale of the Imaging
Business. The increase in other income was offset by a decrease in the amount of
customer finance charge income and an increase in the loss on sales of property
and equipment recorded at the Physician Supply Business.
Provision for Income Taxes. Provision for income taxes was $2.4 million for the
three months ended December 27, 2002, a change of $0.2 million from the
provision for income taxes of $2.2 million for the three months ended December
28, 2001. The effective income tax rate was approximately 37.5% and 33.5% for
the three months ended December 27, 2002 and December 28, 2001, respectively.
The increase in the effective rate is primarily attributable to an increase in
unfavorable permanent items and a decrease in the income from continuing
operations before provision for income taxes, excluding the effect of the
International Business.
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 $93.2 million for the three months ended
December 27, 2002, a decrease of $83.0 million from net sales of $176.2 million
for the three months ended December 28, 2001. The timing of the sale of the
Imaging Business, which was November 18, 2002, resulted in 35 days of sales
during the three months ended December 27, 2002 compared to 62 days of sales
during the three months ended December 28, 2001.
The pretax loss from operations was $3.6 million for the three months ended
December 27, 2002, an increase of $2.0 million from a pretax loss from
operations of $1.6 million for the three months ended December 28, 2001. This
increase in the loss from operations is primarily related to the reduction in
net sales discussed above.
Net Income. Net income for the three months ended December 27, 2002 totaled $0.6
million compared to $3.4 million for the three months ended December 28, 2001.
The net income for the three months ended December 27, 2002 included a charge of
$1.2 million for the loss on disposal of discontinued operations. Otherwise,
variances are due to the factors discussed above.
NINE MONTHS ENDED DECEMBER 27, 2002 VERSUS NINE MONTHS ENDED DECEMBER 28, 2001
Net Sales.
Nine Months Ended
-----------------------------
December 27, December 28, Increase Percent
(dollars in millions) 2002 2001 (Decrease) Change
------------ ------------ ------------ ---------
Physician Supply Business.............. $562.2 $528.2 $34.0 6.4 %
Long-Term Care Business................ 317.0 289.5 27.5 9.5 %
Other.................................. -- 0.4 (0.4) (100.0)%
------------ ------------ ------------ ---------
Total Company........... $879.2 $818.1 $61.1 7.5 %
============ ============ ============ =========
35
Physician Supply Business--The change in net sales is primarily attributable to
an increase in medical disposables sales of approximately $43.0 million, of
which branded consumables, private label consumables, and pharmaceuticals
increased $28.0 million, $6.0 million, and $9.0 million, respectively. This
increase was offset by a decrease in equipment and Immunoassay sales of
approximately $9.0 million. Medical disposable sales were positively impacted by
(i) the continued success of the SRxSM modules, (ii) an increase in the sale of
flu vaccines compared to the prior period, and (iii) the addition of 29 new
sales representatives.
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 270
customers have adopted the program, which generated approximately $10.4 million
of incremental revenue during the nine months ended December 27, 2002. In
addition, net sales increased due to growth initiatives focused on regional
accounts and product line expansion. The acquisition that was completed during
the three months ended September 27, 2002 provided approximately $2.9 million of
net sales during the nine months ended December 27, 2002.
Gross Profit. Gross profit for the nine months ended December 27, 2002 totaled
$247.9 million, an increase of $24.4 million, or 10.9%, from gross profit of
$223.5 million for the nine months ended December 28, 2001. Gross profit as a
percentage of net sales was 28.2% and 27.3% for the nine months ended December
27, 2002 and December 28, 2001, respectively. The increase in gross profit is
primarily attributable to the overall increase in net sales described above. In
addition, gross profit was positively impacted by (i) a change in sales mix to
higher gross profit consumable products in the Physician Supply Business and
(ii) an increase in vendor incentive rebates earned by the Physician Supply and
Long-Term Care Businesses, offset by the impact of a charge recorded by the
Physician Supply Business related to discontinuing a product line.
General and Administrative Expenses.
Nine Months Ended
----------------------------------------------
December 27, 2002 December 28, 2001
---------------------- -------------------
% of Net % of Net
(dollars in millions) Amount Sales Amount Sales Increase
--------- --------- ------- -------- --------
Physician Supply Business.................... $102.0 18.1% $90.2 17.1% $11.8
Long-Term Care Business...................... 53.2 16.8% 50.8 17.5% 2.4
Other........................................ 11.5 -- 5.0 -- 6.5
--------- --------- ------- -------- --------
Total Company................. $166.7 19.0% $146.0 17.8% $20.7
========= ========= ======= ======== ========
Physician Supply Business--The increase in general and administrative expenses
is primarily attributable to (i) an overall increase in expenses due to the
growth in net sales, (ii) additional salary and travel expenses as a result of
the Rationalization Programs, (iii) additional warehouse salary expenses at
consolidated full-service centers during the Transition Period, offset by the
savings from closed centers, (iv) additional depreciation for completed phases
of its ERP system, myPSS.com electronic commerce platform, and supply chain
initiatives, (v) temporarily increased freight expenses as a result of the
Rationalization Programs, (vi) an increase in business and medical insurance
premiums, and (vii) additional amortization expense as a result of the signing
bonuses given to new sales representatives.
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, (iv) an increase in fees charged by a
Long-Term Care eCommerce network provider as a result of more customers using
the network to purchase products, (v) an increase in expenses and resources
focused on expanding regional accounts and housekeeping product sales, and (vi)
an increase in business and medical insurance premiums. The decrease in general
and administrative expenses as a percent of net sales is due the focus on
leveraging its existing capacity to effectively service the increase in net
sales.
36
Other-- The increase in general and administrative expenses is primarily
attributable to (i) 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, (ii) an increase in salary expense as a result of the supply chain
initiative and two executive positions filled during fiscal year 2002, (iii)
investments in enterprise-wide learning initiatives to increase employee
competencies and knowledge and to ensure consistent business practices, (iv) an
increase in business insurance expense due to rate increases on the corporate
umbrella and director and officer policies, and (v) an increase in medical
insurance premiums. Furthermore, during the nine months ended December 27, 2002,
general and administrative expenses of approximately $8.5 million, which include
both direct and indirect overhead expenses, normally woud have been allocated to
the Imaging Business. However, in accordance with EITF 87-24, the Company was
only permitted to allocate approximately $5.5 million of these expenses to
discontinued operations, which represent overhead expenses directly attributable
to the Imaging Busienss for the period from March 30, 2002 to November 18, 2002.
As a result of a transition services agreement executed upon the sale of the
Imaging Business, approximately $1.6 million of general administrative expenses
were reimbursed by the Buyer. The reimbursement of these expenses is recorded in
other income in the accompanying Statements of Operations. During the nine
months ended December 28, 2001, approximately $7.8 million of expenses normally
allocated to the Imaging Business were included in general and administrative
expenses of which approximately $5.6 million was directly attributable to the
Imaging Business and allocated to discontinued operations. The timing of the
closing of the transaction impacted the amount allocated to discontinued
operations period to period to period.
General and administrative expenses also include charges related to
restructuring activity, merger activity, and other items. These charges
increased approximately $4.7 million during the nine months ended December 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):
Nine Months Ended December 27, 2002
--------------------------------------------------------
Physician Long-
Supply Term Care
Business Business Other Total
------------- -------------- ------------ --------------
Restructuring costs and expenses... $0.8 $-- $0.5 $1.3
Merger costs and expenses.......... -- -- 1.3 1.3
Accelerated depreciation........... 0.2 -- -- 0.2
Reversal of operational tax charge. -- -- (0.2) (0.2)
Other.............................. 0.3 -- 2.9 3.2
------------- -------------- ------------ --------------
Total................ $1.3 $-- $4.5 $5.8
============= ============== ============ ==============
Nine Months Ended December 28, 2001
--------------------------------------------------------
Physician Long-
Supply Term Care
Business Business Other Total
------------- -------------- ------------ --------------
Restructuring costs and expenses... $0.6 $0.2 $ -- $0.8
Merger costs and expenses.......... -- -- 1.7 1.7
Reversal of operational tax charge. -- -- (1.8) (1.8)
Other.............................. 0.2 0.2 -- 0.4
------------- -------------- ------------ --------------
Total................ $0.8 $0.4 $(0.1) $ 1.1
============= ============== ============ ==============
Restructuring Costs and Expenses
Plan Adopted During the Third Quarter of Fiscal Year 2003--Other
Segment. During the nine months ended December 27, 2002, the Company
expensed $0.5 million related to this plan, which includes
approximately $0.4 million of involuntary employee termination costs
and $0.1 million of direct transaction costs.
37
Plan Adopted During the Fourth Quarter of Fiscal Year 2002--Physician
Supply Business. During the nine months ended December 27, 2002, the
Physician Supply Business recorded charges of $1.5 million, which
include branch shut down costs of $0.8 million, involuntary employee
termination costs of $0.4 million, and employee relocation costs of
$0.3 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
nine months ended December 28, 2001, the Company recorded $0.9 million
of restructuring costs as incurred. The costs during the nine months
ended December 28, 2001 primarily resulted from the involuntary
termination of 63 employees, branch shutdown costs and lease
termination costs for the merger into existing locations of three
distribution centers of the Company's Physician Supply Business. During
the nine months ended December 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 $1.3 million and $1.7
million was recognized during the nine months ended December 27, 2002
and December 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
$0.2 million of accelerated depreciation during the nine months ended
December 27, 2002. This change in estimate decreased basic and diluted
earnings per share by less than $0.01 for the nine months ended
December 27, 2002.
Reversal of Operational Tax Charge
During the nine months ended December 27, 2002 and December 28, 2001,
the Company performed an analysis and reversed approximately $0.2
million and $1.8 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 nine months ended December 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 nine months ended December 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. During the nine months ended December 28, 2001, the Company
incurred $0.4 million of lease termination costs for locations that
were previously vacated in connection with prior restructuring plans.
38
Selling Expenses.
Nine Months Ended
---------------------------------------------
December 27, 2002 December 28, 2001
-------------------- ----------------------
% of Net % of Net
(dollars in millions) Amount Sales Amount Sales Increase
-------- -------- ----------- --------- --------
Physician Supply Business.............. $53.2 9.5% $47.6 9.0% $5.6
Long-Term Care Business................ 9.3 2.9% 8.9 3.1% 0.4
-------- -------- ----------- --------- --------
Total Company........... $62.5 7.1% $56.5 6.9% $6.0
======== ======== =========== ========= ========
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 29 new sales representatives, and
(iii) the sales representatives' 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 and on
total gross profit dollars versus established quotas.
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.
Nine Months Ended
--------------------------------
December 27, December 28, Increase
(dollars in millions) 2002 2001 (Decrease)
--------------- ---------------- --------------
Physician Supply Business....................... $17.1 $18.3 $(1.2)
Long-Term Care Business......................... 13.2 7.6 5.6
Other........................................... (11.5) (4.5) (7.0)
--------------- ---------------- --------------
Total Company.................... $18.8 $21.4 $(2.6)
=============== ================ ==============
Income from operations for each business segment changed due to the factors
discussed above.
Interest Expense. Interest expense for the nine months ended December 27, 2002
totaled $6.7 million, an increase of $0.5 million, or 9.3%, from interest
expense of $6.2 million for the nine months ended December 28, 2001. Interest
expense allocated to discontinued operations was $2.2 million and $3.6 million
for the nine months ended December 27, 2002 and December 28, 2001, respectively.
In addition, during the nine months ended December 28, 2001, approximately $1.6
million of interest was capitalized, which reduced interest expense, in
connection with the Company's purchase and development of its ERP systems and
approximately $0.4 million of accelerated amortization of debt issuance costs
was recorded as a result of refinancing the prior credit facility on May 24,
2001. Excluding the effects of the allocation of interest to discontinued
operations, the capitalized interest, and the accelerated amortization of debt
issuance costs, interest expense decreased approximately $2.1 million. This
decrease is primarily attributable to lower outstanding debt balances under the
Company's revolving credit agreement and the Senior Subordinated Notes over the
prior period and an overall reduction in interest rates.
Interest and Investment Income. Interest and investment income for the nine
months ended December 27, 2002 totaled $0.4 million, an increase of $0.2
million, or 108.0%, from interest and investment income of $0.2 million for the
nine months ended December 28, 2001.
39
Other Income. Other income for the nine months ended December 27, 2002 totaled
$2.8 million, an increase of $1.3 million, or 79.7%, from other income of $1.5
million for the nine months ended December 28, 2001. During the nine months
ended December 27, 2002, approximately $1.6 million of other income was recorded
as a result of the transition services agreement associated with the sale of the
Imaging Business. The increase in other income was offset by a decrease in the
amount of customer finance charge income on the Long-Term Care and Physician
Supply Businesses customer accounts and an increase in the loss on sales of
property and equipment recorded at the Physician Supply Business.
Provision for Income Taxes. Provision for income taxes was $5.7 million for the
nine months ended December 27, 2002, a change of $0.3 million from the provision
for income taxes of $6.0 million for the nine months ended December 28, 2001.
The effective income tax rate was approximately 37.4% and 35.1% for the nine
months ended December 27, 2002 and December 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.
Total Loss from Discontinued Operations.
Net sales for the Imaging Business were $445.6 million for the nine months ended
December 27, 2002, a decrease of $86.7 million from net sales of $532.3 million
for the nine months ended December 28, 2001. The timing of the sale of the
Imaging Business, which was November 18, 2002, resulted in 162 days of sales
during the three months ended December 27, 2002 compared to 189 days of sales
during the nine months ended December 28, 2001.
The pretax loss from operations was $6.7 million for the nine months ended
December 27, 2002, an increase of $4.4 million from a pretax loss from
operations of $2.3 million for the nine months ended December 28, 2001. This
increase in the loss from operations is primarily related to a reduction in net
sales discussed above.
The Company has recorded a $35.7 million income tax benefit related to the
disposal of the Imaging Business during the nine months ended December 27, 2002.
The Company has a total deferred tax asset of approximately $57.6 million, which
represents the tax effect of the anticipated income tax net operating loss
("NOL") to be generated as a result of the sale of the Imaging Business. Under
the terms of the Stock Purchase Agreement, the Company made a joint election
with the Buyer to treat the transaction as a sale of assets in accordance with
ss.338(h)(10) of the Internal Revenue Code. Management estimates that this NOL
will be carried forward and applied against regular taxable income for fiscal
years 2004, 2005, and 2006. The NOL 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.
Extraordinary Loss. During the nine months ended December 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 nine months ended December 27, 2002 totaled $52.0
million compared to a net loss of $80.5 million for the nine months ended
December 28, 2001. The net loss for the nine months ended December 27, 2002
included a charge of $60.9 million for the total loss from discontinued
operations and $0.7 million extraordinary loss on early extinguishment of debt.
The net loss for the nine months ended December 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.
40
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. The Company expects 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 $27.7 million and $88.8 million
for the nine months ended December 27, 2002 and December 28, 2001, respectively.
During the nine months ended December 27, 2002 and December 28, 2001, cash flows
from operating activities were positively impacted by noncash items of $18.0
million and $23.6 million, respectively, related to depreciation, amortization
of intangible assets, amortization of debt issuance costs, provisions for
doubtful accounts and notes receivables, benefit for deferred income taxes, and
loss on sales of property and equipment. During the nine months ended December
28, 2001, cash flows from operating activities were positively impacted by the
implementation of working capital reduction initiatives that started in the last
half of fiscal year 2001.
Net cash used in investing activities was $1.0 million and $18.7 million for the
nine months ended December 27, 2002 and December 28, 2001, respectively. During
the nine months ended December 27, 2002 and December 28, 2001, capital
expenditures totaled $8.5 million and $13.9 million, respectively. Capital
expenditures related to the continued development of the Company's ERP system,
electronic commerce platforms, and supply chain integration were approximately
$1.1 million and $9.5 million during the nine months ended December 27, 2002 and
December 28, 2001. During the nine months ended December 27, 2002, approximately
$4.0 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 the three months ended December 27, 2002,
cash flows from investing activities were positively impacted by the sale of the
Imaging Business. The original purchase price was estimated to be $45.0 million
cash subject to adjustment based on the net assets sold and net cash held by the
Imaging Business as of the closing date. Under the Stock Purchase Agreement, the
purchase price was $45.0 million less (i) an adjustment for any change in net
asset value from the initial net asset value target date and (ii) an adjustment
for any change in the net cash from the initial net cash target date. The cash
proceeds received during the nine months ended December 27, 2002 were reduced by
approximately $1.3 million for transaction costs. Approximately $2.7 million of
additional transaction costs, which are accrued in the accompanying balance
sheet as an accrued loss on disposal, will be paid subsequent to December 27,
2002.
Net cash used in financing activities was $44.6 million for the nine months
ended December 27, 2002 compared to net cash used in financing activities of
$65.1 million for the nine months ended December 28, 2001. During the nine
months ended December 27, 2002, the Company paid $19.7 million to retire a
portion of the Notes and $25.2 million to repurchase approximately 3.6 million
shares of the Company's common stock under approved stock repurchase programs.
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 $175.4 million and $188.0 million as of December 27, 2002 and
March 29, 2002, respectively. Accounts receivable, net of allowances, were
$157.0 million and $148.3 million at December 27, 2002 and March 29, 2002,
respectively. The average number of days sales in accounts receivable
outstanding was approximately 46.2 and 46.7 days for the three months ended
December 27, 2002 and March 29, 2002, respectively. For the three months ended
December 27, 2002, the Company's Physician Supply and Long-Term Care Businesses
had days sales in accounts receivable outstanding of approximately 42.6 and 52.6
days, respectively.
Inventories were $84.0 million and $83.9 million as of December 27, 2002 and
March 29, 2002, respectively. The Company had inventory turnover of 10.1x and
9.4x for the three months ended December 27, 2002 and March 29, 2002,
respectively. For the three months ended December 27, 2002, the Company's
Physician Supply and Long-Term Care Businesses had inventory turnover of 9.2x
and 12.2x, respectively.
41
The following table presents Adjusted EBITDA and other financial data for the
three and nine months ended December 27, 2002 and December 28, 2001 (in
thousands):
Other Financial Data:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
December 27, December 28, December 27, December 28,
2002 2001 2002 2001
------------ ------------ ------------- ------------
Income from operations........................ $ 6,589 $ 7,741 $18,772 $ 21,448
Plus: Other income........................... 1,944 397 2,753 1,532
Plus: Depreciation and amortization of
intangible assets.......................... 3,660 2,685 10,675 6,986
Plus: Charges included in general and
administrative expenses (d)................ 1,385 696 5,643 1,096
Plus: International Business exit charge
reversal -- -- -- (514)
------------ ------------ ------------- ------------
Adjusted EBITDA (a)........................... $13,578 $11,519 $37,843 $ 30,548
Interest expense.............................. $ 2,268 $ 1,544 $ 6,732 $ 6,158
Interest coverage (b)......................... 6.0x 7.5x 5.6x 5.0x
Adjusted EBITDA Margin (c).................... 4.5% 4.1% 4.3% 3.7%
Net cash provided by operating activities..... $ 27,716 $ 80,111
Net cash used in investing activities......... $ (909) $(18,666)
Net cash used in financing activities......... $(44,589) $(65,065)
As of
-----------------------------
December 27, December 28,
2002 2001
------------ ------------
Return on committed capital (e) (d).......................... 21.4% 17.4%
Ratio of debt to capitalization (f).......................... 30.0% 38.5%
(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 nine months ended December 27, 2002 excludes $31 and $169 of
accelerated depreciation, respectively. Accelerated depreciation is
included in depreciation and amortization in the Adjusted EBITDA
calculation.
42
(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 $35,675 generated
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 cash
flows from operations, availability under the Revolving Credit Agreement, cash
from obtaining an alternate financing facility, or a combination of these
sources.
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.
43
On June 28, 2001, the Company entered into a First Amendment to the Credit
Agreement (the "Amendment"), by and among the Company, as borrower thereunder,
the subsidiaries of the Company party thereto, the Lenders and the Agent for the
Lenders. The Amendment amended the Credit Agreement to increase the maximum
available borrowings under the Credit Agreement from $120 million to $150
million. The Amendment also, among other things, increased the percentage of
Lenders whose consent was required for an amendment of the Credit Agreement from
more than 50% to more than 55% and amended certain provisions relating to
protective advances, limitations on issuances of letters of credit,
indemnification, and landlord consents.
On 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.
On 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 December 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.
The Company is currently evaluating alternative debt structures with a goal of
reducing its overall cost of debt.
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 December 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
3 months)
2003 2004 2005 2006 2007 Thereafter Total
---------- ---------- --------- ---------- -------- ---------- ----------
Long-term debt................ $ -- $ -- $ -- $ -- $ -- $106,000 $106,000
Operating leases:
Restructuring............. 306 1,184 722 330 29 -- 2,571
Operating................. 5,284 16,239 12,340 8,235 6,147 7,022 55,267
Noncompetition agreements..... 193 238 93 35 34 115 708
Employment agreements......... 1,779 162 162 -- -- -- 2,103
---------- ---------- --------- ---------- -------- ---------- ----------
Total................ $7,562 $17,823 $13,317 $8,600 $6,210 $113,137 $166,649
========== ========== ========= ========== ======== ========== ==========
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 December 27, 2002, the Company had
completed the repurchase of the 3.6 million common shares under this program at
an average price of $7.12 per common share. On December 17, 2002, the Company's
Board of Directors authorized an additional purchase of up to 5% of its common
stock, or approximately 3.4 million common shares, in the open market, in
privately negotiated transactions, or otherwise. As of December 27, 2002, no
shares have been purchased under this program.
44
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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
45
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. (7)
3.1a Articles of Amendment to Articles of Incorporation, dated as of September 24, 2001. (16)
3.1b Articles of Amendment to Articles of Incorporation, dated as of November 9, 2001. (16)
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. (11)
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. (8)
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. (10)
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. (18)
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. (9)
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. (19)
46
10.9a First Amendment to the Amended and Restated Savings Plan (21).
10.10 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. (12)
10.10a 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. (14)
10.11 Employment Agreement, dated as of March 4, 1998, by and between the Company and David A. Smith.
(13)
10.11a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
David A. Smith. (13)
10.12 Employment Agreement, dated as of April 1, 1998, by and between the Company and John F. Sasen,
Sr. (13)
10.12a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and John
F. Sasen, Sr. (13)
10.13 Consulting Agreement, dated as of June 13, 2002, by and between the Company and Douglas J.
Harper. (19)
10.14 Employment Agreement, dated as of April 1, 1998, by and between the Company and Gary A. Corless.
(15)
10.14a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
Gary A. Corless. (15)
10.15 Employment Agreement, dated as of April 1, 1998, by and between the Company and Kevin P. English.
(15)
10.15a Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and
Kevin P. English. (15)
10.16 Employment Agreement, dated as of January 7, 2002, by and between the Company and David M.
Bronson. (17)
10.18 Severance Agreement, dated as of March 21, 2001, by and between the Company and Patrick C. Kelly.
(13)
10.19 Stock Purchase Agreement, dated as of October 28, 2002, among PSS World Medical, Inc., Imaging
Acquisition Corporation, and Platinum Equity, LLC. (20)
10.19a Amendment to Stock Purchase Agreement, dated as of November 18, 2002, among PSS World Medical,
Inc., Diagnostic Imaging, Inc., Imaging Acquisition Corporation and Platinum Equity, LLC. (22)
15 Awareness Letter from KPMG LLP.
47
21 List of Subsidiaries of the Company. (18)
(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 to the Company's Current Report on
Form 8-K, filed April 8, 1998.
(8) Incorporated by Reference to the Company's Current Report on
Form 8-K, filed April 22, 1998.
(9) Incorporated by Reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999.
(10) Incorporated by Reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000.
(11) Incorporated by Reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 29, 2000.
(12) Incorporated by Reference to the Company's Current Report
on Form 8-K, filed June 5, 2001.
(13) Incorporated by Reference to the Company's Annual Report
on Form 10-K for the year ended March 30, 2001.
(14) Incorporated by Reference to the Company's Current Report
on Form 8-K, filed July 3, 2001.
(15) Incorporated by Reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 29, 2001.
(16) Incorporated by Reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 28, 2001.
(17) Incorporated by Reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 28, 2001.
(18) Incorporated by Reference to the Company's Annual Report on
Form 10-K for the year ended March 29, 2002.
(19) Incorporated by Reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 28, 2002.
(20) Incorporated by Reference to the Company's Current Report on
Form 8-K, filed October 30, 2002.
(21) Incorporated by Reference to the Company's Current Report on
Form 10-Q, for the quarter ended September 27, 2002.
(22) Incorporated by Reference to the Company's Current Report on
Form 8-K, filed November 20, 2002.
48
(b)
Reports on Form 8-K:
The following current reports on Form 8-K were filed during the quarter
ended December 27, 2002:
----------------------------- --------------------------------------------------------
Date of Report Items Reported
----------------------------- --------------------------------------------------------
October 30, 2002 Filing to announce the Stock Purchase Agreement
to sell all of the outstanding capital stock of
the Company's wholly owned subsidiary, Diagnostic
Imaging, Inc. to Imaging Acquisition Corporation,
a wholly owned subsidiary of Platinum Equity, LLC.
----------------------------- --------------------------------------------------------
November 12, 2002 Filing of the Chief Executive Officer's and Chief
Financial Officer's written certifications
regarding the Company's Quarterly Report on Form
10-Q, as required under Section 906 of the
Sarbanes-Oxley Act of 2002.
----------------------------- --------------------------------------------------------
November 20, 2002 Filing to announce the completion of the sale of
Diagnostic Imaging, Inc. to Imaging Acquisition
Corporation.
----------------------------- --------------------------------------------------------
December 3, 2002 Filing to amend the current report filed of the
November 20, 2002 filing to include Pro Forma
financial information.
----------------------------- --------------------------------------------------------
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Jacksonville, State of
Florida, on February 7, 2003.
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)
50
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 prepared;
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 function):
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.
February 6, 2003
/s/ David A. Smith
-----------------------------------
David A. Smith
President and Chief Executive Officer
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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 prepared;
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 function):
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.
February 6, 2003
/s/ David M. Bronson
-----------------------------------
David M. Bronson
Senior Vice President and Chief Financial Officer
52