<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 2, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
GULF SOUTH MEDICAL SUPPLY, INC.
(Exact Name of Registrant As Specified In Its Charter)
<TABLE>
<S> <C>
DELAWARE 64-0831411
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
</TABLE>
426 CHRISTINE DRIVE
RIDGELAND, MISSISSIPPI 39157
(601) 856-5900
(Address, including Zip Code, and Telephone Number, including Area Code,
of Registrant's Principal Executive Offices)
---------------------
THOMAS G. HIXON
PRESIDENT
GULF SOUTH MEDICAL SUPPLY, INC.
426 CHRISTINE DRIVE
RIDGELAND, MISSISSIPPI 39157
(601) 856-5900
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
---------------------
Copies to:
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<S> <C>
WILLIAM B. ASHER, JR., ESQ. LARRY A. BARDEN, ESQ.
TESTA, HURWITZ & THIBEAULT, LLP SIDLEY & AUSTIN
HIGH STREET TOWER ONE FIRST NATIONAL PLAZA
125 HIGH STREET CHICAGO, IL 60603
BOSTON, MASSACHUSETTS 02110 (312) 853-7000
(617) 248-7000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
---------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM
AMOUNT PROPOSED MAXIMUM AGGREGATE
TITLE TO EACH CLASS OF TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value
per share.................... 3,210,483 shares $40.4375 $129,823,907 $44,767
===============================================================================================
</TABLE>
(1) Includes 418,759 shares which the Underwriters have the option to purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended, based upon the
average of the high and low sale prices for the Company's Common Stock as
reported on the Nasdaq National Market System on April 25, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION DATED MAY 2, 1996
PROSPECTUS
2,791,724 SHARES
[LOGO]
GULF SOUTH MEDICAL SUPPLY, INC.
COMMON STOCK
------------------
Of the 2,791,724 shares of Common Stock offered hereby, 2,000,000 shares
are being sold by Gulf South Medical Supply, Inc. ("Gulf South" or the
"Company") and 791,724 shares are being sold by the Selling Stockholders. See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders. The Common Stock
of the Company is traded on The Nasdaq National Market under the symbol "GSMS".
On May 1, 1996, the closing sale price of the Common Stock was $41.50 per share.
See "Price Range of Common Stock."
------------------
SEE "RISK FACTORS" ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF
THE SHARES OF COMMON STOCK OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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==================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share $ $ $ $
- --------------------------------------------------------------------------------------------------
Total(3) $ $ $ $
==================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $325,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 418,759 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively.
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for shares of
Common Stock will be available for delivery on or about , 1996 at the
office of Smith Barney Inc., 14 Wall Street, New York, New York 10005.
------------------
SMITH BARNEY INC.
WILLIAM BLAIR & COMPANY
MONTGOMERY SECURITIES
, 1996.
<PAGE> 3
The graphic representation omitted is a map of the United States of America
with stars placed to indicate the location of GSMS Distribution Centers and dots
placed to indicate GSMS Customer Locations, and a key explaining the symbols.
---------------------
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under the
caption "Risk Factors," which could cause actual results to differ materially
from those indicated by such forward-looking statements.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
See "Underwriting."
THE COMPANY
Gulf South is a leading national distributor of medical supplies and
related products to the long-term care industry. The Company provides products
and services to approximately 8,500 long-term care facilities in all 50 states.
The Company's customers range from independent nursing home operators to large
national chains offering a broad range of healthcare services, such as Beverly
Enterprises and Living Centers of America, as well as home healthcare providers,
hospices and sub-acute, rehabilitative and transitional care providers. Through
its 11 full-service regional distribution centers, the Company offers both
national coverage to multi-facility customers and local service to individual
facilities and independent operators. Gulf South believes that it has achieved
its success to date due to the expertise gained from more than eleven years of
focus on the long-term care industry and its strong commitment to providing
superior service to its customers.
According to the latest industry data available, sales of medical supplies
and related products to the nursing home segment of the long-term care industry
in the United States were more than $1.5 billion in 1993 and the Company
estimates that such sales are growing at an annual rate in excess of 10%. The
Company also believes that the home healthcare and sub-acute care segments are
growing at a faster rate than the nursing home segment of the long-term care
industry. Economic, regulatory, political and demographic factors are causing an
increase in the demand for the services provided by long-term care facilities
and in the need for facility operators to provide patients with a broader
variety of medical supplies on a cost-effective basis. In addition to the aging
of the U.S. population, these factors include cost containment measures
initiated by public and private reimbursement programs and the emergence of
long-term care facilities as an effective non-hospital setting in which
sub-acute medical and rehabilitative care can be provided to medically stable
patients.
The Company believes that its ability to compete in the long-term care
market is enhanced by its emphasis on offering customers a single source for
over 10,000 products at competitive prices, coupled with convenient ordering
procedures, accurate and complete fulfillment of small and "broken case" orders,
and consistent and reliable deliveries. The Company estimates that it ships more
than 95% of all orders received on the same day the order is placed, with a fill
rate of 98%. The Company also provides its customers with value-added services
designed to assist in managing inventory usage and controlling costs. These
services include monthly usage reports, inventory control/ancillary billing
software, next-day invoicing and customized programs such as bar code labelling
and customer-specific ordering guides. In addition, the Company utilizes its
electronic data interface (EDI) capabilities to streamline and simplify the
ordering and invoicing process for certain of its major customers, as well as to
ensure accurate order entry and fulfillment.
The Company's net sales have grown at a compound annual rate of 44.0% over
the past five years, from $32 million in 1991 to $130 million in 1995. Operating
income over this period grew at a compound annual rate of 48.1%, from $3.0
million in 1991 to $13.7 million in 1995. Net sales and operating income for the
three months ended March 31, 1996 were $40.2 million and $3.9 million (before
giving effect to merger costs and expenses of $512,000), respectively. The
Company believes that it is well-positioned to pursue growth opportunities in
the long-term care industry. The Company's principal growth strategies are to
increase its sales to existing customers by continuing to meet their product and
service needs as they grow, to add new customers, including large national
chains and group purchasing organizations, to expand its presence in the home
healthcare and sub-acute, rehabilitative and transitional care segments of the
long-term care industry, and to augment its internal growth with the acquisition
of distributors that serve complementary markets or that supplement the
Company's presence in existing markets.
3
<PAGE> 5
RECENT ACQUISITIONS
The Company's strategy is to augment its internal growth with the
acquisition of medical supply distributors that serve complementary markets or
supplement the Company's presence in existing markets. Since September 1995, the
Company has completed three such acquisitions. On September 25, 1995, the
Company purchased for cash all of the operating assets of L&M Medical, Inc., a
regional medical supply distributor serving the home healthcare markets of
Southern California, Nevada and Arizona. L&M Medical had revenues of
approximately $12.0 million during the twelve-month period prior to its
acquisition. On February 29, 1996, the Company acquired Bayer Medical Service
Systems, Inc., a regional medical supply distributor serving the long-term care
markets of the Ohio Valley and Florida, in a stock-for-stock exchange. Bayer
Medical Service Systems had revenues of approximately $10.0 million during the
twelve-month period prior to its acquisition. On April 1, 1996, the Company
purchased all of the operating assets of Express Care, L.P., a regional medical
supply distributor located in Memphis, Tennessee. Express Care provides
distribution services to long-term care and home health facilities owned, leased
or managed by one of the largest national nursing home chains, as well as other
long-term care customers in the southeastern United States. Express Care had
revenues of approximately $6.5 million during the twelve-month period prior to
its acquisition.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company................. 2,000,000 shares
Common Stock Offered by the Selling Stockholders.... 791,724 shares
Common Stock to be Outstanding After the Offering... 15,960,446 shares(1)
Use of Proceeds..................................... Repayment of bank debt; working capital
and other general corporate purposes,
including possible acquisitions
Nasdaq National Market symbol....................... GSMS
</TABLE>
- ---------------
(1) Excludes 715,234 shares of Common Stock reserved for issuance upon exercise
of outstanding options under the Company's 1992 Stock Plan at March 31,
1996. See Note 6 of Notes to Financial Statements.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors related to the
Company and the Common Stock offered hereby.
4
<PAGE> 6
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Net sales.......................... $32,028 $44,659 $65,119 $92,151 $130,094 $29,522 $40,235
Gross profit....................... 8,546 11,618 16,762 24,029 32,121 7,379 9,588
Operating income................... 2,954 4,066 6,455 10,116 13,703 3,143 3,887(2)
Net income(3)...................... $ 1,632 $ 1,794 $ 2,630 $ 5,796 $ 8,160 $ 1,901 $ 2,322
Net income per share(4)............ $ .16 $ .19 $ .29 $ .45 $ .58 $ .14 $ .17
SELECTED OPERATING DATA:
Number of orders shipped........... 119,911 165,834 215,425 283,350 384,401
Average order size................. $ 234 $ 238 $ 270 $ 298 $ 313
Number of facilities served........ 3,039 3,699 4,390 6,314 8,555
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(5)
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<S> <C> <C>
BALANCE SHEET DATA(1):
Working capital.............................................................. $38,707 $117,398
Total assets................................................................. 58,321 131,212
Total debt................................................................... 5,800 --
Stockholders' equity......................................................... 42,552 121,243
</TABLE>
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(1) Restated to reflect the share exchange with Bayer Medical Service Systems,
Inc. accounted for as a pooling of interests. See Note 2 of Notes to
Financial Statements.
(2) Reflects $512 of merger costs and expenses ($315 after tax, or $.02 per
share) incurred in connection with the acquisition of Bayer Medical Service
Systems, Inc. on February 29, 1996. See Note 2 of Notes to Financial
Statements.
(3) The Company elected to be treated as an S corporation for income tax
purposes from January 1, 1989 through June 25, 1992, and accordingly did not
pay federal and state (except in certain states) income taxes during such
periods. The Company distributed S corporation earnings of $1,335 and $998
to its shareholders during 1991 and 1992, respectively. The net income data
reflects a pro forma provision for income taxes during the periods from
January 1, 1991 through June 25, 1992 as if the Company had been subject to
federal and state income taxes. Because the Company has been a C corporation
since June 25, 1992, no pro forma adjustment to net income for periods
subsequent to such date is necessary and, accordingly, the net income data
set forth above for such subsequent periods reflects actual net income.
(4) Computed by dividing net income applicable to Common Stock (net income plus
interest requirements, less tax effects, of the 10% Convertible Subordinated
Debentures due 1997 (the "Convertible Debentures")) by the weighted average
number of shares of Common Stock and equivalents outstanding. The conversion
of the Convertible Debentures was effected upon the closing of the Company's
initial public offering in March 1994. For the year ended December 31, 1991,
the weighted average number of shares of Common Stock and equivalents
outstanding was 10,200,000, for the years ended December 31, 1992, 1993,
1994 and 1995 was 10,200,170, 10,442,066, 13,073,040 and 13,993,595,
respectively, and for the three months ended March 31, 1995 and 1996 was
13,947,724 and 14,047,309, respectively. See Note 1 of Notes to Financial
Statements. Net income per share and weighted average number of shares of
Common Stock and equivalents outstanding for each of the years ended
December 31, 1991, 1992, 1993 and 1994 have been restated to reflect a
two-for-one stock split in the form of a stock dividend effected on May 25,
1995.
(5) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock
offered hereby by the Company at an assumed public offering price of $41.50
per share and the application of the estimated net proceeds therefrom.
Subsequent to March 31, 1996, the Company incurred additional indebtedness
under its revolving line of credit agreement with NationsBank of Tennessee,
N.A. The foregoing balance sheet data as adjusted assumes that total debt at
the completion of this Offering is approximately $9,200, all of which will
be repaid from the net proceeds of the Offering. See "Use of Proceeds."
---------------------
The Company originally was incorporated in Mississippi in 1982 under the
name of Gulf South Supply Company of Mississippi ("Gulf South Mississippi") and
changed its name to Gulf South Medical Supply, Inc. in 1988. In 1993, the
Company was reincorporated in Delaware. The Company's principal executive
offices are located at 426 Christine Drive, Ridgeland, Mississippi 39157, and
its telephone number is (601) 856-5900. As used in this Prospectus, the terms
"Gulf South" and the "Company" refer to Gulf South Medical Supply, Inc., a
Delaware corporation, and its predecessor, unless the context otherwise
requires.
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered hereby.
INTENSE AND INCREASING COMPETITION.
The Company faces intense competition from a variety of regional, local and
national distributors. Barriers to entry in the long-term care distribution
industry are relatively low, and the risk of new competitors entering the
market, particularly on a local level, is high. In response to competitive
pressures, the Company has in the past lowered, and may in the future lower,
selling prices in order to maintain or increase market share, which has
resulted, and may in the future result, in lower gross margins. Although several
national hospital distributors and healthcare manufacturers presently sell to
the long-term care market, to date the long-term care market has not been a
primary focus for such distributors and manufacturers. However, national
hospital distributors and manufacturers, many of which have substantially
greater capital resources, sales and marketing experience and distribution
capabilities than the Company, may focus their efforts more directly on the
long-term care market. Hospitals that form alliances with long-term care
facilities to create integrated healthcare networks may look to hospital
distributors and manufacturers to furnish products to their long-term care
affiliates. Because the national hospital distributors may have cost advantages
over the Company due to their ability to purchase products in large volumes, the
Company may experience significant pricing pressures from these and other
competitors which could adversely affect the Company's business and operating
results. See "Business -- Competition."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY.
A key element of the Company's growth strategy is to augment its internal
growth with the acquisition of medical supply distributors, and inventory and
facilities of such distributors, that serve complementary markets or that
supplement the Company's presence in existing markets. Certain of these
businesses may be marginally profitable or unprofitable. In order to achieve
anticipated benefits from these acquisitions, the Company must successfully
integrate the acquired businesses with its existing operations, and no assurance
can be given that the Company will be successful in this regard. The Company
incurred $512,000 in merger costs and expenses in the quarter ended March 31,
1996 in connection with the acquisition of Bayer Medical Service Systems, Inc.,
and it is likely that similar one-time merger costs and expenses may be incurred
in connection with any future acquisitions. In addition, attractive acquisitions
are difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the possible need to obtain regulatory
approvals. There can be no assurance that the Company will be able to complete
future acquisitions. In order to finance such acquisitions, it may be necessary
for the Company to raise additional funds either through public or private
financings, including bank borrowings. Any financing, if available at all, may
be on terms which are not favorable to the Company. The Company may also issue
shares of its Common Stock to acquire such businesses, which may result in
dilution to the Company's existing stockholders. See "Business -- Growth
Strategy."
CONCENTRATION OF CUSTOMERS.
The Company depends on a limited number of large customers for a
significant portion of its net sales. Consolidation among long-term care
providers and the growth of the Company's business with large chains could
increase such dependence. In the year ended December 31, 1995 and in the three
months ended March 31, 1996, the Company's largest five customers accounted for
approximately 30.8% and 32.3%, respectively, of net sales. Beverly Enterprises
accounted for 16.6% of net sales for the year ended December 31, 1995. As is
customary in its industry, the Company does not have any long-term contracts
with its customers and sells on a purchase order basis only. Significant
declines in the level of purchases by one or more of these customers would have
a material adverse effect on the Company's business and results of operations.
Although the Company has not to date experienced any failure to collect accounts
receivable from its largest customers, an adverse change in the financial
condition of any of these customers, including as a result of a change in
governmental or private reimbursement programs, could have a material adverse
effect
6
<PAGE> 8
upon the Company's results of operations or financial condition. In addition,
the expansion of the Company's business with large chains has in the past
resulted in competitive pricing pressures and lower operating margins and such
pressure on margins may continue in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Customers."
RISKS OF BUSINESS GROWTH AND CHANGING MARKET CONDITIONS.
A key element of the Company's growth strategy is to increase sales to
existing and new customers, including both large chains and independent
operators, by adding one or more additional distribution centers or expanding
existing distribution centers and by hiring additional direct sales or other
personnel and through national account sales efforts. Such efforts will result
in increased operating expenses. There can be no assurance that the
establishment of new distribution centers, the expansion of existing
distribution centers, the addition of new sales or other personnel or national
account sales efforts will result in additional revenues or operating income.
The Company's growth plans also could place significant demands upon the
Company's management and financial resources. The expansion of the Company's
business with large chains has in the past resulted in competitive pricing
pressures and lower operating margins and such pressure on margins may continue
in the future. As a result of changes occurring in the long-term care market,
both the nature of the Company's customer base as well as the products and
services required by its customers are changing. The failure by the Company's
management to effectively respond to and manage changing business conditions,
including changes in customer requirements and changes to the Company's overall
product mix, could have an adverse effect on the Company's business and results
of operations and on operating margins. See "Business -- Industry Overview" and
"-- Customers." As a result of these factors, the Company could experience
fluctuations in operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON MANAGEMENT.
The continued success of the Company's operations will depend largely upon
the continued services of its executive officers, in particular Thomas G. Hixon,
Guy W. Edwards and Steven L. Richardson, who serve as President, Vice President
of Finance and Vice President of Operations, respectively. The loss of service
of one or more of such executive officers could adversely affect the Company's
business. The Company does not have written employment agreements with any
executive officer but does have noncompetition agreements with such individuals,
which extend for two years after termination of employment. The Company
presently maintains keyman life insurance on Thomas G. Hixon in the amount of
$1,500,000 and on Guy W. Edwards and Steven L. Richardson, each in the amount of
$500,000. The Company's future success will also be dependent, in part, upon the
Company's ability to attract and retain additional qualified managers and
employees.
RELIANCE ON CENTRALIZED BUSINESS SYSTEMS AND ON THIRD PARTIES.
Because the Company believes that its success to date is dependent in part
upon its ability to provide prompt, accurate and complete service to its
customers on a price-competitive basis, any disruption in its day-to-day
operations or material increases in its costs of procuring and delivering
products could have an adverse effect on its results of operations. Any failure
of either its management information system or its telephone system, both of
which are located at the Company's principal distribution center in Jackson,
Mississippi, could adversely affect its ability to receive and process customer
orders and ship products on a timely basis. Any significant expansion of the
Company's business, either through the addition of new customers, expansion of
business with existing customers or through acquisitions, could also result in
the need to increase the capacity and capability of the Company's management
information system or telephone system. Strikes or other service interruptions
affecting United Parcel Service or other common carriers used by the Company to
ship its products could also impair the Company's ability to deliver products on
a timely and cost-effective basis. In addition, because the Company typically
bears the cost of shipment to its customers, any increase in shipping rates
could have an adverse effect on the Company's operating results. See
"Business -- Customer Service/Order Entry and Fulfillment."
7
<PAGE> 9
In order to provide prompt and complete service to its customers, the
Company maintains a significant investment in product inventory (approximately
$18.5 million at March 31, 1996) at its eleven warehouse locations. Although the
Company closely monitors its inventory exposure through a variety of inventory
control procedures and policies, there can be no assurance that such procedures
and policies will continue to be effective or that unforeseen product
developments or price changes will not adversely affect the Company's business
or results of operations. In addition, the Company may assume the inventory of
distributors that it acquires which includes product lines or operating assets
not normally carried or used by the Company. These product lines or assets may
be difficult to sell, resulting in the Company writing off any such unsold
inventory or unused assets in future periods. See "Business -- Products" and
"-- Purchasing" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
NATIONAL HEALTH CARE REFORM.
National health care reform has been the subject of a number of legislative
initiatives by Congress. Although the Company is not itself presently subject to
significant direct federal or state regulation, its customers are highly
regulated, and any legislative or regulatory changes which affect them may also
indirectly affect the Company. Due to uncertainties regarding the ultimate
features of health care reform initiatives and their enactment and
implementation, the Company cannot predict which, if any, of such reform
proposals will be adopted, when they may be adopted or what impact they may have
on the Company's customers or on the Company. The actual announcement of reform
proposals and the investment community's reaction to such proposals,
announcements by competitors of their strategies to respond to reform
initiatives and general industry conditions could produce volatility in the
trading and market price of the Company's Common Stock.
UNSPECIFIED USE OF PROCEEDS.
In addition to repayment of outstanding bank indebtedness, the Company
intends to use the net proceeds from this Offering for general corporate
purposes, including the possible acquisition of one or more businesses. However,
a final determination of the use of such proceeds has not been made. See "Use of
Proceeds." Thus, after the Offering has been consummated, management and the
Board of Directors of the Company will be able to determine the specific uses
for such proceeds without first seeking approval from the Company's
stockholders, unless such approval is required by law.
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK.
The Company's Amended and Restated Certificate of Incorporation and By-Laws
contain various provisions that may make it more difficult for a third party to
acquire, or may discourage acquisition bids for, the Company and could limit the
price that certain investors might be willing to pay in the future for shares of
the Company's Common Stock. In addition, the rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of any
holders of Preferred Stock that may be issued in the future and that may be
senior to the rights of the holders of Common Stock.
8
<PAGE> 10
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be $78,691,000
($95,235,331 if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $41.50 per share and after deducting the
estimated underwriting discount and offering expenses payable by the Company.
The Company expects to use the net proceeds from this Offering to repay
borrowings outstanding under its bank credit agreement and for working capital
and other general corporate purposes, including the possible acquisition of one
or more medical supply distributors that serve complementary markets or
supplement the Company's presence in existing markets. However, the Company has
no specific agreements or commitments, and is not currently engaged in any
negotiations, with respect to any acquisition. Pending such uses, the net
proceeds of this Offering will be invested in short-term interest-bearing
securities.
The borrowings under the Company's revolving line of credit agreement with
NationsBank of Tennessee, N.A. (the "Credit Agreement"), of which $5.8 million
was outstanding as of March 31, 1996 and $9.2 million is currently outstanding
and is expected to be outstanding immediately prior to the closing of this
Offering, consist of a revolving credit loan that bears interest, at the
Company's option, at prime or at LIBOR plus an amount ranging from 1% to 2.5%
per annum (with a weighted average interest rate of 6.33% at March 31, 1996).
Borrowings outstanding under the Credit Agreement were incurred primarily for
working capital purposes and to finance the acquisition of Express Care, L.P.
After completion of this Offering and the application of the net proceeds
therefrom, the Company will have a continuing $15.0 million commitment under the
Credit Agreement, which it may borrow from time to time in the future. See Note
3 of Notes to Financial Statements.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol GSMS since March 24, 1994, the date of the Company's initial
public offering of Common Stock. Prior to March 24, 1994, there was no public
market for the Company's Common Stock. The following table sets forth for the
periods indicated the high and low closing sale prices for the Common Stock,
which reflect a 2-for-1 stock split effected in the form of a stock dividend on
May 25, 1995.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1994
Second Quarter....................................................... $14 1/4 $ 9 3/4
Third Quarter........................................................ 15 1/4 12 5/8
Fourth Quarter....................................................... 19 3/4 13 3/4
1995
First Quarter........................................................ $20 7/8 $16 1/2
Second Quarter....................................................... 26 18 1/4
Third Quarter........................................................ 32 1/2 23 1/4
Fourth Quarter....................................................... 30 3/4 19
1996
First Quarter........................................................ $39 $25 3/4
Second Quarter (through April 30, 1996).............................. $44 $37
</TABLE>
See the cover page of this Prospectus for a recent closing sale price of
the Company's Common Stock on the Nasdaq National Market. As of April 30, 1996,
there were approximately 31 stockholders of record and an estimated 2,214
additional beneficial holders.
9
<PAGE> 11
DIVIDEND POLICY
The Company has not paid any cash dividends on its capital stock in the
past three fiscal years and does not anticipate paying cash dividends in the
foreseeable future. The Company intends to retain any earnings or other cash
resources to finance future growth of its business. In addition, the Company's
Credit Agreement restricts the payment of dividends on the Company's capital
stock. Any future determinations to pay cash dividends will be at the discretion
of the Company's Board of Directors and will be dependent upon the Company's
results of operations, financial condition and other factors deemed relevant by
the Board of Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to reflect the issuance and sale of 2,000,000
shares of Common Stock offered hereby by the Company at an assumed public
offering price of $41.50 per share. This table should be read in conjunction
with the financial statements and the notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt...................................... $ 5,800 $ --
======= =========
Long-term debt, net of current portion................................. -- --
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000,000 shares authorized; none
issued............................................................ -- --
Common Stock, $.01 par value, 30,000,000 shares authorized;
13,960,446 shares issued and outstanding and 15,960,446 shares
issued and outstanding, as adjusted(1)............................ 140 160
Additional paid-in capital........................................... 22,327 100,998
Retained earnings.................................................... 20,085 20,085
------- ---------
Total stockholders' equity...................................... 42,552 121,243
Total capitalization......................................... $42,552 $ 121,243
======= =========
</TABLE>
(1) Excludes 715,234 shares of Common Stock subject to outstanding options
granted by the Company under the Company's 1992 Stock Plan at a weighted
average exercise price of $14.09 per share and an additional 216,050 shares
reserved for issuance under such Plan as of March 31, 1996.
10
<PAGE> 12
SELECTED FINANCIAL AND OPERATING DATA
The income statement data and balance sheet data presented below for each
of the years ended December 31, 1992, 1993, 1994 and 1995 have been derived from
the Company's financial statements, which have been audited by Ernst & Young
LLP, independent auditors. The income statement data and balance sheet data
presented below for the year ended December 31, 1991, have been derived from the
Company's financial statements, which have been audited by Haddox, Reid, Burkes
& Calhoun, independent auditors. The income statement data and balance sheet
data presented below for each of the three months ended March 31, 1995 and 1996
are derived from unaudited financial statements which, in the opinion of
management of the Company, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such data. The
results for the three-month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the full fiscal year. The
selected financial data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the financial statements and the notes thereto and other
financial information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED
OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Net sales........................ $32,028 $44,659 $65,119 $92,151 $130,094 $29,522 $40,235
Cost of sales.................... 23,482 33,041 48,357 68,122 97,973 22,143 30,647
------- ------- ------- ------- -------- ------- -------
Gross profit..................... 8,546 11,618 16,762 24,029 32,121 7,379 9,588
Selling, general and
administrative expenses........ 5,592 7,552 10,307 13,913 18,418 4,236 5,189
Merger costs and expenses........ -- -- -- -- -- -- 512
------- ------- ------- ------- -------- ------- -------
Operating income................. 2,954 4,066 6,455 10,116 13,703 3,143 3,887(2)
Interest expense................. (374) (1,242) (2,206) (629) (199) (31) (52)
Interest income.................. 2 -- -- 186 163 59 --
------- ------- ------- ------- -------- ------- -------
Income before income taxes....... 2,582 2,824 4,249 9,673 13,667 3,171 3,835
Income taxes(3).................. (950) (1,030) (1,619) (3,877) (5,507) (1,270) (1,513)
------- ------- ------- ------- -------- ------- -------
Net income(3).................... $ 1,632 $ 1,794 $ 2,630 $ 5,796 $ 8,160 $ 1,901 $ 2,322
======= ======= ======= ======= ======== ======= =======
Net income per share(4).......... $ .16 $ .19 $ .29 $ .45 $ .58 $ .14 $ .17
======= ======= ======= ======= ======== ======= =======
SELECTED OPERATING DATA:
Number of orders shipped......... 119,911 165,834 215,425 283,350 384,401
Average order size............... $ 234 $ 238 $ 270 $ 298 $ 313
Number of facilities served...... 3,039 3,699 4,390 6,314 8,555
BALANCE SHEET DATA (AT PERIOD
END)(1):
Working capital.................. $ 6,203 $ 9,026 $12,842 $28,469 $ 36,228 $30,278 $38,707
Total assets..................... 11,738 16,519 23,576 41,042 55,021 45,414 58,321
Total debt....................... 4,586 19,247 21,015 1,147 3,803 1,341 5,800
Stockholders' equity (deficit)... 3,393 (8,300) (5,670) 30,502 39,954 32,495 42,552
</TABLE>
- ---------------
(1) Restated to reflect the share exchange with Bayer Medical Service Systems,
Inc. accounted for as a pooling of interests. See Note 2 of Notes to
Financial Statements.
(2) Reflects $512 of merger costs and expenses ($315 after tax, or $.02 per
share) incurred in connection with the acquisition of Bayer Medical Service
Systems, Inc. on February 29, 1996. See Note 2 of Notes to Financial
Statements.
(3) The Company elected to be treated as an S corporation for income tax
purposes from January 1, 1989 through June 25, 1992, and accordingly did not
pay federal and state (except in certain states) income taxes during such
periods. The Company distributed S corporation earnings of $1,335 and $998
to its shareholders during 1991 and 1992, respectively. The net income data
reflects a pro forma provision for income taxes during the periods from
January 1, 1991 through June 25, 1992 as if the Company had been subject to
federal and state income taxes. Because the Company has been a C corporation
since June 25, 1992, no pro forma adjustment to net income for periods
subsequent to such date is necessary and, accordingly, the net income data
set forth above for such subsequent periods reflects actual net income.
(4) Computed by dividing net income applicable to Common Stock (net income plus
interest requirements, less tax effects, of the Convertible Debentures) by
the weighted average number of shares of Common Stock and equivalents
outstanding. The conversion of the Convertible Debentures was effected upon
the closing of the Company's initial public offering in March 1994. For the
year ended December 31, 1991, the weighted average number of shares of
Common Stock and equivalents outstanding was 10,200,000, for the years ended
December 31, 1992, 1993, 1994 and 1995 was 10,200,170, 10,442,068,
13,073,040 and 13,993,595 respectively, and for the three months ended March
31, 1995 and 1996 was 13,947,724 and 14,047,309, respectively. See Note 1 of
Notes to Financial Statements. Net income per share and weighted average
number of shares of Common Stock and equivalents outstanding for each of the
years ended December 31, 1991, 1992, 1993 and 1994 have been restated to
reflect a two-for-one stock split in the form of a stock dividend effected
on May 25, 1995.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
audited financial statements and notes thereto included elsewhere in this
Prospectus.
GENERAL
Gulf South's net sales have grown at a compound annual rate of 44.0% over
the past five years, from $32 million in 1991 to $130 million in 1995. The
Company attributes this increase to both the addition of new long-term care
customers and the increased penetration of existing customer accounts, including
increased sales to providers of home healthcare and sub-acute, rehabilitative
and transitional care. The Company's gross profit has increased from $8.5
million in 1991 to $32.1 million in 1995, while the Company's gross profit as a
percentage of net sales ("gross margin") has ranged from 24.7% to 26.7% within
that period. The Company believes that the decline in gross margin from 26.7% in
1991 to 24.7% in 1995 is primarily attributable to competitive pricing of
products sold by the Company in order to maintain or increase market share,
particularly with respect to the Company's large chain customers.
Management believes that the Company's current gross margins are consistent
with the Company's long-term strategy to expand sales with aggressive pricing
and to increase operating margins through reductions in selling, general and
administrative expenses as a percentage of increased net sales. To date, the
decrease in gross margins has been offset in part by participation in
volume-based rebate programs offered by vendors. Notwithstanding these actions,
there can be no assurance that the Company will be able to increase sales
through aggressive pricing or to increase operating margins through controlling
selling, general and administrative expenses; or that participation in vendor
programs will offset reductions in gross margin to a significant extent.
The Company is actively seeking to attract large chain customers and to the
extent that the Company is successful in attracting such customers, the
Company's operating expenses may increase. In order to effectively serve
additional large chain customers, the Company may be required to increase the
size or number of its distribution facilities, to expand its order processing
and delivery systems and to hire additional personnel. The Company may also be
required to lower prices to attract and maintain such customers. The Company's
selling, general and administrative expenses have decreased as a percentage of
net sales over the last five years, although such expenses have increased in
dollar amount in order to support higher sales volume over this period.
Consequently, operating income over this period grew at a compound annual rate
of 48.1%, from $3.0 million in 1991 to $13.7 million in 1995.
Since September 1995, the Company has completed the acquisition of three
medical supply distributors: L&M Medical, Inc., a regional medical supply
distributor serving the home healthcare markets of Southern California, Nevada
and Arizona; Bayer Medical Service Systems, Inc., a regional medical supply
distributor serving the long-term care markets of the Ohio Valley and Florida;
and Express Care, L.P., a regional medical supply distributor located in
Memphis, Tennessee. The acquisitions of L&M Medical and Express Care each
involved the purchase of operating assets for cash and have been accounted for
by the Company as purchases; the acquisition of Bayer Medical Service Systems
was a share exchange and has been accounted for as a pooling-of-interests. To
augment its internal growth, the Company will consider additional acquisitions
of medical supply distributors that serve complementary markets or that
supplement the Company's presence in existing markets. The Company incurred
merger costs and expenses in connection with the acquisition of Bayer Medical
Service Systems and it is likely that similar one-time merger costs and expenses
may be incurred in connection with any future acquisitions. See "Risk
Factors -- Risks Associated with Acquisition Strategy."
Economic, regulatory, political and demographic pressures, including cost
containment measures from public and private reimbursement sources, are
resulting in an increase in the demand for long-term care facilities to provide
medical services to patients at lower cost than traditional hospital care. See
"Business -- Industry Overview." The Company has experienced, and expects to
continue to experience, increasing
12
<PAGE> 14
demand for its products and services in this market, including from customers in
the home healthcare and sub-acute care segments, which it believes are growing
at a faster rate than the nursing home segment. The Company believes that sales
of enteral feeding, respiratory therapy and wound care supplies to home
healthcare providers and sub-acute care facilities will represent an increasing
proportion of its overall product mix. In order to maintain or increase market
share, particularly with respect to the Company's large chain customers, the
Company offers competitive pricing for its products, which has in the past
resulted in lower gross margins. The Company is actively seeking to attract
large chain customers and to the extent that the Company is successful, such
trend may continue.
Certain of the foregoing statements are forward-looking and involve risks
and uncertainties, and the Company's actual experience may differ materially
from that discussed above. Factors that may cause such a difference include, but
are not limited to, those discussed in "Risk Factors."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information
derived from the statements of income of the Company expressed as a percentage
of net sales for such year and the percentage change in such items compared to
the amount for the prior year.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
--------------------------------------------- PERCENTAGE CHANGE
THREE MONTHS -------------------------------------
YEARS ENDED ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, 1994 1995 MARCH 31, 1996
------------------------- --------------- OVER OVER OVER
1993 1994 1995 1995 1996 1993 1994 MARCH 31, 1995
----- ----- ----- ----- ----- ----- ----- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0% 41.5% 41.2% 36.3%
Cost of sales....................... 74.3 73.9 75.3 75.0 76.2 40.9 43.8 38.4
----- ----- ----- ----- -----
Gross profit........................ 25.7 26.1 24.7 25.0 23.8 43.4 33.7 29.9
Selling, general and administration
expenses.......................... 15.8 15.1 14.2 14.4 12.9 35.0 32.4 22.5
Merger costs and expenses........... -- -- -- -- 1.3 -- -- --
----- ----- ----- ----- ----- ----- ----- ------
Operating income.................... 9.9 11.0 10.5 10.6 9.6 56.7 35.5 23.7
Interest expense.................... (3.4) (.7) (.1) (.1) (.1) (71.5) (68.4) 67.7
Interest income..................... -- 0.2 0.1 .2 -- -- (12.4) (100.0)
----- ----- ----- ----- -----
Income before income taxes.......... 6.5 10.5 10.5 10.7 9.5 127.7 41.3 20.9
Income taxes........................ (2.5) (4.2) (4.2) (4.3) (3.7) 139.5 42.0 19.1
----- ----- ----- ----- -----
Net income.......................... 4.0% 6.3% 6.3% 6.4% 5.8% 120.4 40.8 22.2
===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1996 and 1995
Net sales increased by $10.7 million, or 36.3%, to $40.2 million for the
three months ended March 31, 1996 compared to $29.5 million for the same period
in 1995. This increase was attributable to the addition of new customers,
facility expansion by existing customers and increased sales penetration in
existing customer facilities.
Gross profit increased by $2.2 million, or 29.9%, to $9.6 million for the
three months ended March 31, 1996 compared to $7.4 million for the same period a
year ago, while gross margin decreased to 23.8% from 25.0% over the same period.
The decrease in gross margin was primarily due to a greater mix of higher
volume, large chain customers that require more competitive pricing, but was
offset in part by lower selling and servicing costs. In addition, the reduction
in gross margin was also offset in part by vendor performance incentives earned
by the Company through the achievement of certain predetermined sales and
purchase levels, and the taking of prompt pay discounts with certain vendors.
Selling, general and administrative expenses increased by $1.0 million, or
22.5%, to $5.2 million for the three months ended March 31, 1996 compared to
$4.2 million for the three months ended March 31, 1995, but as a percentage of
net sales decreased to 12.9% from 14.4% over the same period. The increase in
the amount of selling, general and administrative expenses was primarily
attributable to salaries, commissions and other costs associated with increased
staffing levels throughout the Company to support the expansion of the Company's
business during the period, and due in part to costs associated with the
operating activities of L&M Medical, Inc. The decrease in selling, general and
administrative expenses as a percentage of net sales was a result of maintaining
controls over such expenses.
13
<PAGE> 15
The Company incurred merger costs and expenses of $512,000 during the three
months ended March 31, 1996 in connection with the acquisition of Bayer Medical
Service Systems, Inc.
Interest expense increased by $21,000, or 67.7%, to $52,000 for the three
months ended March 31, 1996. This increase was attributable to increased
borrowings under the Company's revolving line of credit agreement for working
capital purposes.
Income taxes increased by $243,000 to $1.5 million for the three months
ended March 31, 1996 compared to $1.3 million for the same period in 1995. This
increase was attributable to higher taxable income, which was partially offset
by a decrease in the effective tax rate of 39.5% for the three months ended
March 31, 1996, as compared to 40.1% for the same period in 1995.
Years Ended December 31, 1995 and 1994
Net sales increased by $37.9 million, or 41.2%, to $130.1 million in 1995
compared to $92.2 million in 1994. The net sales growth in 1995 was attributable
to the addition of new customers, facility expansion by existing customers and
increased sales penetration in existing customer facilities.
Gross profit increased by $8.1 million, or 33.7%, to $32.1 million in 1995
compared to $24.0 million in 1994, while gross margin decreased to 24.7% from
26.1% over the same period. The decrease in gross margin was primarily due to a
greater mix of higher volume, large chain customers that require more
competitive pricing, but was offset in part by lower selling and servicing
costs. Other factors contributing to the decrease in gross margin were cost
increases associated with high volume, commodity items, such as latex exam
gloves and paper and resin products, and the Company's aggressive pricing
strategy. In addition, the reduction in gross margin was also offset in part by
vendor performance incentives earned by the Company through the achievement of
certain predetermined sales and purchase levels, and the taking of prompt pay
discounts with certain vendors.
Selling, general and administrative expenses increased by $4.5 million, or
32.4%, to $18.4 million in 1995 compared to $13.9 million in 1994, and as a
percentage of net sales decreased to 14.2% from 15.1% for the same period. The
increase in the amount of selling, general and administrative expenses was
primarily attributable to salaries, commissions and other costs associated with
increased staffing levels throughout the Company to support the expansion of the
Company's business during 1995. The decrease in selling, general and
administrative expenses as a percentage of net sales was a result of both the
economies associated with the Company's net sales growth, particularly with
large chain customers where support costs were generally lower, and increased
controls over such expenses.
Interest expense decreased by $430,000, or 68.4%, to $199,000 in 1995
compared to $629,000 in 1994. This decrease was a result of a portion of the net
proceeds of the Company's initial public offering in March 1994 being used to
repay the Company's outstanding long-term debt.
Income taxes increased by $1.6 million to $5.5 million in 1995 compared to
$3.9 million in 1994. This increase was attributable to higher taxable income,
offset slightly by a reduction in the effective tax rate from 40.3% to 40.1%.
Years Ended December 31, 1994 and 1993
Net sales increased by $27.0 million, or 41.5%, to $92.1 million in 1994
compared to $65.1 million in 1993. The net sales growth in 1994 was attributable
to the addition of new customers, facility expansion by existing customers and
increased sales penetration in existing customer facilities.
Gross profit increased by $7.3 million, or 43.4%, to $24.0 million in 1994
compared to $16.7 million in 1993, while gross margin increased to 26.1% from
25.7% over the same period. The increase in gross margin was primarily due to
the Company's greater participation in manufacturers' rebate programs and taking
prompt payment discounts.
Selling, general and administrative expenses increased by $3.6 million, or
35.0%, to $13.9 million in 1994 compared to $10.3 million in 1993, and as a
percentage of net sales decreased to 15.1% from 15.8% for the
14
<PAGE> 16
same period. The increase in the amount of selling, general and administrative
expenses was primarily attributable to salaries, commissions and other costs
associated with increased staffing levels throughout the Company to support the
expansion of the Company's business during 1994. The decrease in selling,
general and administrative expenses as a percentage of net sales was a result of
increased controls over such expenses.
Interest expense decreased by $1.6 million, or 71.5%, to $0.6 million in
1994 compared to $2.2 million in 1993. This decrease was a result of a portion
of the net proceeds of the Company's initial public offering in March 1994 being
used to repay the Company's outstanding long-term debt.
Income taxes increased by $2.3 million to $3.9 million in 1994 compared to
$1.6 million in 1993. This increase was attributable to higher taxable income
and an increase in the Company's provision for state income taxes, resulting in
an effective tax rate of 40.3% in 1994, as compared to 38.1% in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirement to date has been to fund working
capital in order to support growth of net sales. Through 1995, the Company
funded its working capital requirements principally with cash generated from
operations, proceeds from its bank borrowings and the sale of equity securities.
The Company's working capital was $38.5 million and its current ratio was
3.5 at March 31, 1996 as compared to working capital of $36.2 million and a
current ratio of 3.4 at December 31, 1995.
The Company has a revolving credit facility of $15.0 million, of which $9.2
million was available at March 31, 1996. Borrowings bear interest, at the option
of the Company, at prime or at LIBOR plus an amount ranging from 1% to 2.5% per
annum. A facility fee of 0.125% per annum is charged on the unused portion of
the revolving credit facility. Substantially all of the Company's assets would
collateralize any borrowings in excess of $7.5 million under the revolving
credit facility, which contains numerous restrictive covenants and financial
ratio requirements.
The Company made capital expenditures totaling $146,000 for the three
months ended March 31, 1996 principally to purchase telephone and computer
equipment. The Company expects to make capital expenditures of approximately
$1,500,000 for the balance of the fiscal year principally in connection with
improvements to or expansion of existing facilities and to purchase additional
telephone, computer and warehouse equipment.
The Company expects that available cash, borrowings available under its
existing revolving credit facility and funds generated from operations will be
sufficient to fund its operations through the first quarter of 1997.
The foregoing statements are forward-looking and involve risks and
uncertainties, and the Company's actual experience may differ materially from
that discussed above. Factors that may cause such a difference include, but are
not limited to, those discussed in "Risk Factors" as well as future events that
have the effect of reducing the Company's available cash balances, such as
unanticipated operating losses or capital expenditures related to possible
future acquisitions.
15
<PAGE> 17
QUARTERLY RESULTS (UNAUDITED)
The following table sets forth summary unaudited quarterly financial
information for each quarter in 1994 and 1995 and the first quarter of 1996. In
the opinion of management, such information has been prepared on the same basis
as the audited financial statements appearing elsewhere in this Prospectus and
reflects all necessary adjustments (consisting of only normal, recurring
adjustments) for a fair presentation of such unaudited quarterly results when
read in conjunction with the audited financial statements and notes thereto. The
operating results for any quarter are not necessarily indicative of results for
any future period and there can be no assurance that any trends reflected in
such results will continue in the future. The Company does not believe that its
business is seasonal.
<TABLE>
<CAPTION>
1994 QUARTER ENDING 1995 QUARTER ENDING 1996 QUARTER
---------------------------------------- ---------------------------------------- ENDING
MAR 31 JUN 30 SEP 30 DEC 31 MAR 31 JUN 30 SEP 30 DEC 31 MAR 31
------- ------- ------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales................ $20,566 $22,067 $23,809 $25,709 $29,523 $31,692 $33,253 $35,626 $ 40,235
Gross profit............. 5,371 5,714 6,209 6,735 7,379 7,901 7,958 8,882 9,588
Selling, general and
administrative
expenses............... 3,247 3,331 3,458 3,877 4,236 4,527 4,453 5,202 5,701
Operating income......... 2,124 2,383 2,751 2,858 3,143 3,374 3,505 3,680 3,887
Net income............... $ 943 $ 1,463 $ 1,667 $ 1,723 $ 1,901 $ 2,030 $ 2,079 $ 2,149 $ 2,322
</TABLE>
16
<PAGE> 18
BUSINESS
GENERAL
Gulf South is a leading national distributor of medical supplies and
related products to the long-term care industry. The Company provides products
and services to approximately 8,500 long-term care facilities in all 50 states.
The Company's customers range from independent nursing home operators to large
national chains offering a broad range of healthcare services, such as Beverly
Enterprises and Living Centers of America, as well as home healthcare providers,
hospices and sub-acute, rehabilitative and transitional care providers. Through
its nine full-service regional distribution centers, the Company offers both
national coverage to multi-facility customers and local service to individual
facilities and independent operators. Gulf South believes that it has achieved
its success to date due to the expertise gained from more than eleven years of
focus on the long-term care industry and its strong commitment to providing
superior service to its customers.
INDUSTRY OVERVIEW
According to the latest industry data available, sales of medical supplies
and related products to the nursing home segment of the long-term care industry
in the United States were more than $1.5 billion in 1993 and the Company
estimates that such sales are growing at an annual rate in excess of 10%. The
Company believes that the home healthcare and sub-acute care segments are
growing at a faster rate than the nursing home segment of the long-term care
industry. Medical supplies and related products are distributed to healthcare
providers through two primary channels of distribution. Distribution to
hospitals and surgical clinics generally is made through several large national
hospital distributors or directly by manufacturers. In contrast, distribution to
long-term care facilities typically is made through many local and regional
distributors as well as several national distributors.
Hospital Distribution. The hospital distribution market is characterized by
customers that have physical plants with large inventory storage capacity and
that serve large numbers of patients primarily with short-term acute-level
medical care. In order to service this market and maintain economies of scale,
the large national hospital distribution companies have established multiple
warehouse facilities near the largest concentrations of customers, generally in
urban or metropolitan areas, with an infrastructure that allows them to deliver
goods in bulk volume with frequent, and in many cases same day, service.
Hospital distributors typically maintain their own trucking fleets to deliver
products. Because of the specialized acute care services performed by hospitals,
hospital distributors must handle an extremely broad and diverse range of
products that focus on the short-term medical and surgical needs of hospital
patients.
Distribution to Long-Term Care Industry. Distributors serving the long-term
care market must address a different set of customer needs. The long-term care
market is highly fragmented, consisting of large numbers of independent
operators, small to mid-sized local and regional chains and several national
chains. Facilities are typically located in suburban and rural areas, often at
considerable distances from one another. Long-term care facilities generally
serve a limited patient population (typically from 20 to 200 beds) and have
relatively small physical plants with limited inventory storage capacity.
Although long-term care facilities do not demand immediate same-day delivery,
they require distributors to deliver products in small quantities (including
"broken case" shipments) on a consistent and reliable basis. Distributors
serving the long-term care market must generally have the capability to tailor
their ordering, shipping and billing processes to suit customers' individualized
needs. Because of the fragmented structure and the specialized service needs of
the long-term care market, long-term care facilities have traditionally been
served by locally- or regionally-based distributors which maintain supply
relationships with a limited number of customers within a finite geographic
area. However, these local and regional distributors are increasingly subject to
intense competitive pressures as a result of the consolidation of independent
long-term care operators by large national chains and a growing trend by
manufacturers to deal with fewer and larger distributors in this market.
Certain Trends Affecting the Long-Term Care Market. Economic, regulatory,
political and demographic pressures are combining to cause significant changes
in the long-term care industry. Cost containment pressures from governmental and
private reimbursement sources have led to a reduction in the length of
17
<PAGE> 19
expensive hospital stays and a resulting increase in the demand for long-term
care facilities to provide such services at a significantly lower cost than
hospitals. This trend has also led to a general increase in the acuity levels of
patients found in traditional long-term care facilities, as well as to the
emergence of sub-acute, rehabilitative, transitional and other specialized
long-term care facilities. Cost containment pressures have also contributed to a
need for greater efficiency by long-term care operators, and have led to some
consolidation among these healthcare providers. In addition, the demographic
pressures of an aging U.S. population have caused continued demand for
traditional custodial long-term care and other long-term care services. Census
Bureau data indicates that the number of persons aged 65 and older is expected
to increase from approximately 31.2 million in 1990 to approximately 34.5
million by the year 2000 and that the number of persons aged 85 years and older,
which is the fastest growing segment of the population and the largest consumer
of long-term care, is expected to increase from 3.1 million in 1990 to
approximately 4.1 million during the same period.
These trends affecting the long-term care industry have created the need
for an increasingly sophisticated distribution system for medical and personal
care products. Rising acuity levels within the patient population require
distributors to handle a broader range of products, including more sophisticated
medical supplies and equipment that are often used in small quantities. Industry
consolidation of long-term healthcare providers into regional and national
chains has created a need for distributors that can service facilities in
different locations with consistent and reliable service. Finally, cost
containment pressures and competitive requirements mandate that distributors
provide products and services to this market on an increasingly cost-effective
basis.
BUSINESS STRATEGY
Gulf South's principal business objective is to enhance its position as a
leading national distributor of medical and personal care products to the
long-term care industry. The Company believes that the following factors have
been of principal importance in its ability to achieve its present market
position:
Focus on Long-Term Care Industry. Since its founding more than eleven
years ago, Gulf South has focused primarily on serving the long-term care
market. Based on its industry experience and expertise, the Company has
developed the necessary distribution systems and services that assist
operators of long-term care facilities to source products, manage inventory
usage and control costs. The Company believes that its long-standing focus
on the needs of the long-term care industry has enabled it to develop and
execute a consistent management strategy and to foster stable, long-term
relationships with its customers.
Consistent and Reliable Customer Service. The Company offers customers
a high level of service and support which it believes differentiates it
from its competitors, particularly small to medium-sized local and regional
distributors. The Company's objective is to enable customers to place
orders easily and conveniently, to fill orders accurately and completely
and to deliver orders with prompt, consistent and reliable service. The
Company estimates that it ships more than 95% of all orders on the same day
the order is placed with a fill rate of 98.5% and that more than 90% of
customer orders are delivered to the customer within two days of receipt.
In addition, the Company offers customers various value-added services,
including monthly usage reports, inventory control/ancillary billing
software programs, next-day invoicing and customized programs designed to
assist customers to manage inventory usage and control costs. The Company
centralizes all customer ordering and invoicing and the delivery of
value-added services through its Jackson facility enabling the Company to
provide consistent levels of customer service to each individual facility
within multi-location chains.
Broad Product Offering at Competitive Prices. Gulf South presently
offers over 10,000 medical supplies and related products and updates its
product offerings regularly to meet its customers' changing needs. The
Company's sales volume, national coverage and stable vendor relationships
enable it to obtain products from suppliers at favorable negotiated prices.
Through the breadth of its product offerings and effective use of its
purchasing leverage with vendors, the Company has the capability to serve
as a competitively priced, single source of supply to a wide variety of
long-term care facilities.
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<PAGE> 20
National Coverage With a Local Presence. With 11 full-service regional
distribution centers, each supported by a team of direct sales
representatives, the Company is able to provide consistent and reliable
coverage to mid-sized and large chains that operate in different geographic
areas. The Company also maintains a strong local presence in each region to
support independent operators and individual facilities within
multi-location chains.
GROWTH STRATEGY
The Company believes that the continuing implementation of the business
strategies described above, coupled with a focus on the following growth
strategies, will enhance its ability to expand its sales to existing and new
customers:
Emphasis on Attracting New Customers. The Company's strategy is to
increase its emphasis on attracting large regional and national chains as
well as to target both small chains and independent operators. The Company
believes that it can increase sales to large regional and national chains
by adding new distribution centers, expanding its existing distribution
centers and by hiring additional direct sales or other personnel and
through national account sales efforts. The Company believes that it can
increase its penetration of small chains and independent operators,
particularly in rural areas, by increasing its direct sales force,
utilizing group purchase organizations and by adding new distribution
centers. The Company believes that its high levels of customer service and
value-added support, breadth of its product offerings and competitive
pricing afford it a competitive advantage over the regional and local
distributors that typically target these customers.
Increased Penetration of Existing Customer Base. The Company intends
to capitalize on opportunities to expand sales to existing customers. The
Company believes that continuing industry consolidation will result in an
increase in the number of facilities operated by mid-sized and large chains
presently served by the Company. In addition, rising acuity levels within
the patient population of long-term care facilities are expected to
increase the breadth and amount of products required by the Company's
existing customers. The Company also believes that cost containment
pressures will continue to create incentives for facility operators to deal
increasingly with fewer distributors that, like the Company, can provide
inventory management and cost control programs.
Addressing Needs of Emerging Market Segments. The Company intends to
increase its focus on the home healthcare, hospice and sub-acute,
rehabilitative and transitional care segments of the long-term care market.
The Company believes that the home healthcare and sub-acute care segments
are growing at a faster rate than the nursing home segment of the long-term
care industry.
Acquisitions. The Company's strategy is to augment its internal growth
with the acquisition of medical supply distributors that serve
complementary markets or that supplement the Company's presence in existing
markets. On September 25, 1995, the Company purchased the operating assets
of L&M Medical, Inc., a regional medical supply distributor serving the
home healthcare markets of Southern California, Nevada and Arizona. L&M
Medical had revenues of approximately $12.0 million during the twelve-month
period prior to its acquisition. On February 29, 1996, the Company acquired
the stock of Bayer Medical Service Systems, Inc., a regional medical supply
distributor serving the long-term care markets of the Ohio Valley and
Florida. Bayer Medical Service Systems had revenues of approximately $10.0
million during the twelve-month period prior to its acquisition. On April
1, 1996, the Company purchased the operating assets of Express Care, L.P.,
a regional medical supply distributor located in Memphis, Tennessee.
Express Care provides distribution services to long-term care and home
health facilities owned, leased or managed by one of the largest national
nursing home chains, as well as other long-term care customers in the
southeastern United States. Express Care had revenues of approximately $6.5
million during the twelve-month period prior to its acquisition. See "Risk
Factors -- Risks Associated with Acquisition Strategy."
19
<PAGE> 21
The foregoing discussion contains forward-looking statements which involve
risks and uncertainties, and the Company's actual experience may differ
materially from that discussed above. Factors that may cause such a difference
include, but are not limited to, those discussed in "Risk Factors."
CUSTOMERS
The Company's customers range from independent nursing home operators to
large national chains offering a broad range of healthcare services, as well as
providers of home healthcare and sub-acute, rehabilitative and transitional
care. Nursing home operators tend to focus on providing custodial or skilled
nursing care, principally to elderly patients. In addition, many of these
facilities are increasingly setting aside a portion of their beds for sub-acute
care patients. Principal customers of the Company providing this form of
long-term care include Beverly Enterprises, Living Centers of America, National
HealthCorp. and Sun Healthcare Group. Home healthcare providers offer a wide
range of services such as pulmonary and infusion therapy to patients who have
been discharged from hospitals or sub-acute care facilities. Customers of the
Company providing home healthcare include Vitas Healthcare and Apria Healthcare.
Sub-acute, rehabilitative and transitional care providers generally serve
patients who are recovering from major injury, surgery or illness, but no longer
need the full services of a general acute care hospital. Principal customers of
the Company providing sub-acute, rehabilitative and transitional care include
Sun Healthcare Group.
The Company believes that approximately 75% of its 1995 net sales were
attributable to customers that focused primarily on providing custodial, skilled
nursing and sub-acute care, principally through nursing homes. The Company
estimates that large nursing home chains (operating more than 50 facilities) and
mid-sized nursing home chains (operating between 20 and 50 facilities) accounted
for approximately 39% of the facilities served by the Company in 1995 and 53% of
the Company's 1995 net sales. In the year ended December 31, 1995 and in the
three months ended March 31, 1996, the Company's largest five customers
accounted for approximately 38.8% and 32.3%, respectively, of net sales. Beverly
Enterprises accounted for 16.6% of net sales for the year ended December 31,
1995. The Company does not have long-term contracts with any of its customers.
Although the Company has not to date experienced any failure to collect accounts
receivable from its largest customers, an adverse change in the financial
condition of any of these customers, including as a result of a change in
governmental or private reimbursement programs, which would cause the accounts
receivable to become uncollectible or subject to extended payment terms, could
have a material adverse effect upon the Company's results of operations or
financial condition.
CUSTOMER SERVICE/ORDER ENTRY AND FULFILLMENT
The Company is committed to providing high levels of customer service and
support, the principal basis of which is accurate and complete order fulfillment
and reliable, consistent deliveries. As a result of its efficiency in order
entry and order fulfillment, the Company estimates that it ships more than 95%
of all orders on the same day the order is placed with a fill rate of 98%. Since
approximately 85% of customer orders are placed by telephone, the efficient
handling of incoming calls is critical to the Company's business. The Company
offers to its customers a toll-free telephone number and fax line and is
currently using its EDI ordering capability to accept electronically transmitted
orders from several of its major customers. All orders are received by 54
customer service representatives primarily at the Company's Jackson distribution
facility who utilize on-line computer terminals to enter customer orders and to
access information about products, product availability, pricing, promotions and
the customer's purchasing history. Following entry of an order, the order is
electronically transmitted to the distribution center nearest the customer's
facility and a packing slip for the entire order is printed for order
fulfillment. The Company imposes no minimum dollar amount on orders.
The Company believes that the reliable and consistent delivery of complete
and accurate orders is more important to its customers than immediate same-day
delivery. Accordingly, each distribution facility stocks the 4,000 most
frequently ordered products, with the Jackson facility stocking an additional
6,000 products. Product back orders average less than 2% of products ordered.
The Company estimates that approximately 60% of its orders are shipped by United
Parcel Service while the remaining orders are shipped by various common
carriers. The Company generally does not charge customers for shipping costs for
orders of $300 or
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<PAGE> 22
more. Because the Company seeks to service a customer's entire order from the
distribution center nearest the customer's facility, the Company estimates that
90% of the customers receive their orders within one or two business days of the
order date and 95% of the customers receive their orders within three business
days.
All of the customer service operations of the Company are centralized at
its Jackson facility, enabling the Company to provide consistent levels of
customer service to all customers, including to each individual facility
operated by a large multi-location chain. The Company's customer service
representatives are provided with detailed product knowledge and receive ongoing
training regarding new products and promotions enabling them to provide prompt
and efficient service and accurately answer customer inquiries. From time to
time, the Company arranges for manufacturers to make presentations on new
products both to the customer service representatives and directly to its
customers.
An essential part of the Company's commitment to customer service and
customer relations is the value-added support services developed by the Company
to meet the unique needs of long-term care providers as well as the specialized
needs of individual customers. These services are made available both to large
chains and to independent operators and are generally provided by the Company
without cost to the customer. The principal value-added services currently
provided by the Company include the following:
Monthly Usage Reports. The Company has been producing monthly usage
reports for its customers since the early 1980's and has refined such
reports over time in response to customer needs. The Company believes that
usage reports are critical to managing inventory consumption and
controlling costs. These reports identify each product purchased by a
facility during the month, the quantity purchased, the price per product
and the total price paid and also provide year-to-date totals. The monthly
usage reports enable customers to manage supply requirements, maintain
inventory controls, prepare monthly and yearly forecasts and budgets and
enable operators of multi-facility chains to track product purchases on
either a facility-by-facility or chain-wide basis.
Inventory Control/Ancillary Billing Software Programs. Since 1990, the
Company has offered software programs which allow a customer to maintain a
real time inventory count and order products on a just-in-time basis, as
well as to monitor patients' utilization of products for Medicaid and
Medicare reimbursement purposes. A product identification number is
assigned to each product, and when a product is utilized or distributed
within the facility, the customer enters the product identification number
into its computer system either manually or by use of a bar code scanner.
Next-Day Invoicing. Because the Company's order entry and billing
system is centralized at its Jackson facility and because the Company seeks
to ship each entire order at one time from a single distribution center,
the Company is able to generate and mail a single invoice directly to the
customer within one business day of the order date. As a result, the
customer generally receives the invoice concurrently with or within one day
of receiving the order, facilitating efficient verification of charges and
reducing handling and administrative costs for the customer.
Customized Services. The Company frequently works directly with a
customer to provide services tailored to its specialized needs. The Company
will generate customized invoices for customers upon request. For those
customers that use an inventory control/ancillary billing system, the
Company can provide bar code labels to support the customer's software
program, making the scanning process simple for those customers. To enable
multi-facility chains to better manage costs and control product selection,
the Company provides each of its chain customers with a customized ordering
guide which contains only those products selected by the chain operator in
advance to be offered within each of its facilities. The Company presently
publishes approximately 30 customized ordering guides.
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<PAGE> 23
PRODUCTS
The Company offers a comprehensive selection of over 10,000 medical
supplies and related products consisting largely of name brand items. The
breadth of the Company's product offerings and its special order capabilities
enable it to provide its customers with the convenience of one-stop shopping.
The following chart sets forth the principal categories of products offered by
the Company and the top selling types of products in each category, if
appropriate, and percentage of 1995 net sales in parenthesis:
<TABLE>
<S> <C>
MEDICAL/SURGICAL SUPPLIES (54.5%) ENTERAL FEEDING SUPPLIES (7.0%)
Wound care supplies Nutritional supplements
Exam gloves Pump sets
Urologicals Tubing
Blood/urine testing supplies
OTC (NON-LEGEND) DRUGS (3.5%)
PERSONAL CARE ITEMS (11.5%)
Soaps and shampoos RESPIRATORY THERAPY SUPPLIES (3.0%)
Personal hygiene items Oxygen Supplies
Paper products Ventilator supplies
Bedside utensils Trach and suction supplies
INCONTINENT SUPPLIES (13.5%) OSTOMY SUPPLIES (1.7%)
Adult diapers and underpads
DURABLE EQUIPMENT (5.3%)
Medical Instruments
</TABLE>
Wound care supplies, adult diapers and underpads and exam gloves were the
Company's top selling product types in 1995, accounting for 17.4%, 12.4% and
11.8%, respectively, of net sales. Some of the product categories which
experienced a growth rate of 50% or more in 1995 included wound care supplies,
exam gloves, enteral feeding supplies and respiratory therapy supplies.
The Company's Product Task Force regularly evaluates customer response to
product offerings and sales results in order to make informed product selections
and pricing decisions. Product selection is mainly a function of customer
preference, and the Company expects to continue to increase its product line
breadth as customer demand warrants. The Company has increased the number of
products offered from approximately 4,800 in 1989 to over 10,000 in 1995.
SALES AND MARKETING
At March 31, 1996, the Company employed a direct sales force of 56
professionals who have primary responsibility for maintaining relationships with
existing customers and identifying and soliciting new customers. Once a customer
relationship is established, the sales force serves primarily to supplement and
support sales through the Company's catalogs. Three sales professionals
concentrate exclusively on national accounts, calling on the corporate offices
of the national long-term care chains. The sales force supports each of the
Company's 11 regional distribution centers, enabling the Company to establish a
local sales presence in the markets served by each center.
The Company trains its sales professionals through an ongoing program of
identifying and solving customer needs, augmenting selling skills and providing
detailed product knowledge. Manufacturers support this program by assisting from
time to time in the training of the Company's sales professionals.
The Company markets its products to customers primarily through a variety
of catalogs. The Company annually publishes its standard catalog (approximately
100 pages in length), which is designed to serve as a basic resource tool for
customers. The standard catalog features approximately 1,600 products and
provides detailed product descriptions, photographs and helpful technical
information relating to products, if appropriate.
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<PAGE> 24
Approximately twice a year, the Company publishes a standard ordering guide
which contains pricing information and easy-to-follow ordering procedures for
the approximately 750 top selling products carried by the Company. The Company
also publishes for certain of its chain customers customized ordering guides
which contain only those products requested to be included by the chain. In
addition, the Company has introduced specialty ordering guides based on product
category, such as home respiratory therapy supplies. The Company guarantees the
published pricing information for the life of each of its ordering guides
(generally six months).
PURCHASING
The Company believes that effective purchasing is a key element to
providing name brand products at competitive prices. The Company believes that
its high volume purchases have increased its purchasing power with its primary
suppliers, resulting in volume discounts and rebates, favorable return policies
and promotional allowances.
The Company regularly evaluates supplier relationships and considers
alternate sourcing as appropriate to assure competitive costs and quality
standards. No single supplier represented more than 12% of the total cost of the
products purchased by the Company in 1995. The Company's largest suppliers in
1995 were: Kendall Healthcare Products Company, Baxter Healthcare, Inbrand,
Becton, Dickinson & Co., Ross Labs and Bristol-Myers Squibb Company. In 1995,
these suppliers accounted for approximately 30% of the cost of the products
purchased by the Company in 1995. Kendall Healthcare Products Company accounted
for over 10% of the total cost of products purchased by the Company in 1995. As
is customary in the industry, the Company generally does not have any long-term
contracts with its suppliers.
The Company's management information system is used to monitor and manage
its inventory. Generally, the Company has been able to return any unsold or
obsolete inventory to the manufacturer, resulting in negligible inventory
write-offs. At March 31, 1996, the Company maintained an investment in inventory
of approximately $18.5 million, of which approximately $320,000 (less than 2%)
was over 180 days old. The Company turned its inventory approximately seven
times during 1995. The Company also utilizes its management information system
to minimize its inventory out-of-stock position.
DISTRIBUTION FACILITIES
The following table provides certain information about each of the
Company's eleven facilities:
<TABLE>
<CAPTION>
EXPIRATION OF
LOCATION SQUARE FEET LEASED/OWNED LEASE TERM
-------------------------------------- ----------- ------------ --------------
<S> <C> <C> <C>
Jackson, MS........................... 38,000 owned N/A
Sacramento, CA........................ 42,480 leased September 1999
Dallas, TX............................ 43,529 leased February 2001
Harrisburg, PA........................ 31,500 leased November 1996
Los Angeles, CA....................... 31,450 leased July 2001
Stockton, CA.......................... 30,000 leased May 1997
Atlanta, GA........................... 26,000 leased December 1996
Madison, WI........................... 26,000 leased December 1998
Columbus, OH.......................... 23,425 leased January 1997
Phoenix, AZ........................... 19,140 leased April 1999
Orlando, FL........................... 11,700 leased October 1999
</TABLE>
COMPETITION
The Company faces intense competition from many regional and local
distributors in its markets as well as from several companies that distribute
products to long-term care facilities on a national basis. The Company believes
that there are three principal competitors that distribute products to long-term
care facilities on a national basis, General Medical Corporation, Medline
Industries, Inc. and Redline Medical
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<PAGE> 25
Supply Co. In addition, certain national long-term care chains buy products and
supplies directly from manufacturers and distribute such products directly to
their facilities. Although several national hospital distributors and healthcare
manufacturers presently sell to the long-term care market, to date the long-term
care market has not been a primary focus for such distributors and
manufacturers. Barriers to entry for distribution in the long-term care market
are relatively low, and the risk of new competitors entering the market,
particularly in local areas, is high. Certain of the Company's current
competitors, including many national hospital distributors, have substantially
greater capital resources, sales and marketing experience and distribution
capabilities than the Company. In response to competitive pressures from any of
its current or future competitors, the Company may be required to lower selling
prices in order to maintain or increase market share, and such measures could
adversely affect the Company's operating results.
The Company believes that the principal competitive factors in distributing
products to the long-term care market are the quality and level of customer
service, product pricing, breadth and quality of products offered and
consistency and stability of business relationships with customers. The Company
believes that it competes favorably with respect to each of these factors. In
particular, the Company believes it differentiates itself from the smaller local
and regional distributors with which it competes on account of the breadth of
its product offerings, its ability to acquire goods from suppliers at favorable
prices and its national coverage which enables it to offer consistent and
reliable service to multi-location chains. In addition, the Company believes
that it differentiates itself from most other national distributors in the
long-term care market as a result of its focus on providing services that can be
integrated with customers' internal budgetary and cost containment systems.
GOVERNMENT REGULATION
The Company's business is subject to regulation under the federal Food,
Drug and Cosmetic Act and the Occupational Safety and Health Act, as well as
under certain state regulations, because of its labeling, storage and handling
of certain drugs and medical devices. The Company believes that sales of
products that are subject to such regulation are not material in the aggregate.
The Company believes that it is in substantial compliance with such federal and
state laws and regulations and possesses all material licenses and permits
required for the conduct of its business.
EMPLOYEES
As of March 31, 1996, the Company employed 395 persons (all on a full-time
basis), of whom 80 were engaged in management, administration and accounting, 56
were engaged in direct sales, 87 were engaged in customer service, purchasing
and credit collection and 172 were engaged in warehouse and distribution
operations. Of these employees, 160 were located at the Company's corporate
headquarters and distribution center in Jackson, Mississippi. The Company
considers its employee relations to be excellent. No employees are covered by
collective bargaining agreements.
LEGAL PROCEEDINGS
The Company is a defendant from time to time in lawsuits incidental to its
business. The Company currently is not a party to, and none of its property is
subject to, any material legal proceedings.
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<PAGE> 26
MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---------------------------------------- --- --------------------------------------
<S> <C> <C>
Thomas G. Hixon......................... 52 President, Chief Executive Officer and
Chairman of the Board
Guy W. Edwards.......................... 39 Chief Financial Officer, Senior Vice
President, Treasurer and Director
Steven L. Richardson.................... 37 Vice President of Operations
John C. Piper........................... 59 Vice President of Sales and Marketing
Michael C. Tibbitts..................... 48 Vice President of Business Development
Stanton Keith Pritchard................. 31 Vice President of Corporate
Development, Secretary and General
Counsel
Richard W. Bayer........................ 44 Vice President of Market Development
David L. Bogetz......................... 40 Director
Melvin L. Hecktman...................... 56 Director
William W. McInnes...................... 47 Director
</TABLE>
Thomas G. Hixon has served as President, Chief Executive Officer and
director of the Company since 1985, and Chairman of the Board since March 1995.
Mr. Hixon served as General Manager of the Company from 1985 until March 1995.
Guy W. Edwards has been employed by the Company since 1986, serving as Vice
President of Operations from 1986 to 1991, as Vice President of Finance from
1991 until February 1995, as Senior Vice President from February 1995 to the
present and as Chief Financial Officer from 1991 to the present. Mr. Edwards has
served as a director of the Company since June 1992. Mr. Edwards is a Certified
Public Accountant.
Steven L. Richardson has been employed by the Company since its inception
in 1982, initially as a salesman and, from 1987 to 1991, as director of
operations for the Company's Western Division. Mr. Richardson has served as Vice
President of Operations since 1991.
John C. Piper has been employed by the Company in various sales capacities
since 1982. Mr. Piper became Vice President of Sales and Marketing in 1989.
Michael C. Tibbitts has been employed by Company since 1991 as Vice
President of Business Development. Prior to joining the Company, he was employed
for 19 years by Johnson & Johnson, for two divisions: Sterile Design (which
manufactured and marketed kit packages) and Surgikos (which manufactured and
marketed surgical supplies).
Stanton Keith Pritchard has been employed by the Company since July 1993.
He has been Secretary and General Counsel since March 1995 and Vice President
Corporate Development since April 1996. From 1990 until July 1993, Mr. Pritchard
was employed as Vice President by First Southeast Corporation, a private real
estate and investment management company.
Richard W. Bayer has been employed by the Company since February 1996 as
Vice President of Market Development. Mr. Bayer founded Bayer Medical Service
Systems, Inc. in 1985 and served as its President and Chief Executive Officer
from its incorporation until February 1996, when it was acquired by the Company.
David L. Bogetz has been a director of the Company since May 1993. Since
January 1996, Mr. Bogetz has served as Senior Vice President, Private Equity
Management of The Chicago Corporation. From March 1990 and March 1993 until
December 1995, Mr. Bogetz served as Investment Manager and Portfolio Manager,
respectively, for Sears Investment Management Co., a wholly-owned subsidiary of
Sears, Roebuck and Co., which manages the Sears pension and profit sharing
funds. From 1985 until 1990, Mr. Bogetz served as Vice President of Walnut
Capital Corp., a venture capital firm.
Melvin L. Hecktman has been a director of the Company since May 1993. Mr.
Hecktman was associated with United Stationers, Inc. as an employee or director
for 33 years and served as its Vice Chairman from 1989 to 1993. He is presently
President of Hecktman Management, an investment management and consulting firm
and a partner of Commonwealth Capital Partners, a merchant banking group. From
1985 until
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<PAGE> 27
February of 1990, Mr. Hecktman also served as Chairman of Joshua Meier Corp., a
manufacturer of presentation products.
William W. McInnes has been a director of the Company since May 1993. Prior
to February 1993, Mr. McInnes was Vice President Finance and Treasurer of
Hospital Corporation of America, where he was employed for 14 years. Mr. McInnes
is currently a director of The Infinity Funds, Inc.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1996 (except as noted),
as adjusted to reflect the sale of the shares offered hereby (i) by each person
who is known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) by each director of the Company, (iii) by each of
the executive officers of the Company, (iv) by all directors and executive
officers of the Company as a group and (v) by each Selling Stockholder.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE NUMBER OF AFTER THE
OFFERING(1)(2)(3) SHARES TO OFFERING(1)(2)(3)
NAME AND ADDRESS OF ----------------------- BE SOLD IN -----------------------
BENEFICIAL OWNER SHARES PERCENTAGE THE OFFERING SHARES PERCENTAGE
- --------------------------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Thomas G. Hixon........................ 2,198,136 15.7% 500,000 1,698,136 10.6%
1045 NewLand Drive
Jackson, MS 39211
Pilgrim Baxter & Associates, Ltd.(4)... 1,071,700 7.7% -- 1,071,700 6.7%
1255 Drummers Lane, Suite 300
Wayne, PA 19087
Investment Advisors, Inc.(5)........... 736,500 5.3% -- 736,500 4.6%
3700 First Bank Place, Box 357
Minneapolis, MN 55440
William Blair & Company, L.L.C.(4)..... 707,700 5.1% -- 707,700 4.4%
222 West Adams Street
Chicago, IL 60606
Continental Bank, N.A., as trustee of
the Sears Pension Trust.............. 120,000 * 80,000 40,000 *
Guy W. Edwards......................... 74,338 * -- 74,338 *
Steven L. Richardson................... 74,338 * 15,000 59,338 *
John C. Piper.......................... 56,988 * 37,000 19,988 *
Michael C. Tibbitts.................... 37,498 * 25,000 12,498 *
Stanton Keith Pritchard................ 131,400 * 20,000 111,400 *
Richard W. Bayer....................... 151,724 1.1% 96,724 55,000 *
David L. Bogetz........................ 34,000 * -- 34,000 *
Melvin L. Hecktman..................... 25,000 * 10,000 15,000 *
William W. McInnes..................... 17,002 * 8,000 9,002 *
All executive officers and directors as
a group (10 persons)................. 2,800,424 19.7% 711,724 2,088,700 12.9
</TABLE>
- ---------------
* Less than 1% of the outstanding Common Stock.
(1) The persons and entities named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned
by them, except as noted in the footnotes below.
26
<PAGE> 28
(2) The number of shares of Common Stock deemed outstanding prior to this
Offering includes (i) 13,960,446 shares of Common Stock outstanding as of
March 31, 1996 and (ii) shares of Common Stock issuable pursuant to options
held by the respective person which may be exercised within 60 days after
the date of this Prospectus, as set forth below. The number of shares of
Common Stock deemed to be outstanding after this Offering includes an
additional 2,000,000 shares of Common Stock which are being offered for sale
by the Company in this Offering.
(3) Includes options to purchase shares of Common Stock which may be exercised
within 60 days of the date of this Prospectus as follows: Mr. Hixon, 64,840
shares; Mr. Edwards, 17,001 shares; Mr. Richardson, 54,841 shares; Mr.
Piper, 12,001 shares; Mr. Tibbitts, 37,260 shares; Mr. Pritchard, 10,400
shares; Mr. Bogetz, 34,000 shares; Mr. Hecktman, 19,000 shares; and Mr.
McInnes, 17,002 shares.
(4) Reflects ownership as of December 31, 1995.
(5) These shares are owned by various custodian banks for various clients of
Investment Advisors, Inc., a registered investment advisor, which may be
deemed to be the beneficial owner of such shares in its capacity as
investment advisor. None of the individual clients or custodian banks holds
more than 5% or more of the shares. Reflects ownership as of December 31,
1995.
27
<PAGE> 29
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, par value $.01 per share and 1,000,000 shares of Preferred
Stock, par value $.01 per share.
COMMON STOCK
As of March 31, 1996, there were 13,960,446 shares of Common Stock
outstanding and held of record by approximately 31 stockholders. The Company
believes that shares of the Company's Common Stock held in bank, money
management, institution and brokerage house "nominee" names may account for at
least an estimated 2,214 additional beneficial holders. Based upon the number of
shares outstanding as of that date and giving effect to the issuance of the
2,000,000 shares of Common Stock offered by the Company hereby, there will be
15,960,446 shares of Common Stock outstanding upon the closing of this offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of holders of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are, and
the shares offered by the Company in this offering will be, when issued and paid
for, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time up
to an aggregate of 1,000,000 shares of Preferred Stock in one or more series and
to fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof, including
the dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change of control of the Company. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock which the Company may designate and issue in the
future. The Company has no present plans to issue any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board of Directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock.
The Company's Amended and Restated Certificate of Incorporation (the
"Charter") provides for the division of the Board of Directors into three
classes as nearly equal in size as possible with staggered three-year terms. See
"Management -- Executive Officers and Directors." Any director may be removed
without cause only by the vote of at least 75% of the shares entitled to vote
for the election of directors.
28
<PAGE> 30
The Charter empowers the Board of Directors, when considering a tender
offer or merger or acquisition proposal, to take into account factors in
addition to potential economic benefits to stockholders. Such factors may
include (i) comparison of the proposed consideration to be received by
stockholders in relation to the then current market price of the Company's
capital stock, the estimated current value of the Company in a freely negotiated
transaction and the estimated future value of the Company as an independent
entity; (ii) the impact of such a transaction on the employees, suppliers and
customers of the Company and its effect on the communities in which the Company
operates; and (iii) the ability of the Company to fulfill its objectives under
applicable statutes and regulations.
The Charter provides that any action required or permitted to be taken by
the stockholders of the Company may be taken only at a duly called annual or
special meeting of the stockholders and that special meetings may be called only
by the Chairman of the Board of Directors or the President of the Company. These
provisions could have the effect of delaying until the next annual stockholders
meeting, stockholder actions which are favored by the holders of a majority of
the outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the Company's
Common Stock, because such person or entity, even if it acquired a majority of
the outstanding voting securities of the Company, would be able to take action
as a stockholder (such as electing new directors or approving a merger) only at
a duly called stockholders meeting, and not by written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. The
Charter requires the affirmative vote of the holders of at least 75% of the
outstanding voting stock of the Company to amend or repeal any of the foregoing
Charter provisions, and to reduce the number of authorized shares of Common
Stock and Preferred Stock. An 80% vote is required to amend or repeal the
Company's Amended and Restated By-Laws (the "By-Laws"). The By-Laws may also be
amended ore repealed by a majority vote of the Board of Directors. Such
stockholder vote would be in addition to any separate class vote that might in
the future be required pursuant to the terms of any Preferred Stock that might
be outstanding at the time any such amendments are submitted to stockholders.
The Company's By-Laws provide that for nominations for the Board of
Directors or for other business to be properly brought by a stockholder before a
meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not less than 60 days nor more
than 90 days prior to an annual meeting. With respect to special meetings,
notice must be generally be delivered not more than 90 days prior to such
meeting and not later than the later of 60 days prior to such meeting or 10 days
following the date on which public announcement of such meeting is first made by
the Company. The notice must contain, among other things, certain information
about the stockholder delivering the notice and, as applicable, background
information about each nominee or a description of the proposed business to be
brought before the meeting.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
control of the Company.
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors. These provisions eliminate a director's liability
for monetary damages for a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The By-Laws also contain provision
indemnifying the directors and officers of the Company to the fullest extent
permitted by the DGCL. The Company believes that these provisions will assist
the Company in attracting and retaining qualified individuals to serve as
directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Saving Bank, Chicago, Illinois.
29
<PAGE> 31
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each of the Underwriters (the "Underwriters")
named below have severally agreed to purchase, and the Company and the Selling
Stockholders have agreed to sell to such Underwriter, the number of shares of
Common Stock set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------------------------------------------------- ----------
<S> <C>
Smith Barney Inc.........................................................
William Blair & Company, L.L.C...........................................
Montgomery Securities....................................................
----------
Total.......................................................... 2,791,724
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., William Blair & Company,
L.L.C. and Montgomery Securities are acting as the Representatives, propose to
offer part of the shares of Common Stock directly to the public at the public
offering price set forth on the cover page of this Prospectus and part of the
shares to certain dealers at a price that represents a concession not in excess
of $ per share under the public offering price. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain other dealers.
The Company has granted to the Underwriters an option, exercisable for
thirty days from the date of this Prospectus, to purchase up to 418,759
additional shares of Common Stock at the price to public set forth on the cover
page of this Prospectus minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with the offering of the shares offered
hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares listed in such table.
The Company, its executive officers and directors, and the Selling
Stockholders have agreed that, for a period of 90 days from the date of this
Prospectus, they will not, without the prior consent of Smith Barney Inc.,
offer, sell, contract to sell, or otherwise dispose of, any shares of Common
Stock of the Company or any securities convertible into, or exercisable or
exchangeable for Common Stock of the Company, except, in the case of the
Company, pursuant to the grant or exercise of options under the Company's stock
option plans and shares issuable to acquire assets or businesses.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
The rules of the Commission generally prohibit the Underwriters and other
members of the selling group, if any, from making a market in the Common Stock
during a "cooling-off" period immediately preceding the commencement of sales in
the offering. The Commission has, however, adopted exemptions from these rules
that permit passive market making under certain conditions. These rules permit
an Underwriter or other members of the selling group, if any, to continue to
make a market in the Common Stock subject to the condition, among others, that
its bid not exceed the highest bid by a market maker not connected with the
30
<PAGE> 32
offering and that its net purchases on any one trading day not exceed prescribed
limits. Pursuant to these exemptions, certain Underwriters and other members of
the selling group, if any, may engage in passive market making in the Common
Stock during the cooling-off period.
According to ownership records as of December 31, 1995, William Blair &
Company, L.L.C. beneficially owned, prior to this Offering, 5.1% of the
outstanding Common Stock of the Company, and will beneficially own, after this
Offering, 4.4% of the outstanding Common Stock of the Company.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Testa, Hurwitz & Thibeault,
LLP, Boston, Massachusetts. A partner of Testa, Hurwitz & Thibeault, LLP is the
holder of 2,000 shares of Common Stock. Certain legal matters in connection with
this Offering will be passed upon for the Underwriters by Sidley & Austin,
Chicago, Illinois.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995
and for each of the three years in the period ended December 31, 1995, appearing
in this Prospectus and in the Registration Statement have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere in this Prospectus and in the Registration Statement, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; 500 West Madison Street,
Chicago, IL 60621; and Seven World Trade Center, New York, NY 10048. Copies of
such material can be obtained from the Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Company's Common Stock is traded on the Nasdaq National Market, and
such reports, proxy statements and other information may be inspected at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (including all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Common Stock offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus omits certain information
contained in the Registration Statement. For further information with respect to
the Company and the Common Stock offered hereby, reference is hereby made to the
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any agreement
or other document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is made to the copy of such
agreement filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, may be inspected at the public
reference facilities maintained by the Commission as described above, and copies
of all or any part thereof may be obtained from such facilities upon payment of
the prescribed fees.
31
<PAGE> 33
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, heretofore filed by the Company with the
Commission pursuant to the Exchange Act, are incorporated by reference in this
Prospectus:
(i) Annual Report on Form 10-K for the fiscal year ended December 31,
1995, including portions of the Company's Proxy Statement dated March 15,
1996 for its Annual Meeting of Stockholders held on April 18, 1996; and
(ii) The section entitled "Description of Registrant's Securities to
be Registered" contained in the Company's Registration Statement on Form
8-A filed under the Exchange Act and declared effective March 24, 1994,
including any amendment or reports filed for the purpose of updating such
description.
Each document subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the offering
of the shares of Common Stock made hereby, shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such document. The Company will provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any document described
above (other than exhibits). Requests for such copies should be directed to
Stanton Keith Pritchard, Secretary, Gulf South Medical Supply, Inc., 426
Christine Drive, Ridgeland, Mississippi 39157; telephone (601) 856-5900.
Any statement contained herein or in a document incorporated or deemed to
be incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document that is incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
32
<PAGE> 34
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited)........ F-3
Statements of Income for the years ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1995 and 1996 (unaudited).............................. F-4
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and
1995 and the three months ended March 31, 1996 (unaudited).......................... F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1995 and 1996 (unaudited).............................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Gulf South Medical Supply, Inc.
We have audited the accompanying balance sheets of Gulf South Medical
Supply, Inc. as of December 31, 1994 and 1995, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gulf South Medical Supply,
Inc. as of December 31, 1994, and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Jackson, Mississippi
February 14, 1996, except for Note 2, as to which the date is April 19, 1996.
F-2
<PAGE> 36
GULF SOUTH MEDICAL SUPPLY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 9,151 $ 2,147 $ 1,087
Trade accounts receivable, less allowance for doubtful
accounts of $1,203 in 1994, $1,717 in 1995 and $1,651
(unaudited) in 1996...................................... 19,266 28,742 31,662
Inventories................................................. 9,438 16,874 18,500
Prepaid income taxes........................................ -- 1,032 --
Prepaid expenses and other.................................. 589 1,836 2,563
Deferred income taxes (Note 4).............................. 565 664 664
------- ------- -------
Total current assets................................ 39,009 51,295 54,476
Property and equipment:
Land........................................................ 567 567 567
Building.................................................... 598 600 600
Equipment................................................... 1,042 1,853 2,002
------- ------- -------
2,207 3,020 3,169
Accumulated depreciation.................................... (623) (882) (973)
------- ------- -------
1,584 2,138 2,196
Other assets:
Goodwill (Note 2)........................................... -- 1,141 1,110
Notes receivable from affiliate (Note 5).................... 413 413 413
Other assets................................................ 36 34 126
------- ------- -------
449 1,588 1,649
------- ------- -------
Total assets........................................ $41,042 $55,021 $58,321
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank........................................ $ 1,147 $ 1,403 $ --
Trade accounts payable...................................... 7,418 9,913 7,927
Accrued expenses and other current liabilities.............. 1,975 1,351 2,042
Current portion of long-term debt........................... -- 2,400 5,800
------- ------- -------
Total current liabilities........................... 10,540 15,067 15,769
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares -- 1,000,000
Issued and outstanding shares -- none
Common stock, $.01 par value:
Authorized shares -- 30,000,000
Issued and outstanding shares -- 13,728,734 in 1994,
13,918,096 in 1995 and 13,960,446 (unaudited) in 1996.... 137 139 140
Paid-in capital............................................. 20,762 22,052 22,327
Retained earnings............................................. 9,603 17,763 20,085
------- ------- -------
Total stockholders' equity.......................... 30,502 39,954 42,552
------- ------- -------
Total liabilities and stockholders' equity.......... $41,042 $55,021 $58,321
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 37
GULF SOUTH MEDICAL SUPPLY, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ----------------------
1993 1994 1995 1995 1996
------- ------- -------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. $65,119 $92,151 $130,094 $29,522 $40,235
Cost of sales............................. 48,357 68,122 97,973 22,143 30,647
------- ------- -------- ------- -------
Gross profit.............................. 16,762 24,029 32,121 7,379 9,588
Selling, general and administrative
expenses................................ 10,307 13,913 18,418 4,236 5,189
Merger costs and expenses (Note 2)........ -- -- -- -- 512
------- ------- -------- ------- -------
Operating income.......................... 6,455 10,116 13,703 3,143 3,887
Interest expense.......................... (2,206) (629) (199) (31) (52)
Interest income........................... -- 186 163 59 --
------- ------- -------- ------- -------
Income before income taxes................ 4,249 9,673 13,667 3,171 3,835
Income taxes (Note 4)..................... (1,619) (3,877) (5,507) (1,270) (1,513)
Net income................................ $ 2,630 $ 5,796 $ 8,160 $ 1,901 $ 2,322
======= ======= ======== ======= =======
Net income per share...................... $ 0.29 $ 0.45 $ 0.58 $ 0.14 $ 0.17
======= ======= ======== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 38
GULF SOUTH MEDICAL SUPPLY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
----------- ------ -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993............. 10,200,000 $102 $ 3,396 $ 1,000 $(13,000) $ (8,502)
Acquisition -- pooling of interest
(Note 2).......................... 151,724 1 24 177 -- 202
Net income for 1993.................. -- -- -- 2,630 -- 2,630
---------- ---- -------- -------- -------- --------
Balance at December 31, 1993........... 10,351,724 103 3,420 3,807 (13,000) (5,670)
Net income for 1994.................. 5,796 5,796
Public offering of common stock...... 3,240,000 32 23,350 -- -- 23,382
Retirement of treasury stock......... (6,120,000) -- (13,000) -- 13,000 --
Conversion of convertible debentures
into common stock................. 6,120,000 -- 6,500 -- -- 6,500
Issuance of common stock from
exercise of options............... 137,010 2 37 -- -- 39
Tax benefit of stock options
exercised......................... -- -- 455 -- -- 455
---------- ---- -------- -------- -------- --------
Balance at December 31, 1994........... 13,728,734 137 20,762 9,603 -- 30,502
Net income for 1995.................. -- -- -- 8,160 -- 8,160
Issuance of common stock from
exercise of options............... 189,362 2 110 -- -- 112
Tax benefit of stock options
exercised......................... -- -- 1,180 -- -- 1,180
---------- ---- -------- -------- -------- --------
Balance at December 31, 1995........... 13,918,096 139 22,052 17,763 -- 39,954
Net income for three months ended
March 31, 1996 (unaudited)........ 2,322 2,322
Issuance of common stock from
exercise of options (unaudited)... 42,350 1 170 -- -- 171
Tax benefit of stock options
exercised (unaudited)............. -- -- 105 -- -- 105
---------- ---- -------- -------- -------- --------
Balance at March 31, 1996
(unaudited).......................... 13,960,446 $140 $ 22,327 $ 20,085 $ -- $ 42,552
========== ==== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 39
GULF SOUTH MEDICAL SUPPLY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ----------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................. $ 2,630 $ 5,796 $ 8,160 $ 1,901 $ 2,322
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization............ 175 223 327 61 119
Deferred income tax credits.............. (262) (173) (99) -- --
Provision for doubtful accounts.......... 505 525 869 217 35
Provision for inventory obsolescence..... 70 -- -- -- --
Changes in operating assets and
liabilities net of assets acquired and
liabilities assumed of L&M Medical,
Inc.:
Increase in trade accounts
receivable.......................... (5,146) (5,798) (8,940) (4,005) (2,955)
Increase in inventories............... (1,533) (2,958) (6,101) (1,526) (1,626)
(Increase) decrease in prepaid income
taxes, prepaid expenses and other... (135) (382) (2,249) 156 305
Increase (decrease) in trade accounts
payable............................. 1,784 1,820 2,495 1,695 (1,986)
Increase in accrued expenses.......... 637 459 56 490 796
------- ------- ------- ------- -------
Net cash used in operating activities...... (1,275) (488) (5,482) (1,011) (2,990)
INVESTING ACTIVITIES
Purchase of L&M Medical, Inc. ............. -- -- (3,749) -- --
Purchases of equipment..................... (238) (359) (539) (235) (146)
(Increase) decrease in other assets........ 7 3 (2) (10) (92)
------- ------- ------- ------- -------
Net cash used in investing activities...... (231) (356) (4,290) (245) (238)
FINANCING ACTIVITIES
Principal payments on long-term debt....... (80) (7,103) -- -- --
Net borrowings (payments) under revolving
line of credit........................... 2,086 (6,927) 2,656 194 1,997
Proceeds from issuance of common stock..... -- 23,382 -- -- --
Proceeds from exercise of stock options.... -- 39 112 92 171
------- ------- ------- ------- -------
Net cash provided by financing
activities............................... 2,006 9,391 2,768 286 2,168
Net increase (decrease) in cash and cash
equivalents.............................. 500 8,547 (7,004) (970) (1,060)
Cash and cash equivalents at beginning of
period................................... 104 604 9,151 9,151 2,147
------- ------- ------- ------- -------
Cash and cash equivalents at end of
period................................... $ 604 $ 9,151 $ 2,147 $ 8,181 $ 1,087
======= ======= ======= ======= =======
NON-CASH TRANSACTIONS:
Conversion of convertible subordinated
debentures............................... $ -- $ 6,500 $ -- $ -- $ --
======= ======= ======= ======= =======
Tax benefit of stock options exercised..... $ -- $ 455 $ 1,180 $ -- $ 105
======= ======= ======= ======= =======
Cash paid for:
Interest................................... $ 2,155 $ 1,026 $ 177 $ 46 $ 29
======= ======= ======= ======= =======
Federal and state income taxes............. $ 1,771 $ 3,518 $ 5,372 $ 189 $ 206
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 40
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. ACCOUNTING POLICIES
Nature of Business
The Company is a national distributor of medical supplies and related
products to the long-term care industry.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents, which consist of highly liquid investments with
maturities of three months or less when purchased, are stated at cost which
approximates market value.
Inventories
Inventories, which consist primarily of medical supplies and related
products, are stated at the lower of cost (average cost method) or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is provided by straight-line and accelerated methods over the
estimated useful lives, which is 31 years for the building and from 3 to 7 years
for the equipment.
Goodwill
The excess of the cost of acquisition over the fair value of the net assets
acquired (goodwill) is amortized on a straight-line basis over its estimated
useful life of 10 years (See Note 2). Management assesses the recoverability of
goodwill based on undiscounted cash flows.
Long-Lived Assets
Effective January 1, 1996, the Company adopted FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The effect
of this adoption was not material to the Company's financial position or
operations.
Revenue Recognition
Revenue is recognized when product is shipped to customers. Credit is
extended based upon an evaluation of the customer's financial condition and
generally does not require collateral. Substantially all of the Company's
accounts receivables are due from companies in the long-term care industry
located throughout the United States. Credit losses are provided for in the
financial statements and have consistently been within management's
expectations.
F-7
<PAGE> 41
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Compensation
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, Accounting for Stock Issued to Employees.
Income Taxes
Deferred income taxes, which are provided on the liability method, relate
to temporary differences between assets and liabilities recognized differently
for financial reporting purposes and for income tax purposes.
Net Income Per Common Share
Net income per common share is computed by dividing net income applicable
to common stock (interest expense, net of income taxes, on the 10% convertible
subordinated debentures has been eliminated in 1993 and 1994), based on the
weighted average number of shares outstanding (as restated, see Note 2) during
each period presented (10,442,066 in 1993, 13,073,040 in 1994, 13,993,595 in
1995, and 13,947,724 (unaudited) and 14,047,309 (unaudited) for the three months
ended March 31, 1995 and 1996, respectively). Weighted average shares reflect
the stock split as discussed in note 7. Common equivalent shares include the
conversion of the 10% convertible subordinated debentures in 1993 and 1994.
Common equivalent shares relating to the stock options exercisable at December
31, 1994 and 1995, and March 31, 1995 and 1996 (unaudited) have been calculated
using the treasury stock method based on the average market value of the common
stock during 1994, 1995 and 1996.
2. ACQUISITIONS
On February 29, 1996, the Company completed the acquisition of all of the
outstanding common stock of Bayer Medical Service Systems, Inc. ("Bayer"). The
Company issued 151,724 (unaudited) shares of its common stock in exchange for
the outstanding common stock of Bayer. The share exchange was accounted for as a
pooling of interests and accordingly, the Company's financial statements have
been restated to include accounts and operations of Bayer (unaudited) for all
periods prior to the share exchange. Separate results of operations for the
periods prior to the share exchange with Bayer are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ------------------
1993 1994 1995 1995 1996
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales
Gulf South................................. $58,150 $83,376 $120,287 $27,008 $37,710
Bayer...................................... 6,969 8,775 9,807 2,514 2,525
------- ------- -------- ------- -------
Combined................................... $65,119 $92,151 $130,094 $29,522 $40,235
======= ======= ======== ======= =======
Gross profit
Gulf South................................. $14,518 $21,282 $ 29,752 $ 6,707 $ 9,161
Bayer...................................... 2,244 2,747 2,369 672 427
------- ------- -------- ------- -------
Combined................................... $16,762 $24,029 $ 32,121 $ 7,379 $ 9,588
======= ======= ======== ======= =======
Net income
Gulf South................................. $ 2,481 $ 5,728 $ 8,567 $ 1,914 $ 2,321
Bayer...................................... 149 66 (407) (13) 1
------- ------- -------- ------- -------
Combined................................... $ 2,630 $ 5,796 $ 8,160 $ 1,901 $ 2,322
======= ======= ======== ======= =======
</TABLE>
F-8
<PAGE> 42
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the share exchange, $512 (unaudited) of merger costs and
expenses ($315 after tax, or $.02 per share) were incurred and have been charged
to expense in the quarter ended March 31, 1996. The merger costs and expenses
related to legal, accounting and costs incurred in combining the operations of
the previously separate companies.
Effective September 25, 1995, the Company acquired certain operating assets
and liabilities of L&M Medical, Inc. ("L&M") for $3,749. This acquisition has
been accounted for using the purchase method of accounting. The purchase price
has been allocated on the basis of fair values of the assets acquired and
liabilities assumed. The purchase price was allocated to the assets acquired and
liabilities assumed as follows:
<TABLE>
<S> <C>
Accounts receivable......................................................... $1,405
Inventory................................................................... 1,335
Property and equipment...................................................... 289
Prepaid expenses............................................................ 30
Other assets................................................................ 19
Goodwill.................................................................... 1,171
Accrued expenses............................................................ (500)
------
$3,749
======
</TABLE>
Accordingly, the results of operations of the Company include L&M from the
date acquired. The operations of L&M were not material to the Company's
operations for 1993 and 1994. L&M was a distributor of medical supplies and
related products to the long-term care industry in southern California and
Arizona.
3. CREDIT FACILITIES
The Company has a $15.0 million revolving credit facility which matures
September 25, 1998, of which $12.6 million and $9.2 million (unaudited) were
available at December 31, 1995 and March 31, 1996, respectively. Borrowings bear
interest at prime or at LIBOR plus 1% to 2.5% per annum. A facility fee of .125%
per annum is charged on the unused portion of the revolving credit facility.
Borrowings under the revolving credit facility up to $7.5 million are unsecured.
Substantially all of the Company's assets would collateralize any borrowings in
excess of $7.5 million. The revolving credit facility contains numerous
restrictive covenants and financial ratio requirements.
4. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Current:
Federal.................................................. $1,523 $3,378 $4,561
State.................................................... 358 672 1,045
------ ------ ------
1,881 4,050 5,606
Deferred (credits):
Federal.................................................. (229) (151) (86)
State.................................................... (33) (22) (13)
------ ------ ------
(262) (173) (99)
------ ------ ------
$1,619 $3,877 $5,507
====== ====== ======
</TABLE>
F-9
<PAGE> 43
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred income tax assets are as follows:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Accounts receivable................................................... $445 $500
Inventory............................................................. 40 80
Accrued expenses...................................................... 80 84
---- ----
Deferred tax assets................................................... $565 $664
==== ====
</TABLE>
The difference between income taxes at the Company's effective tax rate and
income taxes (credits) at the statutory federal tax rate are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory federal income taxes............ $1,445 $3,288 $4,683 $1,078 $1,304
State income taxes, net................... 214 429 678 120 144
Other..................................... (40) 160 (146) 72 65
------ ------ ------ ------ ------
$1,619 $3,877 $5,507 $1,270 $1,513
====== ====== ====== ====== ======
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company had the following receivables from a company ("related
company") whose stockholders include the stockholders of the Company. The note
receivable bears interest at 10% per annum and is payable on demand.
<TABLE>
<CAPTION>
1993 1994 1995 1996
---- ---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Account receivable.................................. $160 $163 $332 $ 337
Note receivable..................................... 413 413 413 413
</TABLE>
Sales to the related company were approximately $65 in 1993, $7 in 1994, $3
in 1995, and $3 (unaudited) and $0 (unaudited) for the three months ended March
31, 1995 and 1996, respectively.
F-10
<PAGE> 44
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTION PLAN
Under the Company's 1992 Stock Plan, 1,300,000 shares of common stock have
been reserved for grant to key management personnel and to members of the Board
of Directors. At December 31, 1995 and March 31, 1996, 416,050 shares and
216,050 shares (unaudited), respectively, were available for grant under the
1992 plan. The options granted vest over terms of either three or five years
from either the date of grant or the first employment anniversary date. Changes
in outstanding options were as follows:
<TABLE>
<CAPTION>
OPTION
SHARES PRICE PER SHARE
------- ---------------
<S> <C> <C>
Outstanding at December 31, 1993............................ 651,950 $ .21 - .49
Granted................................................... 32,000 8.00
Exercised................................................. 137,002 .21 - .42
------- --------------
Outstanding at December 31, 1994............................ 546,948 .21 - 8.00
Granted................................................... 200,000 20.38 - 22.41
Exercised................................................. 189,364 .21 - 20.38
------- --------------
Outstanding at December 31, 1995............................ 557,584 .21 - 22.41
Granted (unaudited)....................................... 200,000 28.50 - 31.35
Exercised (unaudited)..................................... 42,350 .21 - 20.38
------- --------------
Outstanding at March 31, 1996 (unaudited)................... 715,234 $ .21 - 31.35
======= ==============
</TABLE>
Options for 211,442 shares, and 224,728 shares and 284,764 shares
(unaudited) were exercisable at December 31, 1994 and 1995 and March 31, 1996,
respectively. Compensation expense of $54, $54 and $13 (unaudited) has been
accrued applicable to certain options exercisable at December 31, 1994 and 1995
and March 31, 1996, respectively.
7. OTHER MATTERS
One customer accounted for 10.1%, 16.6% and 15.5% (unaudited) and 19.3%
(unaudited) of net sales for the year ended December 31, 1994 and 1995 and March
31, 1995 and 1996, respectively.
The Company leases certain vehicles, computers and office equipment under
operating leases. Lease periods range from two to four years. The Company also
leases warehouse space in Pennsylvania, Texas, California, Georgia and Wisconsin
under operating leases with lease periods ranging from three to five years.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1995, by year and in
the aggregate, are as follows:
<TABLE>
<S> <C>
1996................................................ $ 874
1997................................................ 387
1998................................................ 239
1999................................................ 107
------
Total minimum lease payments........................ $1,607
======
</TABLE>
Rental expense under the operating leases was $429 in 1993, $680 in 1994,
$1,054 in 1995 and $264 (unaudited) and $301 (unaudited) for the three months
ended March 31, 1995 and 1996, respectively.
The Company is involved from time to time in claims and routine litigation
incidental to its business. Management is of the opinion, based on the advice of
counsel, that the outcome of any presently pending matters will not have a
material adverse effect on the financial position or results of the operation of
the Company.
F-11
<PAGE> 45
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On May 23, 1995 a two-for-one stock split in the form of a stock dividend
was completed. All share and per share data and the stockholders' equity account
balances for all periods presented in the accompanying financial statements have
been retroactively adjusted to reflect the additional shares outstanding.
8. SUBSEQUENT EVENTS
Subsequent to March 31, 1996, the Company acquired certain operating assets
of Express Care, L.P. for approximately $3.5 million (unaudited). The
transaction will be accounted for using the purchase method of accounting.
The Company intends to file a registration statement with the Securities
and Exchange Commission covering 2,000,000 shares of the common stock to be sold
by the Company in an underwritten public offering.
F-12
<PAGE> 46
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 9
Price Range of Common Stock............ 9
Dividend Policy........................ 10
Capitalization......................... 10
Selected Financial and Operating
Data................................. 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 12
Business............................... 17
Management............................. 25
Principal and Selling Stockholders..... 26
Description of Capital Stock........... 28
Underwriting........................... 30
Legal Matters.......................... 31
Experts................................ 31
Additional Information................. 31
Incorporation of Certain Documents By
Reference............................ 32
Index to Financial Statements.......... F-1
</TABLE>
================================================================================
================================================================================
2,791,724 SHARES
[LOGO]
COMMON STOCK
------------
PROSPECTUS
, 1996
------------
SMITH BARNEY INC.
WILLIAM BLAIR & COMPANY
MONTGOMERY SECURITIES
================================================================================
<PAGE> 47
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses (other than underwriting discounts and commissions) payable in
connection with the sale of the Common Stock offered hereby (including the
Common Stock which may be issued pursuant to an over-allotment option) are as
follows:
<TABLE>
<CAPTION>
AMOUNTS*
----------
<S> <C>
SEC Registration fee..................................................... 44,767
NASD filing fee.......................................................... 13,483
Nasdaq National Market fee............................................... 17,500
Printing expenses........................................................ 120,000
Legal fees and expenses.................................................. 50,000
Accounting fees and expenses............................................. 35,000
Blue sky fees and expenses (including legal fees and expenses)........... 15,000
Transfer agent and registrar fees and expenses........................... 4,000
Miscellaneous............................................................ 25,250
----------
Total.......................................................... $ 325,000
==========
</TABLE>
The Company will bear all expenses shown above.
- ---------------
* All amounts are estimated, except SEC Registration, NASD and Nasdaq National
Market fees.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law, Article Tenth of the Company's
Amended and Restated Certificate of Incorporation, and Article 7 of the
Company's By-laws provide for indemnification of the Company's directors and
officers for liabilities and expenses that they may incur in such capacities. In
general, directors and officers are indemnified with respect to actions taken in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company, and with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). Reference is made to the
form of Underwriting Agreement filed as Exhibit 1 hereto.
The Company maintains directors and officers liability insurance for the
benefit of its directors and certain of its officers.
ITEM 16. EXHIBITS
Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<S> <C>
1.1 -- Form of Underwriting Agreement.
4.1(1) -- Specimen certificate representing the Common Stock.
5.1 -- Opinion of Testa, Hurwitz & Thibeault, LLP.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1).
24.1 -- Power of Attorney (included on page II-3).
27 -- Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated herein by reference to the exhibits (of the same exhibit
number) to the Company's Registration Statement on Form S-1 (File No.
33-75170).
II-1
<PAGE> 48
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of his registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was declared
effective. (2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 15 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE> 49
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement on Form S-3 to be signed on its behalf by the undersigned, thereunto
duly authorized, in Jackson, Mississippi on April 30, 1996.
GULF SOUTH MEDICAL SUPPLY, INC.
By: /s/ THOMAS G. HIXON
--------------------------------
Thomas G. Hixon
President
We, the undersigned officers and directors of Gulf South Medical Supply,
Inc., hereby severally constitute and appoint Thomas G. Hixon and Guy W.
Edwards, and each of them singly, our true and lawful attorneys, with full power
to them and each of them singly, to sign for us and in our names in the
capacities indicated below, the Registration Statement on Form S-3 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and, in connection with any registration of additional
securities pursuant to Rule 462(b) under the Securities Act of 1933, to sign any
abbreviated registration statement and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, in each case, with the Securities and Exchange Commission, and
generally to do all such things in our names and on our behalf in our capacities
as officers and directors to enable Gulf South Medical Supply, Inc. to comply
with the provisions of the Securities Act of 1933, as amended, and all
requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- --------------------------------------------- -------------------------------------------------
<C> <S> <C>
/s/ THOMAS G. HIXON President, Chief Executive Officer
- --------------------------------------------- and Director (principal
Thomas G. Hixon executive officer) April 30, 1996
/s/ GUY W. EDWARDS Vice President of Finance, Chief
- --------------------------------------------- Financial Officer, Treasurer and
Guy W. Edwards Director (principal financial
and accounting officer) April 30, 1996
/s/ DAVID L. BOGETZ Director April 30, 1996
- ---------------------------------------------
David L. Bogetz
/s/ MELVIN L. HECKTMAN Director April 30, 1996
- ---------------------------------------------
Melvin L. Hecktman
/s/ WILLIAM W. McINNES Director April 30, 1996
- ---------------------------------------------
William W. McInnes
</TABLE>
II-3
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------- ----------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.
4.1(1) -- Specimen certificate representing the Common Stock.
5.1 -- Opinion of Testa, Hurwitz & Thibeault, LLP.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit
5.1).
24.1 -- Power of Attorney (included on page II-3).
27 -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated herein by reference to the exhibits (of the same exhibit
number) to the Company's Registration Statement on Form S-1 (File No.
33-75170).
<PAGE> 1
DRAFT
2,791,724 Shares
Gulf South Medical Supply, Inc.
Common Stock
UNDERWRITING AGREEMENT
May __, 1996
SMITH BARNEY INC.
WILLIAM BLAIR & COMPANY, L.L.C.
MONTGOMERY SECURITIES
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Gulf South Medical Supply, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell an aggregate of 2,000,000 shares of its
common stock, $0.01 par value per share, to the several Underwriters named in
Schedule II hereto (the "Underwriters") and the persons named in Part A of
Schedule I hereto (the "Selling Stockholders") propose to sell to the several
Underwriters an aggregate of 791,724 shares of common stock of the Company.
The Company and the Selling Stockholders are hereinafter sometimes referred to
as the "Sellers". The Company's common stock, $0.01 par value, is hereinafter
referred to as the "Common Stock" and the 2,000,000 shares of Common Stock to
be issued and sold to the Underwriters by the Company and the 791,724 shares of
Common Stock to be sold to the Underwriters by the Selling Stockholders are
hereinafter referred to as the "Firm Shares". The Company also proposes to
sell to the Underwriters, upon the terms and conditions set forth in Section 2
hereof, up to an additional 418,759 shares (the "Additional Shares") of Common
Stock. The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "Shares".
The Company and the Selling Stockholders wish to confirm as follows
their respective agreements with you (the "Representatives") and the other
several Underwriters on whose behalf you are acting, in connection with the
several purchases of the Shares by the Underwriters.
1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities
<PAGE> 2
Act of 1933, as amended, and the rules and regulations of the Commission
thereunder (collectively, the "Act"), a registration statement on Form S-3
under the Act (the "registration statement"), including a prospectus subject to
completion relating to the Shares. The term "Registration Statement" as used
in this Agreement means the registration statement (including all financial
schedules and exhibits), as amended at the time it becomes effective, or, if
the registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed and must
be declared effective before the offering of the Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. The term "Prospectus"
as used in this Agreement means the prospectus in the form included in the
Registration Statement, or, if the prospectus included in the Registration
Statement omits information in reliance on Rule 430A under the Act and such
information is included in a prospectus filed with the Commission pursuant to
Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement
means the prospectus in the form included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in the
prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, and as
such prospectus shall have been amended from time to time prior to the date of
the Prospectus. Any reference in this Agreement to the registration statement,
the Registration Statement, any Prepricing Prospectus or the Prospectus shall
be deemed to refer to and include the documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the Act, as of the date of the
registration statement, the Registration Statement, such Prepricing Prospectus
or the Prospectus, as the case may be, and any reference to any amendment or
supplement to the registration statement, the Registration Statement, any
Prepricing Prospectus or the Prospectus shall be deemed to refer to and include
any documents filed after such date under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") which, upon filing, are incorporated by
reference therein, as required by paragraph (b) of Item 12 of Form S-3. As
used herein, the term "Incorporated Documents" means the documents which at the
time are incorporated by reference in the registration statement, the
Registration Statement, any Prepricing Prospectus, the Prospectus, or any
amendment or supplement thereto.
2. Agreements to Sell and Purchase. Subject to such adjustments
as you may determine in order to avoid fractional shares, the Company hereby
agrees, subject to all the terms and
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<PAGE> 3
conditions set forth herein, to issue and sell to each Underwriter and, upon
the basis of the representations, warranties and agreements of the Company and
the Selling Stockholders herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $_____ per Share
(the "purchase price per share"), the number of Firm Shares which bears the
same proportion to the aggregate number of Firm Shares to be issued and sold by
the Company as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule II hereto (or such number of Firm Shares increased as
set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to
be sold by the Company and the Selling Stockholders.
Subject to such adjustments as you may determine in order to avoid
fractional shares, each Selling Stockholder agrees, subject to all the terms
and conditions set forth herein, to sell to each Underwriter and, upon the
basis of the representations, warranties and agreements of the Company and the
Selling Stockholders herein contained and subject to all the terms and
conditions set forth herein, each Underwriter, severally and not jointly,
agrees to purchase from each Selling Stockholder at the purchase price per
share that number of Firm Shares which bears the same proportion to the number
of Firm Shares set forth opposite the name of such Selling Stockholder in
Schedule I hereto as the number of Firm Shares set forth opposite the name of
such Underwriter in Schedule II hereto (or such number of Firm Shares increased
as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares
to be sold by the Company and the Selling Stockholders.
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained and
subject to all the terms and conditions set forth herein, the Underwriters
shall have the right to purchase from the Company, at the purchase price per
share, pursuant to an option (the "over-allotment option") which may be
exercised at any time and from time to time prior to 9:00 P.M., New York City
time, on the 30th day after the date of the Prospectus (or, if such 30th day
shall be a Saturday or Sunday or a holiday, on the next business day thereafter
when the New York Stock Exchange is open for trading), up to an aggregate of
418,759 Additional Shares from the Company. Additional Shares may be purchased
only for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. Upon any exercise of the over-allotment option,
each Underwriter, severally and not jointly, agrees to purchase from the
Company the number of Additional Shares (subject to such adjustments as you may
determine in order to avoid fractional shares) which bears the same proportion
to the number of Additional Shares to be sold by the
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<PAGE> 4
Company as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule II hereto (or such number of Firm Shares increased as
set forth in Section 12 hereof) bears to the aggregate number of Firm Shares to
be sold by the Company and the Selling Stockholders.
Certificates in transferable form for the Shares (including any
Additional Shares) which each of the Selling Stockholders agrees to sell
pursuant to this Agreement have been placed in custody with ______________ (the
"Custodian") for delivery under this Agreement pursuant to a Custody Agreement
and Power of Attorney (the "Custody Agreement") executed by each of the Selling
Stockholders appointing and as agents and
attorneys-in-fact (the "Attorneys-in-Fact"). Each Selling Stockholder agrees
that (i) the Shares represented by the certificates held in custody pursuant to
the Custody Agreement are subject to the interests of the Underwriters, the
Company and each other Selling Stockholder, (ii) the arrangements made by the
Selling Stockholders for such custody are, except as specifically provided in
the Custody Agreement, irrevocable, and (iii) the obligations of the Selling
Stockholders hereunder and under the Custody Agreement shall not be terminated
by any act of such Selling Stockholder or by operation of law, whether by the
death or incapacity of any Selling Stockholder or the occurrence of any other
event. If any Selling Stockholder shall die or be incapacitated or if any
other event shall occur before the delivery of the Shares hereunder,
certificates for the Shares of such Selling Stockholder shall be delivered to
the Underwriters by the Attorneys-in-Fact in accordance with the terms and
conditions of this Agreement and the Custody Agreement as if such death or
incapacity or other event had not occurred, regardless of whether or not the
Attorneys-in-Fact or any Underwriter shall have received notice of such death,
incapacity or other event. Each Attorney-in-Fact is authorized, on behalf of
each of the Selling Stockholders, to execute this Agreement and any other
documents necessary or desirable in connection with the sale of the Shares to
be sold hereunder by such Selling Stockholder, to make delivery of the
certificates for such Shares, to receive the proceeds of the sale of such
Shares, to give receipts for such proceeds, to pay therefrom any expenses to be
borne by such Selling Stockholder in connection with the sale and public
offering of such Shares, to distribute the balance thereof to such Selling
Stockholder, and to take such other action as may be necessary or desirable in
connection with the transactions contemplated by this Agreement. Each
Attorney-in-Fact agrees to perform his duties under the Custody Agreement.
3. Terms of Public Offering. The Sellers have been advised by
you that the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the
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<PAGE> 5
Registration Statement and this Agreement have become effective as in your
judgment is advisable and initially to offer the Shares upon the terms set
forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New
York City time, on , 1993 (the "Closing Date"). The place of
closing for the Firm Shares and the Closing Date may be varied by agreement
among you, the Company and the Attorneys-in-Fact.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the aforementioned office
of Smith Barney Inc. at such time on such date (the "Option Closing Date"),
which may be the same as the Closing Date but shall in no event be earlier than
the Closing Date nor earlier than three nor later than ten business days after
the giving of the notice hereinafter referred to, as shall be specified in a
written notice from you on behalf of the Underwriters to the Company and the
Attorneys-in-Fact of the Underwriters' determination to purchase a number,
specified in such notice, of Additional Shares. The place of closing for any
Additional Shares and the Option Closing Date for such Shares may be varied by
agreement among you, the Company and the Attorneys-in-Fact.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 1:00 P.M., New York City time, on the third
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor by certified or official bank check or checks payable in New
York Clearing House (next day) funds to the order of the Company and the
Attorneys-in-Fact.
5. Agreements of the Company. The Company agrees with the
several Underwriters as follows:
(a) If, at the time this Agreement is executed and
delivered, it is necessary for the Registration Statement or a post-effective
amendment thereto to be declared effective before the offering of the Shares
may commence, the Company will endeavor to cause the Registration Statement or
such post-effective
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<PAGE> 6
amendment to become effective as soon as possible and will advise you promptly
and, if requested by you, will confirm such advice in writing, when the
Registration Statement or such post-effective amendment has become effective.
(b) The Company will advise you promptly and, if
requested by you, will confirm such advice in writing: (i) of any request by
the Commission for amendment of or a supplement to the Registration Statement,
any Prepricing Prospectus or the Prospectus or for additional information; (ii)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction or the
initiation of any proceeding for such purpose; and (iii) within the period of
time referred to in paragraph (f) below, of any change in the Company's
condition (financial or other), business, prospects, properties, net worth or
results of operations, or of the happening of any event, which makes any
statement of a material fact made in the Registration Statement or the
Prospectus (as then amended or supplemented) untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectus (as then amended or supplemented) in order to state a material fact
required by the Act or the regulations thereunder to be stated therein or
necessary in order to make the statements therein not misleading, or of the
necessity to amend or supplement the Prospectus (as then amended or
supplemented) to comply with the Act or any other law. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge (i)
four (4) signed copies of the registration statement as originally filed with
the Commission and of each amendment thereto, including financial statements
and all exhibits to the registration statement, (ii) such number of conformed
copies of the registration statement as originally filed and of each amendment
thereto, but without exhibits, as you may request, (iii) such number of copies
of the Incorporated Documents, without exhibits, as you may request, and (iv)
four (4) copies of the exhibits to the Incorporated Documents.
(d) The Company will not file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus
or, prior to the end of the period of time referred to in the first sentence in
subsection (f) below, file any document which, upon filing becomes an
Incorporated Document, of which you shall not previously have been advised or
to which, after you shall have received a copy of the document proposed to be
filed, you shall reasonably object.
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<PAGE> 7
(e) Prior to the execution and delivery of this
Agreement, the Company has delivered to you, without charge, in such quantities
as you have requested, copies of each form of the Prepricing Prospectus. The
Company consents to the use, in accordance with the provisions of the Act and
with the securities or Blue Sky laws of the jurisdictions in which the Shares
are offered by the several Underwriters and by dealers, prior to the date of
the Prospectus, of each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this
Agreement as possible and thereafter from time to time for such period as in
the opinion of counsel for the Underwriters a prospectus is required by the Act
to be delivered in connection with sales by any Underwriter or dealer, the
Company will expeditiously deliver to each Underwriter and each dealer, without
charge, as many copies of the Prospectus (and of any amendment or supplement
thereto) as you may request. The Company consents to the use of the Prospectus
(and of any amendment or supplement thereto) in accordance with the provisions
of the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Shares are offered by the several Underwriters and by all dealers to
whom Shares may be sold, both in connection with the offering and sale of the
Shares and for such period of time thereafter as the Prospectus is required by
the Act to be delivered in connection with sales by any Underwriter or dealer.
If during such period of time any event shall occur that in the judgment of the
Company or in the opinion of counsel for the Underwriters is required to be set
forth in the Prospectus (as then amended or supplemented) or should be set
forth therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
to supplement or amend the Prospectus (or to file under the Exchange Act any
document which, upon filing, becomes an Incorporated Document) in order to
comply with the Act or any other law, the Company will forthwith prepare and,
subject to the provisions of paragraph (d) above, file with the Commission an
appropriate supplement or amendment thereto (or to such document), and will
expeditiously furnish to the Underwriters and dealers a reasonable number of
copies thereof. In the event that the Company and you, as Representatives of
the several Underwriters, agree that the Prospectus should be amended or
supplemented, the Company, if requested by you, will promptly issue a press
release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Company will cooperate with you and with counsel
for the Underwriters in connection with the registration or qualification of
the Shares for offering and sale by the several Underwriters and by dealers
under the securities or Blue Sky laws
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<PAGE> 8
of such jurisdictions as you may designate and will file such consents to
service of process or other documents necessary or appropriate in order to
effect such registration or qualification; provided that in no event shall the
Company be obligated to qualify to do business in any jurisdiction where it is
not now so qualified or to take any action which would subject it to service of
process in suits, other than those arising out of the offering or sale of the
Shares, in any jurisdiction where it is not now so subject.
(h) The Company will make generally available to its
security holders a consolidated earnings statement, which need not be audited,
covering a twelve-month period commencing after the effective date of the
Registration Statement and ending not later than 15 months thereafter, as soon
as practicable after the end of such period, which consolidated earnings
statement shall satisfy the provisions of Section ll(a) of the Act.
(i) During the period of five years hereafter, the
Company will furnish to you (i) as soon as available, a copy of each report of
the Company mailed to stockholders or filed with the Commission, and (ii) from
time to time such other information concerning the Company as you may request.
(j) If this Agreement shall terminate or shall be
terminated after execution pursuant to any provisions hereof (otherwise than
pursuant to the second paragraph of Section 12 hereof or by notice given by you
terminating this Agreement pursuant to Section 12 or Section 13 hereof) or if
this Agreement shall be terminated by the Underwriters because of any failure
or refusal on the part of the Company or the Selling Stockholders to comply
with the terms or fulfill any of the conditions of this Agreement, the Company
agrees to reimburse the Representatives for all out-of-pocket expenses
(including fees and expenses of counsel for the Underwriters) incurred by you
in connection herewith.
(k) The Company will apply the net proceeds from the sale
of the Shares to be sold by it hereunder substantially in accordance with the
description set forth in the Prospectus.
(l) If Rule 430A of the Act is employed, the Company will
timely file the Prospectus pursuant to Rule 424(b) under the Act and will
advise you of the time and manner of such filing.
(m) Except as provided in this Agreement, the Company
will not sell, contract to sell or otherwise dispose of any Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
grant any options or warrants to purchase Common Stock, for a period of 90 days
after the date of the Prospectus, without the prior written consent of Smith
Barney Inc..
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<PAGE> 9
(n) The Company has furnished or will furnish to you
"lock-up" letters, in form and substance satisfactory to you, signed by each of
its current officers and directors and each of its stockholders designated by
you.
(o) Except as stated in this Agreement and in the
Prepricing Prospectus and Prospectus, the Company has not taken, nor will it
take, directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the
shares of Common Stock which it agrees to sell under this Agreement listed,
subject to notice of issuance, on the Nasdaq National Market on or before the
Closing Date.
6. Agreements of the Selling Stockholders. Each of the Selling
Stockholders agrees with the several Underwriters as follows:
(a) Such Selling Stockholder will cooperate to the extent
necessary to cause the registration statement or any post-effective amendment
thereto to become effective at the earliest possible time.
(b) Such Selling Stockholder will pay all Federal and
other taxes, if any, on the transfer or sale of the Shares being sold by the
Selling Stockholder to the Underwriters.
(c) Such Selling Stockholder will do or perform all
things required to be done or performed by the Selling Stockholder prior to the
Closing Date to satisfy all conditions precedent to the delivery of the Shares
pursuant to this Agreement.
(d) Such Selling Stockholder will not sell, contract to
sell or otherwise dispose of any Common Stock, except for the sale of Shares to
the Underwriters pursuant to this Agreement, prior to the expiration of 90 days
after the date of the Prospectus, without the prior written consent of Smith
Barney Inc..
(e) Except as stated in this Agreement and in the
Prepricing Prospectus and the Prospectus, such Selling Stockholder will not
take, directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of the Shares.
(f) Such Selling Stockholder will advise you promptly,
and if requested by you, will confirm such advice in writing,
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<PAGE> 10
within the period of time referred to in Section 5(f) hereof, of any change in
the Company's condition (financial or other), business, prospects, properties,
net worth or results of operations or of any change in information relating to
such Selling Stockholder or the Company or any new information relating to the
Company or relating to any matter stated in the Prospectus or any amendment or
supplement thereto which comes to the attention of such Selling Stockholder
that suggests that any statement made in the Registration Statement or the
Prospectus (as then amended or supplemented, if amended or supplemented) is or
may be untrue in any material respect or that the Registration Statement or
Prospectus (as then amended or supplemented, if amended or supplemented) omits
or may omit to state a material fact or a fact necessary to be stated therein
in order to make the statements therein not misleading in any material respect,
or of the necessity to amend or supplement the Prospectus (as then amended or
supplemented, if amended or supplemented) in order to comply with the Act or
any other law.
7. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act. The
Commission has not issued any order preventing or suspending the use of any
Prepricing Prospectus.
(b) The Company and the transactions contemplated by this
Agreement meet the requirements for using Form S-3 under the Act. The
registration statement in the form in which it became or becomes effective and
also in such form as it may be when any post-effective amendment thereto shall
become effective and the prospectus and any supplement or amendment thereto
when filed with the Commission under Rule 424(b) under the Act, complied or
will comply in all material respects with the provisions of the Act and will
not at any such times contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, except that this representation and warranty
does not apply to statements in or omissions from the registration statement or
the prospectus made in reliance upon and in conformity with information
relating to any Underwriter furnished to the Company in writing by or on behalf
of any Underwriter through you expressly for use therein.
(c) The Incorporated Documents heretofore filed, when they
were filed (or, if any amendment with respect to any such document was filed,
when such amendment was filed), conformed in
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<PAGE> 11
all material respects with the requirements of the Exchange Act and the rules
and regulations thereunder, any further Incorporated Documents so filed will,
when they are filed, conform in all material respects with the requirements of
the Exchange Act and the rules and regulations thereunder; no such document
when it was filed (or, if an amendment with respect to any such document was
filed, when such amendment was filed), contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading; and no
such further document, when it is filed, will contain an untrue statement of a
material fact or will omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
(d) All the outstanding shares of Common Stock of the
Company have been duly authorized and validly issued, are fully paid and
nonassessable and are free of any preemptive or similar rights; the Shares to
be issued and sold by the Company have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor in accordance with
the terms hereof, will be validly issued, fully paid and nonassessable and free
of any preemptive or similar rights; and the capital stock of the Company
conforms to the description thereof in the registration statement and the
prospectus.
(e) The Company is a corporation duly organized and
validly existing in good standing under the laws of the State of Delaware with
full corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business and is
in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and its
Subsidiary (as hereinafter defined) taken as a whole.
(f) The Company's only subsidiary is Bayer Medical
Service Systems, Inc. (the "Subsidiary"). The Subsidiary is a corporation duly
organized, validly existing and in good standing in the jurisdiction of its
incorporation, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus, and is duly registered and qualified
to conduct its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business requires such
registration or qualification, except where the
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<PAGE> 12
failure so to register or qualify does not have a material adverse effect on
the condition (financial or other), business, properties, net worth or results
of operations of such Subsidiary; all the outstanding shares of capital stock
of the Subsidiary have been duly authorized and validly issued, are fully paid
and nonassessable, and are owned by the Company directly, free and clear of any
lien, adverse claim, security interest, equity or other encumbrance.
(g) There are no legal or governmental proceedings
pending or, to the knowledge of the Company, threatened, against the Company or
the Subsidiary, or to which the Company or the Subsidiary, or to which any of
their respective material properties is subject, that are required to be
described in the Registration Statement or the Prospectus but are not described
as required, and there are no agreements, contracts, indentures, leases or
other instruments that are required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement or any Incorporated Document that are not described or filed as
required by the Act or the Exchange Act.
(h) Neither the Company nor the Subsidiary is in
violation of its certificate or articles of incorporation or by-laws, or other
organizational documents, or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or the Subsidiary or
of any decree of any court or governmental agency or body having jurisdiction
over the Company or the Subsidiary, or in default in any material respect in
the performance of any obligation, agreement or condition contained in any
bond, debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which the Company or the
Subsidiary is a party or by which any of them or any of their respective
properties may be bound.
(i) Neither the issuance and sale of the Shares, the
execution, delivery or performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby (i)
requires any consent, approval, authorization or other order of or registration
or filing with, any court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may be required for the
registration of the Shares under the Act and the Exchange Act and compliance
with the securities or Blue Sky laws of various jurisdictions, all of which
have been or will be effected in accordance with this Agreement) or conflicts
or will conflict with or constitutes or will constitute a breach of, or a
default under, the certificate or articles of incorporation or bylaws, or other
organizational documents, of the Company or the Subsidiary or (ii) conflicts or
will conflict with or constitutes or will constitute a breach of, or a default
under, any material provision of any
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<PAGE> 13
material agreement, indenture, lease or other instrument to which the Company
or the Subsidiary is a party or by which any of them or any of their respective
properties may be bound, or violates or will violate any statute, law,
regulation or filing or judgment, injunction, order or decree applicable to the
Company or the Subsidiary or any of their respective properties, or will result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or the Subsidiary pursuant to the terms of
any material agreement or instrument to which any of them is a party or by
which any of them may be bound or to which any of the property or assets of any
of them is subject.
(j) The accountants, who have certified or shall certify
the financial statements included or incorporated by reference in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto) are independent public accountants as required by the Act.
(k) The financial statements, together with related
schedules and notes, included or incorporated by reference in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), present
fairly in all material respects the consolidated financial position, results of
operations and changes in financial position of the Company and the Subsidiary
on the basis stated in the Registration Statement at the respective dates or
for the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; and the other financial and statistical
information and data included or incorporated by reference in the Registration
Statement and the Prospectus (and any amendment or supplement thereto) are
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Company and the Subsidiary.
(l) The execution and delivery of, and the performance by
the Company of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and legally binding
agreement of the Company, enforceable against the Company in accordance with
its terms, except as rights to indemnity and contribution hereunder may be
limited by federal or state securities laws.
(m) Except as disclosed in the Registration Statement and
the Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor the
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<PAGE> 14
Subsidiary has incurred any liability or obligation, direct or contingent, or
entered into any transaction, not in the ordinary course of business, that is
material to the Company and the Subsidiary taken as a whole, and there has not
been any material change in the capital stock, short-term debt or long-term
debt of the Company or the Subsidiary, or any material adverse change in the
condition (financial or other) or results of operations of the Company and the
Subsidiary taken as a whole.
(n) Each of the Company and the Subsidiary has good and
marketable title to all property (real and personal) described in the
Prospectus as being owned by it, free and clear of all liens, claims, security
interests or other encumbrances except such as are described in the
Registration Statement and the Prospectus or in a document filed as an exhibit
to the Registration Statement or which are not material to the Company and the
Subsidiary taken as a whole and all the property described in the Prospectus as
being held under lease by each of the Company and the Subsidiary is held by it
under valid, subsisting and enforceable leases.
(o) The Company has not distributed and, prior to the
later to occur of (i) the Closing Date and (ii) completion of the distribution
of the Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the Act.
(p) The Company and each of the Subsidiary has such
permits, licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties and
to conduct its business in the manner described in the Prospectus, subject to
such qualifications as may be set forth in the Prospectus or which are not
material to the Company and the Subsidiary taken as a whole; the Company and
the Subsidiary has fulfilled and performed all its material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such permit,
subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, none of such permits
contains any restriction that is materially burdensome to the Company or the
Subsidiary.
(q) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
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<PAGE> 15
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) To the Company's knowledge, neither the Company nor
the Subsidiary nor any employee or agent of the Company or the Subsidiary has
made any payment of funds of the Company or the Subsidiary or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in the
Prospectus.
(s) The Company and the Subsidiary have filed all tax
returns required to be filed, which returns are complete and correct, and
neither the Company nor the Subsidiary is in default in the payment of any
taxes which were payable pursuant to said returns or any assessments with
respect thereto.
(t) No holder of any security of the Company has any
right to require registration of shares of Common Stock or any other security
of the Company because of the filing of the registration statement or
consummation of the transactions contemplated by this Agreement.
(u) The Company and the Subsidiary own or possess all
material patents, trademarks, trademark registration, service marks, service
mark registrations, trade names, copyrights, licenses, inventions, trade
secrets and rights described in the Prospectus as being owned by them or any of
them or necessary for the conduct of their respective businesses, and the
Company is not aware of any claim to the contrary or any challenge by any other
person to the rights of the Company and the Subsidiary with respect to the
foregoing.
(v) The Company has complied with all provisions of
Florida Statutes, '517.075, relating to issuers doing business with Cuba.
8. Representations and Warranties of the Selling Stockholders.
Each Selling Stockholder represents and warrants to each Underwriter that:
(a) Such Selling Stockholder now has, and on the Closing
Date will have, valid and marketable title to the Shares to be sold by such
Selling Stockholder, free and clear of any lien, claim, security interest or
other encumbrance, including, without limitation, any restriction on transfer.
(b) Such Selling Stockholder now has, and on the Closing
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<PAGE> 16
Date will have, full legal right, power and authorization, and any approval
required by law, to sell, assign transfer and deliver such Shares in the manner
provided in this Agreement, and upon delivery of and payment for such Shares
hereunder, the several Underwriters will acquire valid and marketable title to
such Shares free and clear of any lien, claim, security interest, or other
encumbrance.
(c) This Agreement and the Custody Agreement have been
duly authorized, executed and delivered by or on behalf of such Selling
Stockholder and are the valid and binding agreements of such Selling
Stockholder enforceable against such Selling Stockholder in accordance with
their terms.
(d) Neither the execution and delivery of this Agreement
or the Custody Agreement by or on behalf of such Selling Stockholder nor the
consummation of the transactions herein or therein contemplated by or on behalf
of such Selling Stockholder requires any consent, approval, authorization or
order of, or filing or registration with, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
such as may be required under the Act or such as may be required under state
securities or Blue Sky laws governing the purchase and distribution of the
Shares) or conflicts or will conflict with or constitutes or will constitute a
breach of, or default under, or violates or will violate, any agreement,
indenture or other instrument to which such Selling Stockholder is a party or
by which such Selling Stockholder is or may be bound or to which any of such
Selling Stockholder's property or assets is subject, or any statute, law, rule,
regulation, ruling, judgment, injunction, order or decree applicable to such
Selling Stockholder or to any property or assets of such Selling Stockholder.
(e) The Registration Statement and the Prospectus,
insofar as they relate to such Selling Stockholder, do not and will not contain
an untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
(f) Such Selling Stockholder does not have any knowledge
or any reason to believe that the Registration Statement or the Prospectus (or
any amendment or supplement thereto) contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
(g) The representations and warranties of such Selling
Stockholder in the Custody Agreement are, and on the Closing Date and any
Option Closing Date will be, true and correct.
(h) Such Selling Stockholder has not taken, directly or
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<PAGE> 17
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares, except for the lock-up
arrangements described in the Prospectus.
9. Indemnification and Contribution. (a) The Company and each
Selling Stockholder, jointly and severally, agree to indemnify and hold
harmless each of you and each other Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any Prepricing Prospectus or in the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or
arising out of or based upon any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission which has been
made therein or omitted therefrom in reliance upon and in conformity with the
information relating to such Underwriter furnished in writing to the Company by
or on behalf of any Underwriter through you expressly for use in connection
therewith; provided, however, that the indemnification contained in this
paragraph (a) with respect to any Prepricing Prospectus shall not inure to the
benefit of any Underwriter (or to the benefit of any person controlling such
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Shares by such Underwriter to any person if a copy
of the Prospectus shall not have been delivered or sent to such person within
the time required by the Act and the regulations thereunder, and the untrue
statement or alleged untrue statement or omission or alleged omission of a
material fact contained in such Prepricing Prospectus was corrected in the
Prospectus, provided that the Company has delivered the Prospectus to the
several Underwriters in requisite quantity on a timely basis to permit such
delivery or sending. The foregoing indemnity agreement shall be in addition to
any liability which the Company or any Selling Stockholder may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company or any Selling Stockholder, such
Underwriter or such controlling person shall promptly notify the parties
against whom indemnification is being sought (the "indemnifying parties"), and
such indemnifying parties shall assume the defense thereof,
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<PAGE> 18
including the employment of counsel and payment of all fees and expenses. Such
Underwriter or any such controlling person shall have the right to employ
separate counsel in any such action, suit or proceeding and to participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Underwriter or such controlling person unless (i) the
indemnifying parties have agreed in writing to pay such fees and expenses, (ii)
the indemnifying parties have failed to assume the defense and employ counsel,
or (iii) the named parties to any such action, suit or proceeding (including
any impleaded parties) include both such Underwriter or such controlling person
and the indemnifying parties and such Underwriter or such controlling person
shall have been advised by its counsel that representation of such indemnified
party and any indemnifying party by the same counsel would be inappropriate
under applicable standards of professional conduct (whether or not such
representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying
party shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Underwriter or such controlling person). It is
understood, however, that the indemnifying parties shall, in connection with
any one such action, suit or proceeding or separate but substantially similar
or related actions, suits or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of only one separate firm of attorneys (in addition to any
local counsel) at any time for all such Underwriters and controlling persons
not having actual or potential differing interests with you or among
themselves, which firm shall be designated in writing by Smith Barney Inc., and
that all such fees and expenses shall be reimbursed as they are incurred. The
indemnifying parties shall not be liable for any settlement of any such action,
suit or proceeding effected without their written consent, but if settled with
such written consent, or if there be a final judgment for the plaintiff in any
such action, suit or proceeding, the indemnifying parties agree to indemnify
and hold harmless any Underwriter, to the extent provided in the preceding
paragraph, and any such controlling person from and against any loss, claim,
damage, liability or expense by reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, each Selling Stockholder, and any person who
controls the Company or such Selling Stockholder within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company and the Selling Stockholders to each
Underwriter, but only with respect to information relating to such Underwriter
furnished in writing by or on behalf of such Underwriter through you expressly
for use in the Registration
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<PAGE> 19
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto. If any action, suit or proceeding shall be brought against
the Company, any of its directors, any such officer, any Selling Stockholder,
or any such controlling person based on the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto, and in respect of which indemnity may be sought against any
Underwriter pursuant to this paragraph (c), such Underwriter shall have the
rights and duties given to the Company by paragraph (b) above (except that if
the Company shall have assumed the defense thereof such Underwriter shall not
be required to do so, but may employ separate counsel therein and participate
in the defense thereof, but the fees and expenses of such counsel shall be at
such Underwriter's expense), and the Company, its directors, any such officer,
the Selling Stockholders, and any such controlling person shall have the rights
and duties given to the Underwriters by paragraph (b) above. The foregoing
indemnity agreement shall be in addition to any liability which any Underwriter
may otherwise have.
(d) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company and the Selling Stockholders on the one hand and the Underwriters
on the other hand from the offering of the Shares, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Selling Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and
the Selling Stockholders on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page
of the Prospectus; provided that, in the event that the Underwriters shall have
purchased any Additional Shares hereunder, any determination of the relative
benefits received by the Company, the Selling Stockholders or the Underwriters
from the offering of the Shares shall include the net proceeds (before
deducting expenses) received by the Company and the Selling Stockholders, and
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<PAGE> 20
the underwriting discounts and commissions received by the Underwriters, from
the sale of such Additional Shares, in each case computed on the basis of the
respective amounts set forth in the notes to the table on the cover page of the
Prospectus. The relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the Selling
Stockholders on the one hand or by the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(e) The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in paragraph (d) above. The amount paid or payable by an indemnified party
as a result of the losses, claims, damages, liabilities and expenses referred
to in paragraph (d) above shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating any claim or defending
any such action, suit or proceeding. Notwithstanding the provisions of this
Section 9, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price of the Shares underwritten by it and
distributed to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several in proportion to the respective numbers
of Firm Shares set forth opposite their names in Schedule II hereto (or such
numbers of Firm Shares increased as set forth in Section 12 hereof) and not
joint.
(f) No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
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<PAGE> 21
(g) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Stockholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or the Selling Stockholders or any person controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter or any person
controlling any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
9.
10. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and
delivered, it is necessary for the registration statement or a post-effective
amendment thereto to be declared effective before the offering of the Shares
may commence, the registration statement or such post-effective amendment shall
have become effective not later than 5:30 P.M., New York City time, on the date
hereof, or at such later date and time as shall be consented to in writing by
you, and all filings, if any, required by Rules 424 and 430A under the Act
shall have been timely made; no stop order suspending the effectiveness of the
registration statement shall have been issued and no proceeding for that
purpose shall have been instituted or, to the knowledge of the Company or any
Underwriter, threatened by the Commission, and any request of the Commission
for additional information (to be included in the registration statement or the
prospectus or otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement,
there shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, properties, net worth, or results of operations of the Company or the
Subsidiary not contemplated by the Prospectus, which in your good faith
judgment, as Representatives of the several Underwriters, would make it
impractical or inadvisable to proceed with the public offering or purchase of
the Shares, or (ii) any event or development relating
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<PAGE> 22
to or involving the Company or any officer or director of the Company or any
Selling Stockholder which makes any statement made in the Prospectus untrue or
which, in the opinion of the Company and its counsel or the Underwriters and
their counsel, requires the making of any addition to or change in the
Prospectus in order to state a material fact required by the Act or any other
law to be stated therein or necessary in order to make the statements therein
not misleading, if amending or supplementing the Prospectus to reflect such
event or development would, in your good faith judgment, as Representatives of
the several Underwriters, makes it impractical or inadvisable to proceed with
the public offering or purchase of the Shares.
(c) You shall have received on the Closing Date, an
opinion of Testa, Hurwitz & Thibeault counsel for the Company and the Selling
Stockholders, dated the Closing Date and addressed to you, as Representatives
of the several Underwriters, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware with corporate power and authority to own its properties and conduct
its business as described in the Registration Statement and Prospectus and any
amendment or supplement thereto; and the Company has been duly qualified to do
business as a foreign corporation under the corporation law of, and is in good
standing as such in, every jurisdiction where the ownership or leasing of
property, or the conduct of its business requires such qualification except
where the failure so to qualify would not have a material adverse effect upon
the condition (financial or otherwise) or results of operations of the Company;
(ii) except as disclosed in the Prospectus the Company
does not own directly or indirectly 50% or more of (i) the combined voting
power of all classes of stock having general voting power under ordinary
circumstances to elect a majority of the board of directors of any corporation,
(ii) the capital interest or profits interest of a partnership, joint venture
or similar entity or (iii) the beneficial interest of a trust, association or
other unincorporated organization;
(iii) the authorized capital stock of the Company, of which
there is outstanding the amount set forth in the Registration Statement and
Prospectus (except for subsequent issuances, if any, pursuant to stock options
or other rights referred to in the Prospectus), conforms as to legal matters in
all material respects to the description thereof in the Registration Statement
and Prospectus;
(iv) the issued and outstanding capital stock of the
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<PAGE> 23
Company has been duly authorized and validly issued and is fully paid and
nonassessable and free of preemptive rights;
(v) the certificates for the Shares to be delivered
hereunder are in due and proper form, and when duly countersigned by the
Company's transfer agent and delivered to you or upon your order against
payment of the agreed consideration therefor in accordance with the provisions
hereof, the Shares represented thereby will be duly authorized and validly
issued, fully paid and nonassessable and free of preemptive rights and, to the
knowledge of such counsel, will be free of any pledge, lien, encumbrance, claim
or preemptive rights of, or rights of first refusal in favor of, stockholders
with respect to any of the Shares or the issuance or sale thereof, pursuant to
the Certificate of Incorporation or Bylaws of the Company and, to such
counsel's knowledge, there are no contractual preemptive rights, rights of
first refusal, rights of co-sale or other similar rights which exist with
respect to any of the Shares or the issuance and sale thereof; and the Shares
to be sold hereunder have been duly and validly authorized and qualified for
inclusion on the Nasdaq National Market, subject to notice of issuance;
(vi) the Registration Statement has become effective under
the Act, and, to the best knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, any required filing of the Prospectus pursuant to
Rule 424(b) has been made in accordance with Rule 424(b) and the Registration
Statement (including the information deemed to be part of the Registration
Statement at the time of effectiveness pursuant to Rule 430A(b), if
applicable), the Prospectus and each amendment or supplement thereto (except
for the financial statements and notes thereto, the financial statement
schedules and other statistical or financial data included therein as to which
such counsel need express no opinion) comply as to form in all material
respects with the requirements of the Act; such counsel has participated in the
preparation of the Registration Statement and the Prospectus and has no reason
to believe that the Registration Statement (including the information deemed to
be part of the Registration Statement at the time of effectiveness pursuant to
Rule 430A(b), if applicable) as amended or supplemented (except for the
financial statements and notes thereto, the financial statement schedules and
other statistical or financial data included therein as to which such counsel
need express no opinion), as of its effective date, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that, as of its date, the Prospectus or any amendment or supplement thereto
(except for the financial statements and notes thereto, the financial statement
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<PAGE> 24
schedules and other statistical or financial data included therein as to which
such counsel need express no opinion) contained any untrue statement of a
material fact or omitted to state any material fact necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made or that, as of the Closing Date or the Option Closing Date, as
the case may be, either the Registration Statement or the Prospectus or any
further amendment or supplement thereto made by the Company prior to the
Closing Date or the Option Closing Date, as the case may be, (except for the
financial statements and notes thereto, the financial statement schedules and
other statistical or financial data included therein to which such counsel need
express no opinion) contained any untrue statement of a material fact or
omitted to state any material fact necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
such counsel does not know of any legal or governmental proceedings pending or
threatened required to be described in the Prospectus which are not described
as required, nor of any contracts or documents of a character required to be
described in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not described or filed, as
required;
(vii) all Incorporated Documents, when they were filed with
the Commission, complied as to form in all material respects with the
requirements of the Exchange Act; and such counsel has no reason to believe
that any of such documents, when they were so filed, contained an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such documents were so filed, not misleading (except
for the financial statements or other financial or statistical data contained
in any such document as to which counsel need express no opinion);
(viii) this Agreement and the performance of the Company's
obligations hereunder have been duly authorized by all necessary corporate
action and this Agreement has been duly executed and delivered by and on behalf
of the Company; and no approval, order, authorization or consent of any public
board, agency or instrumentality of the United States or of any state or other
jurisdiction is necessary in connection with the issue or sale of the Shares by
the Company pursuant to this Agreement (other than under the Act, applicable
blue sky laws and the rules of the National Association of Securities Dealers,
Inc.) or the consummation of the Company of any other transactions contemplated
hereby;
(ix) the execution and performance of this Agreement, the
issue and sale of the Shares, and the consummation of the
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<PAGE> 25
transactions herein contemplated by the Company, will not contravene, conflict
with any of the provisions of, or result in a breach or default under, any of
the terms or provisions of any agreement, franchise, license, indenture,
mortgage, deed of trust, note agreement or other agreement or instrument known
to such counsel of the Company or by which its property is bound and which
contravention or default would be material to the Company; nor will such
actions violate or conflict with any of the provisions of the Certificate of
Incorporation or Bylaws of the Company or, so far as is known to such counsel,
violate any statute, order, rule or regulation of any court or regulatory or
governmental body having jurisdiction over the Company;
(x) to such counsel's knowledge, except as disclosed in the
Prospectus [Bayer disclosed(?)], no person has the right, contractual or
otherwise, to cause the Company to register pursuant to the Act any shares of
capital stock of the Company upon the issue and sale of the Shares to be sold
by the Company to the Underwriters pursuant to this Agreement;
(xi) to such counsel's knowledge, all offers and sales of the
Company's capital stock prior to the date of the Company's initial public
offering of Common Stock were at all relevant times exempt from the
registration requirements of the Act and were duly registered or the subject of
an available exemption from the registration requirements of the applicable
state securities or blue sky laws;
(xii) with respect to each Selling Stockholder, this
Agreement has been duly authorized, executed and delivered by or on behalf of
each such Selling Stockholder; and the execution and performance of this
Agreement and the Custody Agreement, the sale and transfer of the Shares by
such Selling Stockholder, and the consummation of the transactions herein
contemplated by such Selling Stockholders will not contravene, conflict with
any of the provisions of, or result in a breach or default under, any
agreement, franchise, license, indenture, mortgage, deed of trust, note
agreement or other agreement or instrument known to such counsel to which any
of such Selling Stockholders is a party or by which any are bound or to which
any of the property of such Selling Stockholders is subject, nor will such
actions violate any order, rule or regulation known to such counsel of any
court or regulatory or governmental body having jurisdiction over any of such
Selling Stockholders or any of their properties; and, to such counsel's
knowledge, no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement or the sale of Shares to be sold by
such Selling Stockholders hereunder, except such as have been obtained under
the Act and such as may be required under applicable blue sky laws in
connection
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<PAGE> 26
with the purchase and distribution of such Shares by the Underwriters and the
clearance of such offering with the NASD;
(xiii) each Selling Stockholder has full right, power and
authority to enter into this Agreement and to sell, transfer and deliver the
Shares to be sold on the Closing Date, by such Selling Stockholder hereunder;
upon delivery and payment for such Shares to be sold by such Selling
Stockholder hereunder in accordance with this Agreement, the Underwriters (who
counsel may assume to be bona fide purchasers) will acquire valid title to such
Shares so sold, to the knowledge of such counsel, free and clear of all voting
trust arrangements, liens, encumbrances, adverse claims, security interests and
community property rights or any other restriction on transfer imposed on such
Shares by such Selling Stockholder or the Company; and
(xiv) the Custody Agreement has been duly executed and
delivered by each Selling Stockholder and constitutes a valid and binding
agreement of each such Selling Stockholder in accordance with its terms.
In rendering such opinion, such counsel may state that they
are relying upon the certificate of Harris Trust and Savings Bank, the transfer
agent for the Common Stock, as to the number of shares of Common Stock at any
time or times outstanding, and that insofar as their opinion under clause (vi)
above relates to the accuracy and completeness of the Prospectus and
Registration Statement, it is based upon a general review with the Company's
representatives and independent accountants of the information contained
therein, without independent verification by such counsel of the accuracy or
completeness of such information. Such counsel may also rely upon the opinions
of other competent counsel and, as to factual matters, on certificates of
officers of the Company and of state officials, in which case their opinion is
to state that they are so doing and copies of such opinions or certificates are
to be attached to the opinion unless such opinions or certificates (or, in the
case of certificates, the information therein) have been furnished to the
Underwriters otherwise. Such counsel may also rely, as to factual matters,
upon the representations and warranties of the Company and the Selling
Stockholders contained herein and in the and Custody Agreement.
(e) You shall have received on the Closing Date an opinion of
Sidley & Austin, counsel for the Underwriters, dated the Closing Date and
addressed to you, as Representatives of the Underwriters, with respect to the
incorporation of the Company, the validity of the Shares to be sold by the
Company, the form of the Registration Statement and the Prospectus and other
related matters as you may reasonably require, and the Company shall have
furnished to such counsel such documents and shall have exhibited to them
- 26 -
<PAGE> 27
such papers and records as they request for the purpose of enabling them to
pass upon such matters.
(f) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and the
Closing Date from Ernst Young LLP and Haddox, Reid, Burkes, & Calhoun,
independent certified public accountants, substantially in the forms heretofore
approved by you.
(g)(i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there
shall not have been any material change in the capital stock; the short-term or
long-term debt of the Company (other than in the ordinary course of business)
from that set forth or contemplated in the Registration Statement or the
Prospectus (or any amendment or Supplement thereto); (iii) there shall not have
been, since the respective dates as of which information is given in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto), except as may otherwise be stated in the Registration Statement and
Prospectus (or any amendment or supplement thereto), any material adverse
change in the condition (financial or other) or results of operations of the
Company and the Subsidiary taken as a whole; (iv) the Company and the
Subsidiary shall not have any liabilities or obligations, direct or contingent
(whether or not in the ordinary course of business), that are material to the
Company and the Subsidiary, taken as a whole, other than those reflected in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); and (v) all the representations and warranties of the Company
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), to the effect set
forth in this Section 10(g) and in Section 10(h) hereof.
(h) The Company shall not have failed at or prior to the
Closing Date to have performed or complied with any of its agreements herein
contained and required to be performed or complied with by it hereunder at or
prior to the Closing Date.
(i) All the representations and warranties of the Selling
Stockholders contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing Date
and signed by or on behalf of the Selling Stockholders to the effect set forth
in this
- 27 -
<PAGE> 28
Section 10(i) and in Section 10(j) hereof.
(j) The Selling Stockholders shall not have failed at or
prior to the Closing Date to have performed or complied with any of their
agreements herein contained and required to be performed or complied with by
them hereunder at or prior to the Closing Date.
(k) Prior to the Closing Date the shares of Common Stock
which the Company agrees to sell pursuant to this Agreement shall have been
listed, subject to notice of issuance, on the Nasdaq National Market.
(l) The Sellers shall have furnished or caused to be
furnished to you such further certificates and documents as you shall have
requested.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and your counsel, Sidley & Austin.
Any certificate or document signed by any officer of the
Company or any Attorney-in-Fact or any Selling Stockholder and delivered to
you, as Representatives of the Underwriters, or to counsel for the
Underwriters, shall be deemed a representation and warranty by the Company, the
Selling Stockholders or the particular Selling Stockholder, as the case may be,
to each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the satisfaction on and as of any
Option Closing Date of the conditions set forth in this Section 10, except
that, if any Option Closing Date is other than the Closing Date, the
certificates, opinions and letters referred to in paragraphs (c) through (i)
shall be dated the Option Closing Date in question and the opinions called for
by paragraphs (c), (d) and (e) shall be revised to reflect the sale of
Additional Shares.
11. Expenses. The Sellers (in proportion to the number
of Shares being offered by each of them, including any Additional Shares which
the Underwriters shall have elected to purchase) agree to pay the following
costs and expenses and all other costs and expenses incident to the performance
by them of their obligations hereunder: (i) the preparation, printing or
reproduction, and filing with the Commission of the registration statement
(including financial statements and exhibits thereto), each Prepricing
Prospectus, the Prospectus, and each amendment or supplement to any of them;
(ii) the printing (or reproduction) and delivery (including postage, air
freight charges and charges for counting and packaging) of such copies of the
registration statement, each
- 28 -
<PAGE> 29
Prepricing Prospectus, the Prospectus, the Incorporated Documents, and all
amendments or supplements to any of them, as may be reasonably requested for
use in connection with the offering and sale of the Shares; (iii) the
preparation, printing, authentication, issuance and delivery of certificates
for the Shares, including any stamp taxes in connection with the original
issuance and sale of the Shares; (iv) the printing (or reproduction) and
delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda
and all other agreements or documents printed (or reproduced) and delivered in
connection with the offering of the Shares; (v) the listing of the Shares on
the Nasdaq National Market; (vi) the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of the several
states as provided in Section 5(g) hereof (including the reasonable fees [not
to exceed $_______], expenses and disbursements of counsel for the Underwriters
relating to the preparation, printing or reproduction, and delivery of the
preliminary and supplemental Blue Sky Memoranda and such registration and
qualification); (vii) the filing fees and the fees and expenses of counsel for
the Underwriters in connection with any filings required to be made with the
National Association of Securities Dealers, Inc.; (viii) the transportation and
other expenses incurred by or on behalf of Company representatives in
connection with presentations to prospective purchasers of the Shares; and (ix)
the fees and expenses of the Company's accountants and the fees and expenses of
counsel (including local and special counsel) for the Company and the Selling
Stockholders.
12. Effective Date of Agreement. This Agreement shall
become effective: (i) upon the execution and delivery hereof by the parties
hereto; or (ii) if, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time
as this Agreement shall have become effective, it may be terminated by the
Company, by notifying you, or by you, as Representatives of the several
Underwriters, by notifying the Company and the Selling Stockholders.
If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate number of Shares which the Underwriters
are obligated to purchase on the Closing Date, each non-defaulting Underwriter
shall be obligated, severally, in the proportion which the number of Firm
Shares set forth opposite its name in Schedule
- 29 -
<PAGE> 30
II hereto bears to the aggregate number of Firm Shares set forth opposite the
names of all non-defaulting Underwriters or in such other proportion as you may
specify in accordance with Section 20 of the Master Agreement Among
Underwriters of Smith Barney Inc., to purchase the Shares which such defaulting
Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If
any one or more of the Underwriters shall fail or refuse to purchase Shares
which it or they are obligated to purchase on the Closing Date and the
aggregate number of Shares with respect to which such default occurs is more
than one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date and arrangements satisfactory to you
and the Company for the purchase of such Shares by one or more non-defaulting
Underwriters or other party or parties approved by you and the Company are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company. In any
such case which does not result in termination of this Agreement, either you or
the Company shall have the right to postpone the Closing Date, but in no event
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any such
default of any such Underwriter under this Agreement. The term "Underwriter"
as used in this Agreement includes, for all purposes of this Agreement, any
party not listed in Schedule II hereto who, with your approval and the approval
of the Company, purchases Shares which a defaulting Underwriter is obligated,
but fails or refuses, to purchase.
Any notice under this Section 12 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be
subject to termination in your absolute discretion, without liability on the
part of any Underwriter to the Company or any Selling Stockholder, by notice to
the Company, if prior to the Closing Date or any Option Closing Date (if
different from the Closing Date and then only as to the Additional Shares), as
the case may be, (i) trading in securities generally on the New York Stock
Exchange or the Nasdaq National Market shall have been suspended or minimum
prices shall have been established on such exchange or market,(ii) a general
moratorium on commercial banking activities in New York shall have been
declared by either federal or state authorities, or (iii) there shall have
occurred an outbreak of major armed hostilities between the United States and
any foreign power, the effect of which on the financial markets of the United
States is such as to make it, in your judgment,
- 30 -
<PAGE> 31
impracticable or inadvisable to commence or continue the offering of the Shares
at the offering price to the public set forth on the cover page of the
Prospectus or to enforce contracts for the resale of the Shares by the
Underwriters. Notice of such termination may be given to the Company by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
14. Information Furnished by the Underwriters. The
statements set forth in the last paragraph on the cover page, the second and
third paragraphs on the inside cover page, and the statements in the first and
third paragraphs under the caption "Underwriting" in any Prepricing Prospectus
and in the Prospectus, constitute the only information furnished by or on
behalf of the Underwriters through you as such information is referred to in
Sections 7(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in
Sections 5, 12 and 13 hereof, notice given pursuant to any provision of this
Agreement shall be in writing and shall be delivered (i) if to the Company, at
the office of the Company at , Attention: [insert name and
title]; or (ii) if to the Selling Stockholders, at , Attention:
[insert name and title], or (iii) if to you, as Representatives of the several
Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013, Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors and officers, and the other
controlling persons referred to in Section 9 hereof and their respective
successors and assigns, to the extent provided herein, and no other person
shall acquire or have any right under or by virtue of this Agreement. Neither
the term "successor" nor the term "successors and assigns" as used in this
Agreement shall include a purchaser from any Underwriter of any of the Shares
in his status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
- 31 -
<PAGE> 32
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
GULF SOUTH MEDICAL SUPPLY, INC.
By ...........................
Chief Executive Officer
Each of the Selling Stockholders
named in Schedule I hereto
By ........................
Attorney-in-Fact
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule II
hereto.
SMITH BARNEY INC.
[COMANAGER(S)]
As Representatives of the Several Underwriters
By SMITH BARNEY INC.
By ..........................
Managing Director
- 32 -
<PAGE> 33
SCHEDULE I
NAME OF COMPANY
Part A - Firm Shares
<TABLE>
<CAPTION>
Number of
Selling Stockholders Firm Shares
-------------------- -----------
<S> <C>
______________
Total........ ______________
</TABLE>
- 33 -
<PAGE> 34
SCHEDULE II
NAME OF COMPANY
<TABLE>
<CAPTION>
Number of Number of
Underwriter Firm Shares Underwriter Firm Shares
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
Smith Barney Inc. ....
-------------
Total.....
-------------
</TABLE>
- 34 -
<PAGE> 1
TESTA, HURWITZ & THIBEAULT, LLP
High Street Tower
125 High Street
Boston, MA 02110
May 1, 1996
Gulf South Medical Supply, Inc.
426 Christine Drive
Ridgeland, MS 39157
Re: Registration Statement on Form S-3
Relating to Shares of Common Stock
Dear Sir or Madam:
This opinion relates to an aggregate of 3,210,483 shares of Common Stock,
par value $.01 per share (the "Common Stock"), of Gulf South Medical Supply,
Inc. (the "Company"), which are the subject matter of a Registration Statement
on Form S-3 filed with the Securities and Exchange Commission on May 1, 1996
(the "Registration Statement").
The 3,210,483 shares of Common Stock covered by the Registration Statement
are being sold by the Company and certain stockholders of the Company (the
"Selling Stockholders") and include 418,759 shares subject to an over-allotment
option granted by the Selling Stockholders to the underwriters to be named in
the prospectus (the "Prospectus") included in the Registration Statement.
Based upon such investigation as we have deemed necessary, we are of the
opinion that when the shares of Common Stock to be sold by the Company pursuant
to the Prospectus have been issued and paid for in accordance with the
Prospectus, such shares of Common Stock will have been validly issued and will
be fully paid and nonassessable. The presently outstanding shares of Common
Stock to be sold by certain Selling Stockholders pursuant to the Prospectus are
validly issued, fully-paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm in the Prospectus under
the caption "Legal Matters."
Very truly yours,
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 14, 1996 (except for Note 2, as to which
the date is April 19, 1996) in the Registration Statement (Form S-3) and related
Prospectus of Gulf South Medical Supply, Inc. for the registration of 3,210,483
shares of its common stock and to the incorporation by reference therein of our
report dated February 14, 1996, with respect to the financial statement schedule
of Gulf South Medical Supply, Inc. for the year ended December 31, 1995 included
in the Annual Report (Form 10-K) for 1995 filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Jackson, Mississippi
April 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,087
<SECURITIES> 0
<RECEIVABLES> 33,313
<ALLOWANCES> 1,651
<INVENTORY> 18,500
<CURRENT-ASSETS> 54,476
<PP&E> 3,169
<DEPRECIATION> 973
<TOTAL-ASSETS> 58,321
<CURRENT-LIABILITIES> 15,769
<BONDS> 0
<COMMON> 140
0
0
<OTHER-SE> 42,412
<TOTAL-LIABILITY-AND-EQUITY> 58,321
<SALES> 40,235
<TOTAL-REVENUES> 40,235
<CGS> 30,647
<TOTAL-COSTS> 30,647
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> 3,835
<INCOME-TAX> 1,513
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,322
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
