<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934:
For the quarterly period ended March 31, 1996
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934:
For the transition period from __________ to __________
Commission file number: 0-23540
GULF SOUTH MEDICAL SUPPLY, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 64-0831411
-------- ----------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
426 CHRISTINE DR., RIDGELAND, MISSISSIPPI 39157
-----------------------------------------------
(Address of principal executive offices) (Zip Code)
(601) 856-5900
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of March 31, 1996 there were 13,960,446 shares of common stock
outstanding.
<PAGE> 2
GULF SOUTH MEDICAL SUPPLY, INC.
INDEX
PART I FINANCIAL INFORMATION
page
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of
March 31, 1996 (unaudited)
and December 31, 1995 1
Condensed Statements of Income
(unaudited) for the three-months ended
March 31, 1996 and 1995 2
Condensed Statements of Cash Flows
(unaudited) for the three-months ended
March 31, 1996 and 1995 3
Notes to Condensed Financial
Statements (unaudited) 4
ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 7
PART II OTHER INFORMATION 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES 10
<PAGE> 3
GULF SOUTH MEDICAL SUPPLY, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 1,087 $ 2,147
Trade accounts receivable, less allowance for doubtful accounts
of $1,651 in 1996 and $1,717 in 1995......................... 31,662 28,742
Inventories..................................................... 18,500 16,874
Prepaid income taxes............................................ - 1,032
Prepaid expenses and other...................................... 2,563 1,853
Deferred income taxes........................................... 664 664
----------- -----------
Total current assets....................................... 54,476 51,295
Property and equipment:
Land............................................................ 567 567
Building........................................................ 600 600
Equipment....................................................... 2,002 1,853
----------- -----------
3,169 3,020
Accumulated depreciation........................................ (973) (882)
----------- -----------
2,196 2,138
Other assets:
Goodwill........................................................ 1,110 1,141
Notes receivable from affiliate................................. 413 413
Other assets.................................................... 126 34
----------- -----------
1,649 1,588
----------- -----------
Total assets.................................................... $ 58,321 $ 55,021
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank............................................ $ - $ 1,403
Trade accounts payable.......................................... 7,927 9,913
Accrued expenses and other current liabilities.................. 2,042 1,351
Current portion of long-term debt............................... 5,800 2,400
----------- -----------
Total current liabilities 15,769 15,067
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 -- 13,960,446 in 1996 and
13,918,096 in 1995......................................... 140 139
Paid-in-capital................................................. 22,327 22,052
Retained earnings.................................................. 20,085 17,763
----------- ------------
Total stockholders' equity...................................... 42,552 39,954
----------- ------------
Total liabilities and stockholders' equity...................... $ 58,321 $ 55,021
=========== ============
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
1
<PAGE> 4
GULF SOUTH MEDICAL SUPPLY, INC.
CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales.................................... $ 40,235 $ 29,522
Cost of sales................................ 30,647 22,143
----------- -----------
Gross profit................................. 9,588 7,379
Selling, general and administrative expenses. 5,189 4,236
Merger costs and expenses (Note 2)........... 512 -
----------- -----------
Operating income............................. 3,887 3,143
Interest expense............................. (52) (31)
Interest income.............................. - 59
----------- -----------
Income before income taxes................... 3,835 3,171
Income taxes................................. (1,513) (1,270)
----------- -----------
Net income................................... $ 2,322 $ 1,901
=========== ===========
Net income per share......................... $ 0.17 $ 0.14
=========== ===========
Weighted average shares outstanding.......... 14,047 13,948
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 5
GULF SOUTH MEDICAL SUPPLY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1996 1995
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used in operating activities....................... $ (2,990) $ (1,011)
INVESTING ACTIVITIES
Purchases of equipment...................................... (146) (235)
Increase in other assets.................................... (92) (10)
------------ -----------
Net cash used in investing activities....................... (238) (245)
FINANCING ACTIVITIES
Net borrowings under revolving line of credit............... 1,997 194
Proceeds from exercise of stock options..................... 171 92
------------ -----------
Net cash provided by financing acitivities.................. 2,168 286
Net decrease in cash and cash equivalents................... (1,060) (970)
Cash and cash equivalents at beginning of period............ 2,147 9,151
------------ -----------
Cash and cash equivalents at end of period.................. $ 1,087 $ 8,181
------------ -----------
NON-CASH TRANSACTIONS:
Tax benefit of stock options exercised...................... $ 105 $ -
============ ===========
</TABLE>
See accompanying notes.
3
<PAGE> 6
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, these condensed financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for fair presentation have been included. Operating results for the
three-month period ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1996. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 1995 included in the Gulf South Medical Supply, Inc.'s
Annual Report on Form 10-K.
2. ACQUISITIONS
On February 29, 1996, the Company completed the acquisition of all outstanding
common stock of Bayer Medical Service Systems, Inc. ("Bayer"). The Company
issued 151,724 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 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 March 31,
----------------------------------
1996 1995
------------ ------------
<S> <C> <C> <C>
Net sales
Gulf South $ 37,710 $ 27,008
Bayer 2,525 2,514
------------ ------------
Combined $ 40,235 $ 29,522
Gross
Gulf South $ 9,161 $ 6,707
Bayer 427 672
------------ ------------
Combined $ 9,588 $ 7,379
Net
Gulf South $ 2,321 $ 1,914
Bayer 1 (13)
------------ ------------
Combined $ 2,322 $ 1,901
</TABLE>
4
<PAGE> 7
In connection with the share exchange, $512 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 other costs incurred in combining the
operations of the previously separate companies.
3. COMMON STOCK
On May 23, 1995, a two-for-one stock split in the form of a stock dividend was
completed by the Company. All share and per share data for the three month
period ended March 31, 1995 presented herein have been restated for the effect
of the stock split.
4. 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.
5. STOCK COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, Accounting for Stock Issued to Employees.
6. CREDIT FACILITIES AND LONG-TERM DEBT
The Company has a $15.0 million revolving credit facility which matures
September 25, 1998, 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 1% to 2.5% per annum. A facility fee of .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.
The revolving credit facility contains numerous restrictive covenants and
financial ratio requirements.
7. NET INCOME PER COMMON SHARE
Net income per common share is computed by dividing net income applicable to
common stock based on the weighted average number of shares outstanding (as
restated, see Note 2) during the three months ended March 31, 1996 and 1995
(14,047,309 and 13,947,724 shares, respectively). Common equivalent shares
relating to the stock options exercisable at March 31, 1996 and 1995 have been
calculated using the treasury stock method based on the higher of the average
or the ending market value of the common stock during the three month periods
ended March 31, 1996 and 1995.
5
<PAGE> 8
8. SUBSEQUENT EVENTS
Subsequent to March 31, 1996, the Company acquired certain operating assets of
Express Care, L. P. for approximately $3.5 million. The transaction will be
accounted for using the purchase method of accounting.
6
<PAGE> 9
ITEM 2: 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
condensed financial statements included elsewhere herein.
GENERAL
The following discussion and analysis compares the results of operations of the
Company for the three months ended March 31, 1996 to the three months ended
March 31, 1995.
RESULTS OF OPERATIONS
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 three months ended
March 31, 1995, 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.
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.
7
<PAGE> 10
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.
LIQUIDITY AND CAPITAL RESOURCES
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 LIBOR plus an amount ranging from 1% to 2.5%
per annum. A facility fee of .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 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 Company made capital expenditures totaling $146,000 for the three months
ended March 31, 1996, primarily to purchase additional telephone and computer
equipment.
The foregoing statements are forward-looking statements 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 "Factors Affecting Future Performance" 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.
Factors Affecting Future Performance
The Company's future operating results may be affected by various trends and
factors which are beyond the Company's control. These include adverse changes
in general economic conditions and changes in federal and state regulation
affecting the Company's customers. Accordingly, past trends should not be used
to anticipate future results and trends. Further, the Company's prior
performance should not be presumed to be an accurate indicator of future
performance.
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. Certain of the
Company's current competitors, including many national hospital distributors,
have substanitally greater capital resources, sales and marketing experience,
and distribution capabilities than the Company. Because the natinal 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 operating results.
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 exisitng markets. In order to achieve
anticipated benefits from these acquisitions, the Comapny 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. In the past
the Company has incurred one-time costs and expenses in connection with
acquisitions and it is likely that similar one-time costs and expenses may be
incurred in connection with future acquisitions, including the write-off of
unsold inventory and unused assets. 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 approval. There can be no assurance that the Company will be able to
complete future acquisitions. In order to finance such acquistions, 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.
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. Significant declines in the level of purchases by one or more of
these customers would have a material adverse effect on the Company's operating
results. 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 customer,s including as a result of a
change in governmental or private reimbursement programs, could have a material
adverse effect upon the Company's opertaing results. 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.
A key element of the Company's growth strategy is to increase sales to existing
and new customers, including 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 operations inocme. 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 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 operating results and gross margins.
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 cost of procuring and delivering products could have
an adverse effect on its operating results. In order to provide prompt and
complete service to is customers, the Company maintains a significant
investment in product inventory. 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 operating results.
8
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(11) Statement re: Computation of Earnings per Share
(b) The Company did not file any reports on Form 8-K during the
three months ended March 31, 1996.
9
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GULF SOUTH MEDICAL SUPPLY, INC.
Date: May 3, 1996 By: /s/ Guy W. Edwards
----------------------------
Guy W. Edwards
Senior Vice President and
Chief Financial Officer
10
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
Ex. 11 Statement re: Computation of Earnings per Share
Ex. 27 Financial Data Schedule
</TABLE>
<PAGE> 1
GULF SOUTH MEDICAL SUPPLY, INC.
EXHIBIT (11) - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1996 1995
------------- --------------
<S> <C> <C>
Average shares outstanding................................................ 13,832 13,786
Net effect of common stock options -- based on the treasury
method using assumed fair value equal to the higher
of the average or the ending market value of the common
stock during the three months ended March 31, 1996 and 1995........... 215 162
-------- ---------
Weighted average number of common shares.................................. 14,047 13,948
======== =========
Net income................................................................ $ 2,322 $ 1,901
======== =========
Net income per share...................................................... $ .17 $ .14
======== =========
</TABLE>
<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>
