<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 September 30, 1997
[ ] 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)
ONE WOODGREEN PLACE, MADISON, MISSISSIPPI 39110
-----------------------------------------------
(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 November 10, 1997 there were 16,316,864 shares of common stock
outstanding.
<PAGE> 2
GULF SOUTH MEDICAL SUPPLY, INC.
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
page
ITEM 1. FINANCIAL STATEMENTS ----
<S> <C>
Condensed Consolidated Balance Sheets as of
September 30, 1997 (unaudited) and
December 31, 1996 1
Condensed Consolidated Statements of Income
(unaudited) for the three months ended
September 30, 1997 and 1996 and nine months
ended September 30, 1997 and 1996 2
Condensed Consolidated Statements of Cash
Flows (unaudited) for the nine months ended
September 30, 1997 and 1996 3
Notes to Condensed Consolidated Financial
Statements (unaudited) - September 30, 1997 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6
PART II OTHER INFORMATION 11
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES 12
</TABLE>
<PAGE> 3
GULF SOUTH MEDICAL SUPPLY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 49,154 $ 76,054
Trade accounts receivable, less allowance for doubtful accounts of
$1,948 in 1997 and $1,651 in 1996 ...................................... 54,055 48,404
Inventories ............................................................ 31,734 27,189
Prepaid income taxes ................................................... -- 1,501
Prepaid expenses and other ............................................. 1,497 1,113
Deferred income taxes .................................................. 1,485 1,485
---------- ----------
Total current assets ................................................. 137,925 155,746
Property and equipment:
Land ................................................................... 567 567
Building ............................................................... 1,278 1,270
Equipment .............................................................. 4,394 3,127
---------- ----------
6,239 4,964
Accumulated depreciation ............................................... (1,714) (1,092)
---------- ----------
4,525 3,872
Other assets:
Goodwill .............................................................. 34,575 34,824
Deferred income taxes ................................................. 1,965 1,965
Other assets .......................................................... 1,167 1,564
---------- ----------
37,707 38,353
========== ==========
Total assets ........................................................... $ 180,157 $ 197,971
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to others ................................................ $ -- $ 25,321
Trade accounts payable ................................................. 19,289 14,381
Accrued expenses and other current liabilities ......................... 3,856 8,970
Current portion of long-term debt ...................................... -- 5,000
---------- ----------
Total current liabilities ............................................ 23,145 53,672
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 - 16,311,164 in 1997 and
16,264,923 in 1996 .................................................... 163 163
Paid-in capital ........................................................... 115,727 115,679
Retained earnings ......................................................... 41,122 28,457
---------- ----------
Total stockholders' equity ............................................ 157,012 144,299
---------- ----------
Total liabilities and stockholders' equity ............................ $ 180,157 $ 197,971
========== ==========
</TABLE>
See accompanying notes.
Note: The balance sheet at December 31, 1996 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.
1
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GULF SOUTH MEDICAL SUPPLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ...................................... $ 73,371 $ 46,122 $ 205,039 $ 130,980
Cost of sales .................................. 56,667 35,430 158,153 100,217
--------- --------- --------- ---------
Gross profit ................................... 16,704 10,692 46,886 30,763
Selling, general and administrative expenses ... 9,435 6,141 27,003 16,948
Intangible amortization expense ................ 298 30 890 72
Acquisition and merger expenses ................ -- -- -- 512
--------- --------- --------- ---------
Operating income ............................... 6,971 4,521 18,993 13,231
Interest expense ............................... (3) (24) (15) (219)
Interest income ................................ 569 756 1,453 962
--------- --------- --------- ---------
Income before income taxes ..................... 7,537 5,253 20,431 13,974
Income tax expense ............................. 2,921 1,869 7,766 5,309
--------- --------- --------- ---------
Net income ..................................... $ 4,616 $ 3,384 $ 12,665 $ 8,665
========= ========= ========= =========
Net income per share (Note 4) .................. $ 0.28 $ 0.21 $ 0.76 $ 0.57
========= ========= ========= =========
Weighted average shares outstanding (Note 4) ... 16,678 16,421 16,576 15,085
========= ========= ========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 5
GULF SOUTH MEDICAL SUPPLY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities ................. $ 5,853 $ (5,917)
INVESTING ACTIVITIES
Purchase of building and equipment .................................. (1,244) (852)
Purchase of operating assets of American Medical Products, Inc. in
1997 and Express Care, L.P. in 1996 ................................. (1,633) (3,482)
(Increase) decrease in other assets ................................. 397 (3,166)
-------- --------
Net cash used in investing activities ............................... (2,480) (7,500)
FINANCING ACTIVITIES
Principal payment on notes payable-others ........................... (25,321) (1,403)
Net payments under revolving line of credit ......................... (5,000) (2,400)
Proceeds from exercise of stock options ............................. 48 570
Proceeds from issuance of common stock .............................. -- 93,081
-------- --------
Net cash provided by (used in) financing activities ................. (30,273) 89,848
-------- --------
Net increase (decrease) in cash and cash equivalents ................ (26,900) 76,431
Cash and cash equivalents at beginning of period .................... 76,054 2,147
-------- --------
Cash and cash equivalents at end of period .......................... $ 49,154 $ 78,578
======== ========
NON-CASH TRANSACTIONS:
Tax benefit of stock options exercised .............................. $ -- $ 1,721
======== ========
Conversion of account receivable to note receivable ................. $ -- $ 1,882
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 6
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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 consolidated 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. All intercompany
transactions have been eliminated in consolidation. Operating results for the
three- and nine-month periods ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. For further information, refer to the consolidated financial statements
and footnotes thereto for the year ended December 31, 1996 included in the Gulf
South Medical Supply, Inc.'s Annual Report on Form 10-K.
2. ACQUISITIONS
On March 24, 1997, the Company acquired certain operating assets and assumed
certain operating liabilities of American Medical Products, Inc. for $1,633 in a
transaction 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. Accordingly, the results of operations of the Company
include American Medical Products, Inc. from the date acquired.
3. CREDIT FACILITIES AND NOTES PAYABLE
The Company has a $15,000 revolving credit facility which matures September 25,
1998, all of which was available at September 30, 1997. 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 $7,500. The revolving credit facility
contains numerous restrictive covenants and financial ratio requirements.
4. 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 during
the three months ended September 30, 1997 and 1996 (16,677,949 and 16,420,856
shares, respectively) and the nine months ended September 30, 1997 and September
30, 1996 (16,576,067 and 15,085,007 shares, respectively). Common equivalent
shares relating to the stock options and warrants outstanding during the three
and nine months ended September 30, 1997 and 1996, when dilutive, 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 and nine month
periods ended September 30, 1997 and 1996.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effects of
stock options will be excluded. The impact of Statement No. 128 on the
calculation of primary and fully diluted earnings per share for the three and
nine months ended September 30, 1997 and 1996 is not expected to be material.
4
<PAGE> 7
5. SUBSEQUENT EVENTS
On October 1, 1997, the Company acquired certain operating assets and assumed
certain operating liabilities of Tri-Medical Supply, Inc. for $14,304 in a
transaction accounted for using the purchase method of accounting.
5
<PAGE> 8
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
Consolidated Financial Statements included elsewhere herein.
Certain of the statements contained herein are forward-looking statements and
involve risks and uncertainties, and the Company's actual experience may differ
materially from that discussed below. 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.
GENERAL
The Company completed a third public offering on June 12, 1996 pursuant to which
the Company received net proceeds of approximately $91.5 million from the sale
by the Company of 2,223,276 shares of its common stock. The net proceeds from
the offering were used to repay the outstanding balance under the Company's
revolving credit facility ($9.6 million), with the remaining balance used for,
and continuing to be used for, general corporate purposes, including the
acquisitions of Gateway Healthcare Corporation in December 1996 and certain
operations of other regional medical supply distributors, and the possible
acquisitions of one or more additional medical supply distributors that serve
complementary markets or supplement the Company's presence in existing markets.
As part of the Company's growth strategy, the Company continually evaluates
potential acquisition candidates. However, the Company presently has no specific
agreements or commitments with respect to any material acquisition. Pending such
uses, the remaining net proceeds of the offering are invested in short-term
interest-bearing cash equivalents.
Management of the Company anticipates further downward pressures on gross margin
because of continued price competition influenced primarily by large chain
customers, continued implementation of the Company's long-term strategy to
expand sales with aggressive pricing, and as a result of changes in governmental
or private reimbursement programs. The Company expects that these pressures on
gross margin may be offset to some extent by reducing selling, general and
administrative expenses as a percentage of increased net sales, and by
increasing as a percentage of net sales the sales volume to the Company's
independent and home health customers, which sales have historically yielded
higher gross margins due to the nature of the services involved. To date, the
Company has also offset the decrease in gross margin in part by participation in
volume-based rebate programs offered by vendors. Notwithstanding these
strategies, there can be no assurance that the Company will be able to offset
reductions in gross margin to a significant extent.
Management has determined that certain existing distribution facilities are
non-essential for the Company's distribution activities, and do not meet the
Company's strategic objectives. The Company plans to consolidate such
distribution facilities into its existing larger regional distribution centers.
Management does not anticipate charges related to such distribution facility
closures to be material to the Company's operations or financial position. Such
charges would consist of, among other matters, asset write-offs, relocation and
employment severance costs, and facility lease costs.
For discussion purposes, selling, general and administrative expenses include
intangible amortization expenses. The following discussion and analysis compares
the results of operations of the Company for the three and nine months ended
September 30, 1997 to the three and nine months ended September 30, 1996.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net sales increased by $27.2 million, or 59.1%, to $73.4 million for the three
months ended September 30, 1997 compared to $46.1 million for the same period in
1996. This increase was primarily attributable to the purchase of Gateway
Healthcare Corporation in December 1996 and the purchases of certain operations
of other regional medical supply distributors subsequent to September 30, 1996,
and to a lesser extent, internal sales growth through the addition of new
customers and increased sales penetration in existing customer facilities.
6
<PAGE> 9
Gross profit increased by $6.0 million, or 56.2%, to $16.7 million for the three
months ended September 30, 1997 compared to $10.7 million for the three months
ended September 30, 1996, while gross margin decreased to 22.8% from 23.2% over
the same period. The decrease in gross margin was primarily due to a greater
sales mix of high volume, large chain customers that require more competitive
pricing, offset in part by lower selling and servicing costs associated with
such business, and a continuation of the Company's long-term strategy to
increase sales penetration in existing customer facilities and to expand the
Company's market reach to new customers through aggressive pricing. Both factors
were 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, including intangible amortization
expense, increased by $3.6 million, or 57.7%, to $9.7 million for the three
months ended September 30, 1997 compared to $6.2 million for the three months
ended September 30, 1996, and as a percentage of net sales decreased to 13.3%
from 13.4% 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 to
costs associated with the operating activities of Gateway Healthcare Corporation
and certain operations of other regional medical supply distributors purchased
subsequent to September 30, 1996. The decrease in selling, general and
administrative expenses as a percentage of net sales was due to leveraging of
the Company's general and administrative expenses through increased sales volume
and the lower selling and servicing costs generally associated with the
Company's greater mix of higher volume, large chain customers. Both factors were
offset in part by costs associated with the operating activities of Gateway
Healthcare Corporation and other regional medical supply distributors purchased
subsequent to September 30, 1996.
There was $3,000 interest expense for the three months ended September 30, 1997,
compared to $24,000 for the same period a year ago. This decrease was a result
of a portion of the net proceeds of the public offering in June 1996 being used
to repay the outstanding balance under the Company's revolving credit facility.
Interest income was $569,000 for the three months ended September 30, 1997
compared to $756,000 in the same period a year ago. This decrease was
attributable to a lower amount of cash being invested in short-term
interest-bearing cash equivalents due to cash expenditures associated with the
acquisition of Gateway Healthcare Corporation and other regional medical supply
distributors purchased subsequent to September 30, 1996.
Income taxes increased by $1.1 million to $2.9 million for the three months
ended September 30, 1997 compared to $1.9 million for the same period in 1996.
This increase was attributable to higher taxable income, as well as an increase
in the effective tax rate to 38.8% for the three months ended September 30,
1997, as compared to 35.6% for the same period in 1996. The increase in the
effective tax rate was primarily due to tax-exempt interest income as a
percentage of pre-tax income being lower in the three months ended September 30,
1997 as compared to the same period in 1996.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net sales increased by $74.3 million, or 56.7%, to $205.3 million for the nine
months ended September 30, 1997 compared to $131.0 million for the same period
in 1996. This increase was primarily attributable to the purchase of Gateway
Healthcare Corporation in December 1996 and the purchases of certain operations
of other regional medical supply distributors subsequent to September 30, 1996,
and to a lesser extent, internal sales growth through the addition of new
customers and increased sales penetration in existing customer facilities.
Gross profit increased by $16.1 million, or 52.4%, to $46.9 million for the nine
months ended September 30, 1997 compared to $30.8 million for the same period a
year ago, while gross margin decreased to 22.8% from 23.5% over the same period.
The decrease in gross margin was primarily due to a greater sales mix of high
volume, large chain customers that require more competitive pricing, offset in
part by lower selling and servicing costs associated with such business, and a
continuation of the Company's long-term strategy to increase sales penetration
in existing customer facilities and to expand the Company's market reach to new
customers through aggressive pricing. Both
7
<PAGE> 10
factors were 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, including intangible amortization
expense, increased by $10.9 million, or 63.9%, to $27.9 million for the nine
months ended September 30, 1997 compared to $17.0 million for the nine months
ended September 30, 1996, and as a percentage of net sales increased to 13.6%
from 13.0% over the same period. The increase in the amount of selling, general
and administrative expenses in whole and as a percentage of net sales, 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 to costs associated with the operating
activities of Gateway Healthcare Corporation and other regional medical supply
distributors purchased subsequent to September 30, 1996, offset in part by
leveraging of the Company's general and administrative expenses through
increased sales volume and the lower selling and servicing costs generally
associated with the Company's greater mix of higher volume, large chain
customers.
The Company incurred acquisition and merger expenses of $512,000 during the nine
months ended September 30, 1996 in connection with the acquisition of Bayer
Medical Service Systems, Inc.
Interest expense decreased to $15,000 for the nine months ended September 30,
1997 compared to $219,000 for the same period a year ago. This decrease was a
result of a portion of the net proceeds of the public offering in June 1996
being used to repay the outstanding balance under the Company's revolving credit
facility.
Interest income was $1.5 million for the nine months ended September 30, 1997
compared to $962,000 for the same period a year ago. This increase was
attributable to the net proceeds of the public offering in June 1996, in excess
of the amounts used to pay the Company's outstanding long-term debt, and net
cash provided by operations being invested in short-term interest-bearing cash
equivalents.
Income taxes increased by $2.5 million to $7.8 million for the nine months ended
September 30, 1997 compared to $5.3 million for the same period in 1996. This
increase was principally attributable to higher taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements to date have been to fund working
capital in order to support growth of net sales. During the three and nine
months ended September 30, 1997, the Company funded its working capital
requirements principally with cash generated from operations.
The Company's working capital was $114.8 million and its current ratio was 6.0
to 1 at September 30, 1997 as compared to working capital of $102.1 million and
a current ratio of 2.9 to 1 at December 31, 1996. Included in working capital
are cash and cash equivalents from the Company's public offering in June 1996.
The Company has a revolving credit facility of $15.0 million, all of which was
available at September 30, 1997. 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 has consolidated, and plans to consolidate, certain distribution
facilities into its larger regional distribution centers which has resulted, and
may continue to result, in cash expenditures in excess of those required in the
ordinary course of business. See "Factors Affecting Future Performance".
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 third quarter of 1998.
8
<PAGE> 11
The Company made capital expenditures totaling $1.2 million for the nine months
ended September 30, 1997, primarily to purchase additional telephone and
computer equipment, and to fund various warehouse improvements.
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 distributors, have
substantially greater capital resources, sales and marketing experience, and
distribution capabilities than the Company. Certain of these national
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 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. 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 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 or other equity 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, including Beverly Enterprises which accounted for
19.6% of net sales for the year ended December 31, 1996. Consolidation among
long-term care providers and the growth of the Company's business with large
chains could increase such dependence, or in the case of consolidation, result
in the loss of such business. The loss of, or 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
customers, including as a result of a change in governmental or private
reimbursement programs, could have a material adverse effect upon the Company's
operating 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 new strategic 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 strategic 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.
9
<PAGE> 12
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 of 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.
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 its 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.
10
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its current and former officers and directors, among
others, are named as defendants in two purported securities class action
lawsuits entitled Ernest Klein v. Gulf South Medical Supply, Inc., Thomas G.
Hixon, John C. Piper, Michael C. Tibbitts, Stanton Keith Pritchard, Richard W.
Bayer, David L. Bogetz, Melvin L. Hecktman, William W. McInnes, Guy W. Edwards,
William Blair & Company, Smith Barney, Inc. and Montgomery Securities, Civil
Action No. 3:97cv526WS, and Ann Krupnick v. Gulf South Medical Supply, Inc.,
Thomas G. Hixon, John C. Piper, Michael C. Tibbitts, Richard W. Bayer, Guy W.
Edwards and William Blair & Company, Civil Action No. 3:97cv525BN. On August 5,
1997, the Company learned of these lawsuits when it was served with copies of
the complaints. Both actions, which were filed on July 21, 1997, are pending in
the United States District Court for the Southern District of Mississippi. The
Plaintiff in the Klein action alleges, for himself and for a purported class of
similarly situated shareholders that allegedly purchased stock in the Company's
June 1996 public offering of three million shares of its common stock (the "June
1996 Offering"), that the defendants engaged in violations of certain provisions
of the Securities Act of 1933 and Mississippi state law. The plaintiff in the
Krupnick action alleges, for herself and for a purported class of similarly
situated shareholders who purchased the Company's stock between May 2, 1996 and
July 22, 1996, that the defendants engaged in certain violations of the
Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder and
Mississippi state law. Both lawsuits relate to disclosures made in the
prospectus issued by the Company in connection with its June 1996 Offering.
Plaintiffs seek damages, including costs and expenses. The Company believes that
the allegations contained in the complaints are without merit and intends to
defend vigorously as against the claims. However, the lawsuits are in their
earliest stages, and there can be no assurances that this litigation will
ultimately be resolved on terms that are favorable to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(11) Statement re: Computation of Earnings per
Share
(27) Financial Data Schedule
(b) The Company did not file any reports on Form 8-K
during the three months ended September 30, 1997.
11
<PAGE> 14
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: November 12, 1997 By: /s/ John L. Vaughan Jr.
---------------------------------
John L. Vaughan Jr.
Vice President of Finance
12
<PAGE> 15
INDEX TO EXHIBITS
EXHIBIT NO.
----------
11 Statement re: Computation of Earnings per Share
27 Financial Data Schedule
<PAGE> 1
GULF SOUTH MEDICAL SUPPLY, INC.
EXHIBIT (11) - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Average shares outstanding ..................................................... 16,310 16,265 16,301 14,894
Net effect of common stock options - based on the treasury
method using assumed fair market value equal to
the higher of the average or the ending market value of
the common stock during the three months ended
September 30, 1997 and 1996 and the nine months ended
September 30, 1997 and 1996 ................................................ 368 156 275 191
------- ------- ------- -------
Weighted average number of common shares ....................................... 16,678 16,421 16,576 15,085
======= ======= ======= =======
Net income ..................................................................... $ 4,616 $ 3,384 $12,665 $ 8,665
======= ======= ======= =======
Net income per share ........................................................... $ 0.28 $ 0.21 $ 0.76 $ 0.57
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's financial statements for the three and nine month periods ended
September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 49,154
<SECURITIES> 0
<RECEIVABLES> 56,003
<ALLOWANCES> 1,948
<INVENTORY> 31,734
<CURRENT-ASSETS> 137,925
<PP&E> 6,239
<DEPRECIATION> 1,714
<TOTAL-ASSETS> 180,157
<CURRENT-LIABILITIES> 23,145
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 156,849
<TOTAL-LIABILITY-AND-EQUITY> 180,157
<SALES> 205,039
<TOTAL-REVENUES> 205,039
<CGS> 158,153
<TOTAL-COSTS> 158,153
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> 20,431
<INCOME-TAX> 7,766
<INCOME-CONTINUING> 12,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,665
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
</TABLE>
