<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
----------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 23, 1997
PHYSICIAN SALES AND SERVICE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 0-23832 59-2280364
(STATE OR OTHER (COMMISSION (I.R.S. EMPLOYER
JURISDICTION FILE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION)
4345 SOUTHPOINT BOULEVARD, JACKSONVILLE, FLORIDA 32216
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (904) 332-3000
N/A
--------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS.
On December 14, 1997, Physician Sales & Service, Inc. ("PSS") entered into
an Agreement and Plan of Merger dated as of December 14, 1997 by and among
PSS, PSS Merger Corp. ("Merger Corp.") and Gulf South Medical Supply, Inc.
("GSMS"), providing for the merger of Merger Corp. with and into GSMS with
GSMS surviving as a wholly owned subsidiary of PSS.
PSS hereby files pro forma information required by Article 11 of Regulation
S-X promulgated by the Securities and Exchange Commission (the "Commission"),
and the consolidated financial statements of GSMS required by Rule 3-05 of
Regulation S-X promulgated by the Commission as Exhibits 99.1 and 99.2,
respectively.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c)Exhibits
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Unaudited Pro Forma Condensed Combined Financial Statements.
99.2 Consolidated Financial Statements of Gulf South Medical Supply, Inc.
2
<PAGE>
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 hereunto duly authorized.
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
By:__________________________________
David A. Smith
Executive Vice President and Chief
Financial Officer
Dated: December 23 , 1997
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
------ ----------- ----
<C> <S> <C>
23.1 Consent of Ernst & Young LLP, Independent Auditors...............
99.1 Unaudited Pro Forma Condensed Combined Financial Statements......
99.2 Consolidated Financial Statements of Gulf South Medical Supply,
Inc..............................................................
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (Nos. 33-80657, 333-15043, 333-15107 and 333-30427) of Physician
Sales & Service, Inc., of our report dated February 7, 1997 (except for Note
8, as to which the date is December 14, 1997), with respect to the
consolidated financial statements and schedule of Gulf South Medical Supply,
Inc. for the year ended December 31, 1996, filed with the Securities and
Exchange Commission and included in Physician Sales & Service, Inc.'s Current
Report on Form 8-K dated December 23, 1997.
/s/ Ernst & Young LLP
Jackson, Mississippi
December 23, 1997
<PAGE>
EXHIBIT 99.1
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On December 14, 1997, Physician Sales & Service, Inc. ("PSS") signed a
definitive agreement to acquire Gulf South Medical Supply, Inc. ("GSMS") in a
merger (the "Merger") to be accounted for as a pooling of interests. The
unaudited pro forma condensed combined balance sheet as of September 30, 1997
has been prepared as if the Merger took place on that date. The unaudited pro
forma condensed combined income statements for the three years ended March 28,
1997 and for the six months ended September 30, 1997 and 1996 have been
prepared as if the Merger had occurred on April 1, 1994. The unaudited pro
forma condensed combined financial statements are based on the separate
historical condensed financial statements of PSS and GSMS giving effect to the
transaction under the assumptions and adjustments outlined in the accompanying
Notes to Unaudited Pro Forma Condensed Combined Financial Statements. The
unaudited pro forma condensed combined financial statements are provided for
comparative purposes only and are not necessarily indicative of the actual
results that would have been obtained had the Merger occurred on the dates
indicated or that may be achieved in the future.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the separate audited consolidated financial
statements of PSS and GSMS filed on Form 10-K for the fiscal years ended March
28, 1997 and December 31, 1996, respectively, the separate quarterly unaudited
consolidated financial statements of PSS and GSMS filed on Form 10-Q for the
quarters ended September 30, 1997, and PSS's Current Report on Form 8-K filed
on December 23, 1997 which reflects the pooling with S&W X-Ray, Inc.
1
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------- ---------------------
PSS GSMS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 22,273 $ 49,154 $ 71,427
Marketable securities................. 842 -- 842
Accounts receivable, net.............. 150,995 54,055 205,050
Inventories........................... 79,129 31,734 110,863
Prepaid expenses and other............ 32,437 2,982 35,419
-------- -------- --------
Total current assets................. 285,676 137,925 423,601
Property and equipment, net............ 22,599 4,525 27,124
Intangibles, net....................... 47,692 34,575 82,267
Other assets........................... 6,958 3,132 10,090
-------- -------- --------
Total assets.......................... $362,925 $180,157 $543,082
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 83,530 $ 19,289 $102,819
Accrued expenses...................... 23,937 3,856 27,793
Other................................. 15,557 -- 15,557
-------- -------- --------
Total current liabilities.............. 123,024 23,145 146,169
Long-term debt and capital lease
obligations, net of current
maturities............................ 1,749 -- 1,749
Other liabilities...................... 4,151 -- 4,151
-------- -------- --------
Total liabilities..................... 128,924 23,145 152,069
-------- -------- --------
Shareholders' equity:
Common stock.......................... 401 163 $ 122 (1) 686
Additional paid-in capital............ 221,075 115,727 (122)(1) 336,680
Retained earnings..................... 12,245 41,122 53,367
Cumulative foreign currency transla-
tion adjustment...................... 280 -- 280
-------- -------- ----- --------
Total shareholders' equity............ 234,001 157,012 (0) 391,013
-------- -------- ----- --------
Total liabilities and shareholders'
equity.............................. $362,925 $180,157 $ 0 $543,082
======== ======== ===== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
2
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ---------------------
PSS GSMS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales.............................. $476,638 $140,430 $617,068
Cost of goods sold..................... 347,354 108,234 455,588
-------- -------- --------
Gross profit....................... 129,284 32,196 161,480
Selling, general and administrative ex-
penses................................ 112,194 18,795 130,989
Merger costs and expenses.............. 1,838 -- 1,838
Non-recurring ESOP cost of acquired
company............................... 2,457 -- 2,457
-------- -------- --------
Income from operations............. 12,795 13,401 26,196
-------- -------- --------
Other income (expense):
Net interest (expense) income......... (99) 973 874
Other income.......................... 2,021 -- 2,021
-------- -------- --------
1,922 973 2,895
-------- -------- --------
Income before income taxes......... 14,717 14,374 29,091
Provision for income taxes............. 6,169 5,520 11,689
-------- -------- --------
Net income............................. $ 8,548 $ 8,854 $ 17,402
======== ======== ========
Net income per common and common equiv-
alent share........................... $ 0.21 $ 0.53 $ 0.25
======== ======== ========
Weighted average shares................ 39,832 16,595 12,446(1) 68,873
======== ======== ====== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
3
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------- ---------------------
PSS GSMS ADJUSTMENTS COMBINED
-------- ------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................................ $359,573 $90,745 $450,318
Cost of goods sold....................... 262,935 69,570 332,505
-------- ------- --------
Gross profit......................... 96,638 21,175 117,813
Selling, general and administrative ex-
penses.................................. 86,104 11,831 97,935
Merger costs and expenses................ 6,934 -- 6,934
Non-recurring ESOP cost of acquired com-
pany.................................... 700 -- 700
-------- ------- --------
Income from operations............... 2,900 9,344 12,244
-------- ------- --------
Other income:
Net interest income..................... 1,051 795 1,846
Other income............................ 674 -- 674
-------- ------- --------
1,725 795 2,520
-------- ------- --------
Income before income taxes........... 4,625 10,139 14,764
Provision for income taxes............... 1,862 3,796 5,658
-------- ------- --------
Net income............................... $ 2,763 $ 6,343 $ 9,106
======== ======= ========
Net income per common and common equiva-
lent share.............................. $ 0.07 $ 0.41 $ 0.14
======== ======= ========
Weighted average shares.................. 38,006 15,604 11,703(1) 65,313
======== ======= ====== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
4
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED MARCH 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ---------------------
PSS GSMS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales............................ $763,054 $202,084 $965,138
Cost of goods sold................... 558,164 155,616 713,780
-------- -------- --------
Gross profit..................... 204,890 46,468 251,358
Selling, general and administrative
expenses............................ 187,441 27,359 214,800
Merger costs and expenses............ 12,128 1,866 13,994
Non-recurring ESOP cost of acquired
company............................. 1,446 -- 1,446
-------- -------- --------
Income from operations........... 3,875 17,243 21,118
-------- -------- --------
Other income (expense):
Interest expense..................... (1,188) (189) (1,377)
Interest and investment income....... 2,419 2,248 4,667
Other income......................... 1,537 -- 1,537
-------- -------- --------
2,768 2,059 4,827
-------- -------- --------
Income before income taxes....... 6,643 19,302 25,945
Provision for income taxes........... 2,216 7,119 9,335
-------- -------- --------
Net income........................... $ 4,427 $ 12,183 $ 16,610
======== ======== ========
Net income per common and common
equivalent share.................... $ 0.12 $ 0.76 $ 0.25
======== ======== ========
Weighted average shares.............. 38,015 16,042 12,032(1) 66,089
======== ======== ====== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
5
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED MARCH 29, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ---------------------
PSS GSMS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales............................ $589,120 $140,807 $729,927
Cost of goods sold................... 426,530 106,477 533,007
-------- -------- --------
Gross profit....................... 162,590 34,330 196,920
Selling, general and administrative
expenses............................ 141,160 19,371 160,531
Merger costs and expenses............ 15,732 512 16,244
Non-recurring ESOP cost of acquired
company............................. 850 -- 850
-------- -------- --------
Income from operations............. 4,848 14,447 19,295
-------- -------- --------
Other income (expense):
Interest expense..................... (3,568) (220) (3,788)
Interest and investment income....... 1,188 104 1,292
Other income......................... 1,586 -- 1,586
-------- -------- --------
(794) (116) (910)
-------- -------- --------
Income before income taxes......... 4,054 14,331 18,385
Provision for income taxes........... 1,925 5,750 7,675
-------- -------- --------
Net income........................... $ 2,129 $ 8,581 $ 10,710
======== ======== ========
Net income per common and common
equivalent share.................... $ 0.06 $ 0.61 $ 0.19
======== ======== ========
Weighted average shares.............. 32,870 14,019 10,514(1) 57,403
======== ======== ====== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
6
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED MARCH 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ---------------------
PSS GSMS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales........................... $471,985 $101,107 $573,092
Cost of goods sold.................. 339,670 75,070 414,740
-------- -------- --------
Gross profit....................... 132,315 26,037 158,352
Selling, general and administrative
expenses........................... 121,407 14,902 136,309
Restructuring charges............... 4,389 -- 4,389
Non-recurring ESOP cost of acquired
company............................ 832 -- 832
-------- -------- --------
Income from operations............. 5,687 11,135 16,822
-------- -------- --------
Other income (expense):
Interest expense.................... (4,506) (116) (4,622)
Interest and investment income...... 5 245 250
Other income........................ 1,912 -- 1,912
-------- -------- --------
(2,589) 129 (2,460)
-------- -------- --------
Income before income taxes........ 3,098 11,264 14,362
Provision for income taxes.......... 3,038 4,510 7,548
-------- -------- --------
Net income.......................... $ 60 $ 6,754 $ 6,814
======== ======== ========
Net income per common and common
equivalent share................... $ 0.00 $ 0.49 $ 0.14
======== ======== ========
Weighted average shares............. 25,101 13,851 10,388(1) 49,340
======== ======== ======= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
7
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements have been
prepared by combining the historical balances of PSS and the historical
balances of GSMS as recast to a conforming March year end. The following notes
describe the pro forma adjustments and other items relevant to such
statements.
MERGER COSTS AND EXPENSES AND ANTICIPATED COST SAVINGS
Certain expenses are expected to be incurred in connection with the
consolidation and restructuring of PSS and GSMS. Such activities will include
consolidation costs from the closing of duplicate facilites, realigning
regional and corporate functions, consolidating information systems and
reducing personnel. The expenses associated with these activities cannot be
currently estimated with a reasonable degree of accuracy, but preliminary
estimates indicate that these expenses may range between $35 million and $45
million. Income tax benefits at the statutory rate resulting from these
charges range between $14 million and $18 million. The estimated costs
associated with the restructuring activities will be expensed in the period in
which the companies complete the restructuring plan.
Efficiencies and net cost savings are expected to result from the
consolidation and restructuring. The unaudited pro forma condensed combined
financial statements do not reflect such savings.
PRO FORMA ADJUSTMENTS
(1) SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
Shareholders' equity and weighted average common share amounts represent the
aggregate weighted average shares of PSS after the pooling, adjusted to
reflect the exchange ratio of 1.75 shares of PSS common stock for each share
of GSMS common stock.
8
<PAGE>
EXHIBIT 99.2
INDEX TO GULF SOUTH MEDICAL SUPPLY, INC. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996....................................... 2
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....................................................... 3
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 1997 and 1996................................ 4
Notes to Condensed Consolidated Financial Statements (unaudited)--
September 30, 1997...................................................... 5
FINANCIAL STATEMENTS:
Report of Independent Auditors........................................... 6
Consolidated Balance Sheets as of December 31, 1996 and 1995............. 7
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994........................................................... 8
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994........................................ 9
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994..................................................... 10
Notes to Consolidated Financial Statements............................... 12
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts............................ 19
</TABLE>
All other schedules are omitted since the required information is
inapplicable or has been presented in the financial statements and related
notes.
1
<PAGE>
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.
2
<PAGE>
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.
3
<PAGE>
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 payments on notes payable to 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.
4
<PAGE>
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.
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>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Gulf South Medical Supply, Inc.
We have audited the accompanying consolidated balance sheets of Gulf South
Medical Supply, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. Our
audit also included the financial statement schedule listed in the index under
Exhibit 99.2. These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule 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 consolidated financial position of Gulf South
Medical Supply, Inc. and subsidiaries as of December 31, 1996, and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Jackson, Mississippi
February 7, 1997,
except for Note 8,
as to which the
date is December 14, 1997
6
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 76,054 $ 2,147
Trade accounts receivable, less allowance for doubtful
accounts of $1,651
in 1996 and $1,717 in 1995............................... 48,404 28,742
Inventories............................................... 27,189 16,874
Prepaid income taxes...................................... 1,501 1,032
Prepaid expenses and other................................ 1,113 1,836
Deferred income taxes (Note 2 and 4)...................... 1,485 664
-------- -------
Total current assets.................................... 155,746 51,295
Property and equipment:
Land...................................................... 567 567
Building.................................................. 1,270 600
Equipment................................................. 3,127 1,853
-------- -------
4,964 3,020
Accumulated depreciation.................................. (1,092) (882)
-------- -------
3,872 2,138
Other assets:
Goodwill (Note 2)......................................... 34,824 --
Deferred income taxes (Note 2 and 4)...................... 1,965 1,141
Notes receivable from affiliate (Note 5).................. -- 413
Other assets.............................................. 1,564 34
-------- -------
38,353 1,588
-------- -------
Total assets............................................ $197,971 $55,021
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
To bank................................................. $ -- 1,403
Others (Note 2 and 3)................................... 25,321 --
Trade accounts payable.................................... 14,381 9,913
Accrued expenses and other current liabilities............ 8,970 1,351
Current portion of long-term debt......................... 5,000 2,400
-------- -------
Total current liabilities............................... 53,672 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--16,264,923 in 1996 and
13,918,096 in 1995....................................... 163 139
Paid-in capital........................................... 115,679 22,052
Retained earnings........................................... 28,457 17,763
-------- -------
Total stockholders' equity.............................. 144,299 39,954
-------- -------
Total liabilities and stockholders' equity............ $197,971 $55,021
======== =======
</TABLE>
See accompanying notes.
7
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net sales......................................... $177,710 $130,094 $92,151
Cost of sales..................................... 136,344 97,973 68,122
-------- -------- -------
Gross profit...................................... 41,366 32,121 24,029
Selling, general and administrative expenses (Note
2)............................................... 23,450 18,418 13,913
Acquisition and merger expenses (Note 2).......... 2,378 -- --
-------- -------- -------
Operating income.................................. 15,538 13,703 10,116
Interest expense.................................. (229) (199) (629)
Interest income................................... 1,771 163 186
-------- -------- -------
Income before income taxes........................ 17,080 13,667 9,673
Income taxes (Note 4)............................. (6,386) (5,507) (3,877)
-------- -------- -------
Net income........................................ $ 10,694 $ 8,160 $ 5,796
-------- -------- -------
Net income per share.............................. $ .69 $ .58 $ .45
-------- -------- -------
</TABLE>
See accompanying notes.
8
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK STOCKHOLDERS'
------------------ PAID-IN RETAINED TREASURY EQUITY
SHARES AMOUNT CAPITAL EARNINGS STOCK (DEFICIT)
---------- ------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... 10,200,000 $102 $ 3,396 $ 3,480 $(13,000) $ (6,022)
Acquisition--pooling of
interest (Note 2)...... 151,724 1 24 327 -- 352
Net income for 1994..... -- -- -- 5,796 -- 5,796
Public offering of com-
mon stock.............. 3,240,000 32 23,350 -- -- 23,382
Retirement of treasury
stock.................. (6,120,000) -- (13,000) -- 13,000 --
Conversion of convert-
ible debentures into
common stock........... 6,120,000 -- 6,500 -- -- 6,500
Issuance of common stock
from exercise of op-
tions.................. 137,010 2 37 -- -- 39
Tax benefit of stock op-
tions 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 1996..... -- -- -- 10,694 -- 10,694
Public offering of com-
mon stock.............. 2,223,276 22 91,441 -- -- 91,463
Issuance of common stock
from exercise of op-
tions.................. 123,551 2 569 -- -- 571
Tax benefit of stock op-
tions exercised........ -- -- 1,617 -- -- 1,617
---------- ---- -------- ------- -------- --------
Balance at December 31,
1996................... 16,264,923 $163 $115,679 $28,457 $ -- $144,299
========== ==== ======== ======= ======== ========
</TABLE>
See accompanying notes.
9
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-----------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $10,694 $8,160 $5,796
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization....................... 492 327 223
Deferred income tax expense (credits)............... 239 (99) (173)
Provision for doubtful accounts..................... 924 869 525
Note receivable from affiliate...................... 378 -- --
Changes in operating assets and liabilities net of
assets acquired and liabilities assumed of Gateway
Healthcare Corporation, Express Care, L.P.,
Alternative Healthcare Services and TDR Medical LLC
in 1996 and L&M Medical, Inc. in 1995:
Increase in trade accounts receivable .............. (8,345) (8,940) (5,798)
Increase in inventories............................. (4,231) (6,101) (2,958)
Decrease (increase) in prepaid income taxes, prepaid
expenses and other................................. 315 (2,249) (382)
Increase (decrease) in trade accounts payable....... (2,012) 2,495 1,820
Increase in accrued expenses........................ 1,461 56 459
------- ------ ------
Net cash used in operating activities................. (85) (5,842) (488)
INVESTING ACTIVITIES
Transaction costs related to the purchase of Gateway
Healthcare Corporation, net of cash acquired......... (732) -- --
Purchase of Express Care, L.P., Alternative Healthcare
Services, and TDR Medical LLC in 1996 and L&M
Medical, Inc. in 1995................................ (4,452) (3,749) --
Purchases of building and equipment................... (1,117) (539) (359)
Decrease (increase) in other assets................... (1,473) (2) 3
------- ------ ------
Net cash used in investing activities................. (7,774) (4,290) (356)
FINANCING ACTIVITIES
Principal payments on note payable to bank ........... (1,403) -- --
Principal payment on notes payable-others............. (11,465) -- --
Principal payments on long-term debt.................. -- -- (7,103)
Net borrowings (payments) under revolving line of
credit .............................................. 2,600 (2,656) (6,927)
Proceeds from issuance of common stock................ 91,463 -- 23,382
Proceeds from exercise of stock options............... 571 112 39
------- ------ ------
Net cash provided by financing activities............. 81,766 2,768 9,391
------- ------ ------
Net increase (decrease) in cash and cash equivalents . 73,907 (7,004) 8,547
Cash and cash equivalents at beginning of year........ 2,147 9,151 604
------- ------ ------
Cash and cash equivalents at end of year.............. $76,054 $2,147 $9,151
======= ====== ======
</TABLE>
10
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
-------- ------ -------
<S> <C> <C> <C>
NON-CASH TRANSACTIONS:
Issuance of notes for the purchase of Gateway
Healthcare Corporation................................ $ 25,321 $ -- $ --
======== ====== =======
Conversion of convertible subordinated debentures...... $ -- $ -- $ 6,500
======== ====== =======
Tax benefit of stock options exercised................. $ 1,617 $1,180 $ 455
======== ====== =======
Cash paid for:
Interest............................................. $ 202 $ 177 $ 1,026
======== ====== =======
Federal and state income taxes ...................... $ 4,903 $5,372 $ 3,518
======== ====== =======
</TABLE>
See accompanying notes.
11
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 1996
1. ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include Gulf South
Medical Supply, Inc. and subsidiaries (the "Company"). All intercompany
transactions have been eliminated in consolidation.
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 consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
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 buildings and from 3 to 7
years for the equipment.
Goodwill
The excess of the cost of acquisitions over the fair value of the net assets
acquired (goodwill) is amortized on a straight-line basis over their estimated
useful lives, principally at 30 years (See Note 2). Management assesses the
recoverability of goodwill based on undiscounted cash flows. Accumulated
amortization was $147 and $30 at December 31, 1996 and 1995, respectively.
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.
12
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO CONSOLIDATED 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 1994 ), based on the weighted
average number of shares outstanding during each year presented (15,419,438 in
1996, 13,993,595 in 1995 and 13,073,040 in 1994). Common equivalent shares
include the conversion of the 10% convertible subordinated debentures in 1994.
Common equivalent shares relating to the stock options and warrants
outstanding during the years ended December 31, 1996, 1995 and 1994, when
dilutive, have been calculated using the treasury stock method based on the
average market value of the common stock during 1996, 1995 and 1994.
2. ACQUISITIONS
On December 26, 1996, the Company acquired all of the outstanding common
stock of Gateway Healthcare Corporation ("Gateway") for $26,077, including
transaction costs of $756, in notes payable to the former shareholders of
Gateway and warrants for 450,000 shares of the Company's common stock (see
notes 3 and 6). The Company also acquired certain operating assets and
liabilities of Express Care, L.P. ("Express Care") on April 1, 1996,
Alternative Healthcare Services ("AHS") on July 1, 1996 and TDR Medical, LLC
("TDR") on December 10, 1996 (collectively, "Others") in separate transactions
totaling $4,670. These acquisitions have been accounted for using the purchase
method of accounting. The total purchase price has been allocated on the basis
of fair values of the assets acquired and liabilities assumed. The total
purchase price was allocated to the assets acquired and liabilities assumed as
follows:
<TABLE>
<CAPTION>
GATEWAY OTHERS
-------- -------
<S> <C> <C>
Cash................................................... $ 24 $ --
Accounts receivable.................................... 10,906 1,300
Inventories............................................ 4,928 1,156
Prepaid expenses....................................... 61 302
Property and equipment................................. 690 222
Other assets........................................... 53 --
Deferred income taxes.................................. 3,025 --
Goodwill............................................... 30,311 3,489
Notes payable to others................................ (11,465) --
Accounts payable....................................... (5,331) (1,149)
Accrued exit and integration expenses.................. (3,677) (600)
Accrued expenses....................................... (3,448) (50)
-------- -------
$ 26,077 $ 4,670
======== =======
</TABLE>
Accordingly, the results of operations of the Company include Gateway,
Express Care, AHS and TDR from the dates acquired. The operations of Express
Care, AHS and TDR were not material to the Company's
13
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
operations for 1996, 1995 and 1994. Gateway, Express Care, AHS and TDR were
distributors of medical supplies and related products serving principally the
East, Southeast, Southern California and South Texas long-term care markets
prior to being acquired by the Company. Accrued exit and integration expenses
principally relate to severance, moving, relocation and lease termination
expenses pertaining to the closure of five Gateway distribution centers and
conversion of Gateway's systems. Included in the accrued severance expenses
were administrative, clerical, sales and warehouse personnel costs.
Unaudited pro forma results of operations of the Company including Gateway
for the periods prior to its acquisition by the Company were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 26, -----------------
1996 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Net sales....................................... $248,544 $177,831 $125,367
Gross profit.................................... 55,815 42,134 30,809
Interest expense................................ 2,249 2,897 3,249
Income before income taxes...................... 13,563 10,877 6,278
Net income...................................... 8,159 6,210 3,964
Net income per share............................ .53 .44 .30
</TABLE>
Pro forma results do not purport to be indicative of actual results had the
acquisition been made at January 1, 1994 or the results that may occur in the
future.
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 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 consolidated 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 two months in 1996 and the two years prior to the share exchange with
Bayer are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net sales
Gulf South......................................... $175,185 $120,287 $83,376
Bayer.............................................. 2,525 9,807 8,775
-------- -------- -------
Combined........................................... $177,710 $130,094 $92,151
======== ======== =======
Gross profit
Gulf South......................................... $ 40,939 $ 29,752 $21,282
Bayer.............................................. 427 2,369 2,747
-------- -------- -------
Combined........................................... $ 41,366 $ 32,121 $24,029
======== ======== =======
Net income
Gulf South......................................... $ 10,693 $ 8,567 $ 5,728
Bayer.............................................. 1 (407) 68
-------- -------- -------
Combined........................................... $ 10,694 $ 8,160 $ 5,796
======== ======== =======
</TABLE>
The Company had expenses of $2,378 during 1996 in connection with the
acquisitions described above and the L&M Medical, Inc. acquisition in 1995.
Included therein was $819 of legal, accounting and other integration costs
incurred in the Bayer share exchange, $771 of integration and exit charges
pertaining to L&M Medical,
14
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inc. acquired in 1995 and $778 pertaining to the Express Care and AHS
acquisitions. Integration and exit charges pertain principally to severance,
moving and relocation costs, operating lease terminations and settlements and
other expenses associated with integration of various systems into those of
the Company.
3. CREDIT FACILITIES AND NOTES PAYABLE
The Company has a $15.0 million revolving credit facility which matures
September 25, 1998, of which $10 million and $12.6 million was available at
December 31, 1996 and 1995, 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.
Notes payable-other consists of $25,321 payable to the former shareholders
of Gateway.
4. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................ $5,125 $4,561 $3,378
State.................................................. 1,022 1,045 672
------ ------ ------
6,147 5,606 4,050
Deferred (credits):
Federal................................................ 211 (86) (151)
State.................................................. 28 (13) (22)
------ ------ ------
239 (99) (173)
------ ------ ------
$6,386 $5,507 $3,877
====== ====== ======
</TABLE>
The components of deferred income tax assets are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Current:
Accounts receivable.............................................. $ 935 $500
Inventories...................................................... 470 80
Accrued expenses................................................. 80 84
------ ----
Current deferred tax asset....................................... 1,485 664
Non-current:
Goodwill......................................................... 550 --
Property and equipment........................................... 215 --
Net operating loss............................................... 1,200 --
------ ----
Non-current deferred tax asset................................... 1,965 664
------ ----
Total deferred tax asset ...................................... $3,450 $664
====== ====
</TABLE>
The Company has net operating loss carryforwards, which have certain
restrictions as to the amount that may be utilized in any given year,
applicable to Gateway, which expire at various dates through 2011.
15
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory federal income taxes.................... $5,807 $4,683 $3,288
State income taxes, net........................... 693 678 429
Tax-exempt interest............................... (442) -- --
Other............................................. 328 (146) 160
------ ------ ------
$6,386 $5,507 $3,877
====== ====== ======
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company had the following receivables from a company ("related company")
whose stockholders included certain executive officers of the Company.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Account receivable.................... $-- $332 $163
Note receivable....................... $-- $413 $413
</TABLE>
The Company acquired the related company during 1996 for the assumption of
its debt. The related company was subsequently acquired by a customer of the
Company for the assumption of such debt, excluding amounts owed to the
Company. As a result, the Company charged off $378 of the note receivable in
connection with the sale.
6. STOCK OPTION PLAN AND WARRANTS OUTSTANDING
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB 25, compensation expense of $31 and $76 has been accrued applicable
to certain options exercisable at December 31, 1996 and 1995, respectively.
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. The options granted have ten year terms with vesting
periods of either three or five years from either the date of grant or the
first employment anniversary date. At December 31, 1996 and 1995, 224,888 and
416,050 shares, respectively, were available for grant under the 1992 plan.
Pro forma information regarding net income and net income per share is
required by FASB Statement No. 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 1996 and 1995: risk-free interest rate of 6.5%; no
dividend yield; volatility factor of the expected market price of the
Company's common stock of .418 and .340, respectively; and a weighted-average
expected life of the options of 3 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
16
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
changes in the subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options granted in 1996 and 1995 is amortized to expense over the options'
vesting period. The Company's pro forma information follows (in thousands
except for earnings per share information):
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Pro forma net income................... $10,314 $8,019
Pro forma net income per share......... $ .67 $ .57
</TABLE>
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1994... 546,948 $ .76
Granted.......................... 200,000 20.78
Exercised........................ 189,364 .58
-------
Outstanding at December 31, 1995... 557,584 8.00
Granted.......................... 202,562 28.93
Exercised........................ 123,550 4.69
Forfeited........................ 11,400 16.75
-------
Outstanding at December 31, 1996... 625,196 15.00
=======
</TABLE>
The weighted-average fair value of options granted during 1996 and 1995 was
$10.39 and $6.56, respectively.
Following is a summary of the status of options outstanding at December 31,
1996:
<TABLE>
<CAPTION>
EXERCISABLE
OUTSTANDING OPTIONS OPTIONS
--------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
----------- ------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$.2118--$.4853 238,334 6.3 years $ .32 206,204 $ .33
$ 6.46 --$ 8.00 19,362 7.6 years $ 7.80 8,162 $ 7.52
$20.375--$22.41 169,500 8.1 years $20.86 54,900 $20.97
$28.50 --$31.35 198,000 9.2 years $28.93 38,000 $28.95
</TABLE>
The Company granted warrants for 450,000 shares of its common stock on
January 2, 1997 at an exercise price of $25.90 in connection with the purchase
of Gateway (see Note 2). All of the warrants were exercisable upon the date of
grant and expire January 2, 2002.
17
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. OTHER MATTERS
One customer accounted for 20.0%, 16.6% and 10.1% of net sales for the years
ended December 31, 1996, 1995 and 1994, respectively.
The Company leases certain vehicles, computers and office equipment under
operating leases. Lease periods range from two to six years. The Company also
leases warehouse space in various states 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, 1996, by year and in the aggregate, are as follows:
<TABLE>
<S> <C>
1997.................................. $1,609
1998.................................. 908
1999.................................. 440
2000.................................. 377
2001.................................. 227
------
Total minimum lease payments...... $3,561
======
</TABLE>
Rental expense under the operating leases was $1,449 in 1996, $1,054 in 1995
and $680 in 1994.
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 results of its operations.
The carrying amounts reported in the balance sheet for cash and cash
equivalents, notes payable to bank and notes payable-others approximate the
fair value at December 31, 1996 and 1995.
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.
8. SUBSEQUENT EVENT
On December 14, 1997, the Company entered into an Agreement and Plan of
Merger dated as of December 14, 1997 by and among Physician Sales & Service,
Inc. ("PSS"), PSS Merger Corp. ("Merger Corp.") and the Company, providing for
the merger of Merger Corp. with and into the Company. The Company shareholders
would receive up to a maximum of 1.75 shares of PSS common stock in exchange
for each share of the Company's common stock. Consummation of the merger is
subject to the approval of the shareholders of both the Company and PSS and
various state and federal regulatory agencies and other customary conditions.
18
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED BALANCE
BALANCE AT TO WRITE-OFF AT END
BEGINNING COST AND OF OF
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS PERIOD
- ----------- ---------- -------- --------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts.......... $1,717 $924 $990 $1,651
====== ==== ==== ======
Reserve for inventory obsolescence....... $ 199 $ -- $ -- $ 199
====== ==== ==== ======
Year ended December 31, 1995:
Allowance for doubtful accounts.......... $1,203 $869 $355 $1,717
====== ==== ==== ======
Reserve for inventory obsolescence....... $ 199 $ -- $ -- $ 199
====== ==== ==== ======
Year ended December 31, 1994:
Allowance for doubtful accounts.......... $ 907 $525 $229 $1,203
====== ==== ==== ======
Reserve for inventory obsolescence....... $ 199 $ -- $ -- $ 199
====== ==== ==== ======
</TABLE>
19
