<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1998
REGISTRATION NO. 333-44323
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PHYSICIAN SALES & SERVICE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 5047 59-2280364
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION)
4345 SOUTHPOINT BOULEVARD
JACKSONVILLE, FLORIDA 32216
(904) 332-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
PATRICK C. KELLY
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
PHYSICIAN SALES & SERVICE, INC.
4345 SOUTHPOINT BOULEVARD
JACKSONVILLE, FLORIDA 32216
(904) 332-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
J. VAUGHAN CURTIS, ESQ. FRED ELEFANT, ESQ. WILLIAM B. ASHER, JR.,
KIMBERLY A. KNIGHT, ESQ. GENERAL COUNSEL ESQ.
ALSTON & BIRD LLP PHYSICIAN SALES & SERVICE, INC. TESTA, HURWITZ &
ONE ATLANTIC CENTER 1650 PRUDENTIAL DRIVE THIBEAULT, LLP
1201 WEST PEACHTREE SUITE 105 125 HIGH STREET
STREET JACKSONVILLE, FLORIDA 32207 HIGH STREET TOWER
ATLANTA, GEORGIA 30309- (904) 398-2277 BOSTON, MA 02110
3424 (404) 881-7000 (617) 248-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At the
effective time of the merger of Gulf South Medical Supply, Inc. with a wholly-
owned subsidiary of the Registrant, as described in the Joint Proxy
Statement/Prospectus included herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
PHYSICIAN SALES & SERVICE, INC.
[PSS LOGO]
February 25, 1998
Dear Stockholder:
You are cordially invited to attend a special meeting of the stockholders
("Special Meeting") of Physician Sales & Service, Inc. ("PSS") to be held at
the Jacksonville Marriott, 4670 Salisbury Road, Jacksonville, Florida 32256,
at 9:30 a.m., local time, on March 26, 1998.
At this important meeting, you will be asked to consider and vote upon the
approval of the issuance (the "Issuance") of shares of common stock, par value
$.01 per share, of PSS ("PSS Common Stock") pursuant to an Agreement and Plan
of Merger, dated December 14, 1997 (the "Merger Agreement"), by and among PSS,
PSS Merger Corp., a wholly owned subsidiary of PSS ("Merger Corp."), and Gulf
South Medical Supply, Inc. ("Gulf South"), pursuant to which Merger Corp. will
be merged with and into Gulf South (the "Merger") and Gulf South will become a
wholly owned subsidiary of PSS. Subject to the terms and conditions of the
Merger Agreement, each share of common stock, par value $.01 per share, of
Gulf South ("Gulf South Common Stock") outstanding immediately prior to the
effective time of the Merger will be converted into 1.75 shares of PSS Common
Stock (the "Exchange Ratio") and options and warrants to purchase shares of
Gulf South Common Stock which are outstanding at such time, whether or not
then exercisable, will become options and warrants to purchase PSS Common
Stock, and PSS will assume each option and warrant (as adjusted to reflect the
Exchange Ratio).
In addition, at this meeting, you will be asked to consider and vote upon
the approval and adoption of amendments to the Amended and Restated Articles
of Incorporation, as amended, of PSS which will: (i) increase the number of
authorized shares of PSS Common Stock from 60,000,000 to 150,000,000 (the
"Stock Amendment") and (ii) change the corporate name of PSS to "PSS World
Medical, Inc." (the "Name Amendment," and with the Stock Amendment, the
"Amendments"). The approval of the Stock Amendment is necessary for, and a
condition to, consummation of the Merger.
After careful consideration, the Board of Directors of PSS has unanimously
determined that the Merger Agreement and the transactions contemplated
thereby, are in the best interests of and fair to PSS and its stockholders,
and has approved the Merger Agreement. In connection with the proposed
transactions, PSS retained as its financial advisor BT Alex. Brown
Incorporated ("BT Alex. Brown"), which firm has delivered to the Board of
Directors its opinion dated December 14, 1997 to the effect that, as of the
date of such opinion and based upon and subject to certain matters stated
therein, the Exchange Ratio was fair, from a financial point of view, to PSS.
A copy of the BT Alex. Brown opinion, which sets forth the assumptions made,
matters considered and the limitations of the review undertaken in connection
therewith, is set forth in Annex F to the accompanying Joint Proxy
Statement/Prospectus and should be read carefully in its entirety.
Management of PSS believes that this acquisition is important for PSS and
its stockholders and encourages you to support the Merger Agreement. THE BOARD
OF DIRECTORS OF PSS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ISSUANCE AND
THE AMENDMENTS.
Enclosed are the (i) Notice of Special Meeting, (ii) Joint Proxy
Statement/Prospectus, and (iii) proxy for the Special Meeting. The Joint Proxy
Statement/Prospectus describes in more detail the Merger Agreement, the
proposed Merger, including a description of the conditions to consummation of
the Merger, and the Amendments. It also contains financial and other
information pertaining to PSS and Gulf South. Please give this information
your careful attention.
The affirmative vote of the holders of a majority of the votes cast by the
holders of record of PSS Common Stock (assuming a quorum is present), is
required for approval of the Issuance and the Amendments. Directors and
executive officers of PSS holding approximately 5.0% of the outstanding votes
represented by the shares of PSS Common Stock have agreed to vote in favor of
the Issuance and the Stock Amendment.
<PAGE>
We urge you to consider carefully these important matters, which are
described in the attached Joint Proxy Statement/Prospectus. In order to ensure
that your vote is represented at the Special Meeting, please indicate your vote
on the enclosed proxy, date and sign it, and return it in the enclosed postage
pre-paid envelope. A prompt response will be appreciated. If you are able to
attend the Special Meeting, you may revoke your proxy and vote in person if you
wish.
We look forward to seeing you at the Special Meeting.
Sincerely yours,
/s/ Patrick C. Kelly
PATRICK C. KELLY
Chairman of the Board and
Chief Executive Officer
2
<PAGE>
PHYSICIAN SALES & SERVICE, INC.
4345 SOUTHPOINT BOULEVARD
JACKSONVILLE, FLORIDA 32216
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AT 9:30 A.M. ON MARCH 26, 1998
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February 25, 1998
TO THE STOCKHOLDERS OF PHYSICIAN SALES & SERVICE, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders ("Special
Meeting") of Physician Sales & Service, Inc. ("PSS") will be held at the
Jacksonville Marriott, 4670 Salisbury Road, Jacksonville, Florida 32256, on
March 26, 1998, at 9:30 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the issuance
(the "Issuance") of shares of common stock, $.01 par value per share, of
PSS ("PSS Common Stock") pursuant to the Agreement and Plan of Merger,
dated December 14, 1997 (the "Merger Agreement"), by and among PSS, PSS
Merger Corp., a wholly owned subsidiary of PSS ("Merger Corp."), and Gulf
South Medical Supply, Inc. ("Gulf South"), pursuant to which: (i) Merger
Corp. will be merged with and into Gulf South, with Gulf South being the
surviving corporation and becoming a wholly owned subsidiary of PSS (the
"Merger"), (ii) each outstanding share of common stock, $.01 par value per
share, of Gulf South ("Gulf South Common Stock") will be cancelled and the
holders of such securities will be entitled to receive 1.75 shares of PSS
Common Stock for each share of Gulf South Common Stock owned by them (the
"Exchange Ratio"), and (iii) options and warrants to purchase shares of
Gulf South Common Stock which are outstanding at such time, whether or not
then exercisable, will become options and warrants to purchase PSS Common
Stock, and PSS will assume each option and warrant (as adjusted to reflect
the Exchange Ratio), all as described in the accompanying Joint Proxy
Statement/Prospectus.
2. To consider and vote upon a proposal to approve an amendment to the
Amended and Restated Articles of Incorporation, as amended, of PSS to
increase the number of authorized shares of PSS Common Stock from
60,000,000 to 150,000,000 (the "Stock Amendment").
3. To consider and vote upon a proposal to approve an amendment to the
Amended and Restated Articles of Incorporation, as amended, of PSS to
change the corporate name of PSS to "PSS World Medical, Inc." (the "Name
Amendment," and with the Stock Amendment, the "Amendments").
4. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
Stockholders of record at the close of business on February 13, 1998, are
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof. It is important that your shares of PSS Common Stock be represented
at the Special Meeting, regardless of the number of shares you hold. Directors
and executive officers of PSS holding approximately 5.0% of the outstanding
votes represented by the shares of PSS Common Stock have agreed to vote in
favor of the Issuance and the Stock Amendment.
THE ISSUANCE AND THE AMENDMENTS HAVE BEEN UNANIMOUSLY APPROVED BY THE BOARD
OF DIRECTORS OF PSS, AND THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
YOU VOTE FOR APPROVAL AND ADOPTION OF THE ISSUANCE AND THE AMENDMENTS.
PLEASE COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY
TO PHYSICIAN SALES & SERVICE, INC. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY
REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU DESIRE TO DO SO, BUT ATTENDANCE AT
THE SPECIAL MEETING DOES NOT ITSELF SERVE TO REVOKE YOUR PROXY.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Fred Elefant
FRED ELEFANT
Secretary
<PAGE>
[GULF SOUTH LOGO]
February 25, 1998
DEAR FELLOW STOCKHOLDER:
You are cordially invited to attend a special meeting of stockholders
("Special Meeting") of Gulf South Medical Supply, Inc. ("Gulf South") to be
held at The Harvey Hotel-North, located at 5075 I-55, North Frontage Road,
Jackson Mississippi 39206, at 9:00 a.m., local time, on March 26, 1998.
At this important meeting, you will be asked to consider and vote upon the
approval of the Agreement and Plan of Merger, dated December 14, 1997 (the
"Merger Agreement"), which provides for the merger of Gulf South with a wholly
owned subsidiary of Physician Sales & Service, Inc. ("PSS"), with the result
that Gulf South will become a wholly owned subsidiary of PSS (the "Merger").
If the proposed merger is consummated, each outstanding share of common stock,
$.01 par value per share, of Gulf South ("Gulf South Common Stock") will be
converted into and exchanged for the right to receive 1.75 shares of common
stock, $.01 per value per share, of PSS ("PSS Common Stock"), all on the terms
set forth in the Merger Agreement (the "Exchange Ratio").
In addition, upon consummation of the Merger, all options and warrants to
purchase shares of Gulf South Common Stock which are outstanding at such time,
whether or not then exercisable, will become options and warrants to purchase
PSS Common Stock, and PSS will assume each option and warrant (as adjusted to
reflect the Exchange Ratio).
After careful consideration, the Board of Directors of Gulf South has
unanimously determined that the Merger Agreement and the transactions
contemplated therein are in the best interests of and fair to Gulf South and
its stockholders and has approved the Merger Agreement. In connection with the
proposed transactions, the Board retained as its financial advisor NationsBanc
Montgomery Securities LLC ("NationsBanc Montgomery"), which firm has delivered
to the Board of Directors its written opinion dated December 14, 1997 to the
effect that, as of the date of such opinion and based upon and subject to
certain matters stated therein, the Exchange Ratio was fair, from a financial
point of view, to the holders of Gulf South Common Stock. A copy of the
NationsBanc Montgomery opinion, which sets forth the assumptions made, matters
considered and the limitations of the review undertaken in connection
therewith, is set forth in Annex G to the accompanying Joint Proxy
Statement/Prospectus and should be read carefully in its entirety.
The affirmative vote of the holders of a majority of the votes entitled to
be cast by the holders of record of Gulf South Common Stock is required for
approval of the Merger Agreement and the consummation of the transactions
contemplated therein. Directors and executive officers of Gulf South holding
approximately 10.7% of the outstanding votes represented by shares of Gulf
South Common Stock have agreed to vote in favor of the Merger Agreement and
the consummation of the transactions contemplated therein.
Enclosed are the (i) Notice of Special Meeting, (ii) Joint Proxy
Statement/Prospectus, and (iii) proxy for the Special Meeting. The Joint Proxy
Statement/Prospectus describes in more detail the Merger Agreement and the
proposed Merger, including a description of the conditions to consummation of
the Merger and the effects of the Merger on the rights of Gulf South
stockholders. It also contains financial and other information pertaining to
PSS and Gulf South. Please give this information your careful attention.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER
AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER
AGREEMENT AND CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREIN.
<PAGE>
In view of the importance of the action to be taken, we urge you to
complete, sign, and date the enclosed proxy and to return it promptly in the
enclosed envelope, whether or not you plan to attend the Special Meeting (if
you attend the Special Meeting, you may vote in person, even if you previously
returned your proxy).
We look forward to seeing you at the Special Meeting.
Sincerely,
/s/ Thomas G. Hixon
Thomas G. Hixon
Chairman of the Board,
President and Chief Executive
Officer
2
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
ONE WOODGREEN PLACE
MADISON, MISSISSIPPI 39110
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AT 9:00 A.M. ON MARCH 26, 1998
----------------
TO THE STOCKHOLDERS OF GULF SOUTH MEDICAL SUPPLY, INC.: February 25, 1998
NOTICE IS HEREBY GIVEN that a special meeting of stockholders ("Special
Meeting") of Gulf South Medical Supply, Inc. ("Gulf South") will be held at
The Harvey Hotel-North, 5075 I-55, North Frontage Road, Jackson, Mississippi
39206, on March 26, 1998, at 9:00 a.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger, dated December 14, 1997 (the "Merger Agreement"), by and among
Gulf South, Physician Sales & Service, Inc. ("PSS"), and PSS Merger Corp.,
a wholly owned subsidiary of PSS ("Merger Corp"), pursuant to which, among
other matters, (i) Merger Corp. will merge with and into Gulf South (the
"Merger") with Gulf South surviving as a wholly owned subsidiary of PSS,
(ii) each outstanding share of common stock, $.01 par value per share, of
Gulf South ("Gulf South Common Stock") will be converted into the right to
receive 1.75 shares of common stock, $.01 par value per share, of PSS ("PSS
Common Stock"), all on the terms set forth in the Merger Agreement (the
"Exchange Ratio"), and (iii) all options and warrants to purchase shares of
Gulf South Common Stock which are outstanding at such time, whether or not
then exercisable, will become options or warrants, respectively, to
purchase PSS Common Stock, and PSS will assume each option and warrant (as
adjusted to reflect the Exchange Ratio), all as more fully described in the
accompanying Joint Proxy Statement/Prospectus. A copy of the Merger
Agreement is set forth in Annex A to the accompanying Joint Proxy
Statement/Prospectus.
2. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements of the Special
Meeting.
Only stockholders of record at the close of business on February 13, 1998,
are entitled to receive notice of and to vote at the Special Meeting or any
adjournments or postponements thereof. Approval of the Merger Agreement and
the consummation of the transactions contemplated therein requires the
affirmative vote of the holders of a majority of the shares of Gulf South
Common Stock entitled to vote at the Special Meeting. Directors and executive
officers of Gulf South holding approximately 10.7% of the outstanding votes
represented by shares of Gulf South Common Stock have agreed to vote in favor
of the Merger Agreement and the consummation of the transactions contemplated
therein.
THE BOARD OF DIRECTORS OF GULF SOUTH UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE CONSUMMATION OF
THE TRANSACTIONS CONTEMPLATED THEREBY.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Thomas G. Hixon
Thomas G. Hixon
Chief Executive Officer
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
JOINT PROXY STATEMENT
OF
PHYSICIAN SALES & SERVICE, INC. GULF SOUTH MEDICAL SUPPLY, INC.
SPECIAL MEETING OF STOCKHOLDERS TO BE SPECIAL MEETING OF STOCKHOLDERS TO BE
HELD HELD
ON MARCH 26, 1998 ---------------ON MARCH 26, 1998
PROSPECTUS
OF
PHYSICIAN SALES & SERVICE, INC.
COMMON STOCK
PAR VALUE $.01 PER SHARE
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THIS PROSPECTUS RELATES TO UP TO 31,036,458 SHARES OF THE COMMON STOCK, PAR
VALUE $.01 PER SHARE ("PSS COMMON STOCK"), OF PHYSICIAN SALES & SERVICE, INC.
("PSS") ISSUABLE TO THE STOCKHOLDERS OF GULF SOUTH MEDICAL SUPPLY, INC. ("GULF
SOUTH") UPON CONSUMMATION OF THE MERGER (AS DEFINED BELOW). SUCH NUMBER OF
SHARES REPRESENTS THE MAXIMUM NUMBER OF SHARES THAT MAY BE ISSUED, ASSUMING
THAT ALL OUTSTANDING OPTIONS AND WARRANTS TO PURCHASE SHARES OF GULF SOUTH
COMMON STOCK (AS DEFINED BELOW) ARE EXERCISED PRIOR TO THE CLOSING OF THE
MERGER. THIS PROSPECTUS ALSO SERVES AS THE PROXY STATEMENT OF EACH OF PSS AND
GULF SOUTH FOR THEIR RESPECTIVE SPECIAL MEETINGS OF STOCKHOLDERS TO BE HELD ON
MARCH 26, 1998, AND ANY ADJOURNMENTS AND POSTPONEMENTS THEREOF (THE "SPECIAL
MEETINGS"). SEE "GENERAL INFORMATION".
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This Joint Proxy Statement/Prospectus describes the terms of a proposed
business combination between PSS and Gulf South, pursuant to which PSS will
acquire Gulf South by means of the merger (the "Merger") of PSS Merger Corp.,
a wholly owned subsidiary of PSS ("Merger Corp."), with and into Gulf South,
with Gulf South being the surviving corporation. After the Merger, the
combined operations of PSS and Gulf South are expected to be conducted with
Gulf South as a wholly owned subsidiary of PSS. The Merger will be effective
pursuant to the terms and conditions of the Agreement and Plan of Merger dated
December 14, 1997, among PSS, Merger Corp. and Gulf South (the "Merger
Agreement"). The Merger Agreement is attached to this Joint Proxy
Statement/Prospectus as Annex A and is incorporated herein by reference.
Upon consummation of the Merger, except as described herein, each
outstanding share of Common Stock, par value $.01 per share, of Gulf South
("Gulf South Common Stock") will be cancelled and the holders of such shares
of Gulf South Common Stock will be entitled to receive 1.75 shares of PSS
Common Stock for each share of Gulf South Common Stock so held (the "Exchange
Ratio"). See "Merger Agreement--Exchange Ratio." In addition, upon
consummation of the Merger, all options to purchase shares of Gulf South
Common Stock ("Gulf South Options") and all warrants to purchase shares of
Gulf South Common Stock ("Gulf South Warrants") which are outstanding at such
time, whether or not then exercisable, will become options and warrants,
respectively, to purchase PSS Common Stock, and PSS will assume each such
option and warrant (as adjusted to reflect the Exchange Ratio).
This Joint Proxy Statement/Prospectus and the forms of proxy are first being
mailed to stockholders of PSS and Gulf South on or about February 26, 1998.
PSS Common Stock is traded in the over-the-counter market and is quoted on
the Nasdaq National Market. On December 12, 1997, the last trading day prior
to public announcement that Gulf South and PSS had executed the Merger
Agreement, the last reported sale price per share of PSS Common Stock on the
Nasdaq National Market was $23.00. On February 24, 1998, the last reported
sale price per share of PSS Common Stock on the Nasdaq National Market was
$19.63.
Gulf South Common Stock is traded in the over-the-counter market and is
quoted on the Nasdaq National Market. On December 12, 1997, the last trading
day prior to public announcement that Gulf South and PSS had executed the
Merger Agreement, the last reported sale price per share of Gulf South Common
Stock on the Nasdaq National Market was $29.06. On February 24, 1998, the last
reported sale price per share of Gulf South Common Stock on the Nasdaq
National Market was $34.06.
THE PSS COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN MATTERS THAT
SHOULD BE CONSIDERED BY STOCKHOLDERS OF PSS AND GULF SOUTH IN CONNECTION WITH
THE MERGER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
The date of this Joint Proxy Statement/Prospectus is February 25, 1998
<PAGE>
AVAILABLE INFORMATION
This Joint Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement on Form S-4, of which this
Joint Proxy Statement/Prospectus is a part, and exhibits thereto (together
with any amendments thereto, the "Registration Statement"), which has been
filed with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(the "Securities Act"), certain portions of which have been omitted pursuant
to the rules and regulations of the Commission and to which portions reference
is hereby made for further information. Statements contained in this Joint
Proxy Statement/Prospectus concerning the provisions of certain documents
filed as exhibits to the Registration Statement are necessarily brief
descriptions thereof, and are not necessarily complete and each such statement
is qualified in its entirety by reference to the full text of such document.
PSS and Gulf South are each subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file periodic reports, proxy statements and other
information with the Commission.
Copies of the Registration Statement, as well as such reports, proxy
statements and other information of PSS, may be inspected, without charge, at
the principal office of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and should be available at the
Commission's Regional Offices at Seven World Trade Center, New York, New York
10007, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, the Commission maintains a site
on the World Wide Web at http://www.sec.gov that contains reports, proxy and
other information that registrants file electronically with the Commission.
PSS' and Gulf South's Common Stock are traded on the Nasdaq National Market
and such reports, proxy statements and other information may also be inspected
at the office of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH REPORTS,
PROXY STATEMENTS AND OTHER INFORMATION FILED BY PSS, OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED HEREIN BY
REFERENCE, ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST, FROM
THE ASSISTANT SECRETARY OF PHYSICIAN SALES & SERVICE, INC., 4345 SOUTHPOINT
BOULEVARD, JACKSONVILLE, FLORIDA 32216, TELEPHONE (904) 332-3000. COPIES OF
SUCH REPORTS, PROXY STATEMENTS AND OTHER INFORMATION FILED BY GULF SOUTH,
OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED HEREIN BY REFERENCE, ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN
OR ORAL REQUEST, FROM THE SECRETARY OF GULF SOUTH MEDICAL SUPPLY, INC., ONE
WOODGREEN PLACE, MADISON, MISSISSIPPI 39110, TELEPHONE (601) 898-2033. TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE AT LEAST
FIVE DAYS PRIOR TO THE SPECIAL MEETINGS.
All information contained in this Joint Proxy Statement/Prospectus or
incorporated herein by reference with respect to PSS was supplied by PSS, and
all information contained in this Joint Proxy Statement/Prospectus or
incorporated by reference with respect to Gulf South was supplied by Gulf
South.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PSS OR GULF SOUTH.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS
RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF PSS, GULF SOUTH, OR ANY OF THEIR RESPECTIVE
SUBSIDIARIES SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO PURCHASE, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO PURCHASE THE
SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT LAWFUL.
2
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by PSS (Commission File
No. 0-23832) and Gulf South (Commission File No. 0-23540) under Section 13(a)
or 15(d) of the Exchange Act are hereby incorporated by reference in this
Joint Proxy Statement/Prospectus and made a part hereof:
PSS Documents
(a) PSS' Annual Report on Form 10-K for the fiscal year ended March 28, 1997
(including those portions of PSS' definitive proxy statement for the Annual
Meeting of Shareholders held on July 22, 1997 incorporated by reference
therein, but specifically excluding Items 6, 7 and 8 thereof, which have been
superceded by PSS' Current Report on Form 8-K filed with the Commission on
December 23, 1997);
(b) PSS' Quarterly Reports on Form 10-Q for the fiscal quarters ended June
30, 1997, September 30, 1997 and December 31, 1997;
(c) PSS' Current Reports on Form 8-K filed with the Commission on September
9, 1997, November 6, 1997 (which has been superceded by PSS' Current Report on
Form 8-K filed with the Commission on December 23, 1997), December 23, 1997
and December 23, 1997; and
(d) Description of PSS Common Stock set forth in PSS' registration statement
filed pursuant to Section 12 of the Exchange Act, and any amendment or report
filed for the purpose of updating any such description.
Gulf South Documents
(a) Gulf South's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (including those portions of Gulf South's definitive proxy
statement for the Annual Meeting of Stockholders held on April 24, 1997
incorporated by reference therein);
(b) Gulf South's Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997;
(c) Gulf South's Current Reports on Form 8-K filed with the Commission on
January 9, 1997, December 22, 1997 and December 23, 1997, and Gulf South's
Current Report on Form 8-K/A filed with the Commission on March 11, 1997; and
(d) Description of Gulf South Common Stock set forth in Gulf South's
registration statement filed pursuant to Section 12 of the Exchange Act, and
any amendment or report filed for the purpose of updating any such
description.
All reports and other documents filed by PSS and Gulf South pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Joint Proxy Statement/Prospectus and prior to the Special Meetings
referenced herein shall be deemed to be incorporated by reference herein and
to be a part hereof from the date of filing of such reports and documents. Any
statement contained herein or incorporated or deemed to be incorporated herein
shall be deemed to be modified or superseded for purposes of this Joint Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Joint Proxy Statement/Prospectus.
Neither PSS nor Gulf South will update this Joint Proxy Statement/Prospectus
for events occurring subsequent to the date on the cover page hereof.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus contains and incorporates by reference
certain "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act with respect to PSS and
Gulf South. All statements other than statements of historical facts included
or incorporated by reference into this Joint Proxy Statement/Prospectus,
including those regarding expected benefits and synergies of the proposed
Merger, market trends, financial position, business strategy, projected costs
and plans and objectives of management for future operations, are forward-
looking statements. In general, such statements are identified by the use of
forward-looking words or phrases including, but not limited to, "intended,"
"will," "should," "could," "may," "expects," and "anticipates," or the
negative thereof or variations thereon or similar terminology. These forward-
looking statements are based on current expectations. Although PSS and Gulf
South believe that the expectations reflected in their respective forward-
looking statements are reasonable, there can be no assurance that such
expectations will prove to be correct. Because forward-looking statements
involve risks and uncertainties, actual results could differ materially.
Important factors that could cause actual results to differ materially from
PSS' or Gulf South's expectations ("Cautionary Statements") are disclosed
under "Risk Factors," and elsewhere in this Joint Proxy Statement/Prospectus,
including, without limitation, in conjunction with the forward-looking
statements included in this Joint Proxy Statement/Prospectus, and from time to
time in PSS' or Gulf South's Commission reports and other filings. These
forward-looking statements represent the judgment of PSS and Gulf South as of
the date of this Joint Proxy Statement/Prospectus. All subsequent written and
oral forward-looking statements attributable to PSS or Gulf South or persons
acting on behalf of PSS or Gulf South are expressly qualified in their
entirety by the Cautionary Statements. PSS and Gulf South disclaim, however,
any intent or obligation to update their respective forward-looking
statements.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION.................................................... 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........................ 3
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS................... 4
SUMMARY.................................................................. 7
Parties to the Merger.................................................. 7
The Special Meetings................................................... 8
The Merger............................................................. 9
Amendments to PSS Articles............................................. 16
Market and Market Prices............................................... 17
Dividends.............................................................. 17
Comparison of Certain Unaudited Historical and Pro Forma
Per Share Data........................................................ 18
Selected Historical and Pro Forma Financial Data....................... 19
RISK FACTORS............................................................. 22
Risks Relating to the Merger........................................... 22
Risks Relating to PSS, Gulf South and the Combined Company............. 24
GENERAL INFORMATION...................................................... 31
Special Meetings....................................................... 31
Record Dates........................................................... 31
Vote Required and Quorum............................................... 32
Voting and Revocability of Proxies..................................... 32
Other Matters; Adjournments............................................ 33
Recommendations of the Boards of Directors............................. 33
Solicitation of Proxies................................................ 33
THE MERGER............................................................... 34
General................................................................ 34
Background of the Merger............................................... 34
Reasons for the Merger................................................. 37
Opinions of Financial Advisors......................................... 39
Exchange Ratio......................................................... 47
Fractional Shares...................................................... 48
Conversion of Stock Options and Warrants............................... 48
Effective Time......................................................... 49
Distribution of PSS Certificates....................................... 49
Certain Federal Income Tax Consequences................................ 50
Interests of Certain Persons in the Merger............................. 51
No Solicitation........................................................ 51
Management and Operations After the Merger............................. 51
Conditions to Consummation of the Regulatory Approvals................. 53
Amendment, Waiver and Termination...................................... 53
Expenses and Fees...................................................... 55
Stock Option Agreements................................................ 56
Voting Agreements...................................................... 57
Conduct of Business Pending the Merger................................. 58
Accounting Treatment................................................... 59
Resales of PSS Common Stock............................................ 60
No Dissenters' Rights.................................................. 60
Nasdaq National Market Listing......................................... 60
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.............. 61
BUSINESS OF PSS.......................................................... 69
General................................................................ 69
Industry............................................................... 69
PSS Strategy........................................................... 70
Sales and Distribution................................................. 71
</TABLE>
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<TABLE>
<S> <C>
Products................................................................ 71
Recruitment and Development............................................. 73
Information Systems..................................................... 74
Purchasing and Vendor Relationships..................................... 74
Acquisitions............................................................ 75
Properties.............................................................. 76
Competition............................................................. 78
Regulatory Matters...................................................... 78
Legal Proceedings....................................................... 78
BUSINESS OF GULF SOUTH.................................................... 79
General................................................................. 79
Industry Overview....................................................... 79
Business Strategy....................................................... 80
Growth Strategy......................................................... 81
Customers............................................................... 81
Customer Service/Order Entry and Fulfillment............................ 82
Products................................................................ 83
Sales and Marketing..................................................... 84
Purchasing.............................................................. 84
Competition............................................................. 85
Government Regulation................................................... 85
Properties.............................................................. 86
Employees............................................................... 86
Legal Proceedings....................................................... 87
AMENDMENTS TO PSS ARTICLES................................................ 88
Stock Amendment......................................................... 88
Name Amendment.......................................................... 89
Vote Required and Quorum................................................ 89
CERTAIN DIFFERENCES IN THE RIGHTS OF PSS AND GULF SOUTH STOCKHOLDERS...... 91
Authorized Capital Stock................................................ 91
Size and Classification of Board of Directors; Vacancies................ 91
Amendment of Articles or Certificate of Incorporation and Bylaws........ 92
Removal of Directors.................................................... 93
Director Liability...................................................... 93
Indemnification......................................................... 94
Special Meeting of Stockholders......................................... 95
Dissenters' Rights...................................................... 95
Dividends and Other Distributions....................................... 96
Mergers and Consolidations.............................................. 96
Certain Business Combinations........................................... 96
Control Share Acquisition Statute....................................... 97
Consideration of Societal Factors....................................... 97
EXPERTS................................................................... 98
LEGAL MATTERS............................................................. 98
STOCKHOLDER PROPOSALS..................................................... 98
OTHER MATTERS............................................................. 98
INDEX TO PSS CONSOLIDATED FINANCIAL STATEMENTS............................ F-1
INDEX TO GULF SOUTH CONSOLIDATED FINANCIAL STATEMENTS..................... F-33
</TABLE>
<TABLE>
<C> <S>
ANNEXES:
Annex A --Agreement and Plan of Merger
Annex B --Gulf South Stock Option Agreement
Annex C --PSS Stock Option Agreement
Annex D --Gulf South Voting Agreement
Annex E --PSS Voting Agreement
Annex F --Opinion of BT Alex. Brown Incorporated
Annex G --Opinion of NationsBanc Montgomery Securities LLC
</TABLE>
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus. This summary is not intended to be a complete
description of the matters covered in this Joint Proxy Statement/Prospectus and
is subject to and qualified in its entirety by reference to the more detailed
information and consolidated financial statements incorporated by reference or
contained elsewhere in this Joint Proxy Statement/Prospectus, including the
Annexes hereto. Stockholders are urged to read carefully the entire Joint Proxy
Statement/Prospectus, including information set forth under "Risk Factors" and
the Annexes. As used in this Joint Proxy Statement/Prospectus, the terms "PSS"
and "Gulf South" refer to such corporations, respectively, and where the
context requires, such corporations and their respective subsidiaries.
PARTIES TO THE MERGER
PSS. PSS is a specialty marketer and distributor of medical products to
physicians, other alternate-site providers and hospitals. PSS is the leading
distributor of medical supplies, equipment and pharmaceuticals to office-based
physicians in the United States based on revenues, serving over 104,000
physician offices (representing approximately 54% of all physician offices) in
all 50 states (the "Physician Supply Business"). PSS, which entered the
imaging-supply market in November 1996, has grown to be the second-largest
distributor of imaging supplies and equipment in the United States based on
revenues, serving over 12,000 customer sites in 25 states (the "Imaging
Business"). PSS also distributes medical products to office-based physicians
and hospitals in five European countries (the "International Business"). PSS
does not currently distribute products to the long-term care market. PSS has
grown rapidly in recent years through acquisitions, same-center growth and new-
center development.
PSS employed over 800 highly trained sales representatives as of December 31,
1997, over 700 of which are focused on the physician-office market. This large
sales organization enables PSS to market medical products in the physician-
office market on a national basis and has positioned PSS as a distributor of
choice for manufacturers whose products require consultative selling. PSS has
established exclusive or semi-exclusive distribution arrangements for certain
products with such leading manufacturers as Abbott Laboratories ("Abbott"),
Siemens AG, Hologic, Inc., C. R. Bard, Inc., HumaScan Inc. and F. Hoffman-La
Roche Ltd. PSS distributes over 39,000 medical products from 91 service
centers, 64 of which are focused on the physician-office market, located
throughout the United States and in Europe, enabling PSS to be highly
responsive to local market needs, including providing same-day delivery service
to most customers on a regular basis.
For the twelve months ended December 31, 1997, PSS reported net revenues of
approximately $938.9 million and net income of approximately $11.0 million. As
of December 31, 1997, PSS had total assets of approximately $485.7 million.
PSS was incorporated under the laws of the State of Florida in April 1983.
The principal executive offices of PSS are located at 4345 Southpoint
Boulevard, Jacksonville, Florida 32216, and its telephone number is (904) 332-
3000. For additional information regarding PSS and its business, see "--
Selected Historical and Pro Forma Financial Data," "Risk Factors" and "Business
of PSS."
Gulf South. Gulf South is a leading national distributor of medical supplies
and related products to the long-term care industry. Gulf South provides
products and services to approximately 10,500 long-term care facilities in all
50 states. Gulf South's customers range from independent nursing home operators
to large national chains offering a broad range of healthcare services, such as
Beverly Enterprises, Vencor, Integrated Health Services, Manor Care and
GranCare, as well as home healthcare providers, hospices and sub-acute,
rehabilitative and transitional care providers. Through its 23 full-service
regional distribution centers, Gulf South offers both national coverage to
multi-facility customers and local service to individual facilities and
independent
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operators. Gulf South believes that it has achieved its success to date due to
the expertise gained from more than 13 years of focus on the long-term care
industry and its strong commitment to providing superior service to its
customers.
At December 31, 1997, Gulf South employed a direct sales force of 107
professionals who have primary responsibility for maintaining relationships
with existing customers and identifying and soliciting new customers. Once a
customer relationship is established, the sales force serves primarily to
supplement and support sales through Gulf South's catalogs. Gulf South offers a
comprehensive selection of over 18,000 medical supplies and related products
consisting largely of name brand items. The breadth of Gulf South's product
offerings and its special order capabilities enable it to provide its customers
with the convenience of one-stop shopping.
For the twelve months ended September 30, 1997, Gulf South reported net
revenues of approximately $251.8 million and net income of approximately $14.7
million. As of September 30, 1997, Gulf South had total assets of approximately
$180.2 million.
Gulf South was formed under the laws of the State of Delaware in 1993 as the
successor to a Mississippi corporation incorporated in 1982. Gulf South's
principal executive offices are located at One Woodgreen Place, Madison,
Mississippi 39110, and its telephone number is (601) 898-2033. For additional
information regarding Gulf South and its business, see "--Selected Historical
and Pro Forma Financial Data," "Risk Factors" and "Business of Gulf South."
Merger Corp. Merger Corp. was organized in Delaware in December 1997 by PSS
solely for the purpose of facilitating the Merger. Pursuant to the Merger
Agreement, Merger Corp. will merge with and into Gulf South, with Gulf South
remaining as the surviving corporation. Merger Corp.'s principal executive
offices are located at 4345 Southpoint Boulevard, Jacksonville, Florida 32216,
and its telephone number is (904) 332-3000. See "The Merger."
THE SPECIAL MEETINGS
PSS. The Special Meeting of PSS stockholders to consider and vote on the
Issuance and the Amendments (the "PSS Special Meeting") will be held at 9:30
a.m., local time, at the Jacksonville Marriott, 4670 Salisbury Road,
Jacksonville, Florida 32256, on March 26, 1998. At the PSS Special Meeting, PSS
stockholders will consider and vote upon proposals to (i) approve the Issuance
and (ii) approve the Amendments to the Amended and Restated Articles of
Incorporation, as amended, of PSS (the "PSS Articles") to increase the number
of authorized shares of PSS Common Stock from 60,000,000 to 150,000,000 (the
"Stock Amendment") and to change the corporate name of PSS to "PSS World
Medical, Inc." (the "Name Amendment," and with the Stock Amendment, the
"Amendments"). Only holders of record of PSS Common Stock at the close of
business on February 13, 1998 (the "PSS Record Date"), will be entitled to
notice of and to vote at the PSS Special Meeting. As of such date, there were
outstanding and entitled to vote 40,984,705 shares of PSS Common Stock. Each
issued and outstanding share of PSS Common Stock is entitled to one vote on
each matter to be presented at the PSS Special Meeting. PSS directors and
executive officers holding approximately 5.0% of the outstanding votes
represented by the shares of PSS Common Stock have agreed to vote in favor of
the Issuance and the Stock Amendment. See "The Merger" and "Amendments to PSS
Articles."
Gulf South. The Special Meeting of Gulf South stockholders to consider and
vote on the Merger Agreement (the "Gulf South Special Meeting") will be held at
9:00 a.m., local time, at The Harvey Hotel-North, 5075 I-55, North Frontage
Road, Jackson, Mississippi 39206, on March 26, 1998. At the Gulf South Special
Meeting, Gulf South stockholders will consider and vote upon a proposal to
approve the Merger Agreement and the consummation of the transactions
contemplated therein. Only holders of record of Gulf South Common Stock at the
close of business on February 13, 1998 (the "Gulf South Record Date"), will be
entitled to notice of and to vote at the Gulf South Special Meeting. As of such
date, there were 16,354,964 shares of Gulf South Common Stock issued and
outstanding which were entitled to be voted at the Gulf South Special Meeting.
Gulf South
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directors and executive officers holding approximately 10.7% of the outstanding
votes represented by the shares of Gulf South Common Stock have agreed to vote
in favor of the Merger Agreement and the consummation of the transactions
contemplated therein. See "The Merger."
Votes Required. Approval of the Issuance by the stockholders of PSS is not
required by Florida law, but is required pursuant to the rules of the National
Association of Securities Dealers, Inc. (the "NASD") relating to the Nasdaq
National Market. Such approval is being sought to comply with such rules of the
NASD. Approval and adoption of the Amendments is required by Florida law.
Approval and adoption of the Issuance and the Amendments by the stockholders of
PSS require the affirmative vote of holders of a majority of the shares of PSS
Common Stock present or represented and entitled to vote at the PSS Special
Meeting. As of the PSS Record Date, PSS directors and executive officers
holding approximately 5.0% of the outstanding shares entitled to vote at the
PSS Special Meeting have agreed to vote in favor of the Issuance and the Stock
Amendment.
Approval of the Merger Agreement and consummation of the transactions
contemplated therein by the stockholders of Gulf South is required by Delaware
law and requires the affirmative vote of the holders of a majority of the
outstanding shares of Gulf South Common Stock entitled to vote at the Gulf
South Special Meeting. As of the Gulf South Record Date, Gulf South directors
and executive officers holding approximately 10.7% of the outstanding shares of
Gulf South Common Stock entitled to vote at the Gulf South Special Meeting have
agreed to vote in favor of the Merger Agreement and the consummation of the
transactions contemplated therein. See "The Merger--Voting Agreements" and
"General Information--Votes Required."
For additional information with respect to the Special Meetings, including
the votes required for approval, see "General Information."
THE MERGER
General. The Merger Agreement provides that Merger Corp., a wholly owned
subsidiary of PSS, shall merge with and into Gulf South. Gulf South shall be
the surviving corporation of the Merger and as a result shall become a wholly
owned subsidiary of PSS and shall continue to be governed by the laws of the
State of Delaware. At the time the Merger becomes effective, each outstanding
share of Gulf South Common Stock shall cease to be outstanding and shall be
converted into and exchanged for the right to receive 1.75 shares of PSS Common
Stock. In addition, immediately after the consummation of the Merger, (i) PSS
will increase the size of its Board of Directors to ten persons, (ii) PSS shall
accept the resignations of four current PSS directors, (iii) Mr. Thomas G.
Hixon and two additional persons who are currently directors of Gulf South will
be named as directors of PSS, and (iv) the PSS Board will appoint a Nominating
Committee composed of Mr. Hixon and such other persons as the PSS Board of
Directors shall determine for the purpose of designating two independent
persons to fill two vacancies on the PSS Board as soon as reasonably
practicable. If the Merger Agreement is approved at the Gulf South Special
Meeting, the Issuance and the Stock Amendment are approved at the PSS Special
Meeting, all required consents and approvals are obtained, and all other
conditions to the obligations of the parties to consummate the Merger are
either satisfied or waived (as permitted), the Merger will be consummated. A
copy of the Merger Agreement is set forth in Annex A to this Joint Proxy
Statement/Prospectus.
Recommendations of the Boards of Directors; Reasons for the Merger. The Board
of Directors of each of PSS and Gulf South has unanimously approved the Merger
Agreement. The Board of Directors of PSS has unanimously recommended a vote FOR
approval of the Issuance and the Amendments, and the Board of Directors of Gulf
South has unanimously recommended a vote FOR approval of the Merger Agreement
and the transactions contemplated therein. Each Board of Directors believes the
Merger Agreement is fair to and in the best interests of the stockholders of
its respective company.
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The PSS Board believes that the Merger is desirable for the following
reasons, among others: (i) the PSS Board of Directors believes that the Merger
would create the leading distributor of medical products to the alternate-site
market and, in the opinion of the PSS Board, is compatible with PSS' strategy
of pursuing acquisitions of medical products distributors, (ii) the PSS Board
considered that, through the Merger, PSS believes that it can leverage its core
competencies in sales and marketing and information technology in the long-term
care and home-care markets, (iii) the PSS Board considered Gulf South's
capabilities in materials management and operations, among other things, as
potential benefits to PSS' existing business and diagnostic imaging businesses,
(iv) the PSS Board of Directors considered that the long-term care and home-
care markets are substantial and that the Merger may enhance PSS' future growth
opportunities, (v) the PSS Board believes that the Merger could result in cost
savings and operating synergies and could be accretive to PSS' future earnings,
(vi) the PSS Board considered the benefit of the addition of Mr. Hixon, with
his experience in marketing and distributing medical products, to the PSS Board
of Directors and PSS' management team, (vii) the PSS Board considered the
structure of the transaction as a stock-for-stock exchange as opposed to a
transaction or series of transactions in which PSS' cash on hand would be
utilized, thus preserving PSS' financial flexibility by retaining existing cash
on hand for use in other potential acquisitions, (viii) the PSS Board
considered that the transaction would be accounted for as a pooling of
interests and, as such, would avoid the recognition of any goodwill by PSS,
thereby avoiding any future expenses associated with the amortization of such
goodwill, and (ix) the PSS Board considered the opinion of BT Alex. Brown
Incorporated ("BT Alex. Brown") which was delivered to the PSS Board on
December 14, 1997 to the effect that, as of such date and based upon and
subject to certain matters stated in such opinion, the Exchange Ratio was fair,
from a financial point of view, to PSS. See "The Merger--Reasons for the
Merger."
The Board of Directors of Gulf South believes that the Merger is in the best
interest of the Gulf South stockholders based on a number of factors,
including: (i) the Merger will result in a combined company with significantly
greater resources and greater sales and marketing capability and may enable the
combined company to compete more effectively, (ii) the purchasing and
administrative economies of scale expected to result from the Merger will be a
competitive asset to the combined company, (iii) PSS has a large, highly
trained sales force that is expected to complement Gulf South's sales
resources, (iv) PSS' ongoing commitment to and investment in information
technology is expected to enable Gulf South to increase its operating
efficiencies, (v) Gulf South stockholders will have the opportunity to
participate in the potential growth of the combined company after the Merger,
and (vi) the Exchange Ratio represented a premium of approximately 38.5% over
the closing market price of Gulf South Common Stock on the business day
preceding the execution of the Merger Agreement. The Gulf South Board also
considered, among other matters, the opinion of NationsBanc Montgomery
Securities LLC, the successor to NationsBanc Montgomery Securities, Inc.
("NationsBanc Montgomery"), which was delivered to the Gulf South Board on
December 14, 1997, to the effect that as of such date, the Exchange Ratio was
fair, from a financial point of view, to the holders of Gulf South Common
Stock. See "The Merger--Reasons for the Merger."
Opinions of Financial Advisors.
PSS. BT Alex. Brown, financial advisor to PSS in connection with the Merger,
has delivered to the Board of Directors of PSS a written opinion dated December
14, 1997 to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the Exchange Ratio was fair, from a
financial point of view, to PSS. The full text of the written opinion of BT
Alex. Brown dated December 14, 1997, which sets forth the assumptions made,
matters considered and limitations of the review undertaken, is attached as
Annex F to this Joint Proxy Statement/Prospectus. THE OPINION OF BT ALEX. BROWN
IS DIRECTED TO THE PSS BOARD OF DIRECTORS, ADDRESSES ONLY THE FAIRNESS OF THE
EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
PSS SPECIAL MEETING. HOLDERS OF PSS COMMON STOCK SHOULD READ SUCH OPINION
CAREFULLY IN ITS ENTIRETY. See "The Merger--Opinions of Financial Advisors--
Opinion of PSS' Financial Advisor."
Gulf South. NationsBanc Montgomery, financial advisor to Gulf South in
connection with the Merger, has delivered to the Board of Directors of Gulf
South a written opinion dated December 14, 1997 to the effect that,
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as of the date of such opinion and based upon and subject to certain matters
stated therein, the consideration to be received by the stockholders of Gulf
South pursuant to the Merger was fair to such stockholders from a financial
point of view. The full text of the written opinion of NationsBanc Montgomery
dated December 14, 1997, which sets forth the assumptions made, matters
considered and limitations of the review undertaken, is attached as Annex G to
this Joint Proxy Statement/Prospectus. THE OPINION OF NATIONSBANC MONTGOMERY IS
DIRECTED TO THE GULF SOUTH BOARD OF DIRECTORS, ADDRESSES ONLY THE FAIRNESS OF
THE CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF GULF SOUTH COMMON STOCK FROM
A FINANCIAL POINT OF VIEW, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE GULF SOUTH SPECIAL
MEETING. HOLDERS OF GULF SOUTH COMMON STOCK SHOULD READ SUCH OPINION CAREFULLY
IN ITS ENTIRETY. See "The Merger--Opinions of Financial Advisors--Opinion of
Gulf South's Financial Advisor."
Exchange Ratio. The Merger Agreement provides that at the effective time of
the Merger each outstanding share of Gulf South Common Stock shall cease to be
outstanding and shall be converted into and exchanged for the right to receive
1.75 shares of PSS Common Stock.
The shares of PSS Common Stock issued to Gulf South stockholders in the
Merger will constitute approximately 41.1% of all of the outstanding PSS Common
Stock after the Merger, and the current PSS stockholders will hold
approximately 58.9% of all of the outstanding PSS Common Stock after the
Merger.
In addition, upon consummation of the Merger, all options and warrants to
purchase shares of Gulf South Common Stock which are outstanding at such time,
whether or not then exercisable, will become options and warrants,
respectively, to purchase PSS Common Stock, and PSS will assume each such
option and warrant (as adjusted to reflect the Exchange Ratio). See "The
Merger--Exchange Ratio."
Effective Time. If the Merger Agreement is approved at the Gulf South
Special Meeting, the Issuance and the Stock Amendment are approved at the PSS
Special Meeting, any required regulatory approvals are obtained, and all other
conditions to the Merger are either satisfied or waived (as permitted), the
Merger will be consummated and will become effective on the date and at the
time that a Certificate of Merger, reflecting the Merger, is filed with the
Secretary of State of the State of Delaware (the "Effective Time"). See "The
Merger--Effective Time."
Distribution of PSS Certificates. Promptly after the Effective Time, each
record holder of Gulf South Common Stock outstanding at the Effective Time will
be mailed a transmittal letter (with instructions) to use in effecting the
surrender and cancellation of those certificates in exchange for PSS Common
Stock. PSS shall not be obligated to deliver the consideration to which any
former holder of Gulf South Common Stock is entitled until such holder
surrenders such holder's certificate or certificates representing such holder's
shares for exchange. The certificate or certificates so surrendered shall be
duly endorsed as PSS may require. STOCKHOLDERS OF GULF SOUTH SHOULD NOT
SURRENDER ANY SHARE CERTIFICATES UNTIL SUCH STOCKHOLDER RECEIVES THE LETTER OF
TRANSMITTAL. See "The Merger--Distribution of PSS Certificates."
Certain Federal Income Tax Consequences. The Merger is intended to be a tax-
free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Generally, no gain or loss
should be recognized for federal income tax purposes by Gulf South stockholders
as a result of the Merger, except that gain or loss will be recognized with
respect to cash received in lieu of fractional shares. It is a condition to
consummation of the Merger that each of PSS and Gulf South will receive an
opinion of Alston & Bird LLP as to the qualification of the Merger as a tax-
free reorganization within the meaning of Section 368(a) of the Code. See "The
Merger--Certain Federal Income Tax Consequences."
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER AND OTHER FACTORS, EACH
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HOLDER OF GULF SOUTH COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN TAX
ADVISER TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE
MERGER (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND
OTHER TAX LAWS).
Interests of Certain Persons in the Merger. Immediately after consummation of
the Merger, Mr. Thomas G. Hixon and two additional persons who are currently
directors of Gulf South will be named as directors of PSS. In addition,
immediately after consummation of the Merger, Mr. Hixon will be elected
President and Chief Operating Officer of PSS, pursuant to an employment
agreement to be entered into on terms satisfactory to PSS and Mr. Hixon, which
are expected to be similar to the terms of employment agreements with other PSS
senior executive officers. In addition, the Merger Agreement provides that PSS
shall for a period of six years after the Effective Time indemnify the present
and former directors, officers, employees and agents of Gulf South against
certain actions and PSS has agreed to obtain "tail" directors' and officers'
liability insurance, covering those persons covered by Gulf South's directors'
and officers' liability insurance policy on the date of the Merger Agreement,
to be effective for a period of six years following the Effective Time. See
"The Merger--Interests of Certain Persons in the Merger" and "--Management and
Operations After the Merger."
No Solicitation. Gulf South and PSS have agreed that, prior to the Effective
Time or earlier termination of the Merger Agreement, neither Gulf South nor PSS
nor any of their respective affiliates will, directly or indirectly, solicit
any merger, consolidation or similar transaction, any sale, lease, exchange or
otherwise of 15% or more of its consolidated assets, or the issuance, sale or
other disposition of 20% or more of the voting power of such party, other than
the transactions contemplated by the Merger Agreement. Unless the Board of
Directors of Gulf South or PSS, as the case may be, after consulting with
outside counsel, determines in good faith that the failure to take such actions
would constitute a breach of fiduciary duties of the members of such Board of
Directors to its stockholders, neither Gulf South or PSS nor any of their
respective affiliates or representatives shall furnish any non-public
information, negotiate with respect to, or enter into any contract with respect
to, any of the foregoing transactions. Each of Gulf South and PSS agrees to
promptly advise the other of the details surrounding any such alternative
acquisition proposal. See "The Merger--No Solicitation."
Conditions to Consummation of the Merger. The obligation of each of PSS,
Merger Corp. and Gulf South to consummate the Merger is subject to certain
additional conditions, including the following: (i) the stockholders of Gulf
South shall have approved the Merger Agreement and the stockholders of PSS
shall have approved the Issuance and the Stock Amendment; (ii) all consents and
notifications to any regulatory authorities and any third parties required for
consummation of the Merger shall have been obtained or made; (iii) no court or
governmental authority shall have enacted any law or order or taken any action
which prohibits the transactions contemplated by the Merger Agreement; (iv) the
shares of PSS Common Stock issuable pursuant to the Merger shall have been
approved for quotation on the Nasdaq National Market; (v) the Registration
Statement shall have been declared effective under the Securities Act and no
stop orders suspending the effectiveness of the Registration Statement shall
have been issued; and (vi) each of PSS and Gulf South shall have received an
opinion from Alston & Bird LLP that, among other things, the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code.
The obligation of PSS to consummate the Merger is subject to, among others,
the following conditions: (i) the representations and warranties of Gulf South
set forth in the Merger Agreement shall be true and correct in all material
respects as of the Effective Time; (ii) Gulf South shall have performed in all
material respects all of its agreements and covenants prior to the Effective
Time as contemplated by the Merger Agreement; (iii) receipt of an opinion of
counsel for Gulf South; (iv) receipt of a letter from Ernst & Young LLP
regarding the qualification of Gulf South as an entity for which pooling-of-
interests accounting is available and receipt of a letter from Arthur Andersen
LLP that the Merger will qualify for pooling-of-interests accounting treatment;
and (v) receipt of an employment agreement executed by Mr. Hixon related to the
employment of Mr. Hixon by PSS.
12
<PAGE>
The obligation of Gulf South to consummate the Merger is subject to, among
others, the following conditions: (i) the representations and warranties of PSS
set forth in the Merger Agreement shall be true and correct in all material
respects as of the Effective Time; (ii) PSS shall have performed in all
material respects all of its agreements and covenants prior to the Effective
Time as contemplated by the Merger Agreement; (iii) receipt of an opinion of
counsel for PSS; and (iv) receipt of a letter from Ernst & Young LLP regarding
the qualification of Gulf South as an entity for which pooling-of-interests
accounting is available and receipt of a letter from Arthur Andersen LLP that
the Merger will qualify for pooling-of-interests accounting treatment. See "The
Merger--Conditions to Consummation of the Merger."
Regulatory Approvals. The consummation of the Merger is subject to the
expiration or termination of the statutory waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). PSS and Gulf South
each filed notification and report forms under the HSR Act on January 21, 1998.
PSS' and Gulf South's requests for early termination of the waiting period
under the HSR Act were granted and such termination became effective on
February 2, 1998. See "The Merger--Regulatory Approvals."
Termination. The Merger Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, notwithstanding approval of
the Merger Agreement by the stockholders of Gulf South and approval of the
Issuance by the stockholders of PSS: (i) by mutual consent of the Boards of
Directors of Gulf South and PSS; (ii) by either party, provided that such party
is not then in material breach of the provisions of the Merger Agreement, in
the event of certain material breaches by the other party of any
representation, warranty, covenant or agreement which are not cured within 30
days of notice thereof; (iii) by either party, provided that such party is not
then in material breach of the provisions of the Merger Agreement, in the event
that a consent or regulatory approval required by the Merger Agreement has been
denied by final nonappealable action or the stockholders of Gulf South or PSS
fail to vote their approval of the matters relating to the Merger Agreement and
the transactions contemplated therein at the Special Meetings; (iv) by either
party, provided that such party is not then in material breach of the
provisions of the Merger Agreement, in the event the Merger is not consummated
by June 30, 1998; or (v) by either party if the conditions precedent to the
obligations of such party cannot be satisfied by June 30, 1998.
The Merger Agreement may also be terminated at any time prior to the
Effective Time: (i) by either party, (a) in the event the Board of Directors of
Gulf South or PSS has authorized, recommended, publicly proposed or publicly
announced an intention to authorize, recommend or propose to its respective
stockholders, or has entered into an agreement with any third party to effect,
a certain alternative acquisition proposal or (b) a tender or exchange offer
for 25% or more of the outstanding shares of PSS Common Stock or Gulf South
Common Stock is commenced; provided that the party to the alternative
acquisition proposal or tender or exchange offer may only terminate the Merger
Agreement if such action is taken in good faith in order to properly discharge
its fiduciary duties and such party has not solicited the proposal, and further
provided that PSS may not terminate the Merger Agreement if it is a party to an
alternative acquisition proposal unless such proposal is conditioned upon the
termination by PSS of the Merger Agreement; (ii) by PSS, if the Board of
Directors of Gulf South shall withdraw, modify or change its approval or
recommendation of the Merger Agreement or the Merger in a manner adverse to PSS
and PSS is not then in material breach of the provisions of the Merger
Agreement; or (iii) by Gulf South, if the Board of Directors of PSS shall
withdraw, modify or change its approval or recommendation of the Issuance and
Gulf South is not then in material breach of the provisions of the Merger
Agreement. See "The Merger--Amendment, Waiver and Termination."
Expenses and Fees. If (i) the Merger Agreement is terminated by PSS due to a
material breach by Gulf South of any representation, warranty, covenant or
agreement which is not cured within 30 days notice thereof, the failure of the
stockholders of Gulf South to approve the Merger Agreement and the transactions
contemplated therein, or the failure of Gulf South to satisfy certain
conditions precedent of PSS; (ii) the Merger is not consummated due to the
failure of Gulf South to satisfy certain conditions precedent, including the
failure of the stockholders of Gulf South to approve the Merger Agreement;
(iii) the Merger Agreement is terminated due to the authorization,
recommendation, public proposal or public announcement by the Board of
Directors of Gulf
13
<PAGE>
South of an intention to authorize, recommend or propose to its stockholders,
or the entry by Gulf South into an agreement with any third party to effect, a
certain alternative acquisition proposal or a tender or exchange offer for 25%
or more of the outstanding Gulf South Common Stock is commenced; or (iv) the
Merger Agreement is terminated by PSS, provided that PSS is not then in
material breach of the provisions of the Merger Agreement, due to the
withdrawal, modification or change by the Board of Directors of Gulf South of
its approval or recommendation of the Merger Agreement or the Merger in a
manner adverse to PSS, then Gulf South has agreed to pay to PSS a fee of
$20,000,000 (subject to the total value of the foregoing amount plus the
consideration that may be received by PSS under the Gulf South Stock Option
Agreement (as defined below) not exceeding $24,000,000), plus out-of-pocket
costs and expenses of PSS up to but not exceeding an additional $1,000,000
(collectively, the "Gulf South Termination Fee").
If (i) the Merger Agreement is terminated by Gulf South due to a material
breach by PSS of any representation, warranty, covenant or agreement which is
not cured within 30 days notice thereof, the failure of the stockholders of PSS
to approve the Issuance or the Stock Amendment, or the failure of PSS to
satisfy certain conditions precedent of Gulf South; (ii) the Merger is not
consummated due to the failure of PSS to satisfy certain conditions precedent,
including the failure of the stockholders of PSS to approve the Issuance and
the Stock Amendment; (iii) the Merger Agreement is terminated due to the
authorization, recommendation, public proposal or public announcement by the
Board of Directors of PSS of an intention to authorize, recommend or propose to
its stockholders, or the entry by PSS into an agreement with any third party to
effect, a certain alternative acquisition proposal or a tender or exchange
offer for 25% or more of the outstanding PSS Common Stock is commenced; or (iv)
the Merger Agreement is terminated by Gulf South, provided that Gulf South is
not then in material breach of the provisions of the Merger Agreement, due to
the withdrawal, modification or change by the Board of Directors of PSS of its
approval or recommendation of the Issuance in a manner adverse to Gulf South,
then PSS has agreed to pay to Gulf South a fee of $20,000,000 (subject to the
total value of the foregoing amount plus the consideration that may be received
by Gulf South under the PSS Stock Option Agreement (as defined below) not
exceeding $24,000,000), plus out-of-pocket costs and expenses of Gulf South up
to but not exceeding an additional $1,000,000 (collectively, the "PSS
Termination Fee"). See "The Merger--Expenses and Fees."
Stock Option Agreements. Pursuant to a Stock Option Agreement dated December
14, 1997 by and between Gulf South, as issuer, and PSS (the "Gulf South Stock
Option Agreement"), Gulf South has granted PSS an irrevocable option (the "Gulf
South Option") to purchase from Gulf South, under certain circumstances, up to
3,253,066 authorized and unissued shares of Gulf South Common Stock (equal to
19.9% of the issued and outstanding shares of Gulf South Common Stock as of
December 12, 1997), at a price of $29.06 per share, subject to adjustment upon
certain changes in Gulf South's capitalization. Pursuant to a Stock Option
Agreement dated December 14, 1997 by and between PSS, as issuer, and Gulf South
(the "PSS Stock Option Agreement," and with the Gulf South Stock Option
Agreement, the "Stock Option Agreements"), PSS has granted Gulf South an
irrevocable option (the "PSS Option") to purchase from PSS, under certain
circumstances, up to 8,098,523 authorized and unissued shares of PSS Common
Stock (equal to 19.9% of the issued and outstanding shares of PSS Common Stock
as of December 12, 1997), at a price of $23.00 per share, subject to adjustment
upon certain changes in PSS' capitalization. In no event shall holders (in the
aggregate) purchase under the terms of the Stock Option Agreements that number
of shares which would have a Spread Value (as defined in the Stock Option
Agreements) in excess of the remainder obtained from subtracting (A) the Gulf
South Termination Fee or PSS Termination Fee, as the case may be, from (B)
$24,000,000. Certain aspects of the Stock Option Agreements (including the fact
that the exercise of the Gulf South Option and the PSS Option would render Gulf
South and PSS, respectively, ineligible for "pooling-of-interests" accounting
treatment for any business combination that would trigger exercisability of the
Gulf South Option or PSS Option) may have the effect of discouraging persons
who might now or prior to the Effective Time be interested in acquiring all of
or a significant interest in, or otherwise effecting a business combination
with, Gulf South or PSS, from considering or proposing such a transaction.
Copies of the Gulf South Stock Option Agreement and PSS Stock Option Agreement
are attached as Annexes B and C, respectively, to this Joint Proxy
Statement/Prospectus. See "The Merger--Stock Option Agreements."
14
<PAGE>
Voting Agreements. PSS and the holders of approximately 10.7% of the Gulf
South Common Stock, including Gulf South directors and executive officers (the
"Gulf South Stockholders"), have entered into voting agreements ("Gulf South
Voting Agreements") pursuant to which the Gulf South Stockholders have agreed
to, and have given certain officers of PSS an irrevocable proxy to, vote such
Gulf South Stockholders' shares of Gulf South Common Stock in favor of the
Merger and the approval of the terms thereof and the transactions contemplated
therein, provided that the Merger Agreement has not been amended so as to
reduce the Exchange Ratio payable to the holders of Gulf South Common Stock or
otherwise materially and adversely impair the Gulf South Stockholders' rights
or increase the Gulf South Stockholders' obligations thereunder. Gulf South and
the holders of approximately 5.0% of the PSS Common Stock, including PSS
directors and executive officers (the "PSS Stockholders"), have entered into
voting agreements ("PSS Voting Agreements") pursuant to which the PSS
Stockholders have agreed to, and have given certain officers of Gulf South an
irrevocable proxy to, vote such PSS Stockholders' shares of PSS Common Stock in
favor of the Issuance and the Stock Amendment, provided that the Merger
Agreement has not been amended so as to increase the Exchange Ratio payable to
the holders of Gulf South Common Stock or otherwise to materially and adversely
impair the PSS Stockholders' rights or increase the PSS Stockholders'
obligations thereunder. The Gulf South Voting Agreements and the PSS Voting
Agreements will terminate upon the earlier of the Effective Time or the date
upon which the Merger Agreement is terminated in accordance with its terms.
Copies of the Gulf South Voting Agreements and PSS Voting Agreements are
attached as Annexes D and E, respectively, to this Joint Proxy
Statement/Prospectus. See "The Merger--Voting Agreements."
Conduct of Business Pending the Merger. Each of Gulf South and PSS has agreed
in the Merger Agreement to, among other things, operate its business only in
the usual, regular and ordinary course and to use commercially reasonable
efforts to preserve its business organization and assets, keep available the
services of its present officers, employees and consultants and preserve its
present relationships with customers, suppliers and other persons. In addition,
each party has agreed not to take certain actions without the prior written
consent of the other prior to consummation of the Merger. See "The Merger--
Conduct of Business Pending the Merger."
Accounting Treatment. It is anticipated that the Merger will qualify as a
"pooling of interests" for financial and accounting reporting purposes. Each of
PSS and Gulf South received as of the date of the Merger Agreement, letters
from Arthur Andersen LLP and Ernst & Young LLP that PSS and Gulf South,
respectively, each qualifies as an entity that may be a party to a business
combination for which the pooling-of-interests method of accounting would be
available. It is a condition to the obligations of PSS and Gulf South to
consummate the Merger that each party shall have received from Ernst & Young
LLP a letter dated the closing date regarding the qualification of Gulf South
as an entity for which pooling-of-interests accounting is available and from
Arthur Andersen LLP, a letter dated the closing date to the effect that the
Merger may be accounted for as a pooling of interests by PSS for financial and
accounting reporting purposes. See "The Merger--Conditions to Consummation" and
"--Accounting Treatment."
Resales of PSS Common Stock. The PSS Common Stock issued in connection with
the Merger will be freely transferable under the Securities Act, except for
shares issued to any stockholder who may be deemed to be an "affiliate"
(generally including, without limitation, directors, certain executive officers
and beneficial owners of 10% or more of any class of capital stock) of Gulf
South under applicable federal securities laws. See "The Merger--Resales of PSS
Common Stock."
No Dissenters' Rights. Neither the holders of Gulf South Common Stock nor the
holders of PSS Common Stock are entitled to dissenters' rights in connection
with the Merger under Delaware or Florida law, respectively.
Nasdaq National Market Listing. PSS Common Stock is traded in the over-the-
counter market and is listed on the Nasdaq National Market. An application will
be filed with the NASD to include for listing the shares of PSS Common Stock to
be issued to the holders of Gulf South Common Stock in the Merger. Although no
15
<PAGE>
assurance can be given that the NASD will accept such shares of PSS Common
Stock for listing, PSS and Gulf South anticipate that these shares will qualify
for listing. It is a condition precedent to the obligations of PSS, Merger
Corp. and Gulf South to consummate the Merger that such shares of PSS Common
Stock be approved for listing on the Nasdaq National Market upon official
notice of issuance at the Effective Time. See "The Merger--Nasdaq National
Market Listing."
Certain Differences in the Rights of Gulf South and PSS Stockholders. The
rights of Gulf South stockholders currently are determined by reference to the
Delaware General Corporation Law ("DGCL") and Gulf South's Amended and Restated
Certificate of Incorporation, as amended, and Amended and Restated Bylaws.
Following the Effective Time, Gulf South stockholders will become stockholders
of PSS, and their rights as stockholders will be determined by the Florida
Business Corporation Act ("FBCA") and PSS' Amended and Restated Articles of
Incorporation, as amended, and Amended and Restated Bylaws. For a description
of the material differences in the rights of Gulf South and PSS stockholders,
see "Certain Differences in the Rights of PSS and Gulf South Stockholders."
AMENDMENTS TO PSS ARTICLES
Stock Amendment. The PSS Board of Directors has unanimously adopted, subject
to stockholder approval, an amendment to the PSS Articles to increase the
number of authorized shares of PSS Common Stock from 60,000,000 to 150,000,000
(the "Stock Amendment"). The relative rights and limitations of the PSS Common
Stock would remain unchanged under the Stock Amendment. The PSS Common Stock
does not have preemptive rights. The Stock Amendment is a condition to
consummation of the Merger, so that PSS will have sufficient authorized shares
of PSS Common Stock to issue or reserve for issuance to holders of Gulf South
Common Stock, Gulf South Options and Gulf South Warrants pursuant to the Merger
Agreement. If, however, the Merger is not approved or consummated for any
reason, but the Stock Amendment is approved by PSS stockholders, the Stock
Amendment will be effective and will be implemented by PSS.
The PSS Board believes that the proposed Stock Amendment will provide several
long-term advantages to PSS and its stockholders. The proposed increase in the
number of shares of authorized PSS Common Stock will (i) ensure that a
sufficient number of shares will be available for issuance upon approval and
consummation of the Merger, and (ii) provide PSS with flexibility in any
possible future transactions approved by the PSS Board of Directors, including,
but not limited by mergers, acquisitions, financings, stock splits, stock
dividends, issuances under PSS stock plans and other corporate purposes. The
PSS Board of Directors has no current plans for the use of additional shares,
the approval of which is sought hereby.
The PSS Board of Directors unanimously recommends that the stockholders of
PSS vote FOR the Stock Amendment.
Name Amendment. The PSS Board of Directors has unanimously adopted, subject
to stockholder approval, an amendment to the PSS Articles to change the
corporate name of PSS to "PSS World Medical, Inc." (the "Name Amendment," and
with the Stock Amendment, the "Amendments"). The PSS Board believes that the
proposed change in corporate name will better reflect PSS' expansion into
multiple medical distribution sectors, including, but not limited to, PSS'
continued expansion into the imaging-supply market and proposed expansion into
the long-term care market if the Merger is approved and consummated. If the
Name Amendment is adopted, stockholders of PSS will not be required to exchange
outstanding stock certificates of PSS Common Stock for new certificates.
The PSS Board of Directors unanimously recommends that the stockholders of
PSS vote FOR the Name Amendment.
See "Amendments to PSS Articles."
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<PAGE>
MARKET AND MARKET PRICES
PSS Common Stock is traded in the over-the-counter market and is quoted on
the Nasdaq National Market under the symbol PSSI. Gulf South Common Stock is
traded in the over-the-counter market and is quoted on the Nasdaq National
Market under the symbol GSMS. Set forth below are the closing prices per share
of PSS Common Stock and Gulf South Common Stock on the Nasdaq National Market
on (i) December 12, 1997, the last business day preceding public announcement
of the Merger, and (ii) February 24, 1998; and the equivalent pro forma price
per share of Gulf South Common Stock as of such dates based upon the closing
price per share of PSS Common Stock multiplied by the Exchange Ratio of 1.75:
<TABLE>
<CAPTION>
CLOSING PRICE PER CLOSING PRICE PER EQUIVALENT CLOSING
SHARE OF PSS SHARE OF GULF SOUTH PRICE PER SHARE OF GULF
DATE COMMON STOCK COMMON STOCK SOUTH COMMON STOCK
- ---- ----------------- ------------------- -----------------------
<S> <C> <C> <C>
December 12, 1997....... $23.00 $29.06 $40.25
February 24, 1998....... $19.63 $34.06 $34.35
</TABLE>
The following table sets forth the reported high and low closing prices per
share of PSS Common Stock and Gulf South Common Stock on the Nasdaq National
Market for the periods indicated:
<TABLE>
<CAPTION>
GULF SOUTH
PSS COMMON COMMON
STOCK PRICES STOCK PRICES
------------- -------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Calendar 1996:
March 31......................................... $30.25 $22.50 $38.38 $25.75
June 30.......................................... 33.00 22.75 49.25 36.00
September 30..................................... 25.63 15.00 41.00 17.13
December 31...................................... 26.88 13.75 31.50 21.25
Calendar 1997:
March 31......................................... $19.75 $12.63 $28.75 $16.50
June 30.......................................... 19.00 12.00 21.00 13.25
September 30..................................... 19.50 16.75 27.13 19.00
December 31...................................... 26.00 18.31 37.25 28.00
Calendar 1998:
March 31 (through February 24, 1998)............. $22.25 $17.88 $37.81 $31.00
</TABLE>
Stockholders are advised to obtain current market quotations for PSS Common
Stock and Gulf South Common Stock. No assurance can be given as to the market
price of PSS Common Stock or Gulf South Common Stock at the Effective Time or
at any other time. Because the Exchange Ratio is fixed, the Exchange Ratio will
not be adjusted to compensate Gulf South stockholders for decreases in the
market price of PSS Common Stock which could occur before the Effective Time.
In the event that the market price of PSS Common Stock increases or decreases
prior to the Effective Time, the value at the Effective Time of the PSS Common
Stock to be received in the Merger in exchange for Gulf South Common Stock
would correspondingly increase or decrease.
As of the PSS Record Date, there were approximately 1,725 record holders of
PSS Common Stock. As of the Gulf South Record Date, there were approximately 31
record holders of Gulf South Common Stock. Following the Merger, all Gulf South
Common Stock will be owned by PSS and, as a result, Gulf South Common Stock
will no longer be listed on the Nasdaq National Market.
DIVIDENDS
PSS has never paid dividends on its common stock and does not anticipate the
payment of dividends in the near future. It has been the policy of the Board of
Directors of PSS to retain earnings to support operations and to finance
continued growth of its business rather than to pay dividends. Any future
payment of cash dividends of PSS would be determined by its Boards of Directors
in light of circumstances then existing, including its
17
<PAGE>
growth, profitability, financial condition and results of operations, and such
other factors as the PSS Board deems relevant. The ability of PSS to declare
and pay dividends is limited by certain restrictive covenants contained in its
long-term debt agreements.
Gulf South has not paid any cash dividends on its common stock in the past
three fiscal years and, subject to consummation of the Merger, does not
anticipate paying cash dividends in the foreseeable future.
COMPARISON OF CERTAIN UNAUDITED HISTORICAL AND PRO FORMA PER SHARE DATA
The following summary presents selected comparative per share data (i) on a
historical basis for PSS and Gulf South, (ii) on a pro forma combined basis per
share of PSS Common Stock giving effect to the Merger on a pooling-of-interests
basis, and (iii) on an equivalent pro forma combined basis per share of Gulf
South Common Stock giving effect to the Merger on a pooling-of-interests basis.
Gulf South's fiscal year end is December 31 of each year; however all financial
information related to Gulf South for the years ended March 30, 1995, March 29,
1996 and March 28, 1997 has been derived from financial information of Gulf
South for such periods, adjusted to reflect the results of operations on a
twelve-month basis. Information concerning dividends paid per share by PSS and
Gulf South is not presented in the table below as neither PSS nor Gulf South
has paid a cash dividend in the past three fiscal years.
The data shown below should be read in conjunction with the historical
consolidated financial statements of PSS and Gulf South, including the
respective notes thereto, and the pro forma financial data appearing elsewhere
in this Joint Proxy Statement/Prospectus. See "--Selected Historical and Pro
Forma Financial Data," "Unaudited Pro Forma Condensed Combined Financial Data,"
"PSS Consolidated Financial Statements" and "Gulf South Consolidated Financial
Statements." The pro forma data shown below is not indicative of the operating
results that would have been achieved had the Merger been consummated as of the
beginning of the periods presented and should not be construed as
representative of future operating results or financial condition.
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------- NINE MONTHS ENDED
MARCH 30, 1995 MARCH 29, 1996 MARCH 28, 1997(5) DECEMBER 31, 1997(5)
-------------- -------------- ----------------- --------------------
<S> <C> <C> <C> <C>
PSS COMMON STOCK
Net income per common
share(1):
Historical..........
Basic.............. $0.00 $0.07 $0.12 $ 0.35
Diluted............ $0.00 $0.06 $0.12 $ 0.34
Pro forma com-
bined(2)...........
Basic.............. 0.14 0.19 0.25 $ 0.38
Diluted............ 0.14 0.19 0.25 $ 0.38
Book value per common
share(3):
Historical.......... -- -- $5.43 $ 5.99
Pro forma com-
bined(2)........... -- -- $5.33 $ 5.79
GULF SOUTH COMMON STOCK
Net income per common
share(1):
Historical.......... $0.49 $0.61 $0.76 $ 0.76
Equivalent pro forma
combined(4)........
Basic.............. 0.25 0.33 0.44 $ 0.67
Diluted............ 0.25 0.33 0.44 $ 0.67
Book value per common
share(3):
Historical.......... -- -- $9.08 $ 9.63
Equivalent pro forma
combined(4)........ -- -- $9.32 $10.13
</TABLE>
- --------
(1) Net income represents net income from continuing operations.
(2) Pro forma combined amounts per share of PSS Common Stock represent the sum
of pro forma combined amounts for PSS and Gulf South, divided by pro forma
combined weighted average common shares outstanding.
(3) Historical book value per share information for PSS and Gulf South as of
the end of each period presented is computed by dividing historical
shareholders' equity for each company by the number of shares of PSS Common
Stock or Gulf South Common Stock, as the case may be, outstanding at the
end of each period presented, excluding stock options and warrants. Pro
forma combined book value per share information as of the end of the period
presented is computed by dividing pro forma shareholders' equity by the
number of shares of PSS Common Stock outstanding on such dates and the
shares of PSS Common Stock to be issued in the Merger.
(4) Equivalent pro forma combined amounts per share of Gulf South Common Stock
represent the pro forma combined amounts per share of PSS Common Stock,
multiplied by a 1.75 Exchange Ratio.
(5) Amounts for Gulf South are for the nine months ended September 30, 1997.
18
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
Set forth below is certain consolidated historical selected financial data
relating to PSS and Gulf South, and certain unaudited selected pro forma
condensed combined financial data, giving effect to the Merger under the
pooling-of-interests method of accounting. See "The Merger--Accounting
Treatment." This information should be read in conjunction with the historical
financial statements of PSS and Gulf South, including the respective notes
thereto, and with the unaudited pro forma condensed combined financial
information, including the notes thereto, appearing elsewhere in this Joint
Proxy Statement/Prospectus. See "Unaudited Pro Forma Condensed Combined
Financial Statements," "PSS Consolidated Financial Statements" and "Gulf South
Consolidated Financial Statements."
SELECTED FINANCIAL DATA OF PSS (HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data for fiscal years 1995
through 1997 were derived from the audited consolidated financial statements of
PSS which include the pre-merger financial information for the mergers of
Taylor Medical, Inc. ("Taylor"), Treadway Enterprises, Inc. d/b/a X-ray of
Georgia ("X-ray Georgia"), and S&W X-Ray, Inc. ("S&W"). The selected financial
data for fiscal years 1993 and 1994 has been derived from PSS' unaudited
consolidated financial statements which include the pre-merger financial
information for the mergers of Taylor, X-ray Georgia, and S&W. The following
information should be read in conjunction with the historical consolidated
financial statements of PSS, including the notes thereto, appearing elsewhere
in this Joint Proxy Statement/Prospectus. See "PSS Consolidated Financial
Statements."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1) NINE MONTHS ENDED
----------------------------------------------------- -------------------------
APRIL 2, APRIL 1, MARCH 30, MARCH 29, MARCH 28, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1997 1996 1997
----------- ----------- --------- --------- --------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............. $318,515 $405,535 $471,985 $589,120 $763,054 $558,018 $733,882
Gross profit(2)........ 93,884 116,863 132,315 162,590 208,990 152,104 200,828
Selling, general and
administrative
expenses.............. 87,987 108,246 121,407 141,160 187,441 134,511 171,251
Restructuring
charges(3)............ 303 308 4,389 -- -- -- --
Merger costs and
expenses(4)........... -- -- -- 15,732 12,128 7,251 5,625
Non-recurring ESOP cost
of acquired
company(5)............ 427 519 832 850 1,446 1,050 2,457
Net income............. $ 1,467 $ 2,009 $ 60 $ 2,129 $ 4,427 $ 7,194 $ 13,717
Earnings per share:
Basic.................. N/A N/A $0.00 $ 0.07 $ 0.12 $ 0.19 $ 0.35
Diluted................ $0.08 $0.10 $0.00 $ 0.06 $ 0.12 $ 0.19 $ 0.34
Weighted average shares
outstanding(6):
Basic.................. N/A N/A 24,027 31,591 37,496 37,153 39,689
Diluted................ 18,431 19,472 25,101 32,870 38,015 37,845 40,120
BALANCE SHEET DATA:
Working capital........ $ 42,553 $ 51,487 $ 59,542 $177,263 $171,599 $174,361 $290,785
Total assets........... 105,345 137,985 148,824 295,870 321,269 341,773 485,658
Long-term liabilities.. 45,459 60,757 38,780 6,819 8,460 7,523 132,538
Total shareholders'
equity................ 22,133 24,349 48,612 203,131 210,555 212,088 242,410
</TABLE>
- --------
(1) PSS' fiscal year ends on the Friday closest to March 31. Fiscal years 1993
through 1995 ended on the Thursday closest to March 31. All periods
presented were 52 weeks.
(2) Excludes fiscal year 1997 Physician Supply Business operating write-offs of
inventory of branches involved in mergers of approximately $4.1 million.
(3) Restructuring charges reflect charges taken by a company merged with PSS
pursuant to a pooling-of-interests transaction, prior to the date of
merger. The fiscal year 1995 restructuring charge of $4,389 reflects the
assessment of former management of such merged company of the under-
realization of future benefits related to certain intangible assets. The
fiscal year 1994 restructuring charge of $308 resulted from such merged
company's consolidation of an acquisition. The fiscal year 1993
restructuring charge of $303 resulted from the write-down by former
management of such merged company of capitalized software costs.
(4) Merger costs and expenses reflect direct merger expenses incurred in
connection with mergers accounted for as pooling-of-interests transactions.
(5) Reflects compensation expense of leveraged ESOP of a company acquired. No
future compensation expense will be incurred subsequent to September 30,
1997.
(6) Adjusted to give effect to a three-for-one stock split in fiscal year 1996.
19
<PAGE>
SELECTED FINANCIAL DATA OF GULF SOUTH (HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The income statement data and balance sheet data presented below for each of
the years ended December 31, 1992, 1993, 1994, 1995 and 1996 have been derived
from Gulf South's financial statements, which have been audited by Ernst &
Young LLP, independent auditors. The income statement data and balance sheet
data presented below for each of the nine months ended September 30, 1996 and
1997 are derived from unaudited financial statements which, in the opinion of
management of Gulf South, included all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such data. The
results for the nine-month period ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the full fiscal year. The
selected financial data presented below should be read in conjunction with the
financial statements and the notes thereto and other financial information
appearing elsewhere in this Joint Proxy Statement/Prospectus. See "Gulf South
Consolidated Financial Statements."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
--------------------------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:(1)
Net sales.............. $44,659 $65,119 $92,151 $130,094 $177,710 $130,980 $205,039
Cost of sales.......... 33,041 48,357 68,122 97,973 136,344 100,217 158,153
------- ------- ------- -------- -------- -------- --------
Gross profit........... 11,618 16,762 24,029 32,121 41,366 30,763 46,886
Selling, general and
administrative
expenses.............. 7,552 10,307 13,913 18,418 23,450 17,020 27,893
Acquisition and merger
expenses.............. -- -- -- -- 2,378 512 --
------- ------- ------- -------- -------- -------- --------
Operating income(2).... 4,066 6,455 10,116 13,703 15,538 13,231 18,993
Interest expense....... (1,242) (2,206) (629) (199) (229) (219) (15)
Interest income........ -- -- 186 163 1,771 962 1,453
------- ------- ------- -------- -------- -------- --------
Income before income
taxes................. 2,824 4,249 9,673 13,667 17,080 13,974 20,431
Income tax expense..... (1,030) (1,619) (3,877) (5,507) (6,386) 5,309 7,766
------- ------- ------- -------- -------- -------- --------
Net income(3).......... $ 1,794 $ 2,630 $ 5,796 $ 8,160 $ 10,694 $ 8,665 $ 12,665
======= ======= ======= ======== ======== ======== ========
Net income per
share(4).............. $ .19 $ .29 $ .45 $ .58 $ .69 $ .57 $ .76
Weighted average number
of shares
outstanding........... 10,200 10,442 13,073 13,993 15,419 15,085 16,576
BALANCE SHEET DATA:
Working capital........ $ 9,026 $12,842 $28,469 $ 36,228 $102,074 $131,297 $114,780
Total assets........... 16,519 23,576 41,042 55,021 197,971 151,683 180,157
Long-term liabilities.. 19,247 21,015 1,147 3,803 30,321 -- --
Total stockholders'
equity (deficit)...... (8,300) (5,670) 30,502 39,954 144,299 142,271 157,012
</TABLE>
- --------
(1) Restated to reflect the share exchange with Bayer Medical Service Systems,
Inc. in February 1996 accounted for as a pooling of interests. See Note 2
of Notes to Gulf South Consolidated Financial Statements.
(2) Reflects $819 ($513 after tax, or $.03 per share) of legal, accounting and
other integration costs incurred in connection with the Bayer Medical
Service Systems, Inc. share exchange in February 1996 and additional
integration and exit charges of $771 ($483 after taxes, or $.03 per share)
pertaining to the acquisition of L&M Medical, Inc. in 1995 and $778 ($487
after taxes, or $.03 per share) pertaining to the Express Care L.P. and
Alternative Healthcare Services acquisitions in 1996. See Note 2 of Notes
to Gulf South Consolidated Financial Statements.
(3) Gulf South elected to be treated as an S corporation for income tax
purposes from January 1, 1989 through June 25, 1992, and accordingly did
not pay federal and state (except in certain states) income taxes during
such periods. Gulf South distributed S corporation earnings of $998 to its
stockholders during 1992. The net income data reflects a pro forma
provision for income taxes during the period from January 1, 1992 through
June 25, 1992 as if Gulf South had been subject to federal and state income
taxes. Because Gulf South has been a C corporation since June 25, 1992, no
pro forma adjustment to net income for periods subsequent to such date is
necessary and, accordingly, the net income data set forth above for such
subsequent periods reflects actual net income.
(4) Computed by dividing net income applicable to Gulf South Common Stock (net
income plus interest requirements, less tax effects, of the 10% Convertible
Subordinated Debentures (the "Gulf South Convertible Debentures")) by the
weighted average number of shares of Gulf South Common Stock and
equivalents outstanding. The conversion of the Gulf South Convertible
Debentures was effected upon the closing of Gulf South's initial public
offering in March 1994. For the years ended December 31, 1992, 1993, 1994,
1995 and 1996, the weighted average number of shares of Gulf South Common
Stock and equivalents was 10,200,170, 10,442,068, 13,073,040, 13,993,595
and 15,419,438, respectively. See Note 1 of Notes to Gulf South
Consolidated Financial Statements. Net income per share and weighted
average number of shares of Gulf South Common Stock and equivalents
outstanding for each of the years ended December 31, 1992, 1993 and 1994
have been restated to reflect a two-for-one stock split in the form of a
stock dividend effected on May 25, 1995.
20
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA OF PSS AND GULF SOUTH
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth unaudited selected pro forma condensed
combined financial data of PSS and Gulf South assuming the Merger is
consummated and accounted for under the pooling-of-interests method. See "The
Merger--Accounting Treatment." The pro forma financial data is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the Merger had been
consummated on the dates indicated, nor is it necessarily indicative of future
operating results or financial position. The pro forma financial data has been
derived from and should be read in conjunction with the unaudited pro forma
condensed combined financial statements, including the notes thereto, appearing
elsewhere in this Joint Proxy Statement/Prospectus. This data should also be
read in conjunction with the historical financial statements of PSS and Gulf
South, including the notes thereto, appearing elsewhere in this Joint Proxy
Statement/Prospectus. See " Unaudited Pro Forma Condensed Combined Financial
Data," "PSS Consolidated Financial Statements" and "Gulf South Consolidated
Financial Statements."
<TABLE>
<CAPTION>
FISCAL YEARS ENDED(1) NINE MONTHS ENDED
----------------------------- -------------------------
MARCH 30, MARCH 29, MARCH 28, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996 1997(8)
--------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............. $573,092 $729,927 $965,138 $695,493 $938,921
Gross profit(2)........ 158,352 196,920 251,358 183,882 247,714
Selling, general and
administrative
expenses.............. 136,309 160,531 214,800 152,772 199,144
Restructuring
charges(3)............ 4,389 -- -- -- --
Merger costs and
expenses(4)........... -- 16,244 13,994 9,117 5,625
Non-recurring ESOP
costs of acquired
company(5)............ 832 850 1,446 1,050 2,457
Net income............. $ 6,814 $ 10,710 $ 16,610 $ 15,566 $ 26,382
Earnings per share:(6)
Basic.................. 0.14 0.19 0.25 0.24 0.38
Diluted................ 0.14 0.19 0.25 0.24 0.38
Weighted average shares
outstanding:(6)(7)
Basic.................. 48,266 56,124 65,569 64,938 68,697
Diluted................ 49,340 57,403 66,089 65,630 69,128
</TABLE>
<TABLE>
<CAPTION>
AT
DECEMBER 31,
1997(9)
------------
<S> <C>
BALANCE SHEET DATA:
Working capital................................................... $405,565
Total assets...................................................... 665,815
Long-term liabilities............................................. 132,538
Total shareholders' equity(6)..................................... 399,422
</TABLE>
- --------
(1) PSS' fiscal year ends on the Friday closest to March 31. Fiscal year 1995
ended on the Thursday closest to March 31. All periods presented were 52
weeks.
(2) Excludes fiscal year 1997 Physician Supply Business operating write-offs of
inventory of branches involved in mergers of approximately $4.1 million.
(3) Restructuring charges reflect charges taken by a company merged with PSS
pursuant to a pooling-of-interests transaction, prior to the date of
merger. The fiscal year 1995 restructuring charge of $4,389 reflects the
assessment of former management of such merged company of the under-
realization of future benefits related to certain intangible assets. The
fiscal year 1994 restructuring charge of $308 resulted from such merged
company's consolidation of an acquisition. The fiscal year 1993
restructuring charge of $303 resulted from the write-down by former
management of such merged company of capitalized software costs.
(4) Merger costs and expenses reflect direct merger expenses incurred in
connection with mergers accounted for as pooling-of-interests transactions.
(5) Reflects compensation expense of leveraged ESOP of a company acquired. No
future compensation expense will be incurred subsequent to September 30,
1997.
(6) Shareholders' equity and weighted average common share amounts represent
the aggregate weighted average shares of PSS after the Merger, adjusted to
reflect the exchange ratio of 1.75 shares of PSS Common Stock for each
share of Gulf South Common Stock.
(7) Adjusted to give effect to a three-for-one stock split in fiscal year 1996.
(8) Amounts for Gulf South are for the nine months ended September 30, 1997.
(9) Amounts for Gulf South are as of September 30, 1997.
21
<PAGE>
RISK FACTORS
In addition to the other information in this Joint Proxy
Statement/Prospectus, the following factors should be considered carefully in
evaluating the Merger and an investment in the shares of PSS Common Stock
offered by this Joint Proxy Statement/Prospectus. Unless the context otherwise
requires, for purposes of the following discussion, the terms "PSS" and
"combined company" refer to the combined operations of PSS and Gulf South after
consummation of the Merger. See "Cautionary Notice Regarding Forward-Looking
Statements."
RISKS RELATING TO THE MERGER
Fixed Exchange Ratio Despite Change in Relative Stock Prices
The Exchange Ratio is a fixed ratio and will not be adjusted in the event of
any increase or decrease in the price of either PSS Common Stock or Gulf South
Common Stock. The price of PSS Common Stock at the Effective Time may be higher
or lower than its price at the date of this Joint Proxy Statement/Prospectus or
at the date of the Special Meetings. Such variations may be the result of
changes in the business, operations or prospects of PSS or Gulf South, market
assessments of the likelihood that the Merger will be consummated and the
timing thereof, regulatory considerations, general market and economic
conditions or other factors. Because the Effective Time may occur on a date
later than the Special Meetings, there can be no assurance that the price of
PSS Common Stock on the date of the Special Meetings will be indicative of its
price at the Effective Time. The Effective Time will occur as soon as
practicable following the Special Meetings and the satisfaction or waiver
(where permissible) of the other conditions set forth in the Merger Agreement.
Stockholders of PSS and Gulf South are urged to obtain current market
quotations for the PSS Common Stock and the Gulf South Common Stock. See
"Summary--Market and Market Prices" and "The Merger--Exchange Ratio."
Integration of Operations
The success of the Merger will be determined by various factors, including
the financial performance of the combined company's operations after the Merger
and management's ability to effectively integrate the operations of PSS and
Gulf South. Among other matters, the successful combination of PSS and Gulf
South will require integration of the two companies' sales, marketing and
distribution resources, purchasing activities, management information systems,
and management and other key personnel. The integration of the operations of
PSS and Gulf South may be negatively affected if, among other things: (i)
customers, particularly large chains upon which Gulf South's business depends
to a significant degree (See "Risks Relating to PSS, Gulf South and the
Combined Company--Dependence on Customer Relationships"), are not retained or
do not react positively to the Merger or to some of the planned changes to
integrate the businesses; (ii) unanticipated integration costs are incurred;
(iii) costs or difficulties related to the integration of the businesses of PSS
and Gulf South are greater than expected; or (iv) key employees, managers and
sales personnel are not retained and effectively assimilated. The difficulties
of such integration may be increased by the necessity of coordinating
geographically separated organizations. In addition, the integration of
operations following the Merger will require the dedication of management and
other personnel, which may distract their attention from the day-to-day
business of the combined company. There can be no assurance that the
anticipated benefits of the Merger will be realized or that the Merger will not
adversely affect the future business, financial condition and results of
operations of PSS. See "The Merger" and "Unaudited Pro Forma Condensed Combined
Financial Statements."
Possible Dilutive Effects of Merger on Earnings
Financial analyses prepared in contemplation of the Merger indicated that the
Merger could be dilutive to the earnings per share of PSS in calendar years
1998 and 1999 before giving effect to certain expected potential cost savings
and synergies. Although PSS and Gulf South have entered into the Merger
Agreement with the expectation that the Merger will achieve such cost savings
and synergies, the actual operating or financial results achieved by the
combined company may vary from expected results. Such variations may result
from, among other factors, business and operational difficulties involved in
integrating sales, marketing and distribution resources and purchasing
activities, the timing and amount of synergies actually realized, the costs
associated with achieving such synergies and other factors. There can be no
assurance that the anticipated benefits of the Merger will be realized or that
the Merger will not adversely affect the business, financial condition and
results of operations of PSS. See "The Merger--Reasons for the Merger."
22
<PAGE>
Integration of Information Systems
There can be no assurance that PSS will be able to successfully extend and
integrate its information systems with those of Gulf South in order to, among
other things, increase the capacity of the systems to process increasing
amounts of data and transactions and to enable Gulf South's systems to achieve
the same levels of functionality as PSS' systems. The inability to integrate
effectively such systems could limit PSS' ability to provide services at a rate
or in a manner satisfactory to meet the demands of existing or future customers
or to provide adequate information for PSS to properly manage the assets and
business of Gulf South. Such inability may adversely affect customer
relationships and perceptions of PSS in the markets in which it provides
services and otherwise adversely effect PSS' business, financial condition and
results of operation. In addition, such integration may require substantial
investments of capital, management and other resources. See "Business of PSS--
Information Systems" and "Business of Gulf South--Customer Service/Order Entry
and Fulfillment."
Substantial Expenses Resulting from the Merger
PSS and Gulf South estimate they will incur direct transaction costs relating
primarily to regulatory filing costs, and the fees of financial advisors,
attorneys, accountants, financial printers and proxy solicitors associated with
the Merger, which will be charged to operations upon consummation of the
Merger. PSS and Gulf South also expect PSS to incur additional significant
charges to operations to reflect anticipated costs associated with integrating
the two companies. Such charges are not currently estimable with a reasonable
degree of accuracy but preliminary estimates indicate that the total of the
charges, together with the direct transaction costs, may range between $35
million and $45 million. There can be no assurance that actual costs will not
substantially exceed such estimates, that unanticipated expenses associated
with the integration of the two companies will not arise, or that PSS will not
incur additional material charges in subsequent quarters to reflect additional
costs associated with the integration of the two companies. See "Unaudited Pro
Forma Condensed Combined Financial Statements."
Dilution of Ownership Interest of Current PSS Stockholders
Following the Merger, the current stockholders of PSS will own approximately
58.9% of the outstanding shares of PSS Common Stock. This represents
substantial dilution of the ownership interest in PSS Common Stock by PSS'
current stockholders. The issuance of additional shares of PSS Common Stock
pursuant to outstanding Gulf South Options and Gulf South Warrants being
assumed by PSS will result in further dilution to the current stockholders of
PSS.
Potential Adverse Market Effect of Issuance of PSS Common Stock in Merger
If the Merger is consummated, PSS will issue to stockholders of Gulf South an
aggregate of approximately 28,621,187 shares of PSS Common Stock. Immediately
upon consummation of the Merger, approximately 25,545,378 million of such
shares will be freely tradeable. As a result, substantial sales of PSS Common
Stock could occur after the Merger. Following publication of PSS' financial
results covering 30 days of post-Merger combined operations, an additional
approximately 3,075,809 million shares issued in the Merger to persons who may
be deemed affiliates of Gulf South could be publicly sold pursuant to Rule 145
under the Securities Act, subject to the volume and other limitations thereof.
In addition, based on the number of Gulf South Options and Gulf South Warrants
outstanding as of February 13, 1998, approximately 2,405,821 additional shares
of PSS Common Stock will be reserved for issuance following the Merger. Future
sales of a substantial number of shares of PSS Common Stock could adversely
affect or cause substantial fluctuations in the market price of PSS Common
Stock. See "Summary--Market and Market Prices."
Conditions to Consummation of the Merger and Risks Associated with Failure to
Obtain Consents
Consummation of the Merger is subject to various conditions, including,
without limitation, approval by the stockholders of Gulf South of the Merger
Agreement, approval by the stockholders of PSS of the Issuance and the Stock
Amendment, and compliance with the HSR Act. There can be no assurance that the
Merger will be consummated. In addition, pursuant to the Merger Agreement, Gulf
South and PSS agreed to use their reasonable
23
<PAGE>
best efforts to obtain all consents, waivers, approvals, authorizations or
orders required in connection with the consummation of the Merger. If the
parties have not complied with all applicable legal requirements the
consummation of the Merger may be delayed until that time when such
requirements have been met. There can be no assurance that such delay would not
have a material adverse effect on the business, prospects, financial condition
or results of operations of PSS and Gulf South on a combined basis. In
addition, if the parties have not obtained all requisite consents at such time
as all other material conditions to the Merger have been satisfied or waived,
PSS and Gulf South may nonetheless determine to consummate the Merger. Although
PSS and Gulf South are seeking such consents, it is uncertain whether such
consents will be obtained. If PSS and Gulf South determine to consummate the
Merger without having obtained such consents, no assurance can be given that
any resulting loss of that portion of Gulf South's business to which the
consents relate will not have a material adverse effect on the business,
prospects, financial condition or results of operations of PSS and Gulf South
on a combined basis. See "The Merger--Conditions to Consummation of the
Merger."
RISKS RELATING TO PSS, GULF SOUTH AND THE COMBINED COMPANY
Acquisition Strategy
PSS has grown through, and anticipates that it will continue to grow through,
the acquisition of medical-products distributors. PSS has historically grown
through acquisitions and plans to enter new lines of business and new
geographic areas through acquisitions. Acquisitions, including the Merger, may
expose PSS to particular risks, including, without limitation, diversion of
management's attention, the inability to integrate acquired companies into PSS'
operations, assumption of liabilities and amortization of goodwill and other
acquired intangible assets, some or all of which could have a material adverse
effect on the financial condition or results of operations of PSS. Depending on
the value and nature of the consideration paid by PSS for acquisitions, such
acquisitions may adversely affect PSS' liquidity. In making acquisitions in the
future, PSS anticipates that it may compete for acquisitions with other
companies, many of which are larger and have greater financial resources than
PSS. There can be no assurance that PSS will be successful in consummating
acquisitions and integrating them into PSS' operations. PSS has financed
acquisitions, and anticipates that it will finance future acquisitions, through
cash on hand, the issuance of common stock and borrowings. Such financing may
result in potentially dilutive issuances of equity securities and the
incurrence of additional debt, either of which could have a material adverse
effect on PSS' financial condition and results of operations. PSS has taken,
and in the future may take, charges in connection with acquisitions, including
the Merger. There can be no assurance that the costs and expenses incurred will
not exceed the estimates upon which such charges are based. The indenture
governing PSS' senior subordinated notes (the "Indenture") and PSS' credit
facility limit acquisitions and contain financial covenants which may further
limit PSS' ability to make acquisitions. See "Business of PSS--PSS Strategy"
and "--Acquisitions."
Risks of Business Growth and Margin Pressures Due to Changing Market
Conditions
A key element of Gulf South's and PSS' growth strategies is to increase sales
to existing and new customers, including large chains and independent operators
and provider groups, 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 distribution centers, the expansion of existing
distribution centers, the addition of new sales or other personnel or national
account sales efforts will result in additional revenues or operating income.
The expansion of Gulf South's business with large chains and PSS' business with
consolidating provider groups has in the past resulted in competitive pricing
pressures and lower operating margins, and such pressure on margins may
continue in the future. As a result of changes occurring in the long-term care,
physician and alternate-site markets, both the nature of Gulf South's and PSS'
customer base, as well as the products and services required by its customers,
are changing. The failure by management to effectively respond to and manage
changing business conditions, including changes in customer requirements and
changes to Gulf South's and PSS' overall product mix, could have an adverse
effect on Gulf South's and PSS' business and results of operations and on
operating margins. See "Business of Gulf South--Growth Strategy" and "--
Customers."
24
<PAGE>
PSS has grown through, and PSS anticipates that it will continue to grow
through, the opening of start-up service centers. PSS anticipates that each
start-up service center opened will generally incur operating losses for a
period of time which has historically been approximately 18 months.
Accordingly, PSS' planned expansion creates numerous risks, including the risk
that the expansion may have an adverse effect on working capital and earnings
during the expansion period, and that substantial indebtedness may be incurred
in connection with, and significant losses could result from, unsuccessful
start-ups.
Expansion into New Lines of Business
PSS recently has expanded into new product areas, including distributing
imaging equipment, chemicals and supplies and providing technical service to
physicians, other alternate-site providers and hospitals through its Imaging
Business. Since PSS has not historically distributed medical equipment and
supplies to the long-term care market, the Merger would expand PSS into another
new market. The integration and operation of these new businesses may place
significant demands on PSS' management and other resources. There can be no
assurance that there will be any operating efficiencies between these
businesses or that these businesses can be operated profitably. PSS has
pursued, and anticipates that it will continue to aggressively pursue,
expansion opportunities in these and other medical equipment and supplies
distribution markets; however, there can be no assurance that PSS will be
successful in acquiring, integrating or operating additional businesses. In
addition, although PSS is restricted by the terms of the Indenture from
engaging in any business other than those previously engaged in and certain
reasonably related businesses, PSS may in the future, enter into other lines of
business, which may have the same or additional risks as its existing
businesses. There can be no assurance that if PSS were to enter into any
additional lines of business that it would be able to operate such businesses
successfully. See "Business of PSS--PSS Strategy" and "--Acquisitions."
Dependence on Vendor Relationships
PSS distributes over 39,000 medical products manufactured by approximately
3,000 vendors and is dependent on these vendors for the manufacture and supply
of product. PSS has entered into a contract with Abbott Laboratories ("Abbott")
which accounted for approximately 14% and 16% of PSS' revenues in fiscal years
1996 and 1997, respectively, and which may be terminated by Abbott if PSS does
not meet certain sales levels (the "Abbot Agreement"). PSS and Abbott have in
the past renegotiated such sales levels. Sales pursuant to a distribution
agreement with F. Hoffman-La Roche Ltd. accounted for approximately four
percent of PSS' sales in fiscal year 1997. In addition, PSS has entered into
other separate exclusive distribution agreements, including agreements for
certain products manufactured by Siemens AG, Hologic, Inc., C. R. Bard, Inc.,
Tanita Corporation of America, Inc. and HumaScan Inc. PSS' ability to maintain
good relations with these vendors will affect the profitability of its
business. Currently, PSS relies on vendors to provide: (i) field sales
representatives' technical and selling support; (ii) agreeable purchasing and
delivery terms; (iii) sales performance incentives; (iv) financial support of
sales and marketing programs; and (v) promotional materials. There can be no
assurance that PSS will maintain good relations with its vendors. See "Business
of PSS--PSS Strategy" and "--Products."
Dependence on Customer Relationships
Gulf South depends on a limited number of large customers for a significant
portion of its net sales. Consolidation and competition among distributors to
the long-term care industry, including several national hospital and drug
wholesale distributors and health care manufacturers, and the expansion of Gulf
South's business with large chains could increase such dependence, result in
the loss of customers as a result of acquisitions and result in competitive
pricing pressures and lower operating margins. In fiscal year 1996 and the nine
months ended September 30, 1997, Gulf South's largest five customers accounted
for approximately 32.2% and 27.4%, respectively, of net sales. Beverly
Enterprises accounted for 19.6% and 12.6% of net sales for fiscal year 1996 and
for the nine months ended September 30, 1997, respectively. As is customary in
its industry, Gulf South does not generally have any long-term contracts with
its customers and sells on a purchase order basis only. The loss of, or
significant declines in the level of purchases by, one or more of its large
customers would
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have a material adverse effect on Gulf South's business and results of
operations. Although Gulf South 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 Gulf South's results of operations or financial condition.
See "Business of Gulf South--Customers."
Litigation and Liability Exposure
Gulf South 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., et al.,
Civil Action No. 3:97cv526WS, and Ann Krupnick v. Gulf South Medical Supply,
Inc., et al., Civil Action No. 3:97cv525BN. 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 stockholders that allegedly
purchased stock in Gulf South'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 and
Mississippi state law. The plaintiff in the Krupnick action alleges for herself
and for a purported class of similarly situated stockholders who purchased Gulf
South's stock between May 2, 1996 and July 22, 1996, that the defendants
engaged in certain violations of the Exchange Act, Rule 10b-5 promulgated
thereunder and Mississippi state law. Both lawsuits relate to disclosures made
in the prospectus issued by Gulf South in connection with its June 1996
Offering. Plaintiffs seek damages, including costs and expenses. Gulf South
believes that the allegations contained in the complaints are without merit and
intends to defend vigorously 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 favorable terms. See "Business of Gulf South--Legal
Proceedings."
Although neither PSS nor Gulf South is a manufacturer, the distribution of
medical supplies and equipment entails risks of product liability. Despite the
fact that neither PSS nor Gulf South has experienced any significant product
liability claim to date and currently maintains liability insurance coverage,
such insurance is expensive, difficult to obtain and may be unobtainable in the
future on acceptable terms, if at all. PSS operates approximately 620 vans to
deliver medical products on a same-day delivery basis. PSS has experienced
various claims regarding motor vehicle accidents, all of which have been
covered by insurance, subject to applicable retentions and deductibles. PSS
believes that it maintains adequate insurance coverage for such claims.
Nevertheless, the amount and scope of any coverage may be inadequate in the
event that a product liability or motor vehicle accident claim is successfully
asserted against PSS. See "Business of PSS--Legal Proceedings" and "Business of
Gulf South--Government Regulation" and "--Legal Proceedings."
Risks of Leverage
In connection with the issuance of 8 1/2% Senior Subordinated Notes due 2007,
PSS incurred $125.0 million in indebtedness. As a result of this increased
leverage, PSS' principal and interest obligations have increased substantially.
The level of its indebtedness could adversely affect PSS' ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions or other purposes and could limit its flexibility in reacting to
changes in the industry and economic conditions generally. PSS' increased
leverage could also adversely affect its liquidity, as a substantial portion of
cash flow from operations must be dedicated to debt service and will not be
available for other purposes. PSS believes, based on current circumstances,
that its cash flow, together with available borrowings under its credit
facility, will be sufficient to permit it to meet its operating expenses and to
service its debt requirements as they become due for the foreseeable future.
This belief assumes, among other things, that PSS will succeed in implementing
its business strategy and that there will be no material adverse developments
in its business, liquidity or capital requirements. However, if PSS is unable
to generate sufficient cash flow from operations to service its indebtedness,
it will be forced to adopt an alternative strategy that may include options
such as reducing or delaying acquisitions and capital expenditures, selling
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assets, restructuring or refinancing its indebtedness or seeking additional
equity capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms, if at all.
Dependence on Key Management
The success of PSS is dependent upon the efforts and abilities of its senior
management, including senior Gulf South management retained through the Merger.
The loss of one or more of such individuals may adversely affect PSS' business.
Because of PSS' decentralized operating structure, PSS is also dependent upon
its operations and sales managers for each of its service areas. There can be
no assurance that PSS will be able to retain such key personnel or attract
qualified personnel in the future.
Dependence on Sales Representatives and Service Specialists
PSS believes that to be successful it must continue to hire, train and retain
highly qualified sales representatives and service specialists. PSS' sales
growth has resulted largely from hiring and developing new sales
representatives and adding, through acquisitions, established sales
representatives whose existing customers generally have become customers of
PSS. Due to the relationships developed between PSS' sales representatives and
its customers, upon the departure of a sales representative PSS faces the risk
of losing the representative's customers, especially if the representative were
to act as a representative of PSS' competitors. PSS generally requires its
sales representatives and service specialists to execute a non-competition
agreement as a condition of their employment, however PSS has not obtained non-
competition agreements from certain of the sales representatives and service
specialists hired through acquisitions. Although courts have generally upheld
the terms of PSS' non-competition agreements in the past, there can be no
assurance that such agreements will be upheld in the future. In addition, the
radiology and imaging equipment market served by the Imaging Business is
reliant on the hiring and retention of skilled service specialists to maintain
such equipment. There is a current shortage of these skilled specialists, which
may result in intense competition and increasing salaries. Any inability of PSS
to hire or retain such skilled specialists could limit its ability to expand
its Imaging Business and adversely affect its business, financial condition and
results of operations. There can be no assurance that PSS will be able to
retain or attract qualified personnel in the future. See "Business of PSS--
Recruitment and Development."
Competition
The distribution and marketing of medical products is highly competitive.
PSS' competitors include full-line, full-service medical supply companies, some
of which are national in scope, local and regional distributors and
manufacturers who distribute their products directly to users. These companies
have sales representatives competing directly with PSS. There are also several
mail order firms which distribute medical products on a national or regional
basis. Some of these competitors are substantially larger in size and have
substantially greater financial resources than PSS. In addition, consolidation
within the health care industry has resulted in increased competition by large
national distributors and drug wholesalers. In response to competitive
pressures, PSS has in the past lowered, and may in the future lower, selling
prices in order to maintain market or increase market share, which has
resulted, and may in the future result, in lower gross margins. PSS could
encounter additional competition because many of the products it sells are
readily obtainable by others from various sources of supply and such
competitors could consolidate into regional or national networks. In addition,
a competitor of PSS could obtain exclusive rights to market a certain product
to the exclusion of PSS. There can be no assurance that PSS will not face
increased competition in the future. See "Business of PSS--Competition."
Gulf South's competitors include a variety of regional, local and national
distributors, including several mail order firms which distribute medical
products. 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 addition, consolidation within the
long-term care distribution industry has resulted in increased competition by
large national distributors. In response to competitive pressure, Gulf South
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
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future result, in lower gross margins. Although several national hospital and
drug wholesale distributors and health care manufacturers presently sell to the
long-term care market, to date the long-term care market has not been a primary
focus for such distributors and manufacturers. However, such distributors and
manufacturers may focus their efforts more directly on the long-term care
market. Hospitals that form alliances with long-term care facilities to create
integrated healthcare networks may look to hospital distributors and
manufacturers to furnish products to their long-term care affiliates. Because
certain of Gulf South's competitors may have cost advantages over Gulf South
due to their ability to purchase products in large volumes, Gulf South may
experience significant pricing pressures from these and other competitors. See
"Business of Gulf South--Competition."
Management of International Business
Through its WorldMed International, Inc. subsidiary, PSS has recently
acquired medical supply distributors serving physicians in Belgium, France,
Germany, Luxembourg and the Netherlands and plans to increase its presence in
European markets. As PSS expands internationally, it will need to hire, train
and retain qualified personnel in countries where language, cultural or
regulatory impediments may exist. PSS has encountered and expects to encounter
significant expense and delay in expanding its international operations because
of language and cultural differences, and staffing, communications and related
issues. There can be no assurance that PSS' services and business practices
will be accepted by vendors, physicians or other involved parties in foreign
markets. The cost of medical care in many European countries is funded by the
government, which may significantly impact spending budgets in certain markets.
International revenues are subject to inherent risks, including political and
economic instability, difficulties in staffing and managing foreign operations
and in accounts receivable collection, fluctuating currency exchange rates,
costs associated with localizing service offerings in foreign countries,
unexpected changes in regulatory requirements, difficulties in the repatriation
of earnings and burdens of complying with a wide variety of foreign laws and
labor practices. See "Business of PSS--Distribution."
Imaging Business Technology
The development of new technology may change the manner in which diagnostic
imaging services are provided. Recently, certain manufacturers have developed
digital radiology equipment that does not rely on film and film products, which
currently constitute a substantial percentage of the products distributed by
the Imaging Business. No assurance can be given that the introduction and
proliferation of digital radiology or other technological changes will not
result in a material adverse change in the Imaging Business. While PSS
anticipates that it will distribute new imaging technology, there can be no
assurance that PSS will obtain distribution agreements or develop vendor
relationships to distribute such new technology. In addition, there can be no
assurance that PSS would be able to distribute any such new technology
profitably. See "Business of PSS--Products."
Reliance on Third-Party Shippers
Because Gulf South 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 material increases in its costs of
procuring and delivering products could have an adverse effect on its results
of operations. Strikes or other service interruptions affecting United Parcel
Service ("UPS") or other common carriers used by Gulf South to ship its
products, such as the strike by UPS workers in 1997, could impair Gulf South's
ability to deliver products on a timely and cost-effective basis. In addition,
because Gulf South typically bears the cost of shipment to its customers, any
increase in shipping rates could have an adverse effect on Gulf South's
operating results. See "Business of Gulf South--Customer Service/Order Entry
and Fulfillment."
Risks Associated with Inventory Management
In order to provide prompt and complete service to its customers, Gulf South
maintains a significant investment in product inventory (approximately $27.2
million and $31.7 million at December 31, 1996 and
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September 30, 1997, respectively) at its 23 warehouse locations. Although Gulf
South 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
development or price changes will not adversely affect Gulf South's business or
results of operations. In addition, Gulf South may assume the inventory of
distributors that it acquires which includes product lines or operating assets
not normally carried or used by Gulf South. These product lines or assets may
be difficult to sell, resulting in Gulf South writing off any such unsold
inventory or unused assets in future periods. See "Business of Gulf South--
Purchasing."
Regulation of and Changes in the Practice of Medicine
The health care industry is subject to extensive government regulation,
licensure and operating procedures. Neither PSS nor Gulf South can predict the
impact that present or future regulations may have on operations of PSS or Gulf
South or on their plans to expand business activities. In addition, as
consolidation among physician provider groups, long-term care facilities and
other alternate-site providers continues and provider networks are created,
purchasing decisions may shift to individuals with whom neither PSS nor Gulf
South has had prior selling relationships. PSS and Gulf South are increasingly
focusing on national accounts where the purchasing decision may not be made by
their traditional customers. There can be no assurance that PSS or Gulf South
will be able to maintain their customer relationships in such circumstances or
that such provider consolidation will not result in reduced operating margins.
In addition, national health care reform has been the subject of a number of
legislative initiatives by Congress. Due to uncertainties regarding the
ultimate features of health care reform initiatives and their enactment and
implementation, neither PSS nor Gulf South can predict which, if any, of such
reform proposals will be adopted, when they may be adopted or what impact they
may have on PSS or Gulf South or their respective customers. The actual
announcement of reform proposals and the investment community's reaction to
such proposals, announcements by competitors of their strategies to respond to
reform initiatives and general industry conditions could produce volatility in
the trading and market price of PSS Common Stock. See "Business of PSS--
Regulatory Matters" and "Business of Gulf South--Government Regulation."
Dependence on Third-Party Reimbursement
The cost of a significant portion of medical care in the United States is
funded by government and private insurance programs, such as Medicare, Medicaid
and corporate health insurance plans. In recent years, government-imposed
limits on reimbursement of hospitals, long-term care facilities and other
health care providers have significantly impacted spending budgets in certain
markets within the medical-products industry. Private third-party reimbursement
plans are also developing increasingly sophisticated methods of controlling
health care costs through redesign of benefits and exploration of more cost-
effective methods of delivering health care. Accordingly, there can be no
assurance that reimbursement for purchase and use of medical products will not
be limited or reduced and thereby adversely affect future sales by PSS. See
"Business of PSS--Regulatory Matters."
Two-Tier Pricing
As a result of the Non-Profit Act of 1944, the medical-products industry is
subject to a two-tier pricing structure. Under this structure, certain
institutions, originally limited to non-profit hospitals, can obtain more
favorable prices for medical products than PSS. The two-tiered pricing
structure continues to expand as many large integrated health care providers
and others with significant purchasing power demand more favorable pricing
terms. Although PSS is seeking to obtain similar terms from its manufacturers,
there can be no assurance that such terms can be obtained. Such a pricing
structure, should it persist, may place PSS at a competitive disadvantage. See
"Business of PSS--Regulatory Matters."
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Quarterly Fluctuations in Operating Results
Net sales and operating results may fluctuate quarterly as a result of demand
for PSS' products and services, the introduction of new products and services
by PSS and its competitors, acquisitions or investments, changes in
manufacturers' prices or pricing policies, changes in the level of operating
expenses, product supply shortages, inventory adjustments, changes in product
mix and general competitive and economic conditions. In addition, a substantial
portion of PSS' net sales in each quarter result from orders booked in such
quarter. Accordingly, PSS believes that period-to-period comparisons of its
operating results should not be relied upon as an indication of future
performance. It is possible that in certain future periods, PSS' operating
results may be below the expectations of analysts and investors, which could
materially and adversely affect the trading price of the PSS Common Stock. See
"Summary--Market and Market Prices."
Reliance on Data Processing
PSS' and Gulf South's businesses are dependent upon their ongoing ability to
obtain, process, analyze and manage data, and to maintain and upgrade their
data processing capabilities. PSS typically receives rebates from manufacturers
for the purchase of certain products for its Imaging Business and needs
sophisticated systems to carefully track and apply for such rebates.
Interruption or failure of data processing capabilities for any extended length
of time, the failure to upgrade data services, the inability of PSS' data
processing system to support the expanded scope of PSS' or Gulf South's
businesses or to adequately track PSS' Imaging Business rebates, difficulties
in converting data and information systems after acquisitions, loss of stored
data, programming errors or other computer problems could adversely affect PSS'
and Gulf South's ability to receive and process customer orders and ship
products on a timely basis and otherwise have a material adverse effect on PSS'
business, financial condition and results of operations. See "Business of PSS--
Information Systems" and "Business of Gulf South--Customer Service/Order Entry
and Fulfillment."
Environmental Liabilities and Regulations
The past and present business operations of PSS and Gulf South and the past
and present ownership and leasing of real property by PSS and Gulf South are
subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances. Certain of
the products distributed and serviced by PSS' Imaging Business contain
chemicals and byproducts which require proper disposal under applicable
environmental law. Neither PSS nor Gulf South can predict what environmental
legislation or regulations will be enacted in the future, how existing or
future laws or regulations will be administered or interpreted or what
environmental conditions may be found to exist on its properties. Compliance
with more stringent laws or regulations, as well as more vigorous enforcement
policies of applicable regulatory agencies or stricter interpretations of
existing laws, and discovery of new conditions, may require additional
expenditures by PSS, some of which may be material.
Anti-Takeover Provisions; Possible Issuance of Preferred Stock
The PSS Articles and Amended and Restated Bylaws contain various provisions
that may make it more difficult for a third party to acquire, or may discourage
acquisition bids for, PSS and could limit the price that certain investors
might be willing to pay in the future for shares of the PSS Common Stock. In
addition, the rights of the holders of PSS Common Stock will be subject to, and
may be adversely affected by, the rights of any holders of preferred stock of
PSS that may be issued in the future and that may be senior to the rights of
the holders of PSS Common Stock. Furthermore, PSS has not opted out of certain
provisions of the FBCA, including the provisions relating to control-share
acquisitions, which could have the effect of delaying, deferring or preventing
a change in control of PSS without further action by its stockholders. See
"Certain Differences in the Rights of PSS and Gulf South Stockholders."
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GENERAL INFORMATION
SPECIAL MEETINGS
This Joint Proxy Statement/Prospectus is being furnished by PSS to its
stockholders in connection with the solicitation of proxies by the Board of
Directors of PSS from holders of the outstanding shares of PSS Common Stock for
use at the PSS Special Meeting and at any adjournments or postponements
thereof, to consider and vote upon (i) the approval of the issuance of the
shares of PSS Common Stock pursuant to the Merger Agreement (the "Issuance"),
(ii) the approval of an amendment to the PSS Articles to increase the number of
authorized shares of PSS Common Stock from 60,000,000 to 150,000,000 (the
"Stock Amendment"), and (iii) the approval of an amendment to the PSS Articles
to change the corporate name of PSS to "PSS World Medical, Inc." (the "Name
Amendment," and with the Stock Amendment, the "Amendments"), and to transact
such other business as may properly come before the PSS Special Meeting. The
PSS Special Meeting to consider and vote on the Issuance and the Amendments
will be held at 9:30 a.m., local time, at the Jacksonville Marriott, 4670
Salisbury Road, Jacksonville, Florida 32256, on March 26, 1998. See "The
Merger" and "Amendment of PSS Articles."
This Joint Proxy Statement/Prospectus is being furnished by Gulf South to its
stockholders in connection with the solicitation of proxies by the Board of
Directors of Gulf South from holders of the outstanding shares of Gulf South
Common Stock for use at the Gulf South Special Meeting and at any adjournments
and postponements thereof, to consider and vote upon a proposal to approve the
Merger Agreement and consummation of the transactions contemplated therein, and
to transact such other business as may properly come before the Gulf South
Special Meeting. The Gulf South Special Meeting to consider and vote on the
Merger Agreement will be held at 9:00 a.m., local time, at The Harvey Hotel-
North, 5075 I-55, North Frontage Road, Jackson, Mississippi 39206, on March 26,
1998. See "The Merger."
This Joint Proxy Statement/Prospectus is also being furnished by PSS to
holders of Gulf South Common Stock as a Prospectus in connection with the
issuance by PSS to them of shares of PSS Common Stock upon consummation of the
Merger.
The Merger Agreement provides for a transaction whereby Gulf South will merge
with Merger Corp., a wholly owned subsidiary of PSS. Gulf South shall be the
surviving corporation of the Merger and as a result shall become a wholly owned
subsidiary of PSS and shall continue to be governed by the laws of the State of
Delaware. At the Effective Time, each issued and outstanding share of Gulf
South Common Stock shall cease to be outstanding and shall be converted into
and exchanged for the right to receive 1.75 shares of PSS Common Stock. See
"The Merger--Exchange Ratio."
If the Merger Agreement is approved at the Gulf South Special Meeting and the
Issuance and the Stock Amendment are approved at the PSS Special Meeting, any
required regulatory approvals are obtained, and all other conditions to the
obligations of the parties to consummate the Merger are either satisfied or
waived (as permitted), the Merger will be consummated. See "The Merger--
Effective Time."
RECORD DATES
The Board of Directors of PSS has fixed the close of business on February 13,
1998, as the record date for determining the PSS stockholders entitled to
receive notice of and to vote at the PSS Special Meeting (the "PSS Record
Date"). As of the PSS Record Date, there were outstanding and entitled to vote
40,984,705 shares of PSS Common Stock.
The Board of Directors of Gulf South has fixed the close of business on
February 13, 1998, as the record date for determining the Gulf South
stockholders entitled to receive notice of and to vote at the Gulf South
Special Meeting (the "Gulf South Record Date"). As of the Gulf South Record
Date, there were outstanding and entitled to vote 16,354,964 shares of Gulf
South Common Stock.
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VOTES REQUIRED AND QUORUM
PSS Special Meeting
Approval of the Issuance by the stockholders of PSS is not required by
Florida law, but is required pursuant to the rules of the NASD relating to the
Nasdaq National Market. Such approval is being sought to comply with such rules
of the NASD. Approval and adoption of the Amendments is required by Florida
law. Each share of PSS Common Stock is entitled to one vote on each matter that
comes before the PSS Special Meeting. The affirmative vote of the holders of
shares of PSS Common Stock representing a majority of the votes cast at the PSS
Special Meeting is required to approve and adopt the Issuance and the
Amendments, provided that the total votes cast at the PSS Special Meeting
represent at least 50% of the outstanding shares of PSS Common Stock. As of the
PSS Record Date, PSS directors and executive officers holding approximately
5.0% of the votes entitled to vote at the PSS Special Meeting have agreed to
vote in favor of the Issuance and the Stock Amendment. The presence, in person
or by proxy, of the holders of shares of PSS Common Stock entitled to cast a
majority of the votes entitled to be cast at the PSS Special Meeting will
constitute a quorum at the PSS Special Meeting.
At the PSS Special Meeting, abstentions, although counted for purposes of
determining whether there is a quorum and the number of shares present and
entitled to vote, will not be voted. Accordingly, since the affirmative vote of
the holders of a majority of shares present in person or represented by proxy
and entitled to vote at the PSS Special Meeting is required for approval of the
Issuance and the Amendments, an abstention will have the effect of a vote
against such proposals. Broker non-votes will be included for purposes of
determining the existence of a quorum but will not be counted for the purpose
of determining the number of shares present and entitled to vote, and therefore
will have no effect on the outcome of the vote. A broker non-vote occurs when a
broker holding shares for a beneficial owner is present at the meeting, but
does not vote on a proposal because the broker has not received instructions to
do so from the beneficial owner and does not have discretionary power.
Gulf South Special Meeting
Approval of the Merger Agreement and consummation of the transactions
contemplated therein by the stockholders of Gulf South is required by Delaware
law. Each share of Gulf South Common Stock is entitled to one vote. Approval of
the Merger Agreement and consummation of the transactions contemplated therein
requires the affirmative vote of the holders of a majority of the outstanding
shares of Gulf South Common Stock entitled to vote thereon at the Gulf South
Special Meeting. As of the Gulf South Record Date, Gulf South directors and
executive officers holding approximately 10.7% of the votes entitled to vote at
the Gulf South Special Meeting have agreed to vote in favor of the Merger
Agreement and the consummation of the transactions contemplated therein. The
presence, in person or by proxy, of the holders of shares of Gulf South Common
Stock holding a majority of the votes entitled to be cast at the Gulf South
Special Meeting will constitute a quorum at the Gulf South Special Meeting. At
the Gulf South Special Meeting, abstentions and broker non-votes will be
counted as present for the purposes of determining a quorum and will have the
effect of a vote against approval of the Merger Agreement.
VOTING AND REVOCABILITY OF PROXIES
Shares of PSS Common Stock represented by a properly executed proxy, if such
proxy is received in time and is not subsequently revoked, will be voted in
accordance with the instructions indicated on such proxy. IF A PROXY IS
PROPERLY EXECUTED AND RETURNED WITHOUT INDICATING ANY VOTING INSTRUCTIONS,
SHARES OF PSS COMMON STOCK REPRESENTED BY SUCH PROXY WILL BE VOTED FOR (I)
APPROVAL OF THE ISSUANCE (II) APPROVAL OF THE STOCK AMENDMENT AND (III)
APPROVAL OF THE NAME AMENDMENT.
Shares of Gulf South Common Stock represented by a properly executed proxy,
if such proxy is received in time and is not subsequently revoked, will be
voted in accordance with the instructions indicated on such proxy. IF A PROXY
IS PROPERLY EXECUTED AND RETURNED WITHOUT INDICATING ANY VOTING INSTRUCTIONS,
SHARES OF GULF SOUTH COMMON STOCK REPRESENTED BY SUCH PROXY WILL BE VOTED FOR
APPROVAL OF THE MERGER AGREEMENT AND CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREIN.
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Any proxy given may be revoked by the person giving it at any time prior to
its exercise at the appropriate Special Meeting by (i) giving written notice of
revocation, bearing a later date than the proxy, to the Assistant Secretary or
Secretary of PSS or Gulf South, respectively, (ii) properly submitting to PSS
or Gulf South, as appropriate, a duly executed proxy bearing a later date, or
(iii) voting in person at the appropriate Special Meeting. All written notices
of revocation and other communications with respect to revocation of Gulf South
proxies should be addressed to Gulf South as follows: Gulf South Medical
Supply, Inc., One Woodgreen Place, Madison, Mississippi 39110, Attention:
Stanton Keith Pritchard. All written notices of revocation and other
communications with respect to revocation of PSS proxies should be addressed to
PSS as follows: Physician Sales & Service, Inc., 4345 Southpoint Boulevard,
Jacksonville, Florida 32216, Attention: Patrick C. Kelly.
OTHER MATTERS; ADJOURNMENTS
Neither the PSS Board of Directors nor the Gulf South Board of Directors is
currently aware of any business to be transacted at the PSS Special Meeting or
the Gulf South Special Meeting, respectively, other than as described herein.
If, however, other matters are properly brought before the respective Special
Meeting, or any adjournments or postponements thereof, the persons appointed as
proxies will have discretion to vote or act thereon according to their
judgment. Such adjournments may be for the purpose of soliciting additional
proxies. Shares represented by proxies voting against approval of the Issuance
or the Stock Amendment, with respect to PSS, or the Merger Agreement, with
respect to Gulf South, will be voted against a proposal to adjourn the
respective Special Meeting for the purpose of soliciting additional proxies.
Neither PSS nor Gulf South currently intends to seek an adjournment of its
Special Meeting.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
For the reasons described in this Joint Proxy Statement/Prospectus, the Board
of Directors of PSS has unanimously adopted the Merger Agreement, believes the
Merger is in the best interests of PSS and its stockholders, and unanimously
recommends that the stockholders of PSS vote FOR the Issuance and the
Amendments. For the reasons described in this Joint Proxy Statement/Prospectus,
the Board of Directors of Gulf South has unanimously approved and adopted the
Merger Agreement, believes the Merger is in the best interests of Gulf South
and its stockholders, and unanimously recommends that the stockholders of Gulf
South vote FOR approval of the Merger Agreement and the consummation of the
transactions contemplated therein. See "The Merger--Reasons for the Merger."
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of PSS
and Gulf South, who will not be specifically compensated for such services, may
solicit proxies from the stockholders of PSS and Gulf South, respectively,
personally or by telephone or telegram or other forms of communication.
Brokerage houses, nominees, fiduciaries and other custodians will be requested
to forward soliciting materials to beneficial owners and will be reimbursed for
their reasonable expenses incurred in doing so. PSS has retained Georgeson &
Company Inc. to aid in soliciting proxies from its stockholders. The fees of
such firm are estimated to be $8,500 plus reimbursement of out-of-pocket
expenses. Gulf South has retained Georgeson & Company Inc. to assist in
soliciting proxies from its stockholders. The fees of such firm are estimated
to be $7,500 plus reimbursement of out-of-pocket expenses. The expense of
soliciting proxies for the PSS Special Meeting and the Gulf South Special
Meeting will be borne by PSS and Gulf South, respectively. PSS and Gulf South
have each agreed to pay one-half of the fees for filing and printing this Joint
Proxy Statement/Prospectus.
GULF SOUTH STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS. THE PROCEDURE FOR THE EXCHANGE OF SHARES AFTER THE MERGER IS CONSUMMATED
IS SET FORTH ELSEWHERE IN THIS JOINT PROXY STATEMENT/ PROSPECTUS. SEE "THE
MERGER--DISTRIBUTION OF PSS CERTIFICATES".
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THE MERGER
The following information describes certain information pertaining to the
Merger. This description does not purport to be complete and is qualified in
its entirety by reference to the Annexes hereto, including the Merger
Agreement, a copy of which is set forth in Annex A, the Stock Option
Agreements, copies of which are set forth in Annexes B and C, and the Voting
Agreements, copies of which are set forth in Annexes D and E, to this Joint
Proxy Statement/Prospectus and are incorporated herein by reference. All
stockholders are urged to read the Annexes in their entirety.
GENERAL
The Merger Agreement provides that Merger Corp., a wholly owned subsidiary of
PSS, shall merge with and into Gulf South. Gulf South shall be the surviving
corporation of the Merger and as a result shall become a wholly owned
subsidiary of PSS and shall continue to be governed by the laws of the State of
Delaware. At the Effective Time, each share of issued and outstanding Gulf
South Common Stock shall cease to be outstanding and shall be converted into
and exchanged for the right to receive 1.75 shares of PSS Common Stock. If the
Merger Agreement is approved at the Gulf South Special Meeting, the Issuance
and the Stock Amendment are approved at the PSS Special Meeting, all required
consents and approvals are obtained, and all other conditions to the
obligations of the parties to consummate the Merger are either satisfied or
waived (as permitted), the Merger will be consummated. A copy of the Merger
Agreement is set forth in Annex A of this Joint Proxy Statement/Prospectus. See
"--Exchange Ratio."
BACKGROUND OF THE MERGER
During 1994 and 1995, representatives of PSS and Gulf South met informally at
various investment conferences and industry association meetings. The meetings
primarily involved general discussions about each company's respective market
conditions and general business activities, as well as overall industry trends.
In January 1996, the possibility of merging the two companies arose in
informal discussions between Mr. Patrick C. Kelly, Chairman of the Board and
Chief Executive Officer of PSS, and Mr. Thomas G. Hixon, Chairman of the Board
and Chief Executive Officer of Gulf South. In February 1996, Messrs. Kelly and
Hixon again met informally to discuss the possible combination of the two
companies. In October 1996, Messrs. Hixon and Kelly and Mr. David A. Smith,
Executive Vice President and Chief Financial Officer of PSS, met at a
conference in Chicago, Illinois and once again briefly discussed the
possibility of a business combination.
On June 30, 1997, at a PSS Board meeting, Mr. Kelly discussed in general the
consolidation taking place in the medical-products distribution industry. After
some discussion, the PSS Board authorized Mr. Kelly and senior management to
explore various possible acquisitions and business combinations.
On October 7, 1997, the PSS Board met in Jacksonville, Florida. At this
meeting, the Board discussed several potential acquisitions and business
combinations being considered. Representatives of BT Alex. Brown were present
at this meeting. Messrs. Kelly and Smith and representatives of BT Alex. Brown
discussed a possible business combination with Gulf South and the financial
performance and operational profile of Gulf South.
On October 9, 1997, at an investment conference in New York, New York, Mr.
Hixon and Mr. Stanton Keith Pritchard, Senior Vice President and General
Counsel of Gulf South, met informally with Messrs. Kelly and Smith to discuss
trends in the medical supply distribution industry common to both companies.
During the meeting, Messrs. Kelly and Smith inquired whether Gulf South had an
interest in renewing discussions regarding a possible business combination. At
the conclusion of the meeting, Mr. Hixon advised Messrs. Kelly and Smith that
he would discuss the possibility of a combination of the two companies with the
Gulf South Board at its next meeting.
On October 23, 1997, at a regularly scheduled meeting of the Gulf South
Board, Mr. Hixon provided the Board with a summary of the October 9, 1997
meeting with Messrs. Kelly and Smith. The Gulf South Board had previously
discussed the general desirability of exploring strategic alliances or business
combinations with other complementary companies. The Gulf South Board
authorized management to continue discussions with PSS. Mr. Hixon asked the
assistance of Mr. David L. Bogetz, a Gulf South Board member, to attend a
meeting with Messrs. Kelly and Smith, and a PSS Board member, Mr. James L.L.
Tullis.
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On November 21, 1997, Messrs. Hixon, Pritchard and Bogetz met with Messrs.
Kelly, Smith and Tullis in Atlanta, Georgia. A confidentiality agreement had
been executed by the parties the previous day. The purpose of the meeting was
to allow both companies the opportunity to present a general overview of their
respective businesses, as well as to discuss the possible combination of the
two businesses. At the conclusion of the meeting, it was agreed that each group
would report back to its respective Board and if supported by the Boards, a
follow-up meeting would be scheduled.
On November 26, 1997, a special meeting of the PSS Board was held in
Jacksonville, Florida to discuss a possible business combination with Gulf
South. Representatives of BT Alex. Brown attended. Mr. Kelly reported on the
November 21, 1997 meeting. Senior management outlined a proposed basis to
continue discussions. The potential financial effect of a proposed merger on
the two companies was also discussed.
On December 2, 1997, a conference call was held by the Gulf South Board to
discuss the November 21, 1997 meeting. The primary topics discussed included
the compatibility of both companies' operations, potential benefits of
combining their sales and marketing efforts and the respective corporate
cultures. The Gulf South Board authorized the continuation of discussions with
PSS and requested that more definitive details of the proposed merger be
discussed at the next meeting. In addition, Mr. Hixon was authorized to engage
NationsBanc Montgomery to act as the Gulf South financial advisor in connection
with the PSS discussions, and to engage Mr. Guy W. Edwards, a Gulf South Board
member and former Chief Financial Officer of Gulf South, to act as an
additional consultant.
On December 5, 1997, Messrs. Hixon, Pritchard and Edwards met with Messrs.
Kelly and Smith in the Madison, Mississippi office of Gulf South. The parties
discussed their respective business strategies, products and services, the
feasibility of combining operations, the compatibility of the management teams,
potential synergies and the relative financial positions of the two companies.
They agreed to reconvene in Jackson, Mississippi the following week, with their
respective financial advisors, to conduct further due diligence and continue
discussions on an appropriate exchange ratio.
On December 5, 1997, the PSS Board held a telephone conference meeting to
discuss the status of a potential merger with Gulf South. Financial, legal and
accounting advisors to PSS participated in the meeting. Mr. Smith and
representatives of BT Alex. Brown reviewed with the PSS Board certain financial
information concerning PSS and Gulf South, and Mr. Smith outlined some general
proposed terms for a potential merger. After senior management responded to a
number of questions, the PSS Board authorized management to complete due
diligence and finalize a proposal for the Board.
During the week of December 7, 1997, representatives of Gulf South and its
legal advisors, accountants and financial advisors met in Jacksonville, Florida
and Jackson, Mississippi, and had several conference calls to continue
business, legal and financial due diligence regarding a possible business
combination. In addition, on December 7, 1997, representatives of PSS and Gulf
South, and their financial and legal advisors, had a conference call to discuss
the principal financial, business and legal terms of a proposed business
combination and agree on a schedule for completing due diligence and
negotiating an exchange ratio and definitive agreements.
On December 8, 1997, the Gulf South Board met by telephone conference. At the
meeting, Gulf South senior management summarized the discussions among the
parties which had taken place at the December 7, 1997 meeting and reviewed the
potential benefits and risks to Gulf South of a business combination with PSS.
Representatives of NationsBanc Montgomery presented preliminary financial
information concerning PSS, as well as a preliminary analysis of factors
affecting the fairness of the proposed transaction to the Gulf South
stockholders. Gulf South legal advisors reviewed certain legal issues relating
to the proposed transaction and also summarized the fiduciary responsibilities
of the Board in considering the proposed transaction. After full discussion,
the Gulf South Board instructed management to proceed with the negotiation of
definitive agreements.
On December 11, 1997, the Gulf South Board met by telephone conference. At
this meeting senior management and NationsBanc Montgomery discussed the status
of negotiations and valuation issues relevant to negotiation of a mutually
acceptable exchange ratio, including potential synergies, and reported the
results of the
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business and financial due diligence evaluation of PSS. Gulf South legal
advisors summarized the principal terms of the draft Merger Agreement and
related documents. The Gulf South Board also considered potentially negative
factors and risks relating to the proposed business combination. The Gulf South
Board concluded that it was appropriate to proceed with the negotiation of the
proposed business combination and instructed senior management and its
financial and legal advisors to continue to pursue an agreement with PSS on
terms acceptable to it.
On December 12, 1997, members of the Gulf South Board met informally in
Chicago, Illinois with Mr. Kelly. Mr. Kelly made a presentation regarding,
among other things, the business of PSS, the potential synergies resulting from
a business combination, the strengths of each of the companies and the PSS
strategic vision of a combined company. Mr. Kelly also addressed questions and
comments of the Gulf South directors concerning PSS and the proposed
combination.
On December 13, 1997, Gulf South senior management and representatives from
NationsBanc Montgomery had further discussions regarding valuation issues
relevant to negotiation of a mutually acceptable exchange ratio and other terms
and conditions of a potential business combination.
On December 13 and 14, 1997, Gulf South legal advisors and PSS legal advisors
met and negotiated the terms of the Merger Agreement and related documents.
In the early evening of December 13, 1997, the Gulf South Board met by
telephone conference and reviewed the status of negotiations with respect to
the proposed exchange ratio. Gulf South legal advisors summarized the major
open issues relating to the Merger Agreement, a draft of which had been
previously distributed to the Gulf South Board. Senior management also reported
on the status of discussions with PSS and its financial advisors regarding the
proposed exchange ratio. After considerable discussion, the Gulf South Board
instructed senior management and its financial and legal advisors to continue
to pursue an agreement with PSS on acceptable terms.
In the late evening of December 13, 1997, the Gulf South Board met by
telephone conference where it was reported that a preliminary agreement had
been reached with respect to the exchange ratio, subject to approval by the PSS
and Gulf South Boards. NationsBanc Montgomery made a presentation to the Gulf
South Board regarding the exchange ratio, reviewed the rationale and potential
benefits and risks associated with the transaction, and reviewed a detailed
financial analysis and pro forma and other information with respect to the
proposed Merger. Gulf South legal advisors reported on the status of
negotiations with respect to the open issues in the Merger Agreement and
related documents. The Gulf South Board instructed its legal advisors to
continue to pursue an agreement with PSS on terms acceptable to it.
In the afternoon of December 14, 1997, the Gulf South Board met by telephone
conference with its legal and financial advisors to review the proposed
definitive Merger Agreement and related documents. Senior management and legal
counsel to Gulf South reported that the open issues discussed with the Gulf
South Board the previous evening had been satisfactorily resolved. In addition,
NationsBanc Montgomery delivered its opinion that, as of such date, the
Exchange Ratio was fair to the stockholders of Gulf South from a financial
point of view. It was also reported that management of both companies had
determined that pooling-of interests accounting treatment was available for the
proposed Merger and that the companies' accountants concurred with this
conclusion. At the conclusion of this meeting, the Gulf South Board unanimously
approved the Merger Agreement and related documents.
Also on December 14, 1997, the PSS Board met in Jacksonville, Florida.
Representatives of BT Alex. Brown and legal advisors to PSS were present.
Copies of the proposed definitive Merger Agreement and related documents were
available and were summarized by legal counsel. BT Alex. Brown rendered its
opinion to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the Exchange Ratio was fair from a
financial point of view to PSS, and reviewed with the PSS Board the financial
analyses performed by BT Alex. Brown in connection with such opinion. After a
discussion of the transaction, the Board unanimously approved the transaction
and authorized management to enter into the Merger Agreement and related
documents.
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On December 14, 1997, following final approval by the Gulf South Board and
PSS Board, the Merger Agreement and related agreements were executed.
On December 15, 1997, the parties issued a joint press release announcing the
Merger.
REASONS FOR THE MERGER
PSS. The PSS Board of Directors, after consideration of relevant business,
financial, legal and market factors, including the compatibility of the
operations and management of Gulf South and PSS, and the future prospects of
Gulf South and PSS, has concluded that the Merger is in the best interests of
PSS and its stockholders. The PSS Board believes that the Merger is desirable
for the following reasons, among others:
(i) The PSS Board of Directors believes that the Merger would create the
leading distributor of medical products to the alternate-site market and,
in the opinion of the PSS Board, is compatible with PSS' strategy of
pursuing acquisitions of medical products distributors.
(ii) The PSS Board considered that, through the Merger, PSS believes that
it can leverage its core competencies in sales and marketing and
information technology in the long-term care and home-care markets.
(iii) The PSS Board considered Gulf South's capabilities in materials
management and operations, among other things, as potential benefits to
PSS' existing business and diagnostic imaging businesses.
(iv) The PSS Board of Directors considered that the long-term care and
home-care markets are substantial and that the Merger may enhance PSS'
future growth opportunities.
(v) The PSS Board believes that the Merger could result in cost savings
and operating synergies and could be accretive to PSS' future earnings.
(vi) The PSS Board considered the benefit of the addition of Mr. Hixon,
with his experience in marketing and distributing medical products, to the
PSS Board of Directors and PSS' management team.
(vii) The PSS Board considered the structure of the transaction as a
stock-for-stock exchange as opposed to a transaction or series of
transactions in which PSS' cash on hand would be utilized, thus preserving
PSS' financial flexibility by retaining existing cash on hand for use in
other potential acquisitions.
(viii) The PSS Board considered that the transaction would be accounted
for as a pooling of interests and, as such, would avoid the recognition of
any goodwill by PSS, thereby avoiding any future expenses associated with
the amortization of such goodwill.
(ix) The PSS Board considered the opinion of BT Alex. Brown which was
delivered to the PSS Board on December 14, 1997, to the effect that, as of
such date and based upon and subject to certain matters stated in such
opinion, the Exchange Ratio was fair, from a financial point of view, to
PSS.
In addition to the perceived benefits of the proposed Merger, the PSS Board
also considered certain risks, including the risk that PSS would not
successfully integrate the operations of the two businesses, recognize
potential cost savings or enhance future earnings prospects, the substantial
charges to be incurred by the combined company in connection with the Merger,
and other risks described under "Risk Factors," herein. Although there can be
no assurance such adverse consequences will not occur, the PSS Board, after
consideration of PSS' record of successfully integrating past acquisitions,
believed that the potential benefits outweighed the potential risks of the
Merger.
The foregoing discussion sets forth the material factors and information
considered and given weight by the Board of Directors of PSS. In view of the
variety of factors considered in connection with its evaluation of the Merger,
the PSS Board did not find it necessary or practicable to and did not assign
relative weights to or otherwise quantify the specific factors considered in
reaching its determination. In addition, individual members of the PSS Board
may have given different weights to different factors.
FOR THE FOREGOING REASONS, AMONG OTHERS, THE BOARD OF DIRECTORS OF PSS
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF PSS VOTE FOR THE APPROVAL OF
THE ISSUANCE AND THE STOCK AMENDMENT.
Gulf South. The Gulf South Board of Directors, after consideration of
relevant business, financial, legal and market factors, including the
compatibility of the operations and management of Gulf South and PSS, and the
future prospects of Gulf South and PSS, has concluded that the Merger is in the
best interests of Gulf South
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and its stockholders. The Gulf South Board believes that the Merger is
desirable for the following reasons, among others:
(i) The Merger will result in the creation of a combined company with
significantly greater resources and greater sales and marketing capability
than those of Gulf South alone, and may enable the combined company to
compete more effectively with competitors having greater resources than
Gulf South.
(ii) There is a likelihood that other companies will expand in the
medical supply distribution industry either internally or through
acquisitions, making purchasing and administrative economies of scale such
as those expected to result from the Merger an increasingly important
element in a successful medical supply distribution company.
(iii) PSS has a large, highly trained sales force that is expected to
complement Gulf South's sales resources. PSS focuses not only on recruiting
but also on training and motivating its personnel and uses a consultative
selling approach. The combined sales resources may provide expanded
opportunities to market Gulf South's products to new and existing
customers.
(iv) PSS' ongoing commitment to and investment in information technology
may enable Gulf South to increase its operating efficiencies and provide
enhanced customer service.
(v) The Gulf South stockholders will have the opportunity to participate
in the potential growth of the combined company after the Merger.
(vi) The Exchange Ratio represented a premium of approximately 38.5% over
the closing market price of Gulf South Common stock on the business day
preceding execution of the Agreement.
In the course of its deliberations during Gulf South Board meetings held on
December 8, 11, 13 and 14, 1997, the Gulf South Board met with and questioned
senior management and its financial and legal advisors and reviewed the
anticipated benefits summarized above and a number of additional factors
relevant to the proposed Merger. In particular, the Gulf South Board
considered, among other things, the following factors: (i) historical
information concerning Gulf South's and PSS' respective businesses, prospects,
financial performance and condition, operations, management and competitive
position, including public reports filed with the Commission concerning results
of operations during the most recent fiscal year and quarter for each company;
(ii) management's view as to the financial condition, results of operations and
businesses of Gulf South and PSS before and after giving effect to the Merger,
based on management due diligence and publicly available earnings estimates;
(iii) current market conditions and historical market prices, volatility and
trading information with respect to Gulf South and PSS Common Stock; (iv) the
consideration to be received by Gulf South stockholders in the Merger and the
relationship between the market value of PSS Common Stock to be issued in
exchange for Gulf South Common Stock and a comparison of comparable merger
transactions; (v) the belief that the terms of the Agreement, including the
parties' representations, warranties and covenants, and the conditions to their
respective obligations, are reasonable; (vi) management's view as to the
prospects of Gulf South as an independent company; (vii) the strengths and
capabilities of PSS' senior officers; (viii) management's view as to the
potential for other third parties to acquire Gulf South or PSS; (ix) the impact
of the Merger on Gulf South's customers, suppliers and employees; (x) reports
from management and its financial and legal advisors as to the results of their
due diligence investigation of PSS; (xi) the potential long-term appreciation
in value to Gulf South stockholders; (xii) the potential market strength of the
combined company; and (xiii) the compatibility of the respective business
philosophies and corporate cultures of Gulf South and PSS. In its discussions,
the Gulf South Board also considered the terms of the proposed Merger Agreement
regarding Gulf South's and PSS' respective rights to consider and negotiate
other acquisition proposals in certain circumstances, as well as the possible
effects of the provisions regarding the termination fees and the Stock Option
Agreements. In addition, the Gulf South Board noted that the Merger is expected
to be accounted for as a pooling of interests and no goodwill is expected to be
created of the combined company as a result thereof and that three of the ten
initial seats on the combined company's Board of Directors will be held by Gulf
South Board members following the Merger. The Gulf South Board considered the
opinion of NationsBanc Montgomery delivered at the December 14, 1997 meeting of
the Gulf South Board, which concluded that the consideration to be received by
the stockholders of Gulf South pursuant to the Merger was fair to such
stockholders from a financial point of view as of such date.
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A copy of NationsBanc Montgomery's opinion is included as Annex G, and
stockholders are urged to review this opinion carefully.
The Gulf South Board also identified and considered a variety of potentially
negative factors in its deliberations concerning the Merger, including, but not
limited to: (i) the risk that the cost savings and synergies and other
potential benefits sought in the Merger might not be fully realized; (ii) the
possibility that the Merger might not be consummated and the effect of public
announcement of the Merger on Gulf South's sales and operating results and its
ability to attract and retain key management, marketing and sales personnel;
(iii) the potential dilutive effect of the issuance of PSS Common Stock in the
Merger; (iv) the substantial charges to be incurred by the combined company in
connection with the Merger, including costs of integrating the businesses and
transaction expenses arising from the Merger; (v) the risk that despite the
efforts of the combined company, key customers may not be retained or may not
react positively to the Merger or to the planned changes to integrate the
businesses, or management, marketing and sales personnel may not remain
employed by the combined company; and (vi) the other risks described under
"Risk Factors" herein. The Gulf South Board believed that certain of these
risks could be avoided or mitigated by the combined company and that, overall,
these risks were outweighed by the potential benefits of the Merger.
The foregoing discussions of the information and factors considered by the
Gulf South Board is not intended to be exhaustive but is believed to include
all material factors considered by the Gulf South Board. In view of the variety
of factors considered in connection with its evaluation of the Merger, the Gulf
South Board did not find it practicable to, and did not, quantify or otherwise
assign relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the Gulf South Board may have
given different weight to different factors.
THE BOARD OF DIRECTORS OF GULF SOUTH UNANIMOUSLY RECOMMENDS THAT THE GULF
SOUTH STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND CONSUMMATION
OF THE TRANSACTIONS CONTEMPLATED THEREIN.
OPINIONS OF FINANCIAL ADVISORS
Opinion of PSS' Financial Advisor
PSS engaged BT Alex. Brown to act as its exclusive financial advisor in
connection with the Merger. On December 14, 1997, at a meeting of the PSS Board
of Directors held to evaluate the proposed Merger, BT Alex. Brown rendered to
the PSS Board an opinion dated December 14, 1997 to the effect that, as of such
date and based upon and subject to certain matters stated in such opinion, the
Exchange Ratio was fair from a financial point of view to PSS. No limitations
were imposed by the Board of Directors of PSS upon BT Alex. Brown with respect
to the investigations made or the procedures followed by it in rendering its
opinion.
The full text of the written opinion of BT Alex. Brown, dated December 14,
1997, which sets forth the assumptions made, matters considered and limitations
of the review undertaken, is attached as Annex F to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. BT ALEX. BROWN'S
OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF PSS, ADDRESSES ONLY THE
FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE PSS SPECIAL MEETING. The summary of the opinion of BT Alex.
Brown in this Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion.
In connection with its opinion, BT Alex. Brown reviewed certain publicly
available financial information and other information concerning PSS and Gulf
South and certain internal analyses and other information furnished to BT Alex.
Brown by PSS and Gulf South. BT Alex. Brown also held discussions with members
of the senior management of PSS and Gulf South regarding the business and
prospects of PSS and Gulf South and the joint prospects of a combined company.
In addition, BT Alex. Brown (i) reviewed the reported prices and trading
activity for PSS Common Stock and Gulf South Common Stock, (ii) compared
certain financial and stock market information for PSS and Gulf South with
similar information for certain publicly traded companies, (iii) reviewed the
financial terms of certain recent business combinations which BT Alex. Brown
deemed comparable in whole or in part, (iv) reviewed the terms of the Merger
Agreement and certain related documents, and
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(v) performed such other studies and analyses and considered such other factors
as BT Alex. Brown deemed appropriate.
As described in its opinion, BT Alex. Brown assumed and relied upon, without
independent verification, the accuracy, completeness and fairness of the
information furnished to or otherwise reviewed by or discussed with BT Alex.
Brown for purposes of its opinion. With respect to the information relating to
the prospects of PSS, Gulf South and the combined company, BT Alex. Brown
assumed that such information reflected the best currently available judgments
and estimates of the management of PSS and Gulf South as to the likely future
financial performance of their respective companies and of the combined
company. BT Alex. Brown also assumed, with the consent of the PSS Board of
Directors, that the Merger would qualify for pooling-of-interests accounting
treatment. BT Alex. Brown did not make nor was it provided with an independent
evaluation or appraisal of the assets or liabilities of PSS or Gulf South. BT
Alex. Brown's opinion does not constitute an opinion as to the price at which
the PSS Common Stock will actually trade at any time. BT Alex. Brown's opinion
was based on market, economic and other conditions as they existed and could be
evaluated as of the date of its opinion. Although BT Alex. Brown evaluated the
Exchange Ratio from a financial point of view, the type and amount of
consideration payable in the Merger was determined through negotiation between
PSS and Gulf South.
The following is a summary of the material analyses and factors considered by
BT Alex. Brown in connection with its opinion to the PSS Board of Directors
dated December 14, 1997:
Analysis of Selected Public Companies. BT Alex. Brown compared certain
financial and stock market information for Gulf South with similar information
for the following selected publicly held companies in the health care supplies
and products distribution industry: Advance Paradigm, Inc., Allegiance
Corporation, Cardinal Health, Inc., Express Scripts, Inc., PSS, Henry Schein,
Inc., McKesson Corporation, Omnicare, Inc., Owens & Minor, Inc., Patterson
Dental Company, and Vitalink Pharmacy Services, Inc. (collectively, the
"Selected Companies"). BT Alex. Brown calculated equity market values relative
to each company's net income for the latest 12 months ended September 30, 1997
and estimated earnings per share ("EPS") for calendar years 1998 and 1999, and
adjusted market values (equity market value, plus debt, less cash and
equivalents) relative to each company's revenues, earnings before interest,
taxes, depreciation and amortization ("EBITDA") and earnings before interest
and taxes ("EBIT") for the latest 12 months ended September 30, 1997. All
multiples were based on closing stock prices on December 12, 1997. Calendar
1998 and 1999 EPS estimates for the Selected Companies were based on analysts'
estimates as reported by I/B/E/S, a market research database, and EPS estimates
for Gulf South were based both on analysts' estimates as reported by I/B/E/S
and internal estimates of the management of Gulf South. This analysis indicated
a range of multiples for the Selected Companies of latest 12 months net income
and estimated calendar 1998 and 1999 EPS of 25.1x to 60.6x (with a mean of
37.9x), 18.1x to 28.4x (with a mean of 23.7x) and 15.6x to 22.2x (with a mean
of 19.2x), respectively, and latest 12 months revenues, EBITDA and EBIT of 0.2x
to 3.3x (with a mean of 1.1x), 8.6x to 31.1x (with a mean of 18.0x) and 13.4x
to 41.5x (with a mean of 22.8x), respectively. Based on the closing price of
PSS Common Stock on December 12, 1997, the Exchange Ratio equated to implied
multiples for Gulf South of latest 12 months net income and estimated calendar
1998 and 1999 EPS of 43.2x (latest 12 months net income), 29.2x (estimated
calendar 1998 EPS based on I/B/E/S estimates), 27.0x (estimated calendar 1998
EPS based on estimates of Gulf South management), and 23.8x (estimated calendar
1999 EPS based on I/B/E/S estimates) and 21.3x (estimated calendar 1999 EPS
based on estimates of Gulf South management), respectively, and latest 12
months revenues, EBITDA and EBIT of 2.5x, 26.0x and 27.5x, respectively.
Analysis of Recent Mergers and Acquisitions. BT Alex. Brown reviewed the
purchase price and implied transaction multiples in the following selected
merger and acquisition transactions announced or effected in the health care
supplies and products distribution industry (acquiror/target): McKesson
Corporation/AmeriSource Corporation, Cardinal Health, Inc./Bergen Brunswig
Corporation, Henry Schein, Inc./Sullivan Dental Products, Inc., Henry Schein,
Inc./Micro Bio-Medics, Inc., Cardinal Health, Inc./Owen Healthcare, Inc.,
Cardinal Health, Inc./PCI Services, Inc., Cardinal Health, Inc./Pyxis
Corporation, and Bergen Brunswig Corporation/Durr-Fillauer
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Medical, Inc. (collectively, the "Selected Transactions"). All multiples were
based on publicly available information at the time of announcement of such
transaction. This analysis indicated a range of (i) implied equity market value
multiples for the Selected Transactions of latest 12 months net income and one-
year forward net income of 16.3x to 62.7x (with a mean of 34.9x) and 21.8x to
30.9x (with a mean of 25.6x), respectively, and (ii) implied adjusted market
value multiples for the Selected Transactions of latest 12 months revenues,
EBITDA and EBIT of 0.3x to 4.9x (with a mean of 1.3x), 8.5x to 22.7x (with a
mean of 16.2x) and 11.8x to 30.9x (with a mean of 20.2x), respectively. Based
on the closing price of PSS Common Stock on December 12, 1997, the Exchange
Ratio equated to implied multiples for Gulf South of latest 12 months net
income and one-year forward net income of 43.2x (latest 12 months net income)
and 27.5x (estimated one-year forward net income based on estimates of Gulf
South management), respectively, and latest 12 months revenues, EBITDA and EBIT
of 2.5x, 26.0x and 27.5x, respectively.
Discounted Cash Flow Analyses. BT Alex. Brown performed separate discounted
cash flow analyses of Gulf South and PSS to estimate the present value of the
stand-alone, unlevered, after-tax free cash flows that each of Gulf South and
PSS could generate over the fiscal years 1997 through 2002 (in the case of Gulf
South) and the fiscal years 1998 through 2003 (in the case of PSS), based on
internal estimates of the management of Gulf South and PSS. The stand-alone
discounted cash flow analyses were determined by (i) adding (x) the present
value at September 30, 1997 of the projected free cash flows of Gulf South over
the fiscal years 1997 through 2002 and of PSS over the fiscal years 1998
through 2003 and (y) the present value at September 30, 1997 of the estimated
terminal values of Gulf South in fiscal year 2002 and of PSS in fiscal year
2003 and (ii) subtracting the current net debt of each of Gulf South and PSS at
September 30, 1997. The range of estimated terminal values for each of Gulf
South and PSS was calculated by applying terminal value multiples ranging from
11.0x to 17.0x to the projected fiscal year 2002 EBITDA of Gulf South and the
projected fiscal year 2003 EBITDA of PSS, respectively. The cash flows and
terminal values of each of Gulf South and PSS were discounted to present value
using discount rates ranging from 14% to 18%. This analysis yielded equity
reference ranges for Gulf South Common Stock and PSS Common Stock of
approximately $31.12 to $56.16 per share and approximately $20.37 to $37.00 per
share, respectively.
Premiums Paid Analysis. BT Alex. Brown reviewed the (i) premiums paid in 81
change of control transactions with transaction values between $500.0 million
and $1.0 billion effected since January 1, 1994, which indicated a range of
premiums, based on the target company's stock price one-month prior, and one-
day prior, to public announcement of the transaction of approximately (27.5)%
to 191.7% (with a mean of 46.8%) and (24.3)% to 118.5% (with a mean of 31.6%),
respectively, (ii) premiums paid in 16 change of control transactions with
transaction values between $500.0 million and $1.0 billion involving health
care companies, which indicated a range of premiums, based on the target
company's stock price one-month prior, and one-day prior, to public
announcement of the transaction of approximately 15.7% to 121.9% (with a mean
of 58.1%) and 4.0% to 118.5% (with a mean of 44.3%), respectively, and (iii)
premiums paid in the Selected Transactions described above in "--Analysis of
Recent Mergers and Acquisitions," which indicated a range of premiums based on
the target company's stock price one-month prior, and one-day prior, to public
announcement of the transaction of approximately 10.9% to 78.7% (with a mean of
48.4%) and 11.4% to 62.7% (with a mean of 37.9%), respectively. The premiums
payable in the Merger based on the closing price of Gulf South Common Stock
one-month prior, and one-day prior, to public announcement of the Merger were
approximately 22.7% and 38.5%, respectively.
Historical Exchange Ratio Analysis. BT Alex. Brown reviewed the historical
market prices for PSS Common Stock and Gulf South Common Stock and the implied
historical exchange ratio of Gulf South Common Stock and PSS Common Stock (the
closing price of Gulf South Common Stock divided by the closing price of PSS
Common Stock) based on such market prices six months, three months, 20 trading
days, 10 trading days prior to, and as of, December 12, 1997. The average
exchange ratios for such time periods and as of such dates were 1.34, 1.40,
1.37, 1.35, and 1.26, respectively, as compared to the Exchange Ratio of 1.75.
Contribution Analysis. BT Alex. Brown analyzed the relative contributions of
PSS and Gulf South to, among other things, the revenues, gross profit, EBITDA,
EBIT and net income of the pro forma combined
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company for the latest 12 months ended September 30, 1997, and to the estimated
net income of the pro forma combined company for calendar years 1998 and 1999
based on internal estimates of the management of PSS and Gulf South, and
compared such contributions to the pro forma ownership of the current holders
of PSS Common Stock in the pro forma combined company. This analysis indicated
that (i) for the latest 12 months ended September 30, 1997, PSS would have
contributed approximately 77.8% of the revenues, 80.5% of the gross profit,
60.0% of the EBITDA, 55.3% of the EBIT and 49.3% of the net income of the pro
forma combined company; and (ii) in calendar years 1998 and 1999, PSS would
contribute approximately 59.7% and 61.9%, respectively, of the net income of
the pro forma combined company. Based on the Exchange Ratio, current holders of
PSS Common Stock would own approximately 57.7% of the pro forma combined
company upon consummation of the Merger.
Pro Forma Merger Analysis. BT Alex. Brown analyzed the pro forma effects of
the Merger on the EPS of PSS in calendar years 1998 and 1999 based both on
I/B/E/S estimates and internal estimates of the management of PSS and Gulf
South, both before and after giving effect to certain cost savings and other
potential synergies anticipated by the management of PSS and Gulf South to
result from the Merger (excluding non-recurring costs resulting from the
Merger). This analysis indicated that the Merger could be dilutive to the EPS
of PSS in calendar years 1998 and 1999 before giving effect to such potential
cost savings and synergies, and could be accretive to the EPS of PSS in
calendar years 1998 and 1999 after giving effect to such potential cost savings
and synergies. The actual operating or financial results achieved by the pro
forma combined company may vary from projected results and variations may be
material as a result of business and operational risks, the timing and amount
of synergies, the costs associated with achieving such synergies and other
factors.
Other Analyses. In rendering its opinion, BT Alex. Brown also reviewed and
considered, among other things: (i) historical and projected financial data for
PSS and Gulf South, (ii) historical market prices and trading volumes for PSS
Common Stock and Gulf South Common Stock relative to the Selected Companies and
the S&P 500 Index, (iii) historical forward price to earnings multiples of PSS
and Gulf South relative to the S&P 500 Index, (iv) selected analysts' reports
on PSS and Gulf South, including growth rate estimates of such analysts for PSS
and Gulf South, and (v) the pro forma ownership of PSS, Gulf South and the
combined company.
The summary set forth above does not purport to be a complete description of
the opinion of BT Alex. Brown to the PSS Board of Directors or the financial
analyses performed and factors considered by BT Alex. Brown in connection with
its opinion. The preparation of a fairness opinion is a complex analytic
process involving various determinations as to the most appropriate and
relevant methods of financial analyses and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. BT Alex. Brown believes that its analyses
and the summary set forth above must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, or
selecting portions of the above summary, without considering all factors and
analyses, could create a misleading or incomplete view of the processes
underlying such analyses and opinion. In performing its analyses, BT Alex.
Brown made numerous assumptions with respect to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of PSS and Gulf South. No company, transaction or
business used in such analyses as a comparison is identical to PSS, Gulf South,
or the proposed Merger, nor is an evaluation of the results of such analyses
entirely mathematical; rather, such analyses involve complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the acquisition, public trading or other values of the
companies, business segments or transactions being analyzed. The estimates
contained in such analyses and the ranges of valuations resulting from any
particular analysis are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. BT Alex. Brown's
opinion and financial analyses were only one of many factors considered by the
PSS Board of Directors in its evaluation of the proposed Merger and should not
be viewed as determinative of the views of the Board of Directors or management
of PSS with respect to the Exchange Ratio or the Merger.
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BT Alex. Brown is an internationally recognized investment banking firm and,
as a customary part of its investment banking business, is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, private placements and valuations for
estate, corporate and other purposes. PSS selected BT Alex. Brown to serve as
its exclusive financial advisor based on BT Alex. Brown's reputation, expertise
and familiarity with PSS and its business. BT Alex. Brown previously has
provided various financing and financial advisory services to PSS, for which
services BT Alex. Brown has received customary compensation. BT Alex. Brown
maintains a market in PSS Common Stock and regularly publishes research reports
regarding the health care industry and the businesses and securities of PSS and
other publicly traded companies in the health care industry. In the ordinary
course of business, BT Alex. Brown and its affiliates may actively trade or
hold the securities of both PSS and Gulf South for their own account and the
accounts of customers and, accordingly, may at any time hold a long or short
position in securities of PSS and Gulf South.
Pursuant to the terms of BT Alex. Brown's engagement, PSS has agreed to pay
BT Alex. Brown, upon consummation of the Merger, an aggregate financial
advisory fee of $5.0 million. In addition, PSS has agreed to reimburse BT Alex.
Brown for its out-of-pocket expenses, including fees and disbursements of
counsel, and to indemnify BT Alex. Brown and certain related parties against
certain liabilities, including certain liabilities under the federal securities
laws, relating to, or arising out of, its engagement.
Opinion of Gulf South's Financial Advisor
Gulf South engaged NationsBanc Montgomery to act as its financial advisor in
connection with the Merger. NationsBanc Montgomery is a nationally recognized
firm and, as part of its investment banking activities, is regularly engaged in
the valuation of businesses and their securities in connection with merger
transactions and other types of acquisitions, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Gulf South selected
NationsBanc Montgomery as its financial advisor on the basis of its experience
and expertise in transactions similar to the Merger, its reputation in the
health care and investment communities and its existing investment banking
relationship with Gulf South.
At the December 14, 1997 meeting of Gulf South's Board of Directors,
NationsBanc Montgomery delivered its opinion that the consideration to be
received by the stockholders of Gulf South in the Merger was fair to such
stockholders from a financial point of view, as of the date of such opinion.
NationsBanc Montgomery did not determine the form or amount of consideration to
be received by Gulf South's stockholders in the Merger. The amount of such
consideration was agreed to as a result of negotiations between Gulf South and
PSS. No limitations were imposed by Gulf South on NationsBanc Montgomery with
respect to the investigations made or procedures followed in rendering its
opinion.
THE FULL TEXT OF NATIONSBANC MONTGOMERY'S WRITTEN OPINION TO THE GULF SOUTH
BOARD OF DIRECTORS, DATED DECEMBER 14, 1997, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW UNDERTAKEN BY
NATIONSBANC MONTGOMERY, IS ATTACHED HERETO AS ANNEX G AND IS INCORPORATED
HEREIN BY REFERENCE. THE FOLLOWING SUMMARY OF NATIONSBANC MONTGOMERY'S OPINION
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION,
WHICH SHOULD BE READ CAREFULLY AND IN ITS ENTIRETY. NATIONSBANC MONTGOMERY'S
OPINION IS ADDRESSED TO THE GULF SOUTH BOARD OF DIRECTORS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE GULF SOUTH SPECIAL MEETING. IN FURNISHING SUCH OPINION,
NATIONSBANC MONTGOMERY DOES NOT ADMIT THAT IT IS AN EXPERT WITHIN THE MEANING
OF SECTION 11 OF THE SECURITIES ACT NOR DOES IT ADMIT THAT ITS OPINION
CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11 OF THE
SECURITIES ACT, AND STATEMENTS TO SUCH EFFECT ARE INCLUDED IN NATIONSBANC
MONTGOMERY'S OPINION.
In connection with its opinion, NationsBanc Montgomery, among other things:
(i) reviewed certain publicly available financial and other data with respect
to Gulf South and PSS, including the consolidated financial statements for
recent years and interim periods to September 30, 1997 and certain other
relevant financial and
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operating data relating to Gulf South and PSS made available to NationsBanc
Montgomery from published sources and from the internal records of Gulf South
and PSS; (ii) reviewed the financial terms and conditions of the Merger
Agreement; (iii) reviewed certain publicly available information concerning the
trading of, and the trading market for, Gulf South Common Stock and PSS Common
Stock; (iv) compared Gulf South and PSS from a financial point of view with
certain other companies in the medical products distribution industry which
NationsBanc Montgomery deemed to be relevant; (v) considered the financial
terms, to the extent publicly available, of selected recent business
combinations of companies in the medical products distribution industry which
NationsBanc Montgomery deemed to be comparable, in whole or in part, to the
Merger; (vi) reviewed and discussed with representatives of the management of
Gulf South and PSS certain information of a business and financial nature
regarding Gulf South and PSS, furnished to NationsBanc Montgomery by them,
including financial forecasts and related assumptions of Gulf South and PSS;
(vii) made inquiries regarding and discussed the Merger and the Merger
Agreement and other matters related thereto with Gulf South's counsel; and
(viii) performed such other analyses and examinations as NationsBanc Montgomery
deemed appropriate.
In connection with its review, NationsBanc Montgomery did not assume any
obligation independently to verify the foregoing information and relied on such
information being accurate and complete in all material respects. With respect
to the financial forecasts for Gulf South and PSS provided to NationsBanc
Montgomery by their respective managements, upon their advice and with Gulf
South's consent, NationsBanc Montgomery assumed for purposes of its opinion
that the forecasts, including the assumptions regarding synergies, were
reasonably prepared on bases reflecting the best available estimates and
judgments of their respective managements at the time of preparation as to the
future financial performance of Gulf South and PSS and that they provided a
reasonable basis upon which NationsBanc Montgomery could form its opinion.
NationsBanc Montgomery also assumed that there were no material changes in Gulf
South's or PSS' assets, financial condition, results of operations, business or
prospects since the respective dates of their last financial statements made
available to NationsBanc Montgomery. NationsBanc Montgomery assumed that the
Merger would be consummated in a manner that complies in all respects with the
applicable provisions of the Securities Act, the Exchange Act and all other
applicable federal and state statutes, rules and regulations. In addition,
NationsBanc Montgomery did not assume responsibility for making an independent
evaluation, appraisal or physical inspection of any of the assets or
liabilities (contingent or otherwise) of Gulf South or PSS, nor was NationsBanc
Montgomery furnished with any such appraisals. Gulf South informed NationsBanc
Montgomery, and NationsBanc Montgomery assumed, that the Merger would be
recorded as a pooling of interests under generally accepted accounting
principles. Finally, NationsBanc Montgomery's opinion was based on economic,
monetary and market and other conditions as in effect on, and the information
made available to it as of, December 14, 1997. Accordingly, although subsequent
developments may affect NationsBanc Montgomery's opinion, NationsBanc
Montgomery has not assumed any obligation to update, revise or reaffirm its
opinion.
The following is a summary of the material analyses and factors considered by
NationsBanc Montgomery in connection with its opinion to the Gulf South Board
of Directors dated December 14, 1997.
Selected Comparable Public Company Analysis. NationsBanc Montgomery compared
the implied value of the consideration to be received by the stockholders of
Gulf South in the Merger to certain financial and stock market information of
sixteen publicly-traded companies engaged in the medical products distribution
business that NationsBanc Montgomery believed were comparable in certain
respects to Gulf South (the "Comparable Companies"). The Comparable Companies
included: Allegiance Corporation, Amerisource Health Corporation, Bergen
Brunswig Corporation, Bindley Western Industries Inc., Cardinal Health Inc.,
Graham-Field Health Products Inc., Henry Schein Inc., McKesson Corporation, NCS
Healthcare Inc., Omnicare Inc., Owens & Minor Inc., Patterson Dental Company,
PharMerica Inc., PSS, Suburban Ostomy Supply Company Inc., and Vitalink
Pharmacy Services Inc. The Comparable Companies were chosen by NationsBanc
Montgomery as companies that, based on publicly available data, possess general
business, operating and financial characteristics representative of companies
in the industry in which Gulf South operates, although NationsBanc Montgomery
recognizes that each of the Comparable Companies is distinguishable from Gulf
South in certain respects.
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For each of the Comparable Companies and Gulf South, NationsBanc Montgomery
obtained certain publicly available financial and stock market data, including
last twelve months ("LTM") revenue, projected calendar year 1998 earnings per
share, recently reported total debt and cash and cash equivalents, closing
stock price as of December 12, 1997, and the projected secular growth rate of
earnings. Calendar year 1998 and 1999 EPS estimates for the Comparable
Companies were based on analysts' estimates as reported by First Call, a market
research database, and EPS estimates for Gulf South and PSS were based on both
analysts' estimates as reported by First Call and internal estimates of the
managements of Gulf South and PSS, respectively. Projected secular growth rates
for the Comparable Companies and Gulf South were obtained from I/B/E/S
International, Inc. and Zacks Investment Research, Inc., market research
databases, and from NationsBanc Montgomery research.
NationsBanc Montgomery also compiled "aggregate value" for each of the
Comparable Companies and for Gulf South implied in the Merger. Aggregate value
is the total current equity value plus total debt less cash and cash
equivalents.
Based on this data, NationsBanc Montgomery calculated the following ratios
for each of the Comparable Companies, for PSS, and for Gulf South implied in
the Merger: current stock price to projected 1998 earnings per share ("1998
price/earnings ratio"); 1998 price/earnings ratio to secular growth rate; and
aggregate value to LTM revenue.
The 1998 price/earnings ratio for the Comparable Companies ranged from 17.1x
to 28.1x, and averaged 21.8x compared to 26.4x for PSS and 29.2x for Gulf South
implied in the Merger. The 1998 price/earnings ratio to secular growth rate for
the Comparable Companies ranged from 70.6% to 143.4% and averaged 106.4%,
compared to 145.8% for Gulf South implied in the Merger. The aggregate value to
LTM revenue for the Comparable Companies ranged from 0.1x to 3.0x and averaged
1.1x compared to 1.0x for PSS and 2.6x for Gulf South implied in the Merger.
Selected Comparable Mergers and Acquisitions Analysis. NationsBanc Montgomery
reviewed certain financial data for recently announced mergers and acquisitions
in the medical products distribution industry that were deemed to be comparable
to the Merger and in which the consideration paid was greater than $100 million
(the "Comparable Acquisitions"). The Comparable Acquisitions included McKesson
Corp.'s acquisition of General Medical Inc., Henry Schein Inc.'s acquisitions
of Micro Bio-Medics and Sullivan Dental Products, Inc. and Graham-Field Health
Products' acquisition of Fuqua Enterprises.
For each such transaction NationsBanc Montgomery calculated, among other
things, the ratio of aggregate value to LTM revenues, the ratio of aggregate
value to LTM earnings before interest and taxes ("EBIT"), and the ratio of
equity value to LTM earnings. All multiples were based on publicly available
information at the time of announcement of the Comparable Acquisitions. These
calculations yielded a range of aggregate values to LTM revenues of 0.5x to
1.2x with an average of 0.9x, a range of aggregate values to LTM EBIT of 15.8x
to 31.1x with an average of 20.7x, and a range of equity values to LTM earnings
of 22.8x to 51.8x with an average of 35.8x. NationsBanc Montgomery then
calculated, among other things, the same ratios implied in the Merger. The
calculations yielded, among other things, an aggregate value to LTM revenues of
2.6x, an aggregate value to LTM EBIT of 27.8x, and an equity value to LTM
earnings of 43.7x.
Premiums Paid Analysis. NationsBanc Montgomery reviewed the premiums paid in
ten transactions that were deemed to be comparable to the Merger with
transaction values between $100 million and $1 billion involving health care
services companies in the past two years. NationsBanc Montgomery analyzed the
following transactions: United HealthCare Corp./HealthWise of America, Cardinal
Health Inc./Pyxis Corp., FPA Medical Management/Sterling Healthcare, Cardinal
Health Inc./PCI Services Inc., Cardinal Health Inc./Owen Healthcare Inc., Sun
Healthcare Group Inc./Retirement Care Associates, Henry Schein Inc./Micro Bio-
Medics Inc., CRA Managed Care Inc./Occusystems, Alternative Living
Services/Sterling House Corp., and Henry Schein Inc./Sullivan Dental Products.
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In each of these transactions, NationsBanc Montgomery calculated the premiums
of the price paid by acquirors over the target company's stock price one day,
one week and four weeks prior to public announcement of the transaction. These
calculations yielded average premiums paid based on the target company's stock
price one day, one week and four weeks prior to public announcement of the
transaction of 32.0%, 37.7% and 37.3%, respectively. NationsBanc Montgomery
then calculated the premium to be paid in the Merger based on the Exchange
Ratio and the closing stock price of PSS Common Stock as of December 12, 1997
of $23.00 to Gulf South's stock prices one day, one week and four weeks prior
to public announcement of the Merger. These calculations yielded premiums paid
of 38.5%, 23.6% and 18.4%, respectively.
Contribution Analysis. NationsBanc Montgomery analyzed and compared the
respective contributions of Gulf South and PSS to the pro forma combined
company net income for calendar years 1998 and 1999 and to the pro forma
ownership of the respective stockholders in the combined company upon
consummation of the Merger. Based on publicly available analyst estimates for
Gulf South and PSS for calendar years 1998 and 1999, Gulf South would
contribute approximately 39.2% and 35.7%, respectively, of the projected net
income of the pro forma combined company. Based on internal estimates for Gulf
South and PSS for calendar years 1998 and 1999, Gulf South would contribute
approximately 40.6% and 38.3%, respectively, of the projected net income of the
pro forma combined company. Based on the Exchange Ratio, Gulf South's existing
stockholders would own approximately 42.4% of the pro forma combined company,
on a fully diluted basis, upon consummation of the Merger.
Pro Forma Merger Analysis. NationsBanc Montgomery analyzed the impact of the
Merger on PSS stockholders on a pro forma fully diluted EPS basis for calendar
years 1998 and 1999. NationsBanc Montgomery used publicly available analyst
estimates for calendar years 1998 and 1999 for PSS and Gulf South and performed
the analysis with and without giving effect to the synergies anticipated by the
managements of PSS and Gulf South to result from the Merger (excluding non-
recurring costs resulting from the Merger) in each year. The analysis indicated
that, for PSS stockholders, the Merger could be accretive in each of the years
analyzed with the realization of the synergies and the Merger could be dilutive
in each year without the realization of such synergies. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.
Discounted Cash Flow Analysis. NationsBanc Montgomery performed a discounted
cash flow analysis on certain projected financial statements that were provided
to NationsBanc Montgomery by the management of Gulf South.
In performing this analysis, NationsBanc Montgomery calculated the projected
stand-alone unlevered after-tax cash flows of Gulf South for the calendar years
1998 through 2004. NationsBanc Montgomery calculated Gulf South's terminal
values in calendar year 2004 based on aggregate value/EBIT multiples ranging
from 20.0x to 23.0x. The unlevered after-tax cash flows and the terminal values
were discounted to the present using discount rates ranging from 10.0% to
15.0%. This analysis yielded an equity value range for Gulf South of $28.53 to
$41.50 per fully diluted share.
The summary set forth above does not purport to be a complete description of
the presentation by NationsBanc Montgomery to the Gulf South Board of Directors
or the analyses performed by NationsBanc Montgomery. The preparation of a
fairness opinion is not necessarily susceptible to partial analysis or summary
description. NationsBanc Montgomery believes that its analyses and the summary
set forth above must be considered as a whole and that selecting portions of
its analyses and of the factors considered, without considering all analyses
and factors, would create an incomplete view of the process underlying the
analyses set forth in its presentation to the Gulf South Board of Directors. In
addition, NationsBanc Montgomery may have given various analyses more or less
weight than other analyses, and may have deemed various assumptions more or
less probable than other assumptions so that the ranges of valuations resulting
from any particular analysis described above should not be taken to be
NationsBanc Montgomery's view of the actual value of Gulf South. The fact that
any specific analysis has been referred to in the summary above is not meant to
indicate that such
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analysis was given greater weight than any other analysis. In arriving at its
opinion, NationsBanc Montgomery did not ascribe a specific range of values to
Gulf South, but rather made its determination as to the fairness, from a
financial point of view, of the consideration to be received by the holders of
the Gulf South Common Stock in the Merger on the basis of the financial and
comparative analyses described above.
In performing its analyses, NationsBanc Montgomery made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of Gulf South. The
analyses performed by NationsBanc Montgomery are not necessarily indicative of
actual values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. Such analyses were prepared solely
as part of NationsBanc Montgomery's analysis of the fairness of the transaction
contemplated by the Merger Agreement to the Gulf South stockholders and were
provided to the Gulf South Board of Directors in connection with the delivery
of NationsBanc Montgomery's opinion. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold
or the prices at which any securities may trade at the present time or at any
time in the future. NationsBanc Montgomery used in its analyses various
projections of future performance prepared by the management of Gulf South and
by research analysts. The projections are based on numerous variables and
assumptions which are inherently unpredictable and must be considered not
certain of occurrence as projected. Accordingly, actual results could vary
significantly from those set forth in such projections.
Pursuant to the terms of NationsBanc Montgomery's engagement, Gulf South has
agreed to pay NationsBanc Montgomery a fee equal to $3.5 million. Gulf South
paid NationsBanc Montgomery $150,000 upon rendering its opinion to the Gulf
South Board and will be obligated to pay NationsBanc Montgomery the remainder
of the fee upon the closing of the Merger. Accordingly, a significant portion
of NationsBanc Montgomery's fee is contingent upon the closing of the Merger.
Gulf South has also agreed to reimburse NationsBanc Montgomery for its
reasonable out-of-pocket expenses, including counsel fees, up to a maximum of
$50,000. Pursuant to a separate letter agreement, Gulf South has agreed to
indemnify NationsBanc Montgomery, its affiliates, and their respective
partners, directors, officers, agents, consultants, employees and controlling
persons against certain liabilities, including liabilities under federal
securities laws.
In the ordinary course of business, NationsBanc Montgomery actively trades
Gulf South Common Stock and PSS Common Stock for its own account and for the
accounts of customers and accordingly, may at any time hold a long or short
position in such securities. NationsBanc Montgomery also has in the past
performed certain investment banking services for Gulf South, which included
participation as an underwriter in Gulf South's initial public offering in
March 1994 and Gulf South's follow-on equity offerings in October 1994 and May
1996. NationsBanc Montgomery also has performed certain investment banking
services for PSS, which included participation as an underwriter in a debt
offering in October 1997.
EXCHANGE RATIO
The Merger Agreement provides that at the Effective Time of the Merger each
outstanding share of Gulf South Common Stock shall cease to be outstanding and
shall be converted into and exchanged for the right to receive 1.75 shares of
PSS Common Stock (the "Exchange Ratio"). The Exchange Ratio is a fixed ratio
and will not be adjusted in the event of any increase or decrease in the price
of either PSS Common Stock or Gulf South Common Stock. See "Summary--Market and
Market Prices" and "Risk Factors--Risks Relating to the Merger--Fixed Exchange
Ratio Despite Change in Relative Stock Prices" and "--Risks Relating to PSS,
Gulf South and the Combined Company--Quarterly Fluctuations in Operating
Results."
As of February 13, 1998, there were 16,354,964 shares of Gulf South Common
Stock outstanding. Based upon the foregoing, the shares of PSS Common Stock
issued to Gulf South stockholders in the Merger will constitute approximately
41.1% of the outstanding PSS Common Stock after the Merger, and the current PSS
stockholders will hold approximately 58.9% of the outstanding PSS Common Stock
after the Merger. See "Risk
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Factors--Risks Relating to the Merger--Dilution of Ownership Interest of
Current PSS Stockholders" and --Potential Adverse Market Effect on Issuance of
PSS Shares."
In addition, at the Effective Time, all options and warrants to purchase
shares of Gulf South Common Stock which are outstanding at such time, whether
or not then exercisable, will become options or warrants, respectively, to
purchase PSS Common Stock, and PSS will assume each such option or warrant (as
adjusted to reflect the Exchange Ratio). See "--Conversion of Stock Options and
Warrants."
In the event Gulf South or PSS changes the number of shares of Gulf South
Common Stock or PSS Common Stock, or other common stock equivalents, on a fully
diluted basis, issued and outstanding prior to the Effective Time, or declares
any stock split, stock dividend or similar recapitalization with respect to
such stock and the record date therefor shall be prior to the Effective Time,
the Exchange Ratio shall be proportionately adjusted; provided, however, that
no such adjustment shall occur as a result of the exercise of any presently
outstanding options or warrants of PSS or Gulf South.
FRACTIONAL SHARES
Pursuant to the terms of the Merger Agreement, each holder of shares of Gulf
South Common Stock exchanged pursuant to the Merger, who would otherwise have
been entitled to receive a fraction of a share of PSS Common Stock shall
receive, in lieu thereof, a cash payment (without interest) equal to the
fractional amount due multiplied by the average of the last sale price of a
share of PSS Common Stock on the Nasdaq National Market for the ten most recent
days that the PSS Common Stock has traded, ending on the last trading day
preceding the Effective Time.
CONVERSION OF STOCK OPTIONS AND WARRANTS
At the Effective Time, all rights with respect to Gulf South Common Stock
pursuant to stock options ("Gulf South Options") which are outstanding at the
Effective Time, whether or not then exercisable, will be converted into and
become rights with respect to PSS Common Stock, and PSS will assume each Gulf
South Option, in accordance with the terms of the stock option plan under which
it was issued and the stock option agreement by which it is evidenced, except
that from and after the Effective Time: (i) PSS and its Compensation Committee
shall be substituted for Gulf South and the Committee of Gulf South's Board of
Directors administering such Gulf South stock plans; (ii) each Gulf South
Option assumed by PSS may be exercised solely for shares of PSS Common Stock;
(iii) the number of shares of PSS Common Stock subject to such Gulf South
Option will be equal to the number of shares of Gulf South Common Stock subject
to such Gulf South Option immediately prior to the Effective Time multiplied by
the Exchange Ratio, rounded to the nearest whole share; and (iv) the per share
exercise price under each such Gulf South Option will be adjusted by dividing
the per share exercise price under each such Gulf South Option by the Exchange
Ratio and rounding up to the nearest cent. In addition, each Gulf South Option
will, in accordance with its terms, be subject to further adjustment as
appropriate to reflect any stock split, stock dividend, recapitalization or
other similar transaction subsequent to the Effective Time.
At the Effective Time, all rights with respect to Gulf South Common Stock
pursuant to warrants ("Gulf South Warrants") which are outstanding at the
Effective Time, whether or not then exercisable, will be converted into and
become rights with respect to PSS Common Stock, and PSS will assume each Gulf
South Warrant, in accordance with the terms of the warrant agreement by which
it is evidenced, provided that (i) each Gulf South Warrant assumed by PSS may
be exercised solely for shares of PSS Common Stock and (ii) the number of
shares of PSS Common Stock subject to such Gulf South Warrant will be equal to
the number of shares of Gulf South Common Stock subject to such Gulf South
Warrant immediately prior to the Effective Time multiplied by the Exchange
Ratio. In addition, each Gulf South Warrant will, in accordance with its terms,
be subject to further adjustment as appropriate to reflect any stock split,
stock dividend, recapitalization or other similar transaction subsequent to the
Effective Time.
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At February 13, 1998, Gulf South Options to acquire approximately 924,755
shares of Gulf South Common Stock and Gulf South Warrants to acquire
approximately 450,000 shares of Gulf South Common Stock were outstanding. As
soon as practicable after the Effective Time, PSS has agreed to file a
registration statement on Form S-3 or Form S-8, as the case may be (or any
successor or other appropriate forms), with respect to the shares of PSS Common
Stock subject to such Gulf South Options and to use its reasonable best efforts
to maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such Gulf South Options remain outstanding.
In addition, as soon as practicable after the Effective Time, PSS has agreed to
file a registration statement or registration statements on Form S-3 (or any
successor or other appropriate form), with respect to the shares of PSS Common
Stock issuable upon exercise of the Gulf South Warrants and to use its
reasonable efforts, subject to the terms of the Gulf South warrant agreements,
to maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such warrant agreements require.
EFFECTIVE TIME
If the Merger Agreement is approved by the requisite vote of the Gulf South
stockholders, the Issuance and Stock Amendment are approved by the requisite
vote of the PSS stockholders, all other required consents and approvals are
received, and if the other conditions to the Merger are satisfied or waived (as
permitted), the Merger will be consummated and effected on the date and at the
time the Certificate of Merger, reflecting the Merger, is filed with the
Secretary of State of the State of Delaware (the "Effective Time"). See "--
Conditions to Consummation."
DISTRIBUTION OF PSS CERTIFICATES
Promptly after the Effective Time, PSS shall mail appropriate transmittal
materials to the holders of Gulf South Common Stock to use in effecting the
surrender and cancellation of certificates representing Gulf South Common Stock
in exchange for PSS Common Stock (which shall contain an affidavit for lost or
stolen stock certificates and which shall specify that delivery shall be
effected, and risk of loss and title to the certificates theretofore
representing Gulf South Common Stock shall pass, only upon proper delivery of
such certificates to PSS by the former stockholders of Gulf South). GULF SOUTH
STOCKHOLDERS SHOULD NOT SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL THEY
RECEIVE SUCH LETTER OF TRANSMITTAL AND INSTRUCTIONS. After the Effective Time,
each holder of Gulf South Common Stock issued and outstanding at the Effective
Time shall surrender the certificate or certificates representing such shares
to PSS and shall receive in exchange therefor the proper consideration, and the
certificates thus surrendered will be canceled. PSS shall not be obligated to
deliver the consideration to which any former holder of Gulf South Common Stock
is entitled until such holder surrenders such holder's certificate or
certificates representing such holder's shares for exchange. The certificate or
certificates so surrendered shall be duly endorsed as PSS may require. No party
shall be liable to a holder of Gulf South Common Stock for any property
delivered in good faith to a public official pursuant to any applicable
abandoned property law.
After the Effective Time, holders of certificates will have no rights with
respect to the Gulf South Common Stock represented thereby other than the right
to surrender such certificates and receive in exchange therefor the shares of
PSS Common Stock, if any, to which such holders are entitled, as described
above. In addition, no dividend or other distribution payable to holders of
record of PSS Common Stock will be paid to the holder of any Gulf South
certificates until such holder surrenders such certificates for exchange as
instructed. Subject to applicable law, upon surrender of the certificates, such
holder will receive the certificates representing the shares of PSS Common
Stock issuable upon the exchange or conversion of such Gulf South Common Stock,
all withheld dividends or other distributions (without interest), and any
withheld cash payments (without interest) to which such stockholder is
entitled.
If any certificate for PSS Common Stock is to be issued in a name other than
that in which the Gulf South certificate surrendered for exchange is issued,
the Gulf South certificate so surrendered shall be properly endorsed
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and otherwise in proper form for transfer, and the person requesting such
exchange shall affix any requisite stock transfer tax stamps to the
certificates surrendered, shall provide funds for their purchase, or shall
establish to the exchange agent's satisfaction that such taxes are not payable.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain anticipated federal income tax
consequences of the Merger. This summary is based on the federal income tax
laws now in effect and as currently interpreted; it does not take into account
possible changes in such laws or interpretations, including amendments to
applicable statutes or regulations or changes in judicial or administrative
rulings, some of which may have retroactive effect. This summary does not
purport to address all aspects of the possible federal income tax consequences
of the Merger and is not intended as tax advice to any person. In particular,
and without limiting the foregoing, this summary does not address the federal
income tax consequences of the Merger to stockholders in light of their
particular circumstances or status (for example, foreign persons, tax-exempt
entities, dealers in securities and insurance companies, among others). Nor
does this summary address any consequences of the Merger under any state,
local, estate, or foreign tax laws. Stockholders, therefore, are urged to
consult their own tax advisors as to the specific tax consequences to them of
the Merger, including tax return reporting requirements, the application and
effect of federal, foreign, state, local, and other tax laws, and the
implications of any proposed changes in tax laws.
A federal income tax ruling with respect to this transaction was not
requested from the Internal Revenue Service. Instead, consummation of the
Merger is conditioned upon receipt by PSS and Gulf South of an opinion from
Alston & Bird LLP, special counsel to PSS, concerning certain federal income
tax consequences of the proposed Merger under federal income tax law. Based
upon certain representations made by PSS and Gulf South, it is such firm's
opinion that:
(1) The Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code. Each of PSS, Merger Corp. and Gulf South will
be a party to a reorganization within the meaning of Section 368(b).
(2) No gain or loss will be recognized by PSS, Merger Corp. or Gulf South
as a consequence of the Merger.
(3) No gain or loss will be recognized by any Gulf South stockholder upon
the receipt of PSS Common Stock solely in exchange for its shares of Gulf
South Common Stock.
(4) The basis of the PSS Common Stock received by a Gulf South
stockholder in the transaction will be the same as the basis of the Gulf
South Common Stock surrendered in exchange therefor less the basis
allocated to any fractional share of PSS Common Stock settled by cash
payment.
(5) The holding period of the PSS Common Stock received by a Gulf South
stockholder (including the holding period of any fractional share interest)
will include the holding period of the Gulf South Common Stock surrendered
in exchange therefor, provided the Gulf South Common Stock was held as a
capital asset on the date of the exchange.
(6) The payment of cash to the Gulf South stockholder in lieu of
fractional shares of PSS Common Stock will be treated as if the fractional
shares were issued as part of the exchange and then redeemed by PSS. These
cash payments will be treated as having been received as distributions in
full payment in exchange for the fractional shares of PSS Common Stock
redeemed as provided in Section 302(a).
The opinion of Alston & Bird LLP is based upon certain representations made
by PSS and Gulf South. If these representations prove to be inaccurate or
incomplete in any material respect, then the tax consequences may differ from
those stated above, and the opinion of Alston & Bird LLP as to the federal
income tax consequences of the Merger may not be relied upon.
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THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. IT
DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE MERGER. GULF
SOUTH STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF
FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Gulf South's management and Board of Directors may be
deemed to have interests in the Merger in addition to their interests as
stockholders of Gulf South generally. In each case, the Gulf South Board either
aware of these facts and considered them, among other matters, in approving the
Merger Agreement and the transactions contemplated therein.
The Merger Agreement provides that PSS shall for a period of six years after
the Effective Time indemnify the present and former directors, officers,
employees and agents of Gulf South or any of its subsidiaries to the extent
provided under Gulf South's Amended and Restated Certificate of Incorporation,
as amended, and Amended and Restated Bylaws, as in effect on the date of the
Merger Agreement, with respect to matters occurring at or prior to the
Effective Time. PSS has also agreed to obtain "tail" directors' and officers'
liability insurance, covering those persons covered by Gulf South's directors'
and officers' liability insurance policy on the date of the Merger Agrement, to
be effective for a period of six years following the Effective Time; provided
that PSS shall not be required to spend more than 150% of the annual premium
currently paid for such coverage and provided that if the premium for such
coverage exceeds such amount, PSS shall purchase a policy with the greatest
coverage available for such 150% of the annual premium.
Effective immediately after consummation of the Merger, Mr. Thomas G. Hixon
and two additional persons who are currently directors of Gulf South shall be
named as directors of PSS. The current directors of Gulf South who do not
become directors of PSS will remain as directors of the surviving corporation
after the Effective Time. In addition, immediately after the consummation of
the Merger, Mr. Hixon will be elected President and Chief Operating Officer of
PSS, pursuant to an employment agreement to be entered into on terms
satisfactory to PSS and Mr. Hixon, which are expected to be similar to the
terms of employment agreements with other PSS senior executive officers.
Other than as described above, no director or executive officer of PSS or
Gulf South has any substantial interest, direct or indirect, in the Merger,
other than an interest arising from the ownership of Gulf South Common Stock,
in which case the director or officer receives no extra or special benefit not
shared on a pro rata basis by all other holders of Gulf South Common Stock.
NO SOLICITATION
Gulf South and PSS have agreed that, prior to the Effective Time or earlier
termination of the Merger Agreement, neither Gulf South nor PSS nor any of
their respective affiliates will, directly or indirectly, solicit any
Acquisition Proposal (as defined below). Unless the Board of Directors of Gulf
South or PSS determines in good faith that the failure to take such actions
would constitute a breach of fiduciary duties of the members of such Board of
Directors to its stockholders, neither Gulf South nor PSS nor any of their
respective affiliates, shall furnish any non-public information, negotiate with
respect to, or enter into any contract with respect to an Acquisition Proposal.
Each of Gulf South and PSS agrees to promptly advise the other of the details
surrounding any Acquisition Proposal.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Gulf South will be the surviving corporation resulting from the Merger and
will become a wholly-owned subsidiary of PSS. The Merger Agreement provides
that from and after the Effective Time, the Board of Directors of Gulf South
shall consist of the directors of Merger Corp. immediately prior to the
Effective Time,
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plus the current directors of Gulf South who do not become directors of PSS
together with such additional persons as may thereafter be elected. The Merger
Agreement further provides that the officers of Merger Corp. in office
immediately prior to the Effective Time, together with such additional persons
as may be elected, shall serve as the officers of Gulf South from and after the
Effective Time in accordance with the Amended and Restated Bylaws of Gulf
South.
Effective immediately after consummation of the Merger, PSS has agreed to (i)
increase the size of its Board of Directors to ten persons, (ii) accept the
resignations of four current PSS directors, (iii) appoint or cause to be
elected Mr. Thomas G. Hixon and two other current directors of Gulf South as
directors of PSS to serve in Class I, Class II and Class III, respectively, and
(iv) appoint a Nominating Committee composed of Mr. Hixon and such other
persons as the PSS Board of Directors shall determine for the purpose of
designating two independent persons to fill the two vacancies on the PSS Board
of Directors as soon as reasonably practicable. In addition, immediately after
consummation of the Merger, Mr. Hixon shall be elected to serve as President
and Chief Operating Officer of PSS.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligation of each of PSS, Merger Corp. and Gulf South to consummate the
Merger is subject to certain additional conditions, including the following:
(i) the stockholders of Gulf South shall have approved the Merger Agreement and
the stockholders of PSS shall have approved the Issuance and the Stock
Amendment; (ii) all consents and notifications to any regulatory authorities
and any third parties required for consummation of the Merger shall have been
obtained or made; (iii) no court or governmental authority shall have enacted
any law or order or taken any action which prohibits the transactions
contemplated by the Merger Agreement; (iv) the shares of PSS Common Stock
issuable pursuant to the Merger shall have been approved for quotation on the
Nasdaq National Market; (v) the Registration Statement shall have been declared
effective under the Securities Act and no stop orders suspending the
effectiveness of the Registration Statement shall have been issued; and (vi)
each of PSS and Gulf South shall have received an opinion from Alston & Bird
LLP that, among other things, the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code.
The obligation of PSS to consummate the Merger is subject to, among others,
the following conditions: (i) the representations and warranties of Gulf South
set forth in the Merger Agreement shall be true and correct in all material
respects as of the Effective Time; (ii) Gulf South shall have performed in all
material respects all of its agreements and covenants prior to the Effective
Time as contemplated by the Merger Agreement; (iii) receipt of an opinion of
counsel for Gulf South; (iv) receipt of a letter from Ernst & Young LLP
regarding the qualification of Gulf South as an entity for which pooling-of-
interests accounting is available and receipt of a letter from Arthur Andersen
LLP that the Merger will qualify for pooling-of-interests accounting treatment;
and (v) receipt of an employment agreement executed by Mr. Hixon related to the
employment of Mr. Hixon by PSS.
The obligation of Gulf South to consummate the Merger is subject to, among
others, the following conditions: (i) the representations and warranties of PSS
set forth in the Merger Agreement shall be true and correct in all material
respects as of the Effective Time; (ii) PSS shall have performed in all
material respects all of its agreements and covenants prior to the Effective
Time as contemplated by the Merger Agreement; (iii) receipt of an opinion of
counsel for PSS; and (iv) receipt of a letter from Ernst & Young LLP regarding
the qualification of Gulf South as an entity for which pooling-of-interests
accounting is available and receipt of a letter from Arthur Andersen LLP that
the Merger will qualify for pooling-of-interests accounting treatment.
No assurances can be provided as to when or if all of the conditions
precedent to the Merger can or will be satisfied or waived by the appropriate
party. As of the date of this Joint Proxy Statement/Prospectus, the parties
know of no reason to believe that any of the conditions set forth above will
not be satisfied.
The conditions to consummation of the Merger may be waived, in whole or in
part, to the extent permissible under applicable law, by the party for whose
benefit the condition has been imposed, without the approval of the PSS or Gulf
South stockholders. See "--Amendment, Waiver and Termination."
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REGULATORY APPROVALS
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
the applicable waiting period has expired or been terminated. PSS and Gulf
South filed notification and report forms under the HSR Act with the FTC and
the Antitrust Division on January 21, 1998. PSS and Gulf South's requests for
early termination of the waiting period under the HSR Act were granted and such
termination became effective on February 2, 1998. The requirements of the HSR
Act will be satisfied if the Merger is consummated within one year from the
termination of the waiting period. At any time before or after the Effective
Time, and notwithstanding the granting of early termination or the expiration
of the waiting period under the HSR Act, any state could take such action under
the antitrust laws as it deems necessary or desirable in the public interest.
Such action could include seeking to enjoin the consummation of the Merger or
seeking divestiture of substantial assets of PSS or Gulf South. Private parties
may also seek legal action under the antitrust laws under certain
circumstances.
PSS and Gulf South believe that the Merger can be effected in compliance with
federal and state antitrust laws; however, there can be no assurance that a
challenge to the consummation of the Merger on antitrust grounds will not be
made or that, if such challenge were made, PSS and Gulf South would prevail or
would not be required to accept certain adverse conditions in order to
consummate the Merger.
Other than approvals discussed above, PSS and Gulf South are not aware of any
federal, state or foreign regulatory requirements that must be complied with or
approval that must be obtained in connection with the Merger other than the
filing of this Joint Proxy Statement/Prospectus with the Commission and
compliance with applicable state securities laws and regulations. Should any
such approval be required, it is currently contemplated that such approval will
be sought.
AMENDMENT, WAIVER AND TERMINATION
To the extent permitted by law, Gulf South and PSS, with the approval of
their respective Boards of Directors, may amend the Merger Agreement by written
agreement at any time without the approval of the stockholders of PSS or Gulf
South, provided that after the approval of the Merger Agreement by the Gulf
South stockholders, there shall be made no amendment that requires further
approval by such stockholders without further approval of such stockholders;
and further provided, that after any such approval by the holders of PSS Common
Stock, the provisions of the Merger Agreement relating to the manner or basis
in which shares of Gulf South Common Stock will be exchanged for shares of PSS
Common Stock shall not be amended after the Special Meetings in a manner
adverse to the holders of PSS Common Stock without any requisite approval of
the holders of the issued and outstanding shares of PSS Common Stock entitled
to vote thereon.
Prior to or at the Effective Time, either Gulf South or PSS, acting through
its respective Board of Directors or its Chief Executive Officer or other
authorized officer, may waive any default in the performance of any term of the
Merger Agreement by the other party, may waive or extend the time for the
fulfillment by the other party of any of its obligations under the Merger
Agreement, and may waive any of the conditions precedent to the obligations of
the other party under the Merger Agreement, except any condition that, if not
satisfied, would result in the violation of an applicable law or governmental
regulation.
The Merger Agreement may be terminated, and the Merger abandoned, at any time
prior to the Effective Time, notwithstanding approval of the Merger Agreement
by the stockholders of Gulf South and PSS:
(i) by mutual consent of PSS and Gulf South;
(ii) by either party (provided that the terminating party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in the Merger Agreement) in the event of a material
breach by the other party of any representation or warranty contained in
the Merger Agreement which cannot be or has not been cured within 30 days
after the giving of written notice to the breaching
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party of such breach, such that the conditions precedent to the obligations
of such party to consummate the Merger, would not then be satisfied by the
breaching party;
(iii) by either party (provided that the terminating party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in the Merger Agreement) in the event of a material
breach by the other party of any covenant or agreement contained in the
Merger Agreement which cannot be or has not been cured within 30 days after
the giving of written notice to the breaching party of such breach, such
that the conditions precedent to the obligations of such party to
consummate the Merger would not then be satisfied by the breaching party;
(iv) by either party (provided that the terminating party is not then in
material breach of any representation, warranty, covenant or other
agreement contained in the Merger Agreement) in the event (a) any consent
of any regulatory authority required for consummation of the Merger and the
other transactions contemplated by the Merger Agreement shall have been
denied by final non-appealable action of such authority or if any action
taken by such authority is not appealed within the time limit for appeal
such that the conditions precedent to consummation of the Merger would not
be satisfied, or (b) the stockholders of Gulf South or PSS fail to vote
their approval of the matters relating to the Merger Agreement and the
transactions contemplated therein at the appropriate Special Meeting where
such matters were presented to such stockholders for approval and voted
upon;
(v) by either party in the event that the Merger shall not have been
consummated by June 30, 1998, if the failure to consummate the transactions
contemplated thereby on or before such date is not caused by any breach of
the Merger Agreement by the party electing to terminate pursuant to such
provision;
(vi) by either party (provided that the terminating party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in the Merger Agreement) in the event that any of the
conditions precedent to the obligations of such party to consummate the
Merger cannot be satisfied or fulfilled by June 30, 1998;
(vi) by either party, if: (a) the Board of Directors of Gulf South shall
have authorized, recommended, publicly proposed or publicly announced an
intention to authorize, recommend or propose to the stockholders of Gulf
South, or has entered into an agreement with any person (other than PSS) to
effect an alternative Acquisition Proposal (as defined below) or (b) a
tender offer or exchange offer for 25% or more of the outstanding shares of
Gulf South Common Stock is commenced and the Board of Directors of Gulf
South recommends that the stockholders of the Company tender their shares
in such tender or exchange offer; provided that Gulf South shall not be
entitled to exercise the foregoing termination rights unless (x) any action
of the Board of Directors of Gulf South is taken in good faith by the Board
of Directors of Gulf South after consultation with and consideration of the
advice of its outside counsel and financial advisors, in order to discharge
properly its fiduciary duties to its stockholders and (y) Gulf South has
not directly or indirectly solicited the Acquisition Proposal or tender or
exchange offer;
(vii) by PSS, if the Board of Directors of Gulf South shall withdraw,
modify or change its approval or recommendation of the Merger Agreement or
the Merger in a manner adverse to PSS, provided that PSS is not then in
material breach of any representation, warranty, covenant or agreement
contained in the Merger Agreement;
(viii) by either party, if: (a) the Board of Directors of PSS shall have
authorized, recommended, publicly proposed or publicly announced an
intention to authorize, recommend or propose to the stockholders of PSS, or
has entered into an agreement with any person (other than Gulf South) to
effect an Acquisition Proposal or (b) a tender offer or exchange offer for
25% or more of the outstanding shares of PSS Common Stock is commenced and
the Board of Directors of PSS recommends that the stockholders of PSS
tender their shares in such tender or exchange offer; provided that PSS
shall not be entitled to exercise the foregoing termination rights unless
(x) any such Acquisition Proposal is conditioned upon the termination by
PSS of the Merger Agreement, (y) any action of the Board of Directors of
PSS is taken in good faith by the Board of Directors of PSS after
consultation with and consideration of the advice of its
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outside counsel and financial advisors, in order to discharge properly its
fiduciary duties to its stockholders and (z) PSS has not directly or
indirectly solicited the Acquisition Proposal or tender or exchange offer;
or
(ix) By Gulf South, if the Board of Directors of PSS shall withdraw,
modify or change its approval or recommendation of the issuance of the PSS
Common Stock pursuant to the Merger Agreement, provided that Gulf South is
not then in material breach of any representation, warranty, covenant or
agreement contained in the Merger Agreement.
The term "Acquisition Proposal" is defined in the Merger Agreement to mean,
with respect to a party, (a) a merger, consolidation or similar transaction in
which such party is not the surviving corporation or shall become a subsidiary
of another corporation, (b) except as permitted pursuant to the terms of the
Merger Agreement, the disposition, by sale, lease, exchange or otherwise, of
assets representing 15% or more of the consolidated assets of such party, or
(c) the issuance, sale or other disposition of (including by way of merger,
consolidation, shares exchanged or any similar transaction) securities
representing 20% of more of the voting power of such party.
EXPENSES AND FEES
The Merger Agreement provides that each of PSS and Gulf South shall be
responsible for its own costs and expenses incurred in connection with the
negotiation and consummation of the transactions contemplated by the Merger
Agreement, except that each of PSS and Gulf South shall pay one-half of the
filing fees payable and printing costs incurred in connection with the
Registration Statement and this Joint Proxy Statement/Prospectus.
If (i) the Merger Agreement is terminated by PSS due to a material breach by
Gulf South of any representation, warranty, covenant or agreement which is not
cured within 30 days notice thereof, the failure of the stockholders of Gulf
South to approve the Merger Agreement and the transactions contemplated
thereby, or the failure of Gulf South to satisfy certain conditions precedent
of PSS; (ii) the Merger is not consummated due to the failure of Gulf South to
satisfy certain conditions precedent, including the failure of the stockholders
of Gulf South to approve the Merger Agreement; (iii) the Merger Agreement is
terminated due to the authorization, recommendation, public proposal or public
announcement by the Board of Directors of Gulf South of an intention to
authorize, recommend or propose to its stockholders, or the entry by Gulf South
into an agreement with any third party to effect, an alternative Acquisition
Proposal; or (iv) the Merger Agreement is terminated by PSS, provided that PSS
is not then in material breach of the provisions of the Merger Agreement, due
to the withdrawal, modification or change by the Board of Directors of Gulf
South of its approval or recommendation of the Merger Agreement or the Merger
in a manner adverse to PSS, then Gulf South has agreed to pay to PSS a fee of
$20,000,000 (subject to the total value of the foregoing amount plus the
consideration that may be received by PSS under the Gulf South Stock Option
Agreement (as defined below) not exceeding $24,000,000), plus out-of-pocket
costs and expenses of PSS up to but not exceeding an additional $1,000,000
(collectively, the "Gulf South Termination Fee").
If (i) the Merger Agreement is terminated by Gulf South due to a material
breach by PSS of any representation, warranty, covenant or agreement which is
not cured within 30 days notice thereof, the failure of the stockholders of PSS
to approve the Issuance or the Stock Amendment, or the failure of PSS to
satisfy certain conditions precedent of Gulf South; (ii) the Merger is not
consummated due to the failure of PSS to satisfy certain conditions precedent,
including the failure of the stockholders of PSS to approve the Issuance and
the Stock Amendment; (iii) the Merger Agreement is terminated due to the
authorization, recommendation, public proposal or public announcement by the
Board of Directors of PSS of an intention to authorize, recommend or propose to
its stockholders, or the entry by PSS into an agreement with any third party to
effect, an alternative Acquisition Proposal; or (iv) the Merger Agreement is
terminated by Gulf South, provided that Gulf South is not then in material
breach of the provisions of the Merger Agreement, due to the withdrawal,
modification or change by the Board of Directors of PSS of its approval or
recommendation of the Issuance in a manner adverse to Gulf South, then PSS has
agreed to pay to Gulf South a fee of $20,000,000 (subject to the total value of
the foregoing
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amount plus the consideration that may be received by Gulf South under the PSS
Stock Option Agreement (as defined below) not exceeding $24,000,000), plus out-
of-pocket costs and expenses of Gulf South up to but not exceeding an
additional $1,000,000 (collectively, the "PSS Termination Fee").
The foregoing fees represent the best estimate of PSS and Gulf South of the
out-of-pocket costs incurred by PSS and Gulf South and the value of management
time, overhead, opportunity costs and other unallocated costs of PSS and Gulf
South incurred by or on behalf of PSS and Gulf South in connection with the
Merger Agreement.
STOCK OPTION AGREEMENTS
Following is a summary of certain provisions of the Stock Option Agreement
dated December 14, 1997 by and between Gulf South, as issuer, and PSS (the
"Gulf South Stock Option Agreement") and the Stock Option Agreement dated
December 14, 1997 by and between PSS, as issuer, and Gulf South (the "PSS Stock
Option Agreement," and with the Gulf South Stock Option Agreement, the "Stock
Option Agreements"). Copies of the Gulf South Stock Option Agreement and PSS
Stock Option Agreement are attached as Annexes B and C, respectively, to this
Joint Proxy Statement/Prospectus. This summary is qualified in its entirety by
references to the full text of the Stock Option Agreements attached hereto.
Certain aspects of the Stock Option Agreements (including the fact that the
exercise of the Gulf South Option and the PSS Option would render Gulf South
and PSS, respectively, ineligible for "pooling of interests" accounting
treatment for any business combination that would trigger exercisability of the
Gulf South Option or PSS Option (each as defined below)) may have the effect of
discouraging persons who might now or prior to the Effective Time be interested
in acquiring all of or a significant interest in, or otherwise effecting a
business combination with, Gulf South or PSS, from considering proposing such a
transaction.
For purposes of this section, with respect to the Gulf South Stock Option
Agreement, the term "Issuer" shall mean Gulf South and "Grantee" shall mean
PSS, and with respect to the PSS Stock Option Agreement, the term "Issuer"
shall mean PSS and "Grantee" shall mean Gulf South. Certain capitalized terms
used in this section and not otherwise defined shall have the meanings ascribed
to such terms in the Stock Option Agreements.
Grant of Options
Pursuant to the Gulf South Stock Option Agreement, Gulf South has granted PSS
an irrevocable option (the "Gulf South Option") to purchase from Gulf South,
upon a Purchase Event, up to 3,253,066 authorized and unissued shares ("Gulf
South Option Shares") of Gulf South Common Stock (which is equivalent to 19.9%
of the issued and outstanding shares of Gulf South Common Stock as of December
12, 1997), at a price of $29.06 per share. Pursuant to the PSS Stock Option
Agreement, PSS has granted Gulf South an irrevocable option (the "PSS Option,"
and with the Gulf South Option, the "Options") to purchase from PSS, upon a
Purchase Event, up to 8,098,523 authorized and unissued shares ("PSS Option
Shares," and with the Gulf South Option Shares, the "Option Shares") of PSS
Common Stock (which is equivalent to 19.9% of the issued and outstanding shares
of PSS Common Stock as of December 12, 1997), at a price of $23.00 per share.
In no event shall holders (in the aggregate) purchase under the terms of the
Stock Option Agreements that number of Option Shares which have a Spread Value
in excess of the remainder obtained by subtracting (A) the Gulf South
Termination Fee or PSS Termination Fee, as the case may be, from (B)
$24,000,000 (the "Maximum Amount"). In the event the Spread Value exceeds the
Maximum Amount, the number of Option Shares which the holder is entitled to
purchase at the closing date shall be reduced to that number of shares
necessary such that the Spread Value equals or is less than the Maximum Amount.
56
<PAGE>
Repurchase
At any time commencing upon the first occurrence of: (a) the acquisition or
right to acquire by a person or related group of persons of beneficial
ownership of 50% or more of the then outstanding shares of Issuer Common Stock,
or (b) the entry into an agreement (i) to consolidate with or merge into any
person where the Issuer will not be the continuing or surviving corporation of
such consolidation or the Issuer will be the continuing or surviving
corporation, but, in connection with such merger, the then outstanding shares
of Issuer Common Stock shall be changed into or exchanged for stock or other
securities of Issuer or any other person or cash or any other property or the
outstanding shares of Issuer Common Stock immediately prior to such merger
shall after such merger represent less than 50% of the outstanding shares and
share equivalents of the merged company; or (ii) to sell or otherwise transfer
all or substantially all of its assets to any person, other than Grantee or one
of its Subsidiaries, and ending twelve months after the occurrence of (a) or
(b) above, the Issuer shall repurchase the Option and all shares of Issuer
Common Stock purchased pursuant thereto. The repurchase price shall equal the
sum of (i) the aggregate purchase price paid by the holder for any shares of
Issuer Common Stock acquired pursuant to the Option, plus (ii) the excess of
the Applicable Price (as defined therein) over the purchase price for each
Option Share multiplied by the number of shares of Issuer Common Stock with
respect to which (i) the Option has not been exercised and (ii) the Option has
been exercised and the holder then has beneficial ownership; provided that in
no event shall the foregoing repurchase consideration minus the aggregate
purchase price paid by the holder for the shares of Issuer Common Stock, plus
any Termination Fee received by such holder, exceed $24,000,000.
Registration Rights
Subject to certain limitations, each of PSS and Gulf South has agreed that
following the termination of the Merger Agreement, it will, if requested by any
Grantee, including permitted transferees, as expeditiously as possible, prepare
and file a registration statement under the securities laws if necessary in
order to permit the sale or other disposition of any or all shares of Issuer
Common Stock or other securities acquired upon exercise of the applicable
Option in accordance with the intended method of sale or other disposition
requested by any such holder.
Certain Adjustments
In the event of changes in the PSS Common Stock or Gulf South Common Stock by
reason of stock dividend, stock split, split-up, recapitalization, combination,
exchange of shares or similar transaction, the type and number of shares or
securities subject to the Options and the purchase prices therefor, will be
adjusted appropriately, as applicable. In the event any additional shares of
PSS Common Stock or Gulf South Common Stock (other than pursuant to an event
described in the previous sentence) are issued, the number of shares subject to
the applicable Option will be adjusted so that it equals at least 19.9% of the
number of shares of PSS Common Stock or Gulf South Common Stock, respectively,
then issued and outstanding.
Termination
The Options shall terminate and be of no further force and effect upon the
earliest to occur of (i) the Effective Time, (ii) termination of the Merger
Agreement in accordance with the terms thereof prior to the occurrence of a
Purchase Event or a Preliminary Purchase Event (other than a Default
Termination), (iii) 120 days after a Default Termination (provided, that if,
within 120 days after such termination of the Merger Agreement, a Purchase
Event or a Preliminary Purchase Event shall occur, then notwithstanding
anything to the contrary contained herein (including clause (iv) of this
sentence), the Options shall terminate 120 days after the first occurrence of
such an event), and (iv) 120 days after any termination of the Merger Agreement
(other than a Default Termination) following the occurrence of a Purchase Event
or a Preliminary Purchase Event.
VOTING AGREEMENTS
Simultaneous with the execution of the Merger Agreement, the members of the
Board of Directors of Gulf South and other executive officers entered into
Voting Agreements with PSS (each a "Gulf South Voting
57
<PAGE>
Agreement"). Each Gulf South Voting Agreement provides that each party thereto
(a "Gulf South Stockholder") will vote such Gulf South Stockholder's shares of
Gulf South Common Stock in favor of the Merger and the approval of the terms
thereof and each of the other transactions contemplated by the Merger
Agreement, provided that the terms of the Merger Agreement shall not have been
amended to reduce the Exchange Ratio payable in the Merger to a lesser amount
of PSS Common Stock or otherwise materially and adversely impair the Gulf South
Stockholder's rights or increase the Gulf South Stockholder's obligations
thereunder. Each Gulf South Stockholder has granted an irrevocable proxy to PSS
and to Patrick C. Kelly, Chairman of the Board and Chief Executive Officer of
PSS, and David A. Smith, Executive Vice President and Chief Financial Officer
of PSS, in their respective capacities as officers of PSS, and any individual
who shall succeed to any such office of PSS, to vote such Gulf South
Stockholder's Gulf South Shares consistent with the foregoing agreements.
Collectively, the Gulf South Stockholders own approximately 10.7% of the
outstanding shares of Gulf South Common Stock as of the Gulf South Record Date.
In addition, simultaneous with the execution of the Merger Agreement, the
members of the Board of Directors and other executive officers of PSS entered
into Voting Agreements with Gulf South (each a "PSS Voting Agreement"). Each
PSS Voting Agreement provides that each party thereto (a "PSS Stockholder")
will vote such PSS Stockholder's shares of PSS Common Stock in favor of (i) the
Stock Amendment to the Articles of Incorporation and (ii) the Issuance of the
shares of PSS Common Stock in accordance with the terms of the Merger
Agreement, provided that the terms of the Merger Agreement shall not have been
amended to increase the Exchange Ratio payable in the Merger to a greater
amount of PSS Common Stock or otherwise to materially and adversely impair the
PSS Stockholder's rights or increase the PSS Stockholder's obligations
thereunder. Each PSS Stockholder has granted an irrevocable proxy to Gulf South
and to Mr. Thomas G. Hixon, Chairman of the Board and Chief Executive Officer
of Gulf South, and Mr. Stanton Keith Pritchard, Senior Vice President and
Secretary of Gulf South, in their respective capacities as officers of Gulf
South, and any individual who shall succeed to any such office of Gulf South,
to vote such PSS Stockholder's shares of PSS Common Stock consistent with the
foregoing agreements. Collectively, the PSS Stockholders own approximately 5.0%
of the outstanding shares of PSS Common Stock as of the PSS Record Date.
Each Gulf South Voting Agreement and PSS Voting Agreement will terminate upon
the earlier of the Effective Time or the date upon which the Merger Agreement
is terminated in accordance with its terms. Copies of the Gulf South Voting
Agreement and PSS Voting Agreement are attached as Annexes D and E,
respectively, to this Joint Proxy Statement/Prospectus. The foregoing summary
is qualified in its entirety by references to the full text of the Voting
Agreements attached hereto. See "General Information--Votes Required."
CONDUCT OF BUSINESS PENDING THE MERGER
Each of Gulf South and PSS has agreed in the Merger Agreement to, among other
things, operate its business only in the usual, regular and ordinary course and
to use commercially reasonable efforts to preserve its business organization
and assets, keep available the services of its present officers, employees and
consultants and preserve its present relationships with customers, suppliers
and other persons. In addition, pursuant to the Merger Agreement, prior to the
Closing Date, Gulf South and PSS have agreed to restrict certain of their
activities, except with the prior written consent of the other and except as
necessary to effect the transactions contemplated in the Merger Agreement.
To this end, Gulf South has agreed not to, and not to permit any of its
subsidiaries to: (i) amend its certificate or articles of incorporation or
bylaws or governing instruments; (ii) incur any additional debt obligations in
excess of $250,000 except in the ordinary course of business; (iii) repurchase,
redeem or otherwise acquire or exchange any securities of any such entity or
declare or pay any dividend or distribution in respect of the Gulf South
capital stock; (iv) except for the Merger Agreement or pursuant to the exercise
of stock options or warrants outstanding as of the date of the Merger
Agreement, or pursuant to the Gulf South Stock Option Agreement or as otherwise
disclosed to PSS, issue, sell, pledge, encumber or authorize the issuance of
any additional shares of capital stock of Gulf South or any of its
subsidiaries; (v) adjust, split, combine or reclassify any capital stock of
58
<PAGE>
Gulf South or any of its subsidiaries or issue or authorize the issuance of any
other securities in respect of or in substitution for shares of Gulf South
Common Stock or sell, lease, mortgage or otherwise dispose of or otherwise
encumber any shares of capital stock of any subsidiary of Gulf South or any
material asset other than in the ordinary course of business for reasonable and
adequate consideration; (vi) except for purchases of U.S. Treasury securities
or U.S. Government agency securities, which in either case have maturities of
three years or less, and except as disclosed to PSS, purchase any securities or
make any material investment in any person other than a wholly owned subsidiary
of Gulf South; (vii) grant any increase in compensation or benefits to the
employees or officers of Gulf South or its subsidiaries, except as disclosed to
PSS or as required by law; pay any severance or termination pay or any bonus
other than consistent with policies or with written contracts in effect on the
date of the Merger Agreement and disclosed to PSS, or enter into or amend any
severance agreements with officers of Gulf South or its subsidiaries; grant any
material increase in fees or other increases in compensation or other benefits
to directors of Gulf South or its subsidiaries except in accordance with past
practice as disclosed to PSS; or voluntarily accelerate the vesting of any
stock options or other stock-based compensation or employee benefits or other
equity rights; (viii) enter into or amend any employment contract between any
Gulf South or its subsidiaries and any person having a salary thereunder in
excess of $50,000 per year (unless such amendment is required by law) that Gulf
South or its subsidiaries do not have the unconditional right to terminate
without liability (other than liability for services already rendered), at any
time on or after the Effective Time; (ix) adopt any new employee benefit plan
or terminate or withdraw from, or make any material change in or to, any
existing employee benefit plans other than as disclosed to PSS or any such
change that is required by law or that, in the opinion of counsel, is necessary
or advisable to maintain the tax qualified status of any such plan, or make any
distributions from such employee benefit plans, except as required by law, the
terms of such plans or consistent with past practice; (x) make any significant
change in any tax or accounting methods or systems of internal accounting
controls, except as may be appropriate to conform to changes in tax laws or
regulatory accounting requirements or generally accepted accounting principles;
(xi) commence any litigation other than in accordance with past practice,
settle any litigation involving any liability of Gulf South or any of its
subsidiaries for material money damages or restrictions upon the operations of
Gulf South or any of its subsidiaries; or (xii) except in the ordinary course
of business, enter into, modify, amend or terminate any material contract
(including any loan contract with an unpaid balance exceeding $250,000) or
waive, release, compromise or assign any material rights or claims.
In addition, PSS has agreed not to and not to permit any of its subsidiaries
to: (i) amend the Articles of Incorporation or Bylaws of PSS, in each case, in
any manner adverse to the holders of Gulf South Common Stock; (ii) make any
significant change in any tax or accounting methods or systems of internal
accounting controls, except as may be appropriate to conform to changes in
applicable tax laws or regulatory accounting requirements or generally accepted
accounting principles; (iii) except for the Merger Agreement, or pursuant to
the PSS Stock Option Agreement, issue, sell, pledge, encumber, authorize the
issuance of any additional shares of PSS Common Stock or any other capital
stock of PSS or any of its subsidiaries, or any stock appreciation rights, or
any option, warrant, or other equity right; provided, that PSS is not
prohibited from issuing (a) employee stock options in the ordinary course of
business and consistent with past practices, or (b) issuing securities in
connection with business acquisitions of third parties, unless the issuance of
such securities would require the approval of the stockholders of PSS under
applicable law; or (iv) enter into any agreement with any person to acquire the
business of such person for a purchase price in excess of $75,000,000 whether
payable in shares of PSS Common Stock, cash, or notes.
ACCOUNTING TREATMENT
Consummation of the Merger is conditioned on the Merger being accounted for
on a pooling-of-interests accounting basis and the receipt by PSS and Gulf
South of a letter from Arthur Andersen LLP with respect thereto and a letter
from Ernst & Young LLP with respect to the poolability of Gulf South at the
Effective Time. See "--Conditions to Consummation." Under this method of
accounting, as of the Effective Time, the assets and liabilities of Gulf South
would be added to those of PSS at their recorded book values and the
stockholders' equity accounts of PSS and Gulf South would be combined on PSS'
consolidated balance sheet. On a pooling-of-
59
<PAGE>
interests accounting basis, income and other financial statements of PSS issued
after consummation of the Merger will be restated retroactively to reflect the
combined consolidated financial position and results of operations of PSS and
Gulf South as if the Merger had taken place prior to the periods covered by
such consolidated financial statements and to reflect the accounting policies
of PSS.
The unaudited pro forma financial information contained in this Joint Proxy
Statement/Prospectus has been prepared using the pooling-of-interests
accounting basis to account for the Merger. See "Unaudited Pro Forma Condensed
Combined Financial Statements."
RESALES OF PSS COMMON STOCK
The shares of PSS Common Stock issued in connection with the Merger will be
freely transferable under the Securities Act, except for shares issued to any
stockholder who may be deemed to be an "affiliate" (generally including,
without limitation, directors, certain executive officers and beneficial owners
of 10% or more of any class of capital stock) of Gulf South for purposes of
Rule 145 under the Securities Act as of the date of the Special Meeting or for
purposes of applicable interpretations regarding pooling-of-interests
accounting treatment. Such affiliates may not sell their shares of PSS Common
Stock acquired in connection with the Merger except pursuant to an effective
registration statement under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act and for purposes of
pooling-of-interests accounting treatment until such time as financial results
covering at least 30 days of combined operations of PSS and Gulf South after
the Merger have been published. PSS may place restrictive legends on
certificates representing PSS Common Stock issued to all persons who are deemed
to be "affiliates" of Gulf South under Rule 145. In addition, each person or
entity that is an "affiliate" of Gulf South has entered into a written
agreement relating to such restrictions on sale or other transfer. Each person
or entity that is an "affiliate" of PSS has entered into a written agreement
relating to the restrictions on sale or transfer regarding the pooling-of-
interests accounting treatment. This Joint Proxy Statement/Prospectus does not
cover resales of PSS Common Stock received by any person who may be deemed to
be an affiliate of PSS.
NO DISSENTERS' RIGHTS
The proposed Merger is not a transaction which entitles stockholders of Gulf
South or PSS to dissenters' or appraisal rights under Delaware law or Florida
law, respectively.
NASDAQ NATIONAL MARKET LISTING
PSS Common Stock is traded in the over-the-counter market and is listed on
the Nasdaq National Market. An application will be filed with the NASD to
include for listing the shares of PSS Common Stock to be issued to the holders
of Gulf South Common Stock in the Merger. Although no assurance can be given
that the NASD will accept such shares of PSS Common Stock for listing, PSS and
Gulf South anticipate that these shares will qualify for listing. It is a
condition precedent to the obligations of PSS, Merger Corp. and Gulf South to
consummate the Merger that such shares of PSS Common Stock be approved for
listing on Nasdaq National Market upon official notice of issuance at the
Effective Time.
60
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined balance sheet as of December 31,
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 nine months ended December 31, 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 Gulf South 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
historical consolidated financial statements of PSS and Gulf South, including
the notes thereto, included elsewhere in this Joint Proxy Statement/Prospectus
See "PSS Consolidated Financial Statements" and "Gulf South Consolidated
Financial Statements".
61
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- ------------------------
PSS GULF SOUTH ADJUSTMENTS COMBINED(3)
------------ ------------- ----------- -----------
DECEMBER 31, SEPTEMBER 30,
1997 1997(3)
------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 35,077 $ 49,154 $ 84,231
Short-term investments... 88,795 -- 88,795
Accounts receivable,
net..................... 154,970 54,055 209,025
Inventories.............. 91,935 31,734 123,669
Prepaid expenses and
other................... 30,718 2,982 33,700
-------- -------- --------
Total current assets... 401,495 137,925 539,420
Property and equipment,
net....................... 23,801 4,525 28,326
Intangibles, net........... 48,245 34,575 82,820
Other assets............... 12,117 3,132 15,249
-------- -------- --------
Total assets........... $485,658 $180,157 $665,815
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......... $ 68,015 $ 19,289 $ 87,304
Accrued expenses......... 25,910 3,856 29,766
Other.................... 16,785 -- 16,785
-------- -------- --------
Total current
liabilities........... 110,710 23,145 133,855
Long-term debt and
capital lease
obligations, net of
current maturities...... 129,089 -- 129,089
Other liabilities........ 3,449 -- 3,449
-------- -------- --------
Total liabilities...... 243,248 23,145 266,393
-------- -------- --------
Shareholders' equity:
Common stock............. 404 163 $ 122 (1) 689
Additional paid-in
capital................. 224,180 115,727 (122)(1) 339,785
Retained earnings........ 17,566 41,122 58,688
Cumulative foreign
currency translation
adjustment.............. 260 -- 260
-------- -------- --------
Total shareholders'
equity................ 242,410 157,012 0 399,422
-------- -------- ----- --------
Total liabilities and
shareholders' equity.. $485,658 $180,157 $ 0 $665,815
======== ======== ===== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
62
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- ------------------------
PSS GULF SOUTH ADJUSTMENTS COMBINED(3)
------------ ------------- ----------- -----------
DECEMBER 31, SEPTEMBER 30,
1997 1997(3)
------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................ $733,882 $205,039 $938,921
Cost of goods sold....... 533,054 158,153 691,207
-------- -------- --------
Gross profit......... 200,828 46,886 247,714
Selling, general and
administrative
expenses................ 171,251 27,893 199,144
Merger costs and
expenses................ 5,625 -- 5,625
Non-recurring ESOP cost
of acquired company..... 2,457 -- 2,457
-------- -------- --------
Income from
operations.......... 21,495 18,993 40,488
-------- -------- --------
Other income (expense):
Net interest (expense)
income................ (1,234) 1,438 204
Other income........... 3,429 -- 3,429
-------- -------- --------
2,195 1,438 3,633
-------- -------- --------
Income before income
taxes............... 23,690 20,431 44,121
Provision for income
taxes................... 9,973 7,766 17,739
-------- -------- --------
Net income............... $ 13,717 $ 12,665 $ 26,382
======== ======== ========
Earnings per share:
Basic................... $ 0.35 $ 0.76(2) $ 0.38
======== ======== ========
Diluted................. $ 0.34 $ 0.76(2) $ 0.38
======== ======== ========
Weighted average shares:
Basic................... 39,689 16,576(2) 12,432(1) 68,697
======== ======== ====== ========
Diluted................. 40,120 16,576(2) 12,432(1) 69,128
======== ======== ====== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
63
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- ---------------------
PSS GULF SOUTH ADJUSTMENTS COMBINED
------------ ------------ ----------- --------
DECEMBER 31, DECEMBER 31,
1996 1996
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales.................... $558,018 $137,475 $695,493
Cost of goods sold........... 405,914 105,697 511,611
-------- -------- --------
Gross profit............. 152,104 31,778 183,882
Selling, general and
administrative expenses..... 134,511 18,261 152,772
Merger costs and expenses.... 7,251 1,866 9,117
Non-recurring ESOP cost of
acquired company............ 1,050 -- 1,050
-------- -------- --------
Income from operations... 9,292 11,651 20,943
-------- -------- --------
Other income:
Net interest income........ 1,071 1,594 2,665
Other income............... 1,350 -- 1,350
-------- -------- --------
2,421 1,594 4,015
-------- -------- --------
Income before income
taxes................... 11,713 13,245 24,958
Provision for income taxes... 4,519 4,873 9,392
-------- -------- --------
Net income................... $ 7,194 $ 8,372 $ 15,566
======== ======== ========
Earnings per share:
Basic....................... $ 0.19 $ 0.53(2) $ 0.24
======== ======== ========
Diluted..................... $ 0.19 $ 0.53(2) $ 0.24
======== ======== ========
Weighted average shares:
Basic....................... 37,153 15,877(2) 11,908(1) 64,938
======== ======== ====== ========
Diluted..................... 37,845 15,877(2) 11,908(1) 65,630
======== ======== ====== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
64
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED MARCH 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- ---------------------
PSS GULF SOUTH 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
======== ======== ========
Earnings per share:
Basic......................... $ 0.12 $ 0.76(2) $ 0.25
======== ======== ========
Diluted....................... $ 0.12 $ 0.76(2) $ 0.25
======== ======== ========
Weighted average shares:
Basic......................... 37,496 16,042(2) 12,032(1) 65,569
======== ======== ====== ========
Diluted....................... 38,015 16,042(2) 12,032(1) 66,089
======== ======== ====== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
65
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED MARCH 29, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- ---------------------
PSS GULF SOUTH 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
======== ======== ========
Earnings per share:
Basic........................ $ 0.07 $ 0.61 (2) $ 0.19
======== ======== ========
Diluted...................... $ 0.06 $ 0.61 (2) $ 0.19
======== ======== ========
Weighted average shares:
Basic........................ 31,591 14,019 (2) 10,514(1) 56,124
======== ======== ====== ========
Diluted...................... 32,870 14,019 (2) 10,514(1) 57,403
======== ======== ====== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
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<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED MARCH 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- ---------------------
PSS GULF SOUTH 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
======== ======== ========
Earnings per share:
Basic........................ $ 0.00 $ 0.49 (2) $ 0.14
======== ======== ========
Diluted...................... $ 0.00 $ 0.49 (2) $ 0.14
======== ======== ========
Weighted average shares:
Basic........................ 24,027 13,851 (2) 10,388(1) 48,266
======== ======== ====== ========
Diluted...................... 25,101 13,851 (2) 10,388(1) 49,340
======== ======== ====== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
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<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 Gulf South 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 Gulf South. Such activities will
include consolidation costs from the closing of duplicate facilities,
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 efficiencies and 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 Merger, adjusted to reflect
the exchange ratio of 1.75 shares of PSS Common Stock for each share of Gulf
South Common Stock.
(2) Gulf South Weighted Average Shares and Earnings per Share
Weighted average shares and earnings per share amounts for Gulf South are
computed under APB No. 15. Gulf South is not permitted to report basic and
diluted weighted average shares and earnings per share amounts as early
application of Statement of Financial Accounting Standards No. 128, "Earnings
Per Share", is prohibited.
(3) Gulf South Historical and Pro Forma Combined
Amounts for Gulf South are presented as of September 30, 1997 and for the
nine months ended September 30, 1997, as December 31, 1997 information is not
available for Gulf South.
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BUSINESS OF PSS
The following is a general discussion of the business of PSS as a separate
company and does not specifically contemplate the effects of the proposed
Merger. For a description of Gulf South's business, see "Business of Gulf
South." For a discussion of the anticipated effects of the Merger, see "Risk
Factors," "The Merger--Reasons for the Merger," and "--Management and
Operations after the Merger."
GENERAL
PSS is a specialty marketer and distributor of medical products to
physicians, other alternate-site providers and hospitals. PSS is the leading
distributor of medical supplies, equipment and pharmaceuticals to office-based
physicians in the United States based on revenues, serving over 104,000
physician offices (representing approximately 54% of all physician offices) in
all 50 states. PSS, which entered the imaging-supply market in November 1996,
has grown to be the second-largest distributor of imaging supplies and
equipment in the United States based on revenues, serving over 12,000 customer
sites in 25 states. PSS also distributes medical products to office-based
physicians and hospitals in five European countries.
PSS employed over 800 highly trained sales representatives as of December 31,
1997, over 700 of which are focused on the physician-office market. This large
sales organization enables PSS to market medical products on a national basis
and has positioned PSS as a distributor of choice for manufacturers whose
products require consultative selling. PSS has established exclusive or semi-
exclusive distribution arrangements for certain products with such leading
manufacturers as Abbott, Siemens AG, Hologic, Inc., C. R. Bard, Inc., HumaScan
Inc. and F. Hoffman-La Roche Ltd. PSS distributes over 39,000 medical products
from 91 service centers, 64 of which are focused on the physician-office
market, located throughout the United States and in Europe, enabling PSS to be
highly responsive to local market needs, including providing same-day delivery
service to most customers on a regular basis.
INDUSTRY
PSS believes that the United States medical-products distribution market
aggregates approximately $34 billion in annual revenues, of which approximately
$6.5 billion represents the physician-office market (of which approximately $1
billion are imaging-related medical products) and the balance represents the
hospital, ambulatory surgery center, long-term care and home health care
markets. PSS believes that the imaging-supply market is an approximately $5
billion component of the overall medical-products distribution industry,
encompassing each of the hospital, physician and other provider segments.
Revenues of the medical-products distribution industry are estimated to be
growing as a result of a growing and aging population, increasing health care
awareness, and expanding third-party insurance coverage. In addition, the
physician market is benefiting from the shift of procedures and diagnostic
testing from hospitals to alternate sites, particularly physician offices.
PSS believes that in the United States there are approximately 300 companies
serving the non-imaging physician-supply market and approximately 400 companies
serving the imaging-supply market. The physician-supply market has experienced
rapid consolidation in recent years. PSS believes that the imaging-supply
market is in the early states of consolidation. PSS believes that consolidation
in the physician-supply and imaging-supply markets is occurring due to local
and regional distributors experiencing: (i) a lack of purchasing and
administrative economies of scale; (ii) reduced access to medical equipment
lines as manufacturers seek to reduce marketing costs by minimizing the number
of distributors they use; (iii) consolidation among providers, who are
increasingly seeking to reduce the number of suppliers from which they purchase
medical products; (iv) a lack of resources for continued development and
training of personnel for maintenance, expansion or replacement of existing
business; and (v) a lack of resources to develop new distribution system
technologies and services.
Through its subsidiary, WorldMed International, Inc., PSS operates three
European service centers distributing medical products to the physician office
and hospital markets in Belgium, France, Germany, Luxembourg and the
Netherlands. Government and industry estimates indicate that the medical-
products segment
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of the health care industry of these countries represents an approximately $12
billion market. This industry is highly fragmented with over 1,000 distributors
serving these countries.
PSS STRATEGY
PSS' objectives are to be the leading distributor and marketer of medical
products to office-based physicians and providers of imaging services in the
United States, to expand its European medical supplies and equipment business
and to enhance its operating performance. The key components of PSS' strategy
to achieve these objectives are to continue to:
Pursue Strategic Acquisitions. PSS has made 43, ten, and four acquisitions
since fiscal year 1989 in its Physician Supply Business, Imaging Business, and
International Business, respectively. Recently, PSS acquired General X-Ray,
Inc. ("General X-Ray") and S&W X-Ray, Inc. ("S&W"), which had approximately
$147.6 million in revenues, collectively, for the twelve months ended March 31,
1997. After consummating a merger or acquisition, PSS begins an intensive
process of converting the acquired company to its business model through
information systems conversion, personnel development and training, and service
and product expansion. PSS intends to continue to acquire local, regional, and
other distributors in new and existing markets where it can leverage its
distribution infrastructure, expand its geographic coverage and gain market
share.
Enhance Selling Capabilities. PSS believes its sales force and managers are
its most valuable corporate assets. PSS focuses not only on the recruitment of
sales personnel with superior sales aptitude, but also on the initial and
continued development of its sales force through training at PSS University (as
defined below), its in-house educational center. PSS believes that this
investment in personnel and training enables it to provide high-quality service
to its customers, offer a sophisticated product line, and attract manufacturers
that desire a means of rapidly bringing new products and technology to market.
Offer a Broad Product Line Emphasizing Exclusive Products. PSS seeks to meet
all of the medical products needs of office-based physicians and providers of
imaging services. PSS currently stocks over 35,500 medical products in its
Physician Supply Business and over 3,500 medical products in its Imaging
Business. PSS also seeks to establish exclusive distribution and marketing
arrangements for selected products. In the United States, PSS currently has
exclusive or semi-exclusive marketing arrangements for certain products with
Abbott, Siemens AG, Hologic, Inc., C. R. Bard, Inc., HumaScan, Inc. and F.
Hoffman-La Roche Ltd. PSS believes that its sophisticated selling efforts,
highly trained sales force, and large customer base provide manufacturers with
a unique sales channel through which to distribute new and existing products
that require consultative selling.
Provide Differentiated, High-Quality Service. PSS believes its success to
date has been based largely on its ability to provide superior customer
service, including same-day delivery and "no-hassle" returns. Unlike its
competitors, which generally ship products via common carrier, PSS operates its
own fleet of over 620 delivery vans, thus enabling PSS to provide same-day
delivery to virtually all of its customers. In addition, PSS believes its
consultative selling approach enables it to understand and anticipate customer
needs and that its information systems simplify and expedite the ordering
process.
Utilize Sophisticated Information Systems. In 1994, PSS implemented its
Instant Customer Order Network ("ICON SM"), an ordering and customer data
system, with all its Physician Supply Business sales representatives. ICON SM
has increased time available to sales representatives for selling, decreased
operating expenses, and increased PSS' ability to provide same-day delivery.
During fiscal year 1997, PSS developed and test marketed CustomerLink, an
Internet-based system for inventory management and purchasing. PSS is also
currently developing a separate hardware and software system for the Imaging
Business that will incorporate CustomerLink and ICON SM. PSS intends to
continue to develop sophisticated information technology, which it believes is
essential to its continued success in integrating acquired businesses and
increasing sales and profitability.
Expand Operating Margins. PSS is pursuing several initiatives to enhance its
operating margins. With respect to sales, PSS is focusing its efforts on
higher-margin accounts and on sales of diagnostic equipment, often
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on an exclusive or semi-exclusive basis, that involve ongoing sales of high-
margin reagents. With respect to its product line, PSS seeks to generate high
sales volumes of selected products and to obtain such products on a discounted
basis from manufacturers. Additionally, PSS has developed a private-label
product line, Penny Saver, which has enabled PSS to lower product-acquisition
and inventory-carrying costs. Finally, with respect to its service center
expansion program, PSS intends in the future to emphasize acquisitions over
new-center development, avoiding the substantial start-up losses associated
with new-center development.
SALES AND DISTRIBUTION
PSS focuses on complete customer satisfaction, which it characterizes to its
customers as "no hassle" service. Consistent with this approach, PSS generally
offers its customers same-day delivery service on a regular basis, highly
trained, consultative sales professionals, a broad product line including
medical supplies, sophisticated diagnostic equipment and reagents, and
pharmaceuticals, no minimum order size or shipping charges, and permits returns
of unused, salable products for instant credit.
PSS has increased its emphasis on national customer accounts, including large
physician group practices, physician practice management companies, physician-
hospital organizations, physician management service organizations and group
purchasing organizations. In selling to these national accounts, PSS emphasizes
its core strengths of same-day service, which permits stockless inventory,
competitive pricing and high service levels, including inventory maintenance.
See "Risk Factors--Risks Relating to PSS, Gulf South and the Combined Company--
Regulation of and Change in the Practice of Medicine."
The Physician Supply Business of PSS maintains a highly decentralized
distribution network of 61 service centers operating over 550 delivery vans
throughout the United States. This distribution network, along with its ICONSM,
has enabled PSS to generally provide same-day delivery service. Customer orders
received by 10:30 a.m. at the local service center are generally delivered the
same day within a 100 mile radius. Within a 30 mile radius, orders received by
noon are generally delivered the same day.
Through its over 700 sales representatives in its Physician Supply Business
as of December 31, 1997, PSS distributes medical supplies and equipment to
physicians in approximately 104,000 office sites nationally. Generally, each
sales representative is responsible for calling on approximately 150 to 200
physician offices, with a minimum goal of visiting each office once every one
to two weeks.
The Imaging Business operates in a similar decentralized format with 27
service centers operating a total of over 70 delivery vans throughout 25
states. The Imaging Business has over 95 sales representatives and over 300
service specialists as of December 31, 1997. This business has approximately
12,000 customers including approximately 2,000 hospitals and approximately
10,000 alternate-site providers, including industrial and dental accounts.
The International Business operates three European service centers, located
in Belgium, Germany, and the Netherlands, employing approximately 25 sales
representatives and approximately 65 total employees.
All of PSS' service centers operate as a profit center led by a management
team that typically includes a sales manager and an operations manager. Each
service center employs sales representatives and staff, including purchasing
agents, customer service representatives, and warehouse and delivery personnel.
Employees are compensated based upon both individual and service center
performance. Both management and employee bonuses are based largely upon asset
management, attainment of goals and operating profit performance.
PRODUCTS
PSS carries a significant investment in inventory to meet the rapid delivery
requirements of its customers. PSS distributes over 39,000 different products
manufactured by approximately 3,000 manufacturers. During the twelve months
ended March 28, 1997, Abbott was the only vendor which accounted for more than
10% of PSS' inventory purchases. See "Risk Factors--Risks Relating to PSS, Gulf
South and the Combined Company--Dependence on Vendor Relationships."
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Physician Supply Business
Through its Physician Supply Business, PSS distributes medical products
consisting of medical supplies, diagnostic equipment, and pharmaceuticals. The
following is a discussion of the types of products offered by the Physician
Supply Business. The Physician Supply Business sells over 35,500 medical
products.
Medical Supplies. The Physician Supply Business sells a broad range of
medical supplies, including various types and sizes of paper goods, needles and
syringes, gauze and wound dressings, sutures, latex gloves, orthopedic soft
goods and casting products, wood tongue blades and applicators, sterilization
and intravenous solutions, specimen containers, diagnostic equipment reagents,
and diagnostic rapid test kits for pregnancy, strep, mononucleosis, chlamydia,
H-Pylori, and bladder cancer.
In order to lower product-acquisition and inventory-carrying costs, PSS has
implemented a new Penny Saver product line. The Penny Saver products are those
most frequently used by PSS customers. This product line provides customers a
choice between name-brand products and the Penny Saver quality, low-price
alternatives. Currently, PSS has over 250 products under the Penny Saver label.
PSS plans to continue to focus on providing products and services to the
primary care physician market whether the physician is a single practitioner or
a member of a large group practice. In that effort, PSS developed Network
PlusSM, a comprehensive savings plan for physicians in which PSS offers special
group purchasing contract pricing and provides periodic cost analyses to help
manage the supply needs of each physician. Under this program, when a physician
office guarantees 80% of its purchase volume to PSS, PSS will guarantee the
lowest purchase prices on certain products as well as certain service
guarantees. PSS has recently signed distribution agreements with several
national and regional integrated network systems and managed care groups.
Medical Equipment. The Physician Supply Business equipment lines include
blood chemistry analyzers, automated cell and differential counters,
immunoassay analyzers, bone densitometers, exam tables and furniture,
electrocardiograph monitors and defibrillators, cardiac stress systems, holter
monitors, flexible sigmoidoscopy scopes, autoclaves, spirometers, pulse
oximeters, tympanometers, and microscopes. Demand for diagnostic equipment has
increased recently, reflecting in part, technological advances which enable
increasingly sophisticated diagnostic tests to be performed in the physician's
office. Sales of diagnostic equipment, while generally lower in gross margin
than supplies, normally entail the ongoing reordering of disposable diagnostic
reagents which generally yield higher margins.
PSS recently entered into four separate exclusive distribution agreements for
certain products manufactured by Siemens AG, Hologic, Inc., C. R. Bard, Inc.,
and Tanita Corporation of America, Inc. These supplement PSS' existing
exclusive distribution agreements for certain products with Abbott and HumaScan
Inc. and a semi-exclusive distribution agreement with F. Hoffman-La Roche Ltd.
PSS believes these strategic alliances will continue to broaden its product
offerings to the Physician Supply Business customers.
Pharmaceuticals. PSS' pharmaceutical sales include vaccines, injectables and
ointments. As a result of the changing dynamics in the pharmaceutical industry,
particularly the reduction in sales personnel focused on physicians' offices,
pharmaceutical manufacturers are increasingly seeking alternative means of
distribution. PSS believes that its consultative sales approach and its
emphasis on training have allowed it to be highly effective in selling
pharmaceuticals to the physician-office market. PSS has recently entered into a
three-year primary distribution agreement for certain pharmaceuticals and
related products of Cardinal Health, Inc. PSS believes this agreement will
allow it to reduce its pharmaceutical acquisition costs.
Imaging Business
The Imaging Business distributes a broad range of imaging equipment and
supplies, including general radiographic and mammography systems, fluoroscopic
and electrophysiologic systems, angiographic equipment, medical resonance
imaging (MRI), cath lab and mobile vascular labs, C-arm and ultrasound
equipment. The Imaging Business also distributes consumable and accessory
products, including film and film handling products,
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barium, lead and lead apparel and darkroom cabinets. See "Risk Factors--Risks
Relating to PSS, Gulf South and the Combined Company--Imaging Business
Technology" and "--Environmental Liabilities and Regulation."
International Business
The International Business distributes medical supplies, equipment and
pharmaceuticals similar to those provided by the Physician Supply Business to
five European countries. The International Business offers products to the
European physician office and hospital markets. See "Risk Factors--Risks
Relating to PSS, Gulf South and the Combined Company--Management of
International Business."
RECRUITMENT AND DEVELOPMENT
PSS believes its managers and sales force are its most valuable corporate
assets. Accordingly, PSS invests significant resources in recruiting, training
and developing these employees. PSS spent approximately $2.6 million for
training and development in fiscal year 1997. Over the past ten years, PSS has
refined its recruitment practices and development procedures for its Physician
Supply Business, and PSS is currently developing a similar training program for
the sales representatives and service specialists of its Imaging Business. PSS'
comprehensive program for its Physician Supply Business includes the following:
Recruitment. PSS has developed a recruitment program to help provide it
with a source of mobile and committed sales representatives. PSS believes
that it is a leader in its industry in recruiting sales representatives on
college and university campuses. PSS' recruiters use state-of-the-art
marketing materials to attract candidates who demonstrate superior sales
aptitude. PSS also recruits college graduates with up to five years
experience in business, government or the military as operational
management trainees.
Initial Development. Each trainee is initially assigned to a service
center. Under the supervision of local managers, training consists of a
combination of self-study, individual instruction and interaction with
customers and vendors. Such training includes 16 one-week courses providing
instruction on products, procedures and selling skills. During this
development program, the trainee attends the Jacksonville, Florida training
center ("PSS University") for additional training. Individual progress is
measured weekly through formal testing and role playing, resulting in
continued advancement to graduation, usually within 20 weeks. PSS designs
the program to be strenuous and only approximately 70% of the trainees
successfully complete the program. Upon graduation, the newly appointed
sales representative assumes responsibility for the first available sales
territory, within a preferred region regardless of location. PSS typically
has approximately 30 sales candidates at various stages of the training
process. PSS believes that the level of its expenditures in developing new
sales representatives and its ability to place new sales representatives
quickly in a new region is unique within the industry. The new sales
graduate is placed on a 15-month salary-to-commission conversion program.
Presently, approximately 95% of PSS' sales force is compensated on a
straight commission basis.
Operations Management. PSS' development program for its operations
management trainees consists of approximately twelve months of intensive
training and development. After recruitment, the operations management
trainee is transferred to at least three service centers and is given
various and gradually increasing levels of responsibility. The trainee is
assigned to an operations management position when it becomes available at
a service center, regardless of location. PSS has available approximately
five operations management trainees to support its growth.
Continued Development. PSS provides several programs to continue
development of its sales and management organization. The programs provided
by PSS University include a leadership program for management candidates,
senior sales representatives and general managers, a program emphasizing
creativity and innovation for first-year managers, and a management
development program. In addition, PSS encourages its sales representatives
to participate in industry-accredited self-study programs. Every sales
representative routinely attends local sales meetings, annual sales and
marketing meetings, key vendor product conferences and continuing education
programs at PSS University. Additionally, PSS is developing training
programs on customer service, purchasing and other field operations.
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At December 31, 1997, PSS had approximately 800 sales representatives, 300
service specialists and 2,700 total employees. PSS considers its employee
relations to be excellent. See "Risk Factors--Risks Relating to PSS, Gulf South
and the Combined Company--Dependence on Key Management" and "--Dependence on
Sales Representatives and Service Specialists."
INFORMATION SYSTEMS
The Physician Supply Business maintains a decentralized information system
with data acquisition at the local service centers and a central corporate data
base that is accessible from all of the service centers. The information
systems were designed to allow the service center to have both the hardware and
software to conduct operations independently. The failure of a computer system
at a service center would not affect the operations of any other service center
or the corporate system. Likewise, the short-term failure of the corporate
system would not affect the operations of any service center. See "Risk
Factors--Risks Relating to PSS, Gulf South and the Combined Company--Reliance
on Data Processing."
ICONSM is a sales force automation tool which allows the Physician Supply
Business sales representatives to access critical customer information and
place orders from any location using a pen-based, hand-held computer system.
ICONSM provides the sales representatives with customer pricing, contracts,
backorders, inventory levels, account status and instant ordering. The
customer's order is transmitted via wireless transmission to the corporate
system and then transmitted from the corporate system to the local service
center in less than two minutes. ICONSM has increased time available for
selling, decreased operating expenses in the service centers and enhanced PSS'
ability to provide same-day delivery to customers. Utilizing ICONSM, sales
representatives can give product demonstrations, provide equipment feasibility
studies and perform revenue and return-on-investment analyses for specific
equipment. ICONSM also gives the sales representative the ability to provide
quotes and bids to the larger accounts.
To enable the Company to maintain high customer order fill rates on a
consistent basis, PSS utilizes its Back-Order Eliminator and Allocator of
Resources ("BEAR") system. Each service center reports its inventory quantities
on a daily basis. The separate service center reports are combined into one
company-wide inventory report containing product number, quantity on hand and
historical usage. This systems reduces back-orders to customers and reduces
PSS' total inventory through increased inventory efficiencies. BEAR also
displays the on-hand usage quantities of neighboring service centers that are
within one commercial-shipping day of the service center.
During fiscal year 1997, PSS developed and test-marketed the CustomerLink
system. PSS believes this system is the first Internet-based health care
information system designed and used specifically for inventory management and
purchasing for the medical practice. Company customers can access CustomerLink
through the Internet at http://www.pssd.com after receiving their personal
password from PSS. All company customers, regardless of size, with access to
the Internet, will be given access to services and on-line information,
including: (i) on-line order placement and confirmation; (ii) customer-specific
pricing, product availability, back orders and utilization reports; (iii)
working capital management reports; and (iv) practice compliance assistance for
OSHA and CLIA, including a database of medical safety sheets.
PSS is implementing a delivery automation system that is expected to be
completed in fiscal year 1998. The system will provide electronic signature
recognition and delivery routing which PSS believes will improve its
distribution efficiency.
PSS is currently in the process of developing and implementing separate
systems for its Imaging Business which will include the ICONSM and CustomerLink
systems. PSS expects the Imaging Business system to be implemented in fiscal
year 1998.
PURCHASING AND VENDOR RELATIONSHIPS
PSS aggressively seeks to purchase the medical supplies and equipment it
distributes at the lowest possible price through volume discounts, rebates and
product line consolidation. PSS' corporate materials management department
negotiates all of its contract terms with vendors. Individual orders are placed
by PSS' purchasing
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agents, located at its service centers, who are responsible for purchasing and
maintaining the inventory. Supplies and equipment are delivered directly from
vendors to the service centers.
PSS aggressively pursues the opportunity to market and sell medical equipment
and supplies on an exclusive basis. Manufacturers of medical diagnostic
equipment and supplies typically offer distribution rights only to a selected
group of distributors and are increasingly seeking to reduce the number of
distributors selling their products to end users in an effort to reduce the
cost associated with marketing and field support. PSS has been successful in
assisting manufacturers in their development and marketing plans and in
obtaining the exclusive right to sell certain products. PSS believes that its
ability to capture such distribution rights represents a significant barrier to
the entry of competitors.
PSS recently completed the second year of the Abbott Agreement, which
provides for the exclusive distribution of certain Abbott diagnostic products.
The Abbott Agreement has positioned PSS as the sole distributor to physician
offices with 24 or fewer physicians for, among other products, the CELL DYN(R)
1400, 1600 and 1700 hematology products, Abbott Vision(R) blood chemistry
analyzers and reagents, AXyM(R) and IMx(R) immunoassay analyzers and reagents,
and the Abbott Testpack(R) line of rapid tests and has also enabled PSS to
cross-sell its other products to Abbott customers. Abbott may terminate the
Abbott Agreement if PSS fails to meet certain sales levels. Abbott products
constituted approximately 14% and 16% of PSS' sales in fiscal years 1996 and
1997, respectively.
Currently, PSS has contractual alliances with many vendors including F.
Hoffman-LaRoche, Ltd. These alliances provide PSS volume incentives, dedicated
field support, and select relationships with leading manufacturers. As a result
of PSS' performance in selling their products, these entities participate with
PSS in relationships ranging from exclusivity to shared market resources. In
the office-based physician market, PSS is the United States leader of sales of
hematology and chemistry products for F. Hoffman-La Roche Ltd., which
constituted approximately four percent of PSS' sales in fiscal year 1997.
PSS recently entered into four separate exclusive distribution agreements for
certain products manufactured by Siemens AG (cardiology and OB/GYN ultrasound
equipment), Hologic, Inc. (bone densitometry analyzer), C. R. Bard, Inc.
(bladder cancer diagnostic test) and Tanita Corporation of America, Inc. (body
weight and fat analyzer). In addition, PSS has entered into an exclusive
distribution agreement with HumaScan Inc. (non-invasive breast tumor detection
screen) and has recently entered into a primary distribution agreement with
Cardinal Health, Inc. (certain pharmaceuticals). These strategic alliances
should continue to broaden PSS' product offerings to both the Physician Supply
Business and Imaging Business customers. See "Risk Factors--Risks Relating to
PSS, Gulf South and the Combined Company--Dependence on Vendor Relationships."
ACQUISITIONS
PSS' Physician Supply Business has grown from one service center located in
Jacksonville, Florida in 1983 to 61 service centers currently. Historically,
PSS' growth has been accomplished through both the start-up of service centers
and the acquisition of local and regional medical supply and equipment
distributors. Since fiscal year 1994 PSS has accelerated its acquisition of
medical supply and equipment distributors both in number and in materiality of
the operations acquired. See "Risk Factors--Risks Relating to PSS, Gulf South
and the Combined Company--Acquisition Strategy" and "--Risks of Business Growth
and Margin Pressures Due to Changing Market Conditions."
With the November 1996 acquisition of a medical diagnostic imaging supply and
equipment distributor, PSS began the operations of its Imaging Business.
Subsequent acquisitions have resulted in 27 Imaging Business service centers
operating throughout 25 states. PSS' objectives for the Imaging Business during
fiscal year 1998 are to: (i) continue geographic expansion with acquisitions of
local and regional imaging distributors to leverage existing infrastructure;
(ii) develop and implement a separate hardware and software system for the
business utilizing the Physician Supply Business' ICONSM and CustomerLink
systems; (iii) expand the products and services currently provided; (iv)
implement same-day delivery; and (v) develop a PSS University training program
specifically tailored for the Imaging Business. See "Risk Factors--Risks
Relating to PSS, Gulf South and the Combined Company--Expansion into New Lines
of Business."
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PSS views the acquisition of medical-products distributors as an integral
part of its growth strategy. PSS intends to continue to acquire local and
regional distributors especially in existing markets where it can leverage its
distribution infrastructure, gain market share, and expand geographically. PSS
believes that the consolidation in the physician-supply and imaging-supply
markets is occurring due to local and regional distributors experiencing: (i) a
lack of purchasing and administrative economies of scale; (ii) reduced access
to medical equipment lines as manufacturers seek to reduce marketing costs by
minimizing the number of distributors; (iii) consolidation among providers, who
are increasingly seeking to reduce the number of suppliers from which they
purchase medical products; (iv) a lack of resources for continued development
and training of personnel for maintenance, expansion or replacement of existing
business; and (v) a lack of resources to develop new distribution system
technologies and services.
PSS has completed ten mergers and acquisitions to date in fiscal year 1998.
For example, in July 1997, PSS completed the merger of General X-Ray and
certain affiliated entities, distributors of radiology and imaging equipment
which operated seven distribution centers and distributed to seven states,
primarily in the Midwest. In September 1997, PSS completed the merger of S&W, a
distributor of radiology and imaging equipment, chemicals and supplies, and
provider of technical services to hospitals and alternate-site providers, which
operated five locations which served four Northeastern states.
PSS completed ten mergers and acquisitions in fiscal year 1997, including the
acquisition of Diagnostic Imaging, Inc., a distributor based in Jacksonville,
Florida which began the operations of its Imaging Business. Diagnostic Imaging,
Inc. operated eight distribution centers with 24 sales representatives and 75
service specialists. In fiscal year 1997, PSS expanded its Imaging Business
through mergers with X-ray Georgia and Rad-Tech X-Ray, Inc., both based in the
Atlanta, Georgia area, which collectively served six states in the Southeast
with 13 sales representatives and 51 service specialists and the merger with
Chesapeake X-Ray Corporation based in Roanoke, Virginia, which served four
states in the Southeast with five sales representatives and 15 service
specialists.
PROPERTIES
PSS maintains 91 service centers providing service to 50 states throughout
the United States, as well as Belgium, France, Germany, Luxembourg and the
Netherlands. All service center locations are leased by PSS, with the exception
of the service center located in Leuven, Belgium. The following tables set
forth the service center locations and areas which they service for the
Physician Supply Business, Imaging Business and International Business.
Physician Supply Business
<TABLE>
<CAPTION>
LOCATIONS STATES SERVED LOCATIONS STATES SERVED
- --------- ------------- --------- -------------
<S> <C> <C> <C>
Albany, NY NY, CT, VT Louisville, KY IN, KY
Albuquerque, NM NM, CO, TX Lubbock, TX TX
Atlanta, GA GA, AL Memphis, TN AR, MS, TN
Baltimore, MD MD, PA, VA, WV Milwaukee, WI WI
Beaumont, TX TX Minneapolis, MN IA, MN, MT, ND, SD, WI
Birmingham, AL AL, MS Mobile, AL AL, FL, MS
Boise, ID ID, MT Nashville, TN IL, KY, TN
Charlotte, NC NC, SC, VA, TN New Orleans, LA LA, MS, TX
Chattanooga, TN AL, GA, TN Norfolk, VA NC, VA, WV
Chicago, IL IL, IN, WI Omaha, NE CO, NE, IA, WY
Cincinnati, OH KY, IN, OH, WV Orlando, FL FL
Cleveland, OH OH Philadelphia, PA DE, NJ, NY, PA
Columbia, SC SC, GA Phoenix, AZ AZ
Dallas, TX TX, OK Pittsburgh, PA PA, WV, MD, OH, NY
Davenport, IA IA, IL Portland, OR CA, OR, WA
</TABLE>
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<TABLE>
<CAPTION>
LOCATIONS STATES SERVED LOCATIONS STATES SERVED
- --------- ------------- --------- -------------
<S> <C> <C> <C>
Deerfield Beach, FL FL Raleigh, NC NC, VA
Denver, CO CO, NM, WY Richmond, VA VA
Detroit, MI MI Roanoke, VA TN, VA
Honolulu, HI HI Rochester, NY NY
Houston, TX TX, OK Salt Lake City, UT CO, NV, UT
Indianapolis, IN IN, IL San Antonio, TX TX
Jackson, MS MS, LA San Diego, CA CA
Jacksonville, FL FL, GA, SC San Francisco, CA CA
Kansas City, KS IL, IA, KS, MO Seattle, WA WA, AK
Knoxville, TN KY, NC, TN St. Louis, MO IL, MO
Lafayette, LA LA St. Petersburg, FL FL
Las Vegas, NV NV Tallahassee, FL AL, FL, GA
Little Rock, AR TX, AR Tulsa, OK AK, OK, MO
Long Island, NY CT, NJ, NY Union, NJ NJ, NY
Los Angeles, CA (North) CA Wareham, MA RI, CT, ME, MA, NH
Los Angeles, CA (South) CA
Imaging Business
<CAPTION>
LOCATIONS STATES SERVED LOCATIONS STATES SERVED
- --------- ------------- --------- -------------
<S> <C> <C> <C>
Atlanta, GA GA, SC Mobile, AL AL, FL, MS
Birmingham, AL AL, MS Nashville, TN KY, TN
Charlotte, NC NC, SC Raleigh, NC NC
Columbia, SC SC, GA Richmond, VA VA
Pompano Beach, FL FL Roanoke, VA TN, VA, WV
Jacksonville, FL FL, GA Tallahassee, FL FL, GA, AL
Gainesville, FL FL Savannah, GA GA, SC
Memphis, TN AR, KY, TN, MS Winston Salem, NC NC, VA
Tampa, FL FL Chicago, IL IL, IN, IA, WI
St. Louis, MO MO, IL, IA, AR Indianapolis, IN IN, OH, KY
Rochester, NY NY, PA Albany, NY NY, CT, PA
Syracuse, NY NY, PA Buffalo, NY NY, PA
Albuquerque, NM NM, TX Newburgh, NY NY, CT, NJ, PA
Denver, CO CO, NV
</TABLE>
International Business
<TABLE>
<CAPTION>
LOCATIONS COUNTRIES SERVED
--------- ------------------------
<S> <C>
Leuven, Belgium Belgium, France, Germany
Dusseldorf, Germany Germany, Luxembourg
Utrecht, Netherlands Netherlands
</TABLE>
In the aggregate, PSS' service centers consist of approximately 945,000
square feet, of which all is leased, with the exception of the distribution
center in Leuven, Belgium and a building in Beaumont, Texas, under lease
agreements with expiration dates through 2001. PSS' service centers range in
size from 4,800 square feet to 51,000 square feet.
The corporate offices of PSS consist of approximately 50,000 square feet of
leased office space located at 4345 Southpoint Boulevard, Jacksonville, Florida
32216. The lease for this space expires in April 2002.
At December 31, 1997, PSS' facilities provided adequate space for its
operations. Throughout its history of growth, PSS has been able to secure the
required facilities.
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COMPETITION
PSS operates in a highly competitive environment. PSS' principal competitors
are multi-market medical distributors that are full-line, full-service medical
supply companies, some of which are national in scope. These national companies
have sales representatives and service specialists competing directly with PSS,
are substantially larger in size, and have substantially greater financial
resources than PSS. There are also numerous local dealers and mail order firms
that distribute medical supplies and equipment within the same market as PSS.
Most local dealers are privately owned and operate with limited product lines.
There are several mail order firms which distribute medical supplies on a
national or regional basis. PSS also competes with certain manufacturers that
sell their products both to distributors and directly to users, including
office-based physicians. See "Risk Factors--Risks Relating to PSS, Gulf South
and the Combined Company--Competition."
REGULATORY MATTERS
PSS' business is subject to regulation under the Federal Food, Drug, and
Cosmetic Act, the Prescription Drug Marketing Act of 1987, the Controlled
Substances Act and other regulation by the U.S. Food and Drug Administration
and state laws applicable to the distribution and manufacture of medical
devices and over-the-counter pharmaceutical products as well as the
distribution of prescription pharmaceutical products.
The Federal Food, Drug, and Cosmetic Act generally regulates the manufacture
of drug and medical devices shipped in interstate commerce, including such
matters as labeling, packaging, storage and handling of such products. The
Prescription Drug Marketing Act of 1987, which amended the Federal Food, Drug
and Cosmetic Act, establishes certain requirements applicable to the wholesale
distribution of prescription drugs, including the requirements that wholesale
drug distributors be registered with the Secretary of Health and Human Services
or be licensed in each state in which they conduct business in accordance with
federally established guidelines on storage, handling, and records maintenance.
Under the Controlled Substances Act, PSS, as a distributor of controlled
substances, is required to obtain annually a registration from the Attorney
General in accordance with specified rules and regulations and is subject to
inspection by the Drug Enforcement Administration acting on behalf of the
Attorney General. PSS is required to maintain licenses and permits for the
distribution of pharmaceutical products and medical devices under the laws of
the states in which it operates. In addition, PSS' physician customers are
subject to significant federal and state regulation. There can be no assurance
that regulations that impact the physicians' practices will not have a material
adverse impact on PSS' business.
PSS is also subject to regulation in the European countries where the
International Business markets its products. Many of the regulations applicable
in such countries are similar to those of the U.S. Food and Drug
Administration. The national health or social security organizations of certain
countries require the products distributed by PSS to be qualified before they
can be marketed in those countries.
Federal, state and foreign regulations regarding the sale and distribution of
medical supplies, equipment and devices by PSS are subject to change. PSS
cannot predict what impact, if any, such changes might have on its business.
See "Risk Factors--Risks Relating to PSS, Gulf South and the Combined Company--
Regulation of and Change in the Practice of Medicine" and "--Environmental
Liabilities and Regulations."
LEGAL PROCEEDINGS
Although PSS does not manufacture products, the distribution of medical
supplies and equipment entails inherent risks of product liability. PSS has not
experienced any significant product liability claims and maintains product
liability insurance coverage. In addition, PSS is party to various legal and
administrative proceedings and claims arising in the normal course of business.
While any litigation contains an element of uncertainty, PSS believes that the
outcome of any proceedings or claims which are pending or known to be
threatened will not have a material adverse effect on PSS' consolidated
business, financial condition or results of operations. See "Risk Factors--
Risks Relating to PSS, Gulf South and the Combined Company--Litigation and
Liability Exposure."
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BUSINESS OF GULF SOUTH
The following is a general discussion of the business of Gulf South as a
separate company and does not specifically contemplate the effects of the
proposed Merger. For a description of PSS' business, see "Business of PSS." For
a discussion of the anticipated effects of the Merger, see "Risk Factors," "The
Merger--Reasons for the Merger," and "--Management and Operations after the
Merger."
GENERAL
Gulf South is a leading national distributor of medical supplies and related
products to the long-term care industry. Gulf South provides products and
services to approximately 10,500 long-term care facilities in all 50 states.
Gulf South's customers range from independent nursing home operators to large
national chains offering a broad range of healthcare services, such as Beverly
Enterprises, Vencor, Integrated Health Services, Manor Care and GranCare, as
well as home healthcare providers, hospices and sub-acute, rehabilitative and
transitional care providers. Through its 23 full-service regional distribution
centers, Gulf South offers both national coverage to multi-facility customers
and local service to individual facilities and independent operators. Gulf
South believes that it has achieved its success to date due to the expertise
gained from more than twelve years of focus on the long-term care industry and
its strong commitment to providing superior service to its customers.
INDUSTRY OVERVIEW
According to the latest industry data available, sales of medical supplies
and related products to the nursing home segment of the long-term care industry
in the United States were more than $1.6 billion in 1995 and Gulf South
estimates that such sales are growing at an annual rate in excess of 10%. Gulf
South believes that the home healthcare and sub-acute care segments are growing
at a faster rate than the nursing home segment of the long-term care industry.
Medical supplies and related products are distributed to healthcare providers
through two primary channels of distribution. Distribution to hospitals and
surgical clinics generally is made through several large national hospital
distributors or directly by manufacturers. In contrast, distribution to long-
term care facilities typically is made through many local and regional
distributors as well as several national distributors.
Hospital Distribution. The hospital distribution market is characterized by
customers that have physical plants with large inventory storage capacity and
that serve large numbers of patients primarily with short-term acute-level
medical care. In order to service this market and maintain economies of scale,
the large national hospital distribution companies have established multiple
warehouse facilities near the largest concentrations of customers, generally in
urban or metropolitan areas, with an infrastructure that allows them to deliver
goods in bulk volume with frequent, and in many cases same day, service.
Hospital distributors typically maintain their own trucking fleets to deliver
products. Because of the specialized acute care services performed by
hospitals, hospital distributors must handle an extremely broad and diverse
range of products that focus on the short-term medical and surgical needs of
hospital patients.
Distribution to Long-Term Care Industry. Distributors serving the long-term
care market must address a different set of customer needs. The long-term care
market is highly fragmented, consisting of large numbers of independent
operators, small to mid-sized local and regional chains and several national
chains. Facilities are typically located in suburban and rural areas, often at
considerable distances from one another. Long-term care facilities generally
serve a limited patient population (typically from 20 to 200 beds) and have
relatively small physical plants with limited inventory storage capacity.
Although long-term care facilities do not demand immediate same-day delivery,
they require distributors to deliver products in small quantities (including
"broken case" shipments) on a consistent and reliable basis. Distributors
serving the long-term care market must generally have the capability to tailor
their ordering, shipping and billing processes to suit customers'
individualized needs. Because of the fragmented structure and the specialized
service needs of the long-term care market, long-term care facilities have
traditionally been served by locally- or regionally-based distributors which
maintain supply relationships with a limited number of customers within a
finite geographic area. However, these local and regional distributors are
increasingly subject to intense competitive pressures as a result of the
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consolidation of independent long-term care operators by large national chains
and a growing trend by manufacturers to deal with fewer and larger distributors
in this market.
Certain Trends Affecting the Long-Term Care Market. Economic, regulatory,
political and demographic pressures are combining to cause significant changes
in the long-term care industry. Cost containment pressures from governmental
and private reimbursement sources have led to a reduction in the length of
expensive hospital stays and a resulting increase in the demand for long-term
care facilities to provide such services at a significantly lower cost than
hospitals. This trend has also led to a general increase in the acuity levels
of patients found in traditional long-term care facilities, as well as to the
emergence of sub-acute, rehabilitative, transitional and other specialized
long-term care facilities. Cost containment pressures have also contributed to
a need for greater efficiency by long-term care operators, and have led to some
consolidation among these healthcare providers. In addition, the demographic
pressures of an aging U.S. population have caused continued demand for
traditional custodial long-term care and other long-term care services. Census
Bureau data indicates that the number of persons aged 65 and older is expected
to increase from approximately 31.2 million in 1990 to approximately 34.5
million by the year 2000 and that the number of persons aged 85 years and
older, which is the fastest growing segment of the population and the largest
consumer of long-term care, is expected to increase from 3.1 million in 1990 to
approximately 4.1 million during the same period.
These trends affecting the long-term care industry have created the need for
an increasingly sophisticated distribution system for medical and personal care
products. Rising acuity levels within the patient population require
distributors to handle a broader range of products, including more
sophisticated medical supplies and equipment that are often used in small
quantities. Industry consolidation of long-term healthcare providers into
regional and national chains has created a need for distributors that can
service facilities in different locations with consistent and reliable service.
Finally, cost containment pressures and competitive requirements mandate that
distributors provide products and services to this market on an increasingly
cost-effective basis.
BUSINESS STRATEGY
Gulf South's principal business objective is to enhance its position as a
leading national distributor of medical and personal care products to the long-
term care industry. Gulf South believes that the following factors have been of
principal importance in its ability to achieve its present market position:
Focus on Long-Term Care Industry. Since its founding more than thirteen
years ago, Gulf South has focused primarily on serving the long-term care
market. Based on its industry experience and expertise, Gulf South has
developed the necessary distribution systems and services that assist
operators of long-term care facilities to source products, manage inventory
usage and control costs. Gulf South believes that its long-standing focus
on the needs of the long-term care industry has enabled it to develop and
execute a consistent management strategy and to foster stable, long-term
relationships with its customers.
Consistent and Reliable Customer Service. Gulf South offers customers a
high level of service and support which it believes differentiates it from
its competitors, particularly small to medium-sized local and regional
distributors. Gulf South's objective is to enable customers to place orders
easily and conveniently, to fill orders accurately and completely and to
deliver orders with prompt, consistent and reliable service. As of
September 30, 1997, Gulf South estimates that it shipped more than 95% of
all orders on the same day the order is placed with a fill rate of 98.5%
and that more than 90% of customer orders are delivered to the customer
within two days of receipt. In addition, Gulf South offers customers
various value-added services, including monthly usage reports, inventory
control/ancillary billing software programs, next-day invoicing and
customized programs designed to assist customers to manage inventory usage
and control costs. Gulf South centralizes the majority of customer ordering
and invoicing and the delivery of value-added services through its Jackson
facility enabling Gulf South to provide consistent levels of customer
service to each individual facility within multi-location chains.
Broad Product Offering at Competitive Prices. Gulf South presently offers
over 18,000 medical supplies and related products and updates its product
offerings regularly to meet its customers' changing needs. Gulf South's
sales volume, national coverage and stable vendor relationships enable it
to obtain
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products from suppliers at favorable negotiated prices. Through the breadth
of its product offerings and effective use of its purchasing leverage with
vendors, Gulf South has the capability to serve as a competitively priced,
single source of supply to a wide variety of long-term care facilities.
National Coverage With a Local Presence. With 23 full-service regional
distribution centers, each supported by a team of direct sales
representatives, Gulf South is able to provide consistent and reliable
coverage to mid-sized and large chains that operate in different geographic
areas. Gulf South also maintains a strong local presence in each region to
support independent operators and individual facilities within multi-
location chains.
GROWTH STRATEGY
Gulf South believes that the continuing implementation of the business
strategies described above, coupled with a focus on the following growth
strategies, will enhance its ability to expand its sales to existing and new
customers:
Emphasis on Attracting New Customers. Gulf South's strategy is to
increase its emphasis on attracting large regional and national chains as
well as to target both small chains and independent operators. Gulf South
believes that it can increase sales to large regional and national chains
by adding new distribution centers, expanding its existing distribution
centers and by hiring additional direct sales or other personnel and
through national account sales efforts. Gulf South believes that it can
increase its penetration of small chains and independent operators,
particularly in rural areas, by increasing its direct sales force and
utilizing group purchase organizations. Gulf South believes that its high
levels of customer service and value-added support, breadth of its product
offerings and competitive pricing afford it a competitive advantage over
the regional and local distributors that typically target these customers.
Increased Penetration of Existing Customer Base. Gulf South intends to
capitalize on opportunities to expand sales to existing customers. Gulf
South believes that continuing industry consolidation will result in an
increase in the number of facilities operated by mid-sized and large chains
presently served by Gulf South. In addition, rising acuity levels within
the patient population of long-term care facilities are expected to
increase the breadth and amount of products required by Gulf South's
existing customers. Gulf South also believes that cost containment
pressures will continue to create incentives for facility operators to deal
increasingly with fewer distributors that, like Gulf South, can provide
inventory management and cost control programs.
Addressing Needs of Emerging Market Segments. Gulf South intends to
increase its focus on the home healthcare, hospice and sub-acute,
rehabilitative and transitional care segments of the long-term care market.
Gulf South believes that the home healthcare and sub-acute care segments
are growing at a faster rate than the nursing home segment of the long-term
care industry.
Acquisitions. Gulf South's strategy is to augment its internal growth
with the acquisition of medical supply distributors that serve
complementary markets or that supplement Gulf South's presence in existing
markets. On March 24, 1997, Gulf South acquired certain operating assets
and assumed certain operating liabilities of American Medical Products,
Inc., a regional medical supply distributor serving the long-term care
market in Southern Louisiana. On October 1, 1997, Gulf South acquired
certain operating assets and assumed certain operating liabilities of Tri-
Medical Supply, Inc., a regional medical supply distributor serving the
long-term care markets of Florida, the Southeast, the Southwest, the Ohio
Valley and the New England area.
The foregoing discussion contains forward-looking statements which involve
risks and uncertainties, and Gulf South's actual experience may differ
materially from that discussed above. Factors that may cause such a difference
include, but are not limited to, those discussed in "Risk Factors."
CUSTOMERS
Gulf South's customers range from independent nursing home operators to large
national chains offering a broad range of healthcare services, as well as
providers of home healthcare and sub-acute, rehabilitative and
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transitional care. Nursing home operators tend to focus on providing custodial
or skilled nursing care, principally to elderly patients. In addition, many of
these facilities are increasingly setting aside a portion of their beds for
sub-acute care patients. Principal customers of Gulf South providing this form
of long-term care include Beverly Enterprises, Vencor, Integrated Health
Services, Manor Care and GranCare. Home healthcare providers offer a wide range
of services such as pulmonary and infusion therapy to patients who have been
discharged from hospitals or sub-acute care facilities. Customers of Gulf South
providing home healthcare include IHS HomeCare and Vitas Healthcare. Sub-acute,
rehabilitative and transitional care providers generally serve patients who are
recovering from major injury, surgery or illness, but no longer need the full
services of a general acute care hospital. Principal customers of the Company
providing sub-acute, rehabilitative and transitional care include Sun
Healthcare Group.
Gulf South believes that approximately 77% of its 1996 net sales were
attributable to customers that focused primarily on providing custodial,
skilled nursing and sub-acute care, principally through nursing homes. Gulf
South estimates that large nursing home chains (operating more than 50
facilities) and mid-sized nursing home chains (operating between 20 and 50
facilities) accounted for approximately 24.2% of the facilities served by Gulf
South in 1996 and 50.4% of Gulf South's 1996 net sales. In fiscal year 1996 and
the nine months ended September 30, 1997, Gulf South's largest five customers
accounted for approximately 32.2% and 27.4%, respectively, of net sales.
Beverly Enterprises accounted for 19.6% and 12.6% of net sales for fiscal year
1996 and the nine months ended September 30, 1997, respectively. Gulf South
does not generally have long-term contracts with any of its customers. Although
Gulf South has not to date experienced any failure to collect accounts
receivable from its largest customers, an adverse change in the financial
condition of any of these customers, including as a result of a change in
governmental or private reimbursement programs, which would cause the accounts
receivable to become uncollectible or subject to extended payment terms, could
have a material adverse effect upon Gulf South's results of operations or
financial condition.
CUSTOMER SERVICE/ORDER ENTRY AND FULFILLMENT
Gulf South is committed to providing high levels of customer service and
support, the principal basis of which is accurate and complete order
fulfillment and reliable, consistent deliveries. As a result of its efficiency
in order entry and order fulfillment, Gulf South estimates that, as of
September 30, 1997, it shipped more than 95% of all orders on the same day the
order is placed with a fill rate of 98%. Since approximately 60% of customer
orders are placed by telephone, the efficient handling of incoming calls is
critical to Gulf South's business. Gulf South offers to its customers a toll-
free telephone number and fax line and is currently using its EDI ordering
capability to accept electronically transmitted orders from several of its
major customers. As of September 30, 1997, approximately 30% of customer orders
were placed by EDI and approximately 10% of customer orders were placed by fax.
All telephone and fax orders are received by 90 customer service
representatives primarily at Gulf South's Jackson distribution facility who
utilize on-line computer terminals to enter customer orders and to access
information about products, product availability, pricing, promotions and the
customer's purchasing history. Following entry of an order, the order is
electronically transmitted to the distribution center nearest the customer's
facility and a packing slip for the entire order is printed for order
fulfillment. Gulf South imposes no minimum dollar amount on orders.
Gulf South believes that the reliable and consistent delivery of complete and
accurate orders is more important to its customers than immediate same-day
delivery. Accordingly, each distribution facility stocks the 4,000 most
frequently ordered products, with the Harrisburg, Jackson and Dallas facilities
each stocking an additional 6,000 products. Product back orders average less
than 2% of products ordered. Gulf South estimates that approximately 50% of its
orders are shipped by UPS while the remaining orders are shipped by various
common carriers. Gulf South generally does not charge customers for shipping
costs for orders of $300 or more. Because Gulf South seeks to service a
customer's entire order from the distribution center nearest the customer's
facility, Gulf South estimates that 90% of the customers receive their orders
within one or two business days of the order date and 98% of the customers
receive their orders within three business days. Customer service operations of
Gulf South are primarily centralized at its Jackson facility, enabling Gulf
South to provide consistent levels of customer service to all customers,
including to each individual facility operated by a large
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multi-location chain. Gulf South's customer service representatives are
provided with detailed product knowledge and receive ongoing training regarding
new products and promotions enabling them to provide prompt and efficient
service and accurately answer customer inquiries. From time to time, Gulf South
arranges for manufacturers to make presentations on new products both to the
customer service representatives and directly to its customers.
An essential part of Gulf South's commitment to customer service and customer
relations is the value-added support services developed by Gulf South to meet
the unique needs of long-term care providers as well as the specialized needs
of individual customers. These services are made available both to large chains
and to independent operators and are generally provided by Gulf South without
cost to the customer. The principal value-added services currently provided by
Gulf South include the following:
Monthly Usage Reports. Gulf South has been producing monthly usage
reports for its customers since the early 1980's and has refined such
reports over time in response to customer needs. Gulf South believes that
usage reports are critical to managing inventory consumption and
controlling costs. These reports identify each product purchased by a
facility during the month, the quantity purchased, the price per product
and the total price paid and also provide year-to-date totals. The monthly
usage reports enable customers to manage supply requirements, maintain
inventory controls, prepare monthly and yearly forecasts and budgets and
enable operators of multi-facility chains to track product purchases on
either a facility-by-facility or chain-wide basis.
Inventory Control/Ancillary Billing Software Programs. Since 1990, Gulf
South has offered software programs which allow a customer to maintain a
real time inventory count and order products on a just-in-time basis, as
well as to monitor patients' utilization of products for Medicaid and
Medicare reimbursement purposes. A product identification number is
assigned to each product, and when a product is utilized or distributed
within the facility, the customer enters the product identification number
into its computer system either manually or by use of a bar code scanner.
Next-Day Invoicing. Because Gulf South seeks to ship each entire order at
one time from a single distribution center, Gulf South is able to generate
and mail a single invoice directly to the customer within one business day
of the order date. As a result, the customer generally receives the invoice
concurrently with or within one day of receiving the order, facilitating
efficient verification of charges and reducing handling and administrative
costs for the customer.
Customized Services. Gulf South frequently works directly with a customer
to provide services tailored to its specialized needs. Gulf South will
generate customized invoices for customers upon request. For those
customers that use an inventory control/ancillary billing system, Gulf
South can provide bar code labels to support the customer's software
program, making the scanning process simple for those customers. To enable
multi-facility chains to better manage costs and control product selection,
Gulf South provides each of its chain customers with a customized ordering
guide which contains only those products selected by the chain operator in
advance to be offered within each of its facilities. Gulf South presently
publishes approximately 65 customized ordering guides.
PRODUCTS
Gulf South offers a comprehensive selection of over 18,000 medical supplies
and related products consisting largely of name brand items. The breadth of
Gulf South's product offerings and its special order capabilities enable it to
provide its customers with the convenience of one-stop shopping. The following
chart sets forth the principal categories of products offered by Gulf South and
the top selling types of products in each category, if appropriate, and
percentage of 1996 net sales in parenthesis:
MEDICAL/SURGICAL SUPPLIES (46.0%) ENTERAL FEEDING SUPPLIES (6.4%)
Wound care supplies Nutritional supplements
Exam gloves Pump sets
Urologicals Tubing
Blood/urine testing supplies
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PERSONAL CARE ITEMS (11.6%) DURABLE EQUIPMENT (4.2%)
Soaps and shampoos Medical Instruments
Personal hygiene items
Paper products OTC (NON-LEGEND) DRUGS (3.0%)
Bedside utensils
INCONTINENT SUPPLIES (21.8%)
RESPIRATORY THERAPY SUPPLIES (5.8%) Adult diapers and underpads
Oxygen Supplies
Ventilator supplies OSTOMY SUPPLIES (1.2%)
Trach and suction supplies
Wound care supplies, adult diapers and underpads and exam gloves were Gulf
South's top selling product types in 1996, accounting for 13.8%, 21.8% and
11.1%, respectively, of net sales. Some of the product categories which
experienced a growth rate of 50% or more in 1996 included wound care supplies,
exam gloves, enteral feeding supplies and respiratory therapy supplies.
Gulf South's Product Task Force regularly evaluates customer response to
product offerings and sales results in order to make informed product
selections and pricing decisions. Product selection is mainly a function of
customer preference, and Gulf South expects to continue to increase its product
line breadth as customer demand warrants. Gulf South has increased the number
of products offered from approximately 4,800 in 1989 to over 18,000 in 1997.
SALES AND MARKETING
At December 31, 1997, Gulf South employed a direct sales force of 107
professionals who have primary responsibility for maintaining relationships
with existing customers and identifying and soliciting new customers. Once a
customer relationship is established, the sales force serves primarily to
supplement and support sales through Gulf South's catalogs. Four sales
professionals concentrate exclusively on national accounts, calling on the
corporate offices of the national long-term care chains. The sales force
supports each of Gulf South's 23 regional distribution centers, enabling Gulf
South to establish a local sales presence in the markets served by each center.
Gulf South trains its sales professionals through an ongoing program of
identifying and solving customer needs, augmenting selling skills and providing
detailed product knowledge. Manufacturers support this program by assisting
from time to time in the training of Gulf South's sales professionals.
Gulf South markets its products to customers primarily through a variety of
catalogs. Gulf South publishes its standard catalog (approximately 350 pages in
length), which is designed to serve as a basic resource tool for customers. The
standard catalog features approximately 2,500 products and provides detailed
product descriptions, photographs and helpful technical information relating to
products, if appropriate.
Approximately twice a year, Gulf South publishes a standard ordering guide
which contains pricing information and easy-to-follow ordering procedures for
the approximately 750 top selling products carried by Gulf South. Gulf South
also publishes for certain of its chain customers customized ordering guides
which contain only those products requested to be included by the chain. In
addition, Gulf South has introduced specialty ordering guides based on product
category, such as home respiratory therapy supplies. Gulf South guarantees the
published pricing information for the life of each of its ordering guides
(generally six months).
PURCHASING
Gulf South believes that effective purchasing is a key element to providing
name brand products at competitive prices. Gulf South believes that its high
volume purchases have increased its purchasing power with its primary
suppliers, resulting in volume discounts and rebates, favorable return policies
and promotional allowances.
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Gulf South regularly evaluates supplier relationships and considers alternate
sourcing as appropriate to assure competitive costs and quality standards. No
single supplier represented more than 12% of the total cost of the products
purchased by Gulf South in 1996. Gulf South's largest suppliers in 1996 were:
Kendall Healthcare Products Company, Baxter Healthcare, Inbrand, Becton,
Dickinson & Co., Ross Labs and Proctor & Gamble. In 1996, these suppliers
accounted for approximately 35.0% of the cost of the products purchased by Gulf
South in 1996. Kendall Healthcare Products Company accounted for over 9.5% of
the total cost of products purchased by Gulf South in 1996. As is customary in
the industry, Gulf South generally does not have any long-term contracts with
its suppliers.
Gulf South's management information system is used to monitor and manage its
inventory. Generally, Gulf South has been able to return any unsold or obsolete
inventory to the manufacturer, resulting in negligible inventory write-offs. At
September 30, 1997, Gulf South maintained an investment in inventory of
approximately $31.7 million, of which approximately $775,000 (less than 2.5%)
was over 180 days old. Gulf South turned its inventory approximately seven
times during 1996. Gulf South also utilizes its management information system
to minimize its inventory out-of-stock position.
COMPETITION
Gulf South faces intense competition from many regional and local
distributors in its markets as well as from several companies that distribute
products to long-term care facilities on a national basis. Gulf South believes
that there are four principal competitors that distribute products to long-term
care facilities on a national basis, Bergen Brunswig Medical Corporation,
General Medical Corporation (acquired by McKesson Corp. in January 1997),
Medline Industries, Inc. and Redline Medical Supply Co. In addition, certain
national long-term care chains buy products and supplies directly from
manufacturers and distribute such products directly to their facilities.
Although several national hospital distributors and healthcare manufacturers
presently sell to the long-term care market, to date the long-term care market
has not been a primary focus for such distributors and manufacturers. Barriers
to entry for distribution in the long-term care market are relatively low, and
the risk of new competitors entering the market, particularly in local areas,
is high. In addition, consolidation within the long-term care distribution
industry has resulted in increased competition by large national distributors.
Certain of Gulf South's current competitors, including many national hospital
and wholesale drug distributors, have substantially greater capital resources,
sales and marketing experience and distribution capabilities than Gulf South.
In response to competitive pressures from any of its current or future
competitors, Gulf South may be required to lower selling prices in order to
maintain or increase market share, and such measures could adversely affect
Gulf South's operating results.
Gulf South believes that the principal competitive factors in distributing
products to the long-term care market are the quality and level of customer
service, product pricing, breadth and quality of products offered and
consistency and stability of business relationships with customers. Gulf South
believes that it competes favorably with respect to each of these factors. In
particular, Gulf South believes it differentiates itself from the smaller local
and regional distributors with which it competes on account of the breadth of
its product offerings, its ability to acquire goods from suppliers at favorable
prices and its national coverage which enables it to offer consistent and
reliable service to multi-location chains. In addition, Gulf South believes
that it differentiates itself from most other national distributors in the
long-term care market as a result of its focus on providing services that can
be integrated with customers' internal budgetary and cost containment systems.
GOVERNMENT REGULATION
Gulf South's business is subject to regulation under the federal Food, Drug
and Cosmetic Act and the Occupational Safety and Health Act, as well as under
certain state regulations, because of its labeling, storage and handling of
certain drugs and medical devices. Gulf South believes that sales of products
that are subject to such regulation are not material in the aggregate. Gulf
South believes that it is in substantial compliance with such federal and state
laws and regulations and possesses all material licenses and permits required
for the conduct of its business.
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PROPERTIES
Gulf South owns or leases offices and warehouses in cities throughout the
United States. The following table sets forth the general location and certain
information for each of the distribution centers and other facilities owned or
leased by Gulf South:
<TABLE>
<CAPTION>
DISTRIBUTION CENTER LOCATION LEASED/OWNED
- ---------------------------- ------------
<S> <C>
Atlanta, GA........................................................ Leased
Columbus, OH....................................................... Leased
Cincinnati, OH*.................................................... Leased
Clearwater, FL*.................................................... Leased
Dallas, TX......................................................... Leased
Fort Worth, TX*.................................................... Leased
Harrisburg, PA..................................................... Leased
Indianapolis, IN................................................... Leased
Jackson, MS........................................................ Owned
Kennesaw, GA*...................................................... Leased
Los Angeles, CA.................................................... Leased
Madison, WI........................................................ Leased
Manchester, NH..................................................... Leased
Memphis, TN........................................................ Leased
Orlando, FL........................................................ Leased
Phoenix, AZ........................................................ Leased
Warren, RI......................................................... Leased
Warren, RI*........................................................ Leased
Raleigh, NC........................................................ Leased
Richmond, VA....................................................... Leased
Roanoke, VA........................................................ Leased
Sacramento, CA..................................................... Leased
San Antonio, TX.................................................... Leased
<CAPTION>
ADMINISTRATIVE OFFICERS
- -----------------------
<S> <C>
Richmond, VA....................................................... Leased
Sunbury, PA........................................................ Owned
Madison, MS (headquarters)......................................... Owned
</TABLE>
- --------
* Tri-Medical Supply, Inc. properties assumed October 1, 1997.
Gulf South believes that its facilities are adequate to carry on its business
as currently conducted. A number of leases relating to the above-described
properties are scheduled to terminate within the next several years. Gulf South
believes that, if necessary, it could find facilities to replace such leased
premises without suffering a material effect on its business.
EMPLOYEES
As of December 31, 1997, Gulf South employed 805 persons (all on a full-time
basis), of whom 155 were engaged in management, administration and accounting,
107 were engaged in direct sales, 156 were engaged in customer service,
purchasing and credit collection and 387 were engaged in warehouse and
distribution operations. Of these employees, 205 were located at Gulf South's
corporate headquarters and distribution center in Jackson. Gulf South considers
its employee relations to be excellent. No employees are covered by collective
bargaining agreements.
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LEGAL PROCEEDINGS
Gulf South 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., et al.,
Civil Action No. 3:97cv526WS, and Ann Krupnick v. Gulf South Medical Supply,
Inc., et al., Civil Action No. 3:97cv525BN. 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 stockholders that allegedly
purchased stock in Gulf South'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 and
Mississippi state law. The plaintiff in the Krupnick action alleges for herself
and for a purported class of similarly situated stockholders who purchased Gulf
South Common Stock between May 2, 1996 and July 22, 1996, that the defendants
engaged in certain violations of the Exchange Act, Rule 10b-5 promulgated
thereunder and Mississippi state law. Both lawsuits relate to disclosures made
in the prospectus issued by Gulf South in connection with its June 1996
Offering. Plaintiffs seek damages, including costs and expenses. Gulf South
believes that the allegations contained in the complaints are without merit and
intends to defend vigorously 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 Gulf South.
In addition, Gulf South is a defendant from time to time in lawsuits
incidental to its business. Other than as set forth above, Gulf South is not a
party to, and none of its property is subject to, any material legal
proceedings.
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AMENDMENTS TO PSS ARTICLES
STOCK AMENDMENT
The PSS Board of Directors has unanimously adopted, subject to stockholder
approval, an amendment to PSS' Amended and Restated Articles of Incorporation,
as amended, (the "PSS Articles"), to increase the number of authorized shares
of PSS Common Stock from 60,000,000 to 150,000,000 (the "Stock Amendment"). The
relative rights and limitations of the PSS Common Stock would remain unchanged
under the Stock Amendment. The PSS Common Stock does not have preemptive
rights.
As of the PSS Record Date, there were 40,984,705 shares of PSS Common Stock
outstanding. In addition, approximately 6,903,331 shares of PSS Common Stock
were reserved for issuance under PSS' stock plans. Therefore, as of the PSS
Record Date, approximately 12,111,964 authorized shares of PSS Common Stock
were unissued and not reserved for issuance. If the stockholders of PSS approve
the Issuance and the Stock Amendment, up to an approximately additional
28,621,187 shares of PSS Common Stock would be issued upon consummation of the
Merger and an approximately additional 2,405,821 shares of PSS Common Stock
will be reserved for issuance upon the exercise of Gulf South Options and Gulf
South Warrants. Therefore, approval of the Stock Amendment is necessary for the
consummation of the Merger. If the stockholders of PSS approve the Issuance and
the Stock Amendment, approximately 71,084,956 authorized shares of PSS Common
Stock would be unissued and not reserved for issuance.
The PSS Board of Directors believes that the proposed Stock Amendment will
provide several long-term advantages to PSS and its stockholders. The proposed
increase in the number of shares of authorized PSS Common Stock will (i) ensure
that a sufficient number of shares will be available for issuance upon approval
and consummation of the Merger, and (ii) provide PSS with flexibility in any
possible future transactions approved by the PSS Board of Directors, including,
but not limited to, mergers, acquisitions, financings, stock splits, stock
dividends, issuances under PSS Stock Plans and other corporate purposes. The
PSS Board of Directors believes the availability of the additional shares of
PSS Common Stock for such purposes without delay or the necessity for a special
stockholders' meeting (except as may be required by applicable law or
regulatory authorities or by the rules of the NASD relating to the Nasdaq
National Market or the rules of any stock exchange on which PSS Common Stock
may then be listed) will be beneficial to PSS by providing it with the
flexibility required to consider and respond to future business opportunities
and needs as they arise. The availability of additional authorized shares of
PSS Common Stock will also enable PSS to act promptly when the PSS Board of
Directors determines that the issuance of additional shares is advisable.
Except for shares of PSS Common Stock (i) to be issued upon approval and
consummation of the Merger, and (ii) reserved for issuance under PSS Stock
Plans, the PSS Board of Directors has no current plans for the use of
additional shares, the approval of which is sought hereby. However, PSS
continually reviews and evaluates acquisition candidates as part of its growth
strategy and is at various stages of evaluation, discussion or negotiation with
a number of such candidates, although other than the Merger, PSS is not
currently a party to any definitive agreement or letter of intent regarding any
additional material acquisitions that it considers probable.
The proposed increase in the authorized number of shares of PSS Common Stock
could have a number of effects on stockholders of PSS depending upon the exact
nature and circumstances of any actual issuances of authorized but unissued
shares. The increase could have an anti-takeover effect, in that additional
shares could be issued (within the limits imposed by applicable law) in one or
more transactions that could make a change in control or takeover of PSS more
difficult. For example, additional shares could be issued by PSS so as to
dilute the stock ownership or voting rights of persons seeking to obtain
control of PSS. Similarly, the issuance of additional shares to certain persons
allied with PSS' management could have the effect of making it more difficult
to remove PSS' current management by diluting the stock ownership or voting
rights of persons seeking to cause such removal. Shares of PSS Common Stock may
be issued at a time and under circumstances that may increase or decrease
earnings per share and increase or decrease the book value per share of shares
presently held. Additional issuances of PSS Common Stock could also effect the
market price of the PSS Common Stock.
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The Stock Amendment is a condition to consummation of the Merger, so that PSS
will have sufficient authorized shares of PSS Common Stock to issue or reserve
for issuance to holders of Gulf South Common Stock, Gulf South Options or Gulf
South Warrants pursuant to the Merger Agreement. If the Merger is not approved
or consummated for any reason, but the Stock Amendment is approved by PSS
stockholders, the Stock Amendment will be effective and will be implemented by
PSS.
If the Stock Amendment is approved, the amended portion of Article III of the
PSS Articles will read as follows:
"ARTICLE III. CAPITAL STOCK
The maximum number of shares of stock which the Corporation is
authorized to have outstanding at any one time is 150,000,000 shares
of common stock having a par value of $0.01 per share ("Common Stock")
and 1,000,000 shares of preferred stock having a par value of $0.01
per share ("Preferred Stock"). The Board of Directors shall have full
authority to establish one or more series of Preferred Stock and to
establish, by filing the Secretary of State of the State of Florida,
the designation of each such series and the variations in rights,
preferences and limitations for each such series."
The only change to Article III of the PSS Articles which would be effected if
the Stock Amendment is approved is the change set forth in bold face type
above. Currently, the PSS Articles provide that the maximum number of
authorized shares of PSS Common Stock is 60,000,000 All other portions of
Article III of the PSS Articles will remain unchanged.
THE PSS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
PSS VOTE FOR THE STOCK AMENDMENT.
NAME AMENDMENT
The PSS Board of Directors has unanimously adopted, subject to stockholder
approval, an amendment to the PSS Articles to change the corporate name of PSS
to "PSS World Medical, Inc." (the "Name Amendment," and with the Stock
Amendment, the "Amendments").
The PSS Board of Directors believes that the proposed change in corporate
name will better reflect PSS' expansion into multiple medical distribution
sectors, including, but not limited to, PSS' continued expansion into the
imaging-supply market and proposed expansion into the long-term care market if
the Merger is approved and consummated.
If the Name Amendment is adopted, stockholders of PSS will not be required to
exchange outstanding stock certificates of PSS Common Stock for new
certificates.
If the Name Amendment is approved, the amended portion of Article I of the
PSS Articles will read as follows:
"ARTICLE I. NAME
The name of the corporation is PSS World Medical, Inc. (hereinafter
referred to as the "Corporation")."
THE PSS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
PSS VOTE FOR THE NAME AMENDMENT.
VOTE REQUIRED AND QUORUM
The affirmative vote of the holders of shares of PSS Common Stock
representing a majority of the votes cast at the PSS Special Meeting is
required to approve and adopt the Amendments, provided that the total votes
cast at the PSS Special Meeting represent at least 50% of the outstanding
shares of PSS Common Stock. As of
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the PSS Record Date, PSS directors and executive officers held approximately
5.0% of the votes entitled to vote at the PSS Special Meeting and have agreed
to vote in favor of the Stock Amendment. The presence, in person or by proxy,
of the holders of shares of PSS Common Stock entitled to cast a majority of the
votes entitled to be cast at the PSS Special Meeting will constitute a quorum
at the PSS Special Meeting.
At the PSS Special Meeting, abstentions, although counted for purposes of
determining whether there is a quorum and the number of shares present and
entitled to vote, will not be voted. Accordingly, since the affirmative vote of
the holders of a majority of shares present in person or represented by proxy
and entitled to vote at the PSS Special Meeting is required for approval of the
Issuance and the Amendments, an abstention will have the effect of a vote
against such proposals. Broker non-votes will be included for purposes of
determining the existence of a quorum but will not be counted for the purpose
of determining the number of shares present and entitled to vote, and therefore
will have no effect on the outcome of the vote.
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CERTAIN DIFFERENCES IN THE RIGHTS OF PSS AND GULF SOUTH STOCKHOLDERS
PSS is a Florida corporation subject to the provisions of the Florida
Business Corporation Act ("FBCA"). Gulf South is a Delaware corporation subject
to the provisions of the Delaware General Corporation Law ("DGCL").
Stockholders of Gulf South whose rights are governed by Gulf South's Amended
and Restated Certificate of Incorporation, as amended (the "Gulf South
Certificate"), and Amended and Restated Bylaws (the "Gulf South Bylaws") and by
the DGCL will, upon consummation of the Merger, become stockholders of PSS. The
rights of such stockholders as stockholders of PSS will then be governed by
PSS' Amended and Restated Articles of Incorporation, as amended (the "PSS
Articles"), and Amended and Restated Bylaws (the "PSS Bylaws") and by the FBCA
.
Except as set forth below, there are no material differences between the
rights of a PSS stockholder under the PSS Articles and Bylaws and under the
FBCA, on the one hand, and the rights of a Gulf South stockholder under the
Gulf South Certificate and Bylaws and under the DGCL, on the other hand. This
summary does not purport to be a complete discussion of, and is qualified in
its entirety by reference to, the governing law and the Articles or Certificate
of Incorporation and Bylaws of each corporation.
AUTHORIZED CAPITAL STOCK
PSS. The authorized capital stock of PSS consists of 60,000,000 shares of PSS
Common Stock and 1,000,000 shares of preferred stock, $.01 par value per share,
of PSS ("PSS Preferred Stock"). As of February 13, 1998, there were 40,984,705
shares of Common Stock outstanding and no shares of Preferred Stock
outstanding. In addition, there were outstanding options under PSS stock option
plans to purchase an additional 2,072,533 shares of PSS Common Stock. An
additional 4,830,798 shares of PSS Common Stock were reserved for future option
grants under such plans. The PSS Board of Directors has the authority to issue
the PSS Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions for each such series, without any
further vote or action by the stockholders. The PSS Board has no present
intention of issuing shares of PSS Preferred Stock. The PSS Board has
recommended increasing the number of authorized shares of PSS Common Stock to
150,000,000 as further described in this Joint Proxy Statement/Prospectus. See
"Amendments to PSS Articles."
Gulf South. The authorized capital stock of Gulf South consists of 30,000,000
shares of Gulf South Common Stock and 1,000,000 shares of preferred stock, $.01
par value per share, of Gulf South ("Gulf South Preferred Stock"). As of
February 13, 1998, there were 16,354,964 shares of Gulf South Common Stock
outstanding and no shares of Gulf South Preferred Stock outstanding. In
addition, there were outstanding options under Gulf South stock option plans to
purchase an additional 924,755 shares of Gulf South Common Stock. An additional
685,288 shares of Gulf South Common Stock were reserved for future option
grants under such plans. The Gulf South Board of Directors has the authority to
issue Gulf South Preferred Stock in one or more series and to fix the voting
powers, full or limited, or no voting powers, and such other relative rights,
preferences and qualifications, including without limitation, the dividend
rate, conversion rights, if any, redemption price and liquidation preference,
without any further vote or action by the stockholders, unless such is required
by applicable rules or regulations or by the terms of other outstanding series
of Gulf South Preferred Stock.
SIZE AND CLASSIFICATION OF BOARD OF DIRECTORS; VACANCIES
PSS. The PSS Articles and Bylaws provide that the number of directors will be
fixed from time to time by the consent of three-fifths of the PSS Board of
Directors. The PSS Articles and Bylaws provide for the PSS Board to be divided
into three classes of directors, with each class consisting, as nearly as
possible, of one-third of the total number of directors constituting the entire
PSS Board. The term of one class of directors expires every year, so that each
director's term is for a period of three years.
Any vacancy occurring in the PSS Board, including any vacancy created by
reason of an increase in the number of directors, may be filled by the
affirmative vote of three-fifths of the directors then in office. A director
elected to fill a vacancy shall hold office for the unexpired term and until
his or her successor shall have been
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elected and qualified or, for newly created directorships, until the next
election of the class for which such director shall have been chosen and until
his or her successor shall have been elected and qualified.
Gulf South. The Gulf South Certificate and Bylaws provide for a Board of
Directors of not less than three directors, the exact number of members to be
fixed from time to time by a majority of the members of the Gulf South Board of
Directors then in office; the current number is set at six. The Gulf South
Certificate and Bylaws provide for the Gulf South Board to be divided into
three classes of directors, with no one class having more than one director
more than any other class. The term of one class of directors expires every
year, so that each director's term is for a period of three years.
Unless and until filled by the stockholders, any vacancy in the Gulf South
Board of Directors, however occurring, including a vacancy resulting from an
enlargement thereof, may be filled by vote of a majority of the directors then
in office, although less than a quorum, or by a sole remaining director. A
director elected to fill a vacancy shall be elected for the unexpired term of
his or her predecessor in office, and a director chosen to fill a position
resulting from an increase in the number of directors shall hold office until
the next annual meeting of stockholders at which directors of the class to
which such position belongs are to be elected and until his or her successor is
elected and qualifies, or until his or her earlier death, resignation or
removal.
AMENDMENT OF ARTICLES OR CERTIFICATE OF INCORPORATION AND BYLAWS
PSS. Pursuant to the FBCA, amendments to a corporation's articles of
incorporation relating to (i) the extension of the duration of the corporation,
(ii) the deletion of the names and addresses of the initial directors and the
initial registered agent, (iii) the deletion of information solely of
historical interest, (iv) certain changes in the number of issued and
outstanding shares, (v) the deletion of authorization for a class or series of
shares, (vi) certain changes in the corporation's name and (vii) any other
change permitted by the FBCA without stockholder approval may be made by the
board of directors without stockholder approval, unless the corporation's
articles of incorporation provide otherwise. All other amendments to the
articles of incorporation must be recommended by the board of directors to the
stockholders and approved by a majority of the stockholders entitled to vote on
the amendment unless a greater percentage is provided for in the articles
incorporation or in the resolution of the board of directors proposing such
amendment. In addition, the FBCA provides that the holders of the outstanding
shares of a class shall be entitled to vote as a single class if the holders of
such a class would be adversely or particularly affected by the amendment. The
PSS Articles do not alter the required vote.
Under the FBCA, the board of directors or the stockholders may amend or
repeal a corporation's bylaws unless the FBCA specifically reserves the power
to amend the bylaws to the stockholders, or unless the stockholders, in
amending or repealing the bylaws, provide expressly that the board of directors
may not amend or repeal the bylaws or that bylaw provision. The FBCA permits a
corporation's stockholders to amend or repeal the corporation's bylaws even
though the bylaws may also be amended or repealed by its board of directors.
The PSS Articles provide that if the stockholders have adopted or amended a
provision of the PSS Articles or Bylaws that fixes a greater quorum or voting
requirement for stockholders or voting groups of stockholders than is required
by the FBCA law, the adoption or amendment of a provision in the PSS Articles
or Bylaws that adds, changes, or deletes a greater quorum or voting requirement
for stockholders must meet the same quorum requirement and be adopted by the
same vote and voting groups required to take action under the quorum and voting
requirements then in effect or proposed to be adopted, whichever is greater.
The PSS Articles provide that a provision of the PSS Bylaws which fixes a
greater quorum or voting requirement for stockholders may not be adopted,
amended or repealed by the PSS Board of Directors.
Gulf South. Under the DGCL, unless a corporation's certificate of
incorporation or bylaws otherwise provides, the amendment of a corporation's
certificate of incorporation generally requires the approval of the holders of
a majority of the outstanding stock entitled to vote thereon, and if such
amendment would increase or decrease the number of authorized shares of any
class or series or the par value of such shares or would adversely
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affect the shares of such class or series, the amendment further requires the
approval of the holders of a majority of the outstanding stock of such class or
series. The Gulf South Certificate further requires the affirmative vote of the
holders of at least 75% of the shares of voting stock entitled to vote
generally in the election of directors, voting together as a single class, to
(i) amend the Gulf South Certificate to reduce or eliminate the number of
authorized shares of Gulf South Common Stock or the authorized shares of Gulf
South Preferred Stock or (ii) amend or repeal all other provisions of the Gulf
South Certificate except for (a) the provision declaring the name of the
corporation, (b) the provision declaring the address of the registered office
and the registered agent, and (c) the provision declaring the nature of the
business.
The Gulf South Bylaws provide for amendment by (i) the affirmative vote of a
majority of the directors present at any regular or any special meeting of the
Gulf South Board of Directors at which a quorum is present and (ii) the
affirmative vote of the holders of a majority of the shares of the Gulf South
Common Stock issued and outstanding and entitled to vote at any regular meeting
of stockholders, or at any special meeting of stockholders, provided notice of
such amendment was stated in the notice of such special meeting.
REMOVAL OF DIRECTORS
PSS. The PSS Articles provide that directors may be removed with or without
cause only by the affirmative vote of holders of at least four-fifths of the
outstanding shares of the PSS Common Stock entitled to vote on election of
directors at a meeting called for that purpose ("PSS Voting Stock"), except
that if the PSS Board of Directors, by an affirmative vote of at least three-
fifths of the entire PSS Board, recommends removal of a director to the
stockholders, such removal may be effected by the affirmative vote of the
holders of a majority of the PSS Voting Stock. The PSS Articles provide that
the affirmative vote of the holders of at least four-fifths of the PSS Voting
Stock is required to alter, amend or adopt any provision inconsistent with, or
to repeal, this provision.
Gulf South. The Gulf South Certificate and Bylaws provide that directors may
be removed without cause only by the holders of at least 75% of the shares then
entitled to vote at an election of directors ("Gulf South Voting Stock").
Directors may be removed with cause only by the holders of at least a majority
of Gulf South Voting Stock.
DIRECTOR LIABILITY
PSS. According to the FBCA, a director is not personally liable for monetary
damages to PSS or any other person for any statement, vote, decision or failure
to act, regarding corporate management or policy, unless the director breached
or failed to perform his duties as a director and the director's breach of, or
failure to perform those duties constitutes (i) a violation of criminal law,
unless the director had reasonable cause to believe his conduct was lawful or
had no reason to believe his conduct was unlawful, (ii) a transaction from
which the director derived an improper personal benefit, (iii) a violation of
Section 607.0834 of the FBCA, which concerns unlawful payment of dividends,
(iv) in a proceeding by or in the right of the corporation or a stockholder,
conscious disregard for the best interest of the corporation, or willful
misconduct, or (v) in a proceeding by or in the right of someone other than the
corporation or a stockholder, recklessness or an act or omission which was
committed in bad faith or with malicious purpose or in a manner exhibiting
wanton and willful disregard of human rights, safety or property.
Gulf South. Pursuant to the DGCL, the Gulf South Certificate provides that no
director shall have any personal liability to Gulf South or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to Gulf South or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, which concerns unlawful payments of dividends, stock purchases or
redemptions or (iv) for any transaction from which the director derived an
improper personal benefit.
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INDEMNIFICATION
PSS. The PSS Articles state that PSS shall indemnify officers and directors
to the fullest extent permitted by law. The FBCA provides that a person who is
a party to a legal proceeding by reason of the fact that such person is or was
a director, officer, employee or agent of a corporation shall be indemnified if
such person is successful on the merits in a proceeding giving rise to the
claim for indemnification. According to the FBCA, a director, officer, employee
or agent of the corporation shall be indemnified if such person shall have
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the corporation and, with respect to criminal
proceedings, shall have no reasonable cause to believe his conduct was
unlawful. The FBCA also provides that a person may not be indemnified nor may
expenses be advanced if a judgment or final adjudication establishes that his
actions or omissions to act were material to the cause of action so adjudicated
and constitute: (i) a violation of criminal law, unless such person had
reasonable cause to believe his conduct was lawful or had no reasonable cause
to believe his conduct was unlawful; (ii) a transaction from which the
director, officer, employee or agent derived an improper personal benefit;
(iii) an unlawful distribution under Florida law; or (iv) willful misconduct or
conscious disregard for the best interests of the corporation in a proceeding
by or in the right of the corporation to procure a judgment in its favor or in
a proceeding by or in the right of a stockholder. The PSS Bylaws provide that
any indemnification or advance shall be made promptly and in any event within
60 days upon the written request of the person to be indemnified. In the event
PSS does not pay such indemnification or advance on the basis that such person
has not met the requisite standard of conduct, the burden of proof of such
defense shall be on PSS.
The PSS Bylaws also state that PSS may purchase insurance on behalf of any
person who is or was a director, officer, employee or agent of PSS, or is or
was serving at the request of PSS as a director, officer, employee or agent or
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity or arising out of his status as such. PSS maintains insurance for PSS
and its directors and officers against such liabilities.
Gulf South. The Gulf South Certificate and Bylaws provide that Gulf South
shall indemnify each person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of Gulf South), by reason of the fact that he is or was, or
has agreed to become, a director or officer of Gulf South, or is or was
serving, or has agreed to serve, at the request of Gulf South, as a director,
officer or trustee of, or in a similar capacity with, another corporation,
partnership, joint venture, trust or other enterprise (including any employee
benefit plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or
on his behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of Gulf South, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in, or
not opposed to, the best interests of Gulf South, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
The Gulf South Certificate and Bylaws provide that Gulf South shall indemnify
any Indemnitee who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of Gulf
South to procure a judgment in its favor by reason of the fact that he is or
was, or has agreed to become, a director or officer of Gulf South, or is or was
serving, or has agreed to serve, at the request of Gulf South, as a director,
officer or trustee of, or in a similar capacity with, another corporation,
partnership, joint venture, trust or other enterprise (including any employee
benefit plan), or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees) and amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom, if he
acted in good faith and in a manner he reasonably believed to be in,
94
<PAGE>
or not opposed to, the best interests of Gulf South except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to Gulf South unless
and only to the extent that the Court of Chancery of Delaware or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of such liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for
such expenses (including attorneys' fees) which the Court of Chancery of
Delaware or such other court shall deem proper. To the extent that an
Indemnitee has been successful, on the merits or otherwise, in defense of any
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith.
The Gulf South Certificate and Bylaws provide that the right of such
directors and officers to indemnification includes the right to advancement by
Gulf South of expenses incurred in defending any such proceeding in advance of
its final disposition upon delivery to Gulf South of an undertaking to repay
any amount so advanced if it is ultimately determined by final judicial
decision that the proposed indemnitee is not entitled to be indemnified for
such expenses.
Pursuant to Section 145 of the DGCL, the Gulf South Certificate and Bylaws
provide that in order to obtain indemnification or advancement of expenses, the
Indemnitee shall submit to Gulf South a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by Gulf South of the written request of
the Indemnitee, unless Gulf South determines, by clear and convincing evidence,
within such 60-day period that the Indemnitee did not meet the applicable
standard of conduct. Such determination shall be made in each instance by (i) a
majority vote of a quorum of the directors of Gulf South consisting of persons
who are not at that time parties to the action, suit or proceeding in question
("disinterested directors"), (ii) if no such quorum is obtainable, a majority
vote of a committee of two or more disinterested directors, (iii) a majority
vote of a quorum of the outstanding shares of stock of all classes entitled to
vote for directors, voting as a single class, which quorum shall consist of
stockholders who are not at that time parties to the action, suit or proceeding
in question, (iv) independent legal counsel (who may be regular legal counsel
to Gulf South), or (v) a court of competent jurisdiction.
Gulf South may purchase and maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of Gulf South or another
corporation, partnership, joint venture, trust, or other enterprise (including
employee benefit plan) against any expense, liability or loss incurred by him
in any such capacity, or arising out of his status as such, whether or not Gulf
South would have the power to indemnify such person under the DGCL.
SPECIAL MEETINGS OF STOCKHOLDERS
PSS. The PSS Bylaws provide that special meetings of stockholders may be
called, as provided under the FBCA, by the PSS Board of Directors or by any
other person authorized by the PSS Articles or Bylaws, or by the holders of not
less than 10% of the shares entitled to vote.
Gulf South. The Gulf South Bylaws provide that special meetings of the
stockholders may be called at any time by the Chairman of the Board of
Directors (if any), a majority of the Board of Directors, or by the President.
DISSENTERS' RIGHTS
PSS. The FBCA sets forth procedures under which stockholders may dissent
from, and receive payment of the fair value of their shares in connection with
most mergers, consolidations and exchanges or sales of substantially all or all
of a corporation's assets. Such dissenter's rights are not available with
respect to a plan of merger, consolidation or sale or exchange of assets, to
the holders of shares of any class or series which were either registered on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the NASD or held of record by more than
2,000 stockholders.
95
<PAGE>
Gulf South. Pursuant to the DGCL, any stockholder has the right to dissent
from any merger or consolidation, except as described below, of which Gulf
South is a constituent corporation. No such appraisal rights are available for
the shares of any class or series of Gulf South Common Stock if (i) as of the
record date fixed to determine the stockholders entitled to receive notice of
and to vote at the meeting of stockholders to act upon the agreement or merger
or consolidation, such shares were either listed on a national securities
exchange, designated as a national market system security on an interdealer
quotation system operated by a national securities association, or held of
record by more than 2,000 stockholders or (ii) Gulf South is the surviving
corporation of a merger and the merger did not require the approval of Gulf
South's stockholders, unless, in either case, the holders of such stock are
required by an agreement of merger or consolidation to accept for that stock
something other than: (a) shares of stock of the corporation surviving or
resulting from the merger or consolidation; (b) shares of stock of any other
corporation that, at the effective date of the merger, will be listed on a
national securities exchange, designated as a national market system security
on a interdealer quotation system operated by a national securities
association, or held of record by more than 2,000 stockholders; (c) cash in
lieu of fractional shares of a corporation described in clause (a) or (b)
above; or (d) any combination of the shares of stock and cash in lieu of
fractional shares described in clauses (a) through (c) above.
Neither the holders of PSS Common Stock nor the holders of Gulf South Common
Stock are entitled to dissenters' rights in connection with the Merger under
the FBCA or DGCL, respectively.
DIVIDENDS AND OTHER DISTRIBUTIONS
PSS. The FBCA provides that distributions may be made unless, after giving it
effect, (i) the corporation would not be able to pay its debts as they become
due in the usual course of business or (ii) the corporation's total assets
would be less than the sum of its total liabilities plus the amount needed to
satisfy the preferential rights of any preferred stockholders of the company.
Gulf South. The DGCL generally allows dividends to be paid out of surplus of
the corporation or out of the net profits of the corporation for the current
fiscal year and/or the prior fiscal year. The Gulf South Certificate states
that dividends may be declared and paid on the Gulf South Common Stock from
funds lawfully available as and when determined by the board of directors and
will be subject to any preferential dividend rights of any then outstanding
Gulf South Preferred Stock.
MERGERS AND CONSOLIDATIONS
PSS. The FBCA provides that a vote of a majority of the shares of each class
of stock outstanding and entitled to vote thereon is required to authorize a
merger or consolidation of a corporation into any other corporation, unless the
articles of incorporation require a greater vote or a vote by classes.
Gulf South. The DGCL requires the approval of the board of directors and the
holders of a majority of the outstanding stock of a corporation entitled to
vote thereon for mergers or consolidations involving a Delaware corporation.
The DGCL permits a corporation to merge with another corporation without
obtaining the approval of its stockholders if: (i) such corporation is the
surviving corporation of the merger; (ii) the merger agreement does not amend
in any respect such corporation's certificate of incorporation; (iii) each
share of such corporation's capital stock outstanding immediately prior to the
effective date of the merger is to be an identical outstanding or treasury
share of such corporation after the effective date of the merger; and (iv) any
authorized but unissued shares or treasury shares of common stock to be issued
or delivered under the plan of merger plus those initially issuable upon
conversion of any other securities or obligations to be issued or delivered
under such plan do not exceed 20% of the shares of common stock outstanding
immediately prior to the effective date of the merger.
CERTAIN BUSINESS COMBINATIONS
PSS. The PSS Articles prohibit an "affiliate transaction" (defined generally
to include mergers, sales and leases of assets, issuances of securities and
other similar transactions) by PSS or any subsidiary with an
96
<PAGE>
"interested stockholder" (defined generally to be the beneficial owner of 10%
or more of PSS' voting stock) within three years after the person or entity
becomes an interested stockholder, unless the affiliate transaction is approved
by the holders of at least 80% of the outstanding voting stock of PSS,
excluding shares held by the interested stockholder.
Gulf South. Section 203 of the DGCL would prohibit a "business combination"
(defined generally to include mergers, consolidations, sales and leases of
assets, issuances of securities and similar transactions) by Gulf South or a
subsidiary with an "interested stockholder" (defined generally to be the
beneficial owner of 15% of more of a corporation's voting stock) within three
years after the person or entity becomes an interested stockholder, unless: (i)
prior to the person or entity becoming an interested stockholder, the business
combination or the transaction pursuant to which such person or entity became
an interested stockholder shall have been approved by the board of directors;
(ii) upon the consummation of the transaction in which the person or entity
became an interested stockholder, the interested stockholder holds at least 85%
of the voting stock of a corporation (excluding shares held by persons who are
both officers and directors of a corporation and shares held by certain
employee benefit plans); or (iii) the business combination is approved by the
board of directors and by the holders of at least two-thirds of the outstanding
voting stock of a corporation, excluding shares held by the interested
stockholder.
CONTROL SHARE ACQUISITION STATUTE
PSS. As a Florida corporation, PSS is subject to provisions of Section
607.0902 of the FBCA, which denies voting rights to shares purchased by an
acquiring person who has obtained or anticipates obtaining a specified level of
voting control in shares of an issuing public corporation as part of a control-
share acquisition, except to the extent to which voting rights are conferred by
resolution approved by the stockholders of the issuing public corporation.
Gulf South. The DGCL does not have a similar statute.
CONSIDERATION OF SOCIETAL FACTORS
PSS. Florida law expressly provides that in determining what a director
reasonably believes to be in the best interests of the corporation, such
director may consider the long-term prospects and interests of the corporation
and its stockholders, and the social, economic, legal or other effects of any
action on the employees, suppliers, customers of the corporation or its
subsidiaries, the communities and society in which the corporation or its
subsidiaries operate and the economy of the state and the nation. Thus, these
interests could be considered even in connection with, or after, a decision to
sell a corporation. The PSS Articles and Bylaws do not discuss the
consideration of societal factors.
Gulf South. Delaware does not explicitly provide for the consideration of
societal interests by a corporation's board of directors in making decisions.
The Delaware Supreme Court has, however, held that in discharging their
responsibilities to a corporation, directors may consider constituencies other
than stockholders, such as creditors, customers, employees, and perhaps even
the community in general, as long as there are rationally related benefits
accruing to the stockholders as well. The Delaware Supreme Court has held,
however, that concern for non-stockholder interest is inappropriate when a sale
of a company is inevitable and an auction among active bidders is in progress.
The Gulf South Certificate states that the Gulf South Board of Directors, when
evaluating any offer of another party to effect a business combination, may, in
connection with the exercise of its judgment in determining what is in the best
interests of Gulf South as a whole, give due consideration to any such factors
as the Gulf South Board of Directors determines to be relevant, including,
without limitation, the social, legal and economic effects upon employees,
suppliers, customers, creditors and others having similar relationships with
Gulf South, upon the communities in which Gulf South conducts its business and
upon the economy of the state, region and nation.
97
<PAGE>
EXPERTS
The consolidated financial statements of PSS included elsewhere in this Joint
Proxy Statement/Prospectus as of March 28, 1997 and March 29, 1996, and for
each of the three years for the period ended March 28, 1997, have been audited
by Arthur Andersen LLP, independent certified public accountants, as set forth
in their report thereon included therein, and are included herein in reliance
upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of Gulf South for the years ended
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, included in this Joint Proxy Statement/Prospectus of PSS and
Gulf South that is made a part of the Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Gateway Healthcare Corporation as of
December 31, 1994 and 1995 and for the years then ended, incorporated by
reference into this Joint Proxy Statement/Prospectus from Gulf South's Current
Report on Form 8-K/A dated December 26, 1996 filed with the Commission on March
11, 1997 have been audited by KPMG Peat Marwick LLP, independent certified
public accountants, as set forth in their report included therein, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of PSS Common Stock being offered hereby is being
passed upon for PSS by Alston & Bird LLP, Atlanta, Georgia. Alston & Bird LLP
will also opine as to certain federal income tax consequences of the Merger.
See "The Merger--Certain Federal Income Tax Consequences." Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts, is acting as counsel for Gulf South in
connection with certain legal matters relating to the Merger Agreement and the
transactions contemplated therein.
STOCKHOLDER PROPOSALS
PSS. Stockholder proposals intended to be presented at PSS' 1998 annual
meeting of shareholders must be received by PSS at its principal offices no
later than March 24, 1998 in order to be considered for inclusion in the Proxy
Statement and form of proxy to be distributed by the PSS Board in connection
with such meeting.
Gulf South. Gulf South will hold a 1998 annual meeting only if the Merger is
not consummated before the time of such meeting. In the event that such a
meeting is held, any proposals of stockholders intended to be presented at the
1998 annual meeting of stockholders must have been duly submitted to Gulf South
at its principal office on or prior to November 24, 1997, as provided in the
1996 Annual Meeting Proxy Statement of Gulf South.
OTHER MATTERS
As of the date of this Joint Proxy Statement/Prospectus, neither PSS' or Gulf
South's Board of Directors knows of any matters that will be presented for
consideration at the Special Meetings other than as described in this Joint
Proxy Statement/Prospectus. However, if any other matter shall come before the
Special Meetings or any adjournments or postponements thereof and shall be
voted upon, the proposed proxies will be deemed to confer authority to the
individuals named as authorized therein to vote the shares represented by such
proxies as to any such matters that fall within the purposes set forth in the
Notices of such Special Meetings as determined by a majority of the appropriate
Board of Directors.
98
<PAGE>
INDEX TO PHYSICIAN SALES & SERVICE, INC. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets as of December 31, 1997 (unaudited)
and March 28, 1997...................................................... F-2
Condensed Consolidated Statements of Operations (unaudited) for the three
months ended December 31, 1997 and 1996 and nine months ended December
31, 1997 and 1996....................................................... F-3
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine
months ended December 31, 1997 and 1996................................. F-4
Notes to Condensed Consolidated Financial Statements (unaudited)--
December 31, 1997....................................................... F-5
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants....................... F-8
Consolidated Balance Sheets as of March 28, 1997 and March 29, 1996...... F-9
Consolidated Statements of Income for the years ended March 28, 1997,
March 29, 1996, and March 30, 1995...................................... F-10
Consolidated Statements of Shareholders' Equity for the years ended March
28, 1997, March 29, 1996, and March 30, 1995............................ F-11
Consolidated Statements of Cash Flows for the years ended March 28, 1997,
March 29, 1996, and March 30, 1995...................................... F-12
Notes to Consolidated Financial Statements............................... F-13
</TABLE>
F-1
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
31, MARCH 28,
1997 1997
------------ ------------
(UNAUDITED) *
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 35,077,417 $ 29,075,157
Short-term investments............................ 88,795,505 --
Marketable securities............................. -- 15,045,482
Accounts receivable, net.......................... 154,969,917 130,426,326
Inventories....................................... 91,934,707 75,185,728
Prepaid expenses and other........................ 30,717,902 24,120,998
------------ ------------
Total current assets............................ 401,495,448 273,853,691
Property and equipment, net......................... 23,800,570 20,202,967
Other Assets:
Intangibles, net.................................. 48,244,737 22,083,560
Other............................................. 12,117,276 5,129,048
------------ ------------
Total assets.................................... $485,658,031 $321,269,266
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................. $ 68,015,239 $ 69,011,247
Accrued expenses.................................. 25,910,176 20,012,856
Current maturities of long-term debt and capital
lease obligations................................ 4,251,146 8,099,064
Other............................................. 12,533,322 5,131,051
------------ ------------
Total current liabilities....................... 110,709,883 102,254,218
Long-term debt and capital lease obligations, net of
current portion.................................... 129,089,572 3,825,333
Other............................................... 3,448,548 4,634,291
------------ ------------
Total liabilities............................... 243,248,003 110,713,842
------------ ------------
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, no shares issued and outstanding..... -- --
Common stock, $.01 par value; 60,000,000 shares
authorized, 40,444,533 and 38,799,073 shares
issued and outstanding at December 31, 1997 and
March 28, 1997, respectively..................... 404,445 387,991
Additional paid-in capital........................ 224,180,537 207,675,161
Retained earnings................................. 17,565,536 3,767,240
Foreign currency translation...................... 259,510 92,688
------------ ------------
242,410,028 211,923,080
Unearned ESOP shares of acquired company........ -- (1,367,656)
------------ ------------
Total shareholders' equity...................... 242,410,028 210,555,424
------------ ------------
Total liabilities and shareholders' equity...... $485,658,031 $321,269,266
============ ============
</TABLE>
- --------
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
statements.
F-2
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales............... $257,244,417 $198,444,488 $733,881,946 $558,017,859
Cost of goods sold...... 185,732,447 142,978,822 533,053,858 405,914,002
------------ ------------ ------------ ------------
Gross profit.......... 71,511,970 55,465,666 200,828,088 152,103,857
General and
administrative
expenses............... 36,145,642 30,096,748 106,541,413 84,587,067
Selling expenses........ 22,912,349 18,310,513 64,709,508 49,923,934
Merger costs and
expenses............... 3,786,350 317,388 5,624,848 7,251,388
Non-recurring ESOP cost
of acquired company.... -- 349,989 2,457,074 1,050,000
------------ ------------ ------------ ------------
Income from
operations........... 8,667,629 6,391,028 21,495,245 9,291,468
------------ ------------ ------------ ------------
Other income (expense):
Interest income
(expense)............ (1,135,854) 20,369 (1,234,452) 1,071,034
Other income.......... 1,441,156 675,650 3,429,469 1,349,901
------------ ------------ ------------ ------------
305,302 696,019 2,195,017 2,420,935
------------ ------------ ------------ ------------
Income before provision
for income taxes....... 8,972,931 7,087,047 23,690,262 11,712,403
Provision for income
taxes.................. 3,804,000 2,656,444 9,972,905 4,518,580
------------ ------------ ------------ ------------
Net income.............. $ 5,168,931 $ 4,430,603 $ 13,717,357 $ 7,193,823
============ ============ ============ ============
Earnings per share:
Basic.................. $ 0.13 $ 0.12 $ 0.35 $ 0.19
============ ============ ============ ============
Diluted................ $ 0.13 $ 0.12 $ 0.34 $ 0.19
============ ============ ============ ============
Proforma tax adjustment
on pooled S-Corporation
income................. (156,194) (356,505)
------------ ------------
Proforma net income..... $ 4,274,409 $ 6,837,318
============ ============
Proforma tax adjustment
per common and common
equivalent share on
pooled S-Corporation
income................. $ 0.01 $ 0.01
============ ============
Proforma diluted
earnings per share..... $ 0.11 $ 0.18
============ ============
Weighted average shares
outstanding:
Basic.................. 40,338,000 37,729,000 39,689,000 37,153,000
============ ============ ============ ============
Diluted................ 40,851,000 38,262,000 40,120,000 37,845,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-3
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income............................................. $ 13,717,357 $ 7,193,823
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 6,726,088 3,723,036
Provision for doubtful accounts....................... 827,351 1,372,785
Merger costs and expenses............................. 4,539,779 6,469,506
Foreign currency translation.......................... 166,822 28,495
Unrealized investment income from short-term
investments.......................................... (1,043,922) --
Nonrecurring ESOP cost of acquired company............ 2,457,074 1,416,533
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Increase in accounts receivable...................... (16,272,244) (16,694,020)
Decrease in inventories.............................. (6,070,371) (7,451,564)
(Increase) decrease in prepaid expenses and other
current assets...................................... (3,063,689) 4,988,983
Increase in other assets............................. (7,278,394) (8,131,876)
(Decrease) increase in accounts payable, accrued
expenses and other liabilities...................... (3,181,623) 10,871,053
------------ ------------
Net cash (used in) provided by operating
activities...................................... (8,475,772) 3,786,754
------------ ------------
Cash Flows From Investing Activities:
Purchases of short-term investments.................... (87,751,583) --
Proceeds from sales of marketable securities........... 15,045,482 --
Capital expenditures................................... (6,333,129) (3,769,995)
Purchases of net assets from business acquisitions..... (6,057,796) (5,083,487)
Payments on noncompete agreements...................... (3,069,627) (1,178,932)
------------ ------------
Net cash used in investing activities............ (88,166,653) (10,032,414)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from issuance of Notes........................ 125,000,000 --
Net repayments of long-term debt of acquired
companies............................................. (24,791,259) (16,693,527)
Net proceeds from issuance of common stock............. 2,435,944 1,949,256
Distributions to former S-Corporation shareholders..... -- (1,100,000)
------------ ------------
Net cash provided by (used in) financing
activities...................................... 102,644,685 (15,844,271)
------------ ------------
Net increase (decrease) in cash and cash equivalents..... 6,002,260 (22,089,931)
Cash and cash equivalents, beginning of period........... 29,075,157 86,448,942
------------ ------------
Cash and cash equivalents, end of period................. $ 35,077,417 $ 64,359,011
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-4
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The condensed consolidated financial statements of Physician Sales &
Service, Inc. ("PSS" or the "Company") reflect, in the opinion of management,
all adjustments necessary to present fairly the financial position and results
of operations for the periods indicated. The adjustments include the
retroactive adjustments to give effect to the merger with X-Ray Corporation of
Georgia ("X-Ray GA") effective December 20, 1996, and to the merger with S&W
X-Ray, Inc. ("S&W") effective September 23, 1997, both accounted for under the
pooling-of-interests method.
The accompanying condensed consolidated financial statements should be read
in conjunction with the financial statements and related notes in the
Company's 1997 Annual Report to Shareholders. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
the Securities and Exchange Commission rules and regulations.
Financial statements for the Company's subsidiary outside the United States
are translated into U.S. dollars at quarter-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded as a separate component of
shareholders' equity.
The results of operations for the interim periods covered by this report may
not necessarily be indicative of operating results for the full fiscal year.
Certain items have been reclassified to conform to the current year
presentation.
NOTE 2--BUSINESS ACQUISITIONS
On September 23, 1997, the Company acquired S&W, an imaging supply and
equipment distributor, in a stock-for-stock merger accounted for under the
pooling-of-interests method. The Company issued 1,737,457 shares of common
stock to the former shareholders of S&W in exchange for all of the outstanding
shares of capital stock of S&W valued at $26.0 million at the time of the
merger. S&W reported $72.0 million in revenues for the 12 months prior to
acquisition by the Company. The accompanying consolidated financial statements
have been restated for periods prior to the pooling.
During the nine months ended December 31, 1997, the Company acquired certain
assets of two physician medical supply and equipment distributors, with
aggregate annual revenues of approximately $78.5 million, and certain assets
of two imaging supply and equipment distributors, with aggregate annual
revenues of approximately $5.3 million, in transactions accounted for as
purchases. The aggregate consideration of $16.5 million was comprised of
approximately $3.7 million cash and 933,000 shares of unregistered common
stock. The excess of the purchase price paid over the fair market value of the
tangible net assets acquired of approximately $19.3 million, in aggregate, has
been recorded as goodwill and will be amortized on a straight-line basis over
thirty years.
During the nine months ended December 31, 1997, the Company merged with two
physician medical supply and equipment distributors, with aggregate annual
revenues of approximately $6.7 million, in mergers accounted for under the
pooling-of-interests method. The Company issued approximately 120,000 shares
of PSS common stock in connection with these poolings. The accompanying
consolidated financial statements have not been restated for periods prior to
the poolings due to immateriality. Accordingly, the results of operations have
been reflected in the consolidated financial statements prospectively from the
acquisition dates and retained earnings of approximately $0.1 million of the
acquired companies has been recorded as an adjustment to the retained earnings
of the Company.
F-5
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
On December 14, 1997, the Company entered into a definitive agreement to
acquire Gulf South Medical Supply, Inc. ("Gulf South") in a merger (the
"Merger") expected to be accounted for under the pooling-of-interests method
by issuing 1.75 shares of PSS common stock for each issued and outstanding
share of Gulf South common stock. Gulf South is the largest distributor of
medical supplies and related products to the long-term care industry, with
revenues of approximately $251.8 million for the twelve months ended September
30, 1997, operating 23 regional distribution centers which serve 50 states.
Consummation of the Merger is subject to the approval of the shareholders of
both the Company and Gulf South and other customary conditions. PSS' and Gulf
South's requests for early termination of the waiting period under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 were granted and such
termination became effective February 2, 1998.
Merger costs and expenses of $3.8 and $5.6 million were incurred during the
three and nine months ended December 31, 1997, respectively. Such costs
included direct merger costs primarily consisting of investment banking,
legal, accounting and filing fees, as well as consolidation costs from the
closing of duplicate service center locations, realigning regional and
corporate functions, consolidating information systems and reducing personnel.
At December 31, 1997, accrued merger costs were approximately $4.5 million.
The following presents separate company data of PSS, X-Ray GA and S&W for
the periods prior to merger. X-Ray GA was an S Corporation for income tax
purposes, and therefore did not pay U.S. federal income taxes. The table
includes unaudited pro forma net income and net income per share amounts that
reflect pro forma adjustments to present income taxes of X-Ray GA on the basis
on which they will be reported in future periods. X-Ray GA results of
operations are combined with PSS for periods subsequent to the date of merger.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1996 1996
---------------- ------------------ -----------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C>
Net sales
PSS................... $695,879 $168,743 $470,357
X-Ray GA.............. -- 10,870 33,182
S&W................... 38,003 18,831 54,479
-------- -------- --------
Total................... $733,882 $198,444 $558,018
======== ======== ========
Net income (loss)
PSS................... $ 15,812 $ 4,054 $ 6,139
X-Ray GA.............. -- 411 938
S&W(1)................ (2,095) (34) 117
-------- -------- --------
Net income as reported.. $ 13,717 $ 4,431 $ 7,194
========
Pro forma tax provision
for X-Ray GA........... (156) (357)
-------- --------
Pro forma net income.... $ 4,275 $ 6,837
======== ========
Diluted earnings per
share
As reported........... $ 0.34 $ 0.12 $ 0.19
======== ======== ========
Pro forma............. $ 0.11 $ 0.18
======== ========
</TABLE>
- --------
(1) Net loss includes $2.5 million in non-recurring compensation expense in
connection with a leveraged ESOP maintained by S&W.
F-6
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 3--SENIOR SUBORDINATED NOTES
On October 7, 1997, the Company issued, in a private offering under Rule
144A of the Securities Act of 1933, as amended (the "Act"), an aggregate
principal amount of $125.0 million of its 8 1/2% senior subordinated notes due
in 2007 (the "Private Notes") with net proceeds to the Company of $120.8
million after deduction for offering costs. Interest on the Private Notes
accrues from the date of original issuance and is payable semi-annually on
April 1 and October 1 of each year, commencing on April 1, 1998, at a rate of
8 1/2% per annum. The Private Notes are unconditionally guaranteed on a senior
subordinated basis by all of the Company's domestic subsidiaries. On February
10, 1998, the Company closed its offer to exchange the Private Notes (the
"Exchange Offer") for senior subordinated notes (the "Notes") of the Company
with substantially identical terms to the Private Notes (except that the Notes
do not contain terms with respect to transfer restrictions).
NOTE 4--EARNINGS PER SHARE
At December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 128, "Earnings Per Share." This standard replaces the
presentation of primary earnings per share ("EPS") with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation. All earnings per share amounts for the current and prior periods
have been presented in conformity with the provisions of SFAS 128. The
following table presents the reconciliation of the numerators and denominators
of the basic and diluted EPS calculations.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------- --------------
1997 1996 1997 1996
------ ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income........................................ $5,168 $4,431 $13,717 $7,194
====== ====== ======= ======
Earnings per share:
Basic............................................ $ 0.13 $ 0.12 $ 0.35 $ 0.19
====== ====== ======= ======
Diluted.......................................... $ 0.13 $ 0.12 $ 0.34 $ 0.19
====== ====== ======= ======
Weighted average shares outstanding:
Common shares outstanding........................ 40,338 37,729 39,689 37,153
Assumed exercise of stock options................ 513 533 431 692
------ ------ ------- ------
Diluted shares outstanding....................... 40,851 38,262 40,120 37,845
====== ====== ======= ======
</TABLE>
NOTE 5--SUBSEQUENT EVENTS
In January 1998, the Company completed the acquisition of a medical imaging
distributor located in Albuquerque, New Mexico, with annual revenues of
approximately $25.0 million, in a stock-for-stock merger accounted for as a
pooling-of-interests. The Company issued approximately 200,000 shares of PSS
common stock in exchange for all of the net assets of the acquired company.
In February 1998, the Company acquired certain assets of a medical imaging
distributor based in Chicago, Illinois, with annual revenues of approximately
$3.0 million, in a transaction accounted for as a purchase for aggregate
consideration of $0.3 million in cash.
On February 10, 1998, the Company closed its Exchange Offer with respect to
its $125.0 million senior subordinated notes (see Note 3--Senior Subordinated
Notes).
F-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physician Sales & Service, Inc.:
We have audited the accompanying consolidated balance sheets of Physician
Sales & Service, Inc. (a Florida corporation) and subsidiaries as of March 28,
1997 and March 29, 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended March 28, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Physician
Sales & Service, Inc. and subsidiaries as of March 28, 1997 and March 29,
1996, and the results of their operations and their cash flows for each of the
three years in the period ended March 28, 1997, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Jacksonville, Florida
December 18, 1997
F-8
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 28, 1997 AND MARCH 29, 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 29,075,157 $ 65,681,342
Marketable securities............................ 15,045,482 20,767,600
Accounts receivable, net......................... 130,426,326 105,627,598
Inventories...................................... 75,185,728 60,831,680
Prepaid expenses and other....................... 24,120,998 10,275,156
------------ ------------
Total current assets........................... 273,853,691 263,183,376
Property and equipment, net........................ 20,202,967 15,871,899
Other Assets:
Intangibles, net................................. 22,083,560 14,384,322
Other............................................ 5,129,048 2,430,391
------------ ------------
Total assets................................... $321,269,266 $295,869,988
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 69,011,247 $ 61,121,011
Accrued expenses................................. 20,012,856 7,293,684
Current maturities of long-term debt and capital
lease obligations............................... 8,099,064 11,317,621
Other............................................ 5,131,051 6,187,997
------------ ------------
Total current liabilities...................... 102,254,218 85,920,313
Long-term debt and capital lease obligations, net
of current portion................................ 3,825,333 3,265,662
Other.............................................. 4,634,291 3,552,968
------------ ------------
Total liabilities.............................. 110,713,842 92,738,943
------------ ------------
Commitments and contingencies (Notes 1, 3, 4, 9,
10, 12, 13, and 16)
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, no shares issued and outstanding.... -- --
Common stock, $.01 par value; 60,000,000 shares
authorized, 38,799,073 and 36,859,944 shares
issued and outstanding at March 28, 1997 and
March 29, 1996, respectively.................... 387,991 368,600
Additional paid-in capital....................... 207,675,161 200,186,483
Retained earnings................................ 3,767,240 5,091,891
Cumulative foreign currency translation
adjustment...................................... 92,688 --
------------ ------------
211,923,080 205,646,974
Unearned ESOP shares............................. (1,367,656) (2,515,929)
------------ ------------
Total shareholders' equity..................... 210,555,424 203,131,045
------------ ------------
Total liabilities and shareholders' equity..... $321,269,266 $295,869,988
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-9
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 28, 1997, MARCH 29, 1996, AND MARCH 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................ $763,054,234 $589,120,271 $471,985,254
Cost of goods sold................... 558,164,047 426,529,829 339,669,816
------------ ------------ ------------
Gross profit..................... 204,890,187 162,590,442 132,315,438
General and administrative expenses.. 119,916,121 89,358,343 76,817,943
Selling expenses..................... 67,524,994 51,802,431 44,589,548
Restructuring charges................ -- -- 4,388,592
Merger costs and expenses............ 12,128,168 15,731,716 --
Nonrecurring ESOP cost of acquired
company............................. 1,446,060 849,596 832,403
------------ ------------ ------------
Income from operations........... 3,874,844 4,848,356 5,686,952
------------ ------------ ------------
Other income (expense):
Interest expense................... (1,188,582) (3,568,181) (4,505,999)
Interest and investment income..... 2,419,168 1,187,892 4,540
Other income....................... 1,537,086 1,586,028 1,912,416
------------ ------------ ------------
2,767,672 (794,261) (2,589,043)
------------ ------------ ------------
Income before provision for income
taxes............................... 6,642,516 4,054,095 3,097,909
Provision for income taxes........... 2,215,900 1,925,100 3,037,582
------------ ------------ ------------
Net income........................... $ 4,426,616 $ 2,128,995 $ 60,327
============ ============ ============
Net income per common and common
equivalent share.................... $ 0.12 $ 0.06 --
============ ============ ============
Pro forma tax adjustment on pooled S-
Corporation income.................. (357,000) (438,000) (23,000)
------------ ------------ ------------
Pro forma net income................. $ 4,069,616 $ 1,690,995 $ 37,327
============ ============ ============
Pro forma tax adjustment per common
and common equivalent share on
pooled S-Corporation income......... $ (0.01) $ (0.01) $ --
------------ ------------ ------------
Pro forma net income per common and
common equivalent share............. $ 0.11 $ 0.05 $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-10
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 28, 1997, MARCH 29, 1996, AND MARCH 30, 1995
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY UNEARNED
------------------- PAID-IN RETAINED TRANSLATION ESOP
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT SHARES TOTAL
---------- -------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1994................... 19,790,784 $197,908 $ 25,183,223 $ 2,606,265 $ -- $(3,638,335) $ 24,349,061
Issuance of common
stock................. 6,718,875 67,189 24,033,753 -- -- -- 24,100,942
Distributions to former
S-Corporation
shareholders.......... -- -- -- (516,000) -- -- (516,000)
Release of unallocated
shares to ESOP........ -- -- -- -- -- 617,410 617,410
Net income............. -- -- -- 60,327 -- -- 60,327
---------- -------- ------------ ----------- ------- ----------- ------------
Balance at March 30,
1995................... 26,509,659 265,097 49,216,976 2,150,592 -- (3,020,925) 48,611,740
Issuance of common
stock................. 10,059,699 100,597 148,274,378 -- -- -- 148,374,975
Tax benefits related to
stock option plans.... -- -- 2,687,118 -- -- -- 2,687,118
Distributions to former
S-Corporation
shareholders.......... -- -- -- (455,000) -- -- (455,000)
Release of unallocated
shares to ESOP........ -- -- -- -- -- 504,996 504,996
Net income............. -- -- -- 2,128,995 -- -- 2,128,995
Other poolings......... 290,586 2,906 8,011 1,267,304 -- -- 1,278,221
---------- -------- ------------ ----------- ------- ----------- ------------
Balance at March 29,
1996................... 36,859,944 368,600 200,186,483 5,091,891 -- (2,515,929) 203,131,045
Issuance of common
stock................. 473,987 4,740 2,456,890 -- -- -- 2,461,630
Tax benefits related to
stock option plans.... -- -- 1,832,149 -- -- -- 1,832,149
Distributions to former
S-Corporation
shareholders.......... -- -- -- (1,100,000) -- -- (1,100,000)
Release of unallocated
shares to ESOP........ -- -- 172,811 -- -- 1,148,273 1,321,084
Net income............. -- -- -- 4,426,616 -- -- 4,426,616
Other poolings......... 1,465,142 14,651 3,026,828 (4,651,267) -- -- (1,609,788)
Cumulative foreign
currency translation
adjustment............ -- -- -- -- 92,688 -- 92,688
---------- -------- ------------ ----------- ------- ----------- ------------
Balance at March 28,
1997................... 38,799,073 $387,991 $207,675,161 $ 3,767,240 $92,688 $(1,367,656) $210,555,424
========== ======== ============ =========== ======= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-11
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 28, 1997, MARCH 29, 1996, AND MARCH 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Net income........................ $ 4,426,616 $ 2,128,995 $ 60,327
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization..... 5,985,340 4,302,646 4,393,063
Provision for doubtful accounts... 3,040,548 1,463,758 1,680,585
Merger costs and expenses......... 3,433,190 5,435,196 --
Restructuring charge.............. -- -- 4,388,592
Benefit for deferred income
taxes............................ (5,330,200) (782,900) (141,500)
Gain on sale of equipment......... -- -- (925,784)
Nonrecurring ESOP cost of
acquired company................. 1,446,060 849,596 832,403
Foreign currency translation
adjustment....................... 92,688 -- --
Investment income................. (520,315) -- --
Changes in operating assets and
liabilities, net of effects from
business acquisitions:
Increase in accounts receivable,
net............................. (3,994,955) (25,402,897) (8,944,283)
Decrease (increase) in
inventories..................... 3,695,562 (19,284,103) (3,165,284)
(Increase) decrease in prepaid
expenses and other assets....... (7,647,597) (2,196,836) 438,442
Increase in other assets......... (3,228,105) (1,006,027) (1,293,573)
(Decrease) increase in accounts
payable, accruals, and other
liabilities..................... (2,072,683) 12,490,104 (5,685,126)
------------ ------------- -------------
Net cash used in operating
activities..................... (673,851) (22,002,468) (8,362,138)
------------ ------------- -------------
Cash Flows From Investing
Activities:
Purchases of marketable
securities....................... (19,186,172) (317,769,635) --
Proceeds from sales and maturities
of marketable securities......... 25,428,605 297,002,035 --
Proceeds from sales of assets..... -- -- 11,994,692
Capital expenditures.............. (6,054,156) (5,400,964) (3,476,514)
Purchases of net assets from
business acquisitions............ (6,801,092) (3,373,584) (9,010,130)
Payments on noncompete
agreements....................... (3,980,225) (1,545,970) (1,036,957)
------------ ------------- -------------
Net cash used in investing
activities..................... (10,593,040) (31,088,118) (1,528,909)
------------ ------------- -------------
Cash Flows From Financing
Activities:
Principal payments under capital
lease obligations................ (880,166) (1,124,293) (931,949)
Proceeds from borrowings.......... 3,531,236 287,817,301 423,828,497
Repayments of borrowings.......... (29,311,994) (317,052,461) (435,974,915)
Distributions to former S-
Corporation shareholders......... (1,100,000) (455,000) (516,000)
Proceeds from issuance of common
stock............................ 2,421,630 148,253,975 23,498,353
------------ ------------- -------------
Net cash (used in) provided by
financing activities........... (25,339,294) 117,439,522 9,903,986
------------ ------------- -------------
Net (decrease) increase in cash and
cash equivalents.................. (36,606,185) 64,348,936 12,939
Cash and cash equivalents,
beginning of year................. 65,681,342 1,332,406 1,319,467
------------ ------------- -------------
Cash and cash equivalents, end of
year.............................. $ 29,075,157 $ 65,681,342 $ 1,332,406
============ ============= =============
Supplemental Disclosures:
Interest paid..................... $ 1,034,545 $ 3,685,155 $ 4,763,651
============ ============= =============
Income taxes paid................. $ 5,096,835 $ 2,748,087 $ 3,731,425
============ ============= =============
Merger costs and expenses paid.... $ 8,694,978 $ 10,296,520 $ --
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-12
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1997, MARCH 29, 1996 AND MARCH 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and Nature of Business
Physician Sales & Service, Inc. ("PSS") was incorporated in 1983 in
Jacksonville, Florida. The Company is a leading distributor of medical
supplies, equipment, and pharmaceuticals to primary care and other office-
based physicians. As of March 28, 1997, the Company operated 61 service
centers in the United States distributing to approximately 103,000 physician
office sites in all 50 states.
In November 1996, PSS established a new subsidiary, Diagnostic Imaging, Inc.
("DI" or "imaging division"). DI distributes medical diagnostic imaging
equipment, supplies, and service to acute and alternate care sites. As of
March 28, 1997, DI operated 14 imaging division service centers distributing
to approximately 6,000 medical imaging sites in 9 southeastern states.
In March 1996, PSS established two new subsidiaries, WorldMed International,
Inc. ("WorldMed Int'l") and WorldMed, Inc. These subsidiaries were established
to manage and develop PSS's European medical equipment and supply distribution
market ("European operation"). As of March 28, 1997, the European operation
included 2 service centers distributing to approximately 1,000 acute and
alternate care sites in Belgium, Germany and France.
The accompanying consolidated financial statements give retroactive effect
to the mergers (the "Mergers") with S&W X-ray, Inc. ("S&W"), Taylor Medical,
Inc. ("Taylor") and X-ray of Georgia ("X-ray Georgia"). On August 21, 1995,
PSS issued 3,790,215 shares of its common stock in exchange for all of the
outstanding equity interest of Taylor. Taylor was engaged in the distribution
and sale of medical supplies, equipment, and pharmaceuticals to office-based
physicians and managed care facilities in 24 states. On December 20, 1996, PSS
issued 593,672 shares of its common stock in exchange for all of the
outstanding equity interest of X-ray Georgia. X-ray Georgia distributed
radiology and imaging equipment, chemicals and supplies, and provided
technical service to the acute and alternate site markets. On September 23,
1997, PSS issued 1,737,438 shares of its common stock in exchange for all of
the outstanding equity interest of S&W. S&W distributes radiology and imaging
equipment, chemicals and supplies, and provides technical service to the acute
and alternate site markets through five locations in four states in the
northern region. These transactions were accounted for under the pooling-of-
interests method of accounting, and accordingly, the accompanying consolidated
financial statements have been retroactively adjusted as if PSS, S&W, Taylor
and X-ray Georgia had operated as one entity since inception. Certain items
have been reclassified to conform to the current year presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Stock Split
All stock-related data has been retroactively adjusted to reflect a three-
for-one stock split effective on September 22, 1995 which was distributed on
October 5, 1995.
Fiscal Year
Beginning in fiscal year 1996, the Company's fiscal year ends on the Friday
closest to March 31 of each year. The Company's fiscal year ended on the
Thursday closest to March 31 of each year prior to fiscal year 1996. Fiscal
years 1997, 1996, and 1995 consist of 52 weeks.
F-13
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentration of Credit Risk
The Company's trade accounts receivable are exposed to credit risk; however,
the risk is limited, as the balance is comprised of numerous individual
accounts, none of which is individually significant. The Company monitors the
creditworthiness of its customers on an ongoing basis and provides reserves
for estimated bad debt losses and sales returns. The Company had allowances
for doubtful accounts of approximately $4,234,000 and $2,318,000 as of the end
of fiscal years 1997 and 1996, respectively. Provisions for doubtful accounts
were approximately $3,041,000, $1,464,000, and $1,681,000 for fiscal years
ended 1997, 1996, and 1995, respectively.
Cash Management
The Company utilizes a zero balance bank account, and checks issued for cash
disbursements are funded by advances from overnight investments. Outstanding
checks are recorded as accounts payable until they are presented to the bank,
at which time the payments are applied against the overnight investments. The
Company had approximately $8,060,000 and $6,841,000 of outstanding checks
recorded in accounts payable as of the end of fiscal years 1997 and 1996,
respectively.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash held at banks, short-
term government obligations, and money market instruments. The Company invests
its excess cash in high-grade investments and, therefore, bears minimal risk.
These instruments have original maturity dates not exceeding three months.
Marketable Securities
The Company classifies its marketable securities as trading securities and
carries such securities at fair market value. Net unrealized gains and losses
on trading securities are included in net income.
Marketable securities include municipal bond issues with maturity dates
exceeding three months and equity securities classified as trading securities.
Management's intent is to liquidate these securities within one year.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, marketable securities, short-term trade receivables and
payables, and long-term debt and capital lease obligations, approximate their
fair values.
Inventories
Inventories are comprised principally of medical supplies and equipment and
are stated at the lower of cost (first-in, first-out) or market. Market is
defined as net realizable value.
Property and Equipment
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to thirty years. Leasehold
improvements are amortized over the lease terms or the estimated
F-14
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
useful lives, whichever is shorter. Gain or loss upon retirement or disposal
of property and equipment is recorded in other income in the accompanying
consolidated statements of operations.
Intangibles
Noncompete agreements are amortized on a straight-line basis over the lives
of the agreements, which range from three to fifteen years. Customer lists are
amortized on a straight-line basis over ten years.
The Company has classified as goodwill the cost in excess of the fair value
of net identifiable assets purchased in business acquisitions which are
accounted for as purchase transactions. Goodwill is being amortized over
fifteen to thirty years using the straight-line method. Subsequent to the date
of acquisition, the Company continually evaluates whether later events and
circumstances have occurred that indicate a change in the estimated useful
life or recoverability of goodwill.
Self-Insurance Coverage
The Company maintains a self-insurance program for employee health costs.
Additional coverage is provided by a third party for stop-loss based on
maximum costs of $100,000 per employee and approximately $5.3 million in the
aggregate. Claims that have been incurred but not reported are recorded based
on estimates of claims provided by a third-party administrator and are
included in accrued expenses in the accompanying consolidated balance sheets.
Income Taxes
The Company uses the asset and liability method in accounting for income
taxes. Deferred income taxes result primarily from the net tax effect of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Shareholders' Equity
On May 5, 1994, the Company completed an initial public offering of
5,100,000 shares of its common stock at $3.67 per share, of which 4,200,000
were offered by the Company. On June 3, 1994, the Company's underwriters
exercised their overallotment option for an additional 765,000 shares of the
Company's common stock at $3.67 per share. The proceeds of the sale after
deducting issuance costs were approximately $15,800,000. The Company used all
of the net proceeds to reduce outstanding bank debt.
On March 27, 1995, the Company signed a Distributorship Agreement (the
"Abbott Agreement") with Abbott Laboratories ("Abbott") providing for the
exclusive distribution of certain Abbott diagnostic products. As part of the
Abbott Agreement, Abbott purchased 825,000 unregistered, restricted shares of
PSS common stock. The proceeds of approximately $5,900,000 were used to reduce
outstanding bank debt.
Effective November 13, 1995, the Company completed a secondary offering of
11,500,000 shares of common stock at $17 per share, 8,800,000 of which were
offered by the Company.
During fiscal year 1996, the Company merged with three medical supply and
equipment distributors in stock mergers accounted for under the pooling-of-
interests method by issuing 290,586 shares of PSS common stock in exchange for
all of the common stock of the acquired companies. During fiscal year 1997,
the Company merged with one medical supply and equipment distributor and three
imaging division companies in stock mergers accounted for under the pooling-
of-interests method by issuing approximately 1,465,000 shares of PSS common
stock in exchange for all of the common stock of the acquired companies. The
accompanying consolidated financial statements have not been restated for
periods prior to these poolings due to immateriality.
F-15
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1997 and 1996, the Company realized an income tax benefit from the
exercise or early disposition of certain stock options. This benefit results
in a decrease in current income taxes payable and an increase in additional
paid-in capital.
Foreign Currency Translation
Financial statements for the Company's subsidiary outside the United States
are translated into U.S. dollars at year-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded as a separate component of
shareholders' equity.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the
intrinsic value method. The Company adopted the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." In accordance with SFAS No. 123, for footnote
disclosure purposes only, the Company computes its earnings and earnings per
share on a pro forma basis as if the fair value method had been applied.
Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share is computed using the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year. Weighted average shares outstanding for purposes
of this calculation were approximately 38,015,000, 32,870,000, and 25,101,000
for fiscal years 1997, 1996, and 1995, respectively.
Statements of Cash Flows
The Company issued stock in the amount of $40,000 and $121,000 related to
acquisitions accounted for as purchases in fiscal years 1997 and 1996,
respectively. The Company assumed net liabilities of approximately $1,610,000
and recorded noncompete assets and liabilities of approximately $4,300,000 in
connection with the mergers of four other medical supply and equipment
distributors accounted for under the pooling-of-interests method in fiscal
year 1997. The Company also acquired net assets of approximately $1,278,000 in
conjunction with the mergers of three other medical supply and equipment
distributors accounted for under the pooling-of-interests method in fiscal
year 1996. Also, the Company incurred capital lease obligations to obtain
equipment of approximately $514,000 in fiscal year 1995. All of the above
items were excluded from the statements of cash flows as these items were
noncash transactions.
Accounting Standards Changes
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes new standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock and is effective for
financial statements issued for periods ending after December 15, 1997.
Management expects that the impact of SFAS No. 128 will not be material.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." SFAS No. 129 establishes new standards for
disclosing information about an entity's capital structure and applies to all
entities. SFAS No. 129 is effective for financial statements for periods
ending after December 15, 1997. Management expects that the impact of SFAS No.
129 will not be material.
F-16
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. MARKETABLE SECURITIES
The Company's marketable securities are comprised of municipal bond issues
and equity securities classified as trading securities and are carried at
their fair values based upon the quoted market prices at March 28, 1997 and
March 29, 1996. At March 28, 1997 and March 29, 1996, the aggregate fair
market value of the municipal bonds was approximately $14,469,000 and
$20,768,000, respectively, and the aggregate cost was approximately
$14,552,000 and $20,800,000, respectively. The gross unrealized loss on
municipal bonds for each year was approximately $83,000 and $32,000,
respectively. Interest income, including realized gains, on the municipal
bonds was approximately $626,000 and $195,000 for fiscal years 1997 and 1996,
respectively. At March 28, 1997, the fair market value of equity securities
was $576,000, with a cost of $56,000, and an unrealized gain of $520,000 which
is included in investment income during fiscal year 1997.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
MARCH 28, 1997 MARCH 29, 1996
-------------- --------------
<S> <C> <C>
Lines of credit................................ $ -- $ 3,100,000
Other notes.................................... 774,794 262,961
Long-term debt of acquired company............. 10,692,479 9,960,929
Capital lease obligations...................... 457,124 1,259,393
----------- -----------
11,924,397 14,583,283
Less current maturities........................ 8,099,064 11,317,621
----------- -----------
$ 3,825,333 $ 3,265,662
=========== ===========
</TABLE>
Lines of Credit
The Company has a financing and security agreement (the "Agreement") with a
bank (the "Bank"). The Agreement allows the Company to obtain loans from the
Bank on a revolving basis. The Agreement provides for loans in the amount of
85% of the outstanding amount of eligible accounts receivable plus the lesser
of $30,000,000 or 50% of eligible inventory. The total amount of loans
outstanding under the Agreement cannot exceed the lesser of $60,000,000 or
amounts available subject to eligible collateral. The Agreement provides for
an option, on the part of the Company, to increase the availability to
$75,000,000. There was no balance outstanding at March 28, 1997 and March 29,
1996.
The loans are collateralized by all company assets. Interest accrues,
subject to certain leverage ratio requirements, at a variable rate indexed on
the London Interbank Offered Rate ("LIBOR") plus the applicable margin or the
Bank's prime rate plus the applicable margin at the option of the Company.
Interest rates may vary from prime to prime plus 75 basis points or from LIBOR
plus 150 basis points to LIBOR plus 250 basis points, based on the Company's
leverage ratio. The Agreement provides for a termination date of April 30,
1998, at which time the Agreement may be extended annually at the Bank's sole
discretion upon request by the Company.
The Agreement contains certain restrictive covenants which, among other
things, require the Company to maintain a current ratio of 2 to 1, a debt
service coverage ratio of 1.1 to 1 and a debt leverage ratio no greater than 5
to 1, all computed as defined in the Agreement. In addition, the Company must
maintain minimum tangible net worth plus subordinated indebtedness, as defined
in the Agreement, of $24,500,000 as of March 28, 1997, increasing by
$1,000,000 as of the end of each subsequent fiscal year. The Agreement also
contains
F-17
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
restrictions on mergers, acquisitions, investments, capital expenditures,
intangible assets, indebtedness, and stock transactions, among other things.
Other Notes
X-ray Georgia maintained various other notes which were repaid by the
Company in fiscal year 1997 in conjunction with the merger.
Long-term Debt of Acquired Company
S&W has available three line of credit agreements which provide for
borrowings of up to $10,000,000 for working capital, bulk inventory purchases,
and equipment purchases. As collateral for the lines of credit, the bank has a
security interest in S&W's accounts receivable, equipment, and inventory,
along with the personal guarantee of one of S&W's shareholders.
The primary line of credit is available up to $3,500,000 and bears interest
at the prime rate minus 0.25% or the LIBOR rate plus 2% (7.56% at March 28,
1997). The secondary credit line is available up to $6,000,000 and bears
interest at the prime rate (8.5% at March 28, 1997). The equipment line of
credit is available up to $500,000 and bears interest at the prime rate plus
1.25% (9.75% at March 28, 1997). These lines of credit were repaid in
conjunction with the merger (Notes 1 and 11).
As of March 28, 1997, S&W has an Employee Stock Ownership Trust note payable
due to a bank in minimum monthly principal installments of $20,555 plus
interest at the LIBOR rate plus 1.5% (7.06% at March 28, 1997), through
February 1, 2001, at which time all remaining principal is due. This note
payable was repaid in conjunction with the merger (Notes 1, 10, and 11).
S&W has a note payable due to a bank in monthly principal installments of
$33,333 plus interest at the LIBOR rate plus 2.25% (7.81% at March 28, 1997),
through November 31, 2001. This note payable was repaid in conjunction with
the merger (Notes 1 and 11).
S&W has a mortgage note payable to a bank due in monthly principal
installments of $3,125 plus interest at the prime rate plus 1% (9.5% at March
28, 1997). This note was repaid in conjunction with the merger (Notes 1 and
11).
Long-term debt, excluding capital lease obligations, outstanding at March
28, 1997 was approximately $3,768,000. As of March 28, 1997, future minimum
payments of long-term debt, by fiscal year and in the aggregate, are
approximately as follows:
<TABLE>
<S> <C>
Fiscal Year:
1998........................................................... $ 7,699,000
1999........................................................... 868,000
2000........................................................... 737,000
2001........................................................... 1,758,000
2002........................................................... 289,000
Thereafter..................................................... 116,000
-----------
Total........................................................ $11,467,000
===========
</TABLE>
F-18
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Capital Lease Obligations
As of March 28, 1997, future minimum payments, by fiscal year and in the
aggregate, required under capital leases are approximately as follows:
<TABLE>
<S> <C>
Fiscal Year:
1998............................................................. $432,000
1999............................................................. 34,000
2000............................................................. 28,000
--------
Net minimum lease payments......................................... 494,000
Less amount representing interest.................................. 37,000
--------
Present value of net minimum lease payments under capital leases... 457,000
Less amounts due in one year....................................... 400,000
--------
Amounts due after one year..................................... $ 57,000
========
</TABLE>
4. OPERATING LEASE COMMITMENTS
The Company leases various facilities and equipment under operating leases
which expire at various dates through 2005. Certain lease commitments provide
that the Company pay taxes, insurance, and maintenance expenses related to the
leased assets.
Rent expense approximated $6,634,000, $5,691,000, and $5,542,000 for fiscal
years 1997, 1996, and 1995, respectively. As of March 28, 1997, future minimum
payments, by fiscal year and in the aggregate, required under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
Fiscal Year:
1998........................................................... $ 9,038,000
1999........................................................... 5,905,000
2000........................................................... 4,351,000
2001........................................................... 2,924,000
2002........................................................... 1,627,000
Thereafter..................................................... 993,000
-----------
Total........................................................ $24,838,000
===========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land............................................. $ 383,312 $ 271,524
Building......................................... 2,842,764 1,875,426
Equipment........................................ 24,861,392 19,999,027
Furniture, fixtures and leasehold
improvements.................................... 6,962,170 3,936,950
------------ ------------
35,049,638 26,082,927
Accumulated
depreciation.................................... (14,846,671) (10,211,028)
------------ ------------
$ 20,202,967 $ 15,871,899
============ ============
</TABLE>
F-19
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Equipment includes equipment acquired under capital leases with a cost of
$109,000 and $3,909,000 and related accumulated depreciation of $38,000 and
$1,766,000 at March 28, 1997 and March 29, 1996, respectively. Depreciation
expense aggregated approximately $3,481,000, $2,412,000, and $2,396,000 for
1997, 1996, and 1995, respectively, and is included in general and
administrative expenses.
6. INTANGIBLES
Intangibles, stated at cost, consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Customer lists..................................... $ 3,228,105 $ 3,466,285
Goodwill........................................... 12,370,204 7,441,804
Noncompete agreements.............................. 11,921,251 7,146,913
----------- -----------
27,519,560 18,055,002
Accumulated amortization........................... (5,436,000) (3,670,680)
----------- -----------
$22,083,560 $14,384,322
=========== ===========
</TABLE>
As of March 28, 1997, approximate future minimum payments, by fiscal year
and in the aggregate, required under noncompete agreements are as follows:
<TABLE>
<S> <C>
1998.............................................................. $2,312,000
1999.............................................................. 1,736,000
2000.............................................................. 550,000
2001.............................................................. 85,000
2002.............................................................. 42,000
Thereafter........................................................ 73,000
----------
$4,798,000
==========
</TABLE>
Amortization expense aggregated approximately $2,504,000, $1,891,000, and
$1,997,000 for 1997, 1996, and 1995, respectively, and is included in general
and administrative expenses.
7. INCOME TAXES
The provisions for income taxes are detailed below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Current tax provision:
Federal............................... $ 6,105,000 $2,171,000 $2,554,000
State................................. 1,442,000 537,000 626,000
----------- ---------- ----------
Total current....................... 7,547,000 2,708,000 3,180,000
----------- ---------- ----------
Deferred tax benefit:
Federal............................... (4,305,000) (638,000) (107,000)
State................................. (1,026,000) (145,000) (35,000)
----------- ---------- ----------
Total deferred...................... (5,331,000) (783,000) (142,000)
=========== ========== ==========
Total income tax provision.......... $ 2,216,000 $1,925,000 $3,038,000
=========== ========== ==========
</TABLE>
F-20
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between income tax computed at the federal statutory rate and
the actual tax provision is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Income before provision for taxes.......... $6,643,000 $4,054,000 $3,098,000
========== ========== ==========
Tax provision at the statutory rate........ 2,259,000 1,378,000 1,053,000
---------- ---------- ----------
(Decrease) increase in taxes:
Change in valuation allowance for
deferred taxes.......................... (900,000) (956,000) 1,023,000
State income tax, net of federal
benefit................................. 389,000 424,000 172,000
Write-off of intangibles................. -- -- 583,000
Meals and entertainment.................. 180,000 167,000 162,000
Goodwill amortization.................... 15,000 8,000 10,000
Cash surrender value of life insurance... 62,000 45,000 26,000
Nontaxable interest income............... (660,000) (198,000) --
Merger costs and expenses................ 721,000 2,216,000 --
Utilization of tax net operating losses.. -- (776,000) --
LIFO reserve of pooled companies......... 121,000 -- --
Other, net............................... 348,000 9,000 30,000
Income of S-corporation.................. (319,000) (392,000) (21,000)
---------- ---------- ----------
Total (decrease) increase in taxes..... (43,000) 547,000 1,985,000
---------- ---------- ----------
Total income tax provision............. $2,216,000 $1,925,000 $3,038,000
========== ========== ==========
Effective tax rate......................... 33.4% 47.5% 98.1%
========== ========== ==========
</TABLE>
Deferred income taxes for 1997 and 1996 reflect the impact of temporary
differences between the financial statement and tax bases of assets and
liabilities. The tax effect of temporary differences which create deferred tax
assets and liabilities at March 28, 1997 and March 29, 1996 are detailed
below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Merger costs and expenses.......................... $ 1,455,000 $ 204,000
Allowance for doubtful accounts and sales returns.. 1,620,000 757,000
Intangibles........................................ 674,000 681,000
Inventory uniform cost capitalization.............. 1,007,000 513,000
Net operating loss carryforwards................... 1,738,000 219,000
Accrued expenses................................... 801,000 399,000
Reserve for inventory obsolescence................. 39,000 105,000
Long-term incentive plan........................... 174,000 --
Other.............................................. 219,000 197,000
----------- -----------
Gross deferred tax assets........................ 7,727,000 3,075,000
----------- -----------
Deferred tax liabilities:
Excess of tax depreciation and amortization over
book depreciation and amortization................ (1,541,000) (1,184,000)
Other.............................................. -- (136,000)
----------- -----------
Gross deferred tax liabilities................... (1,541,000) (1,320,000)
----------- -----------
6,186,000 1,755,000
Valuation allowance.............................. -- (900,000)
----------- -----------
Net deferred tax asset........................... $ 6,186,000 $ 855,000
=========== ===========
</TABLE>
F-21
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A valuation allowance was provided in prior years for those temporary
differences for which utilization was uncertain. Based on an evaluation of the
realizability of deferred tax assets, the valuation allowance was reduced by
$900,000 and $956,000 during fiscal years 1997 and 1996, respectively.
The income tax benefit related to the exercise or early disposition of
certain stock options reduces taxes currently payable and is credited to
additional paid-in capital. Such amounts approximated $1,832,000 and
$2,687,000 for fiscal years 1997 and 1996, respectively.
At March 28, 1997, the Company had net operating loss carryforwards for
income tax purposes arising from mergers of approximately $4,486,000 which
expire from 2006 to 2011. The utilization of the net operating loss
carryforwards is subject to limitation in certain years.
8. RELATED-PARTY TRANSACTIONS
A member of the board of directors provides legal services as general
counsel to the Company. Fees for such legal services were approximately
$132,000, $136,000, and $124,000 in 1997, 1996, and 1995, respectively.
A member of the board of directors is chairman and CEO of the insurance
company that administered the Company's self-insurance program through
December 31, 1995. Administrative fees paid to the company were approximately
$484,000 during the first nine months of fiscal year 1996 and $339,000 for
fiscal year 1995. The Company changed its self-insurance administrator as of
January 1, 1996 to an unrelated party.
S&W has a demand note payable outstanding to S&W shareholders and other
related parties that bears interest at the prime rate plus 1% (9.5% at March
28, 1997). Payments to S&W related parties were approximately $1,174,000,
$791,000, and $1,275,000 for the years ended March 28, 1997, March 29, 1996,
and March 30, 1995, respectively. This note payable was repaid in conjunction
with the merger (Notes 1, 3, and 11).
Subsequent to year-end, the Company loaned its Chairman of the Board and
Chief Executive Officer of the Company approximately $3.2 million to refinance
debt incurred in connection with previous purchases of Common Stock. The loans
are unsecured and bear interest at 6.55% and are payable on demand and
expected to be repaid over a 10-year period.
9. STOCK-BASED COMPENSATION PLANS
At March 28, 1997, the Company had five stock-based compensation plans as
described below:
Incentive Stock Option Plan
Under the Company's qualified 1986 Incentive Stock Option Plan, 8,001,000
shares of the Company's common stock are reserved for sale to officers and key
employees. Options may be granted at prices not less than fair market value at
the date of grant and are exercisable during periods of up to five years from
that date. The exercisability of the options is not subject to future
performance.
F-22
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information regarding this plan is summarized below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Balance, March 31, 1994......................... 1,540,497 $2.47
Granted....................................... 648,000 4.18
Exercised..................................... (817,899) 2.17
Canceled...................................... (12,000) 1.59
--------- -----
Balance, March 30, 1995......................... 1,358,598 2.89
Granted....................................... -- --
Exercised..................................... (607,405) 2.68
Canceled...................................... (30,297) 1.48
--------- -----
Balance, March 29, 1996......................... 720,896 2.94
Granted....................................... -- --
Exercised..................................... (345,570) 2.83
Canceled...................................... (12,000) 3.28
--------- -----
Balance, March 28, 1997......................... 363,326 $3.05
========= =====
</TABLE>
At March 31, 1994, March 30, 1995, March 29, 1996, and March 28, 1997,
1,411,542, 1,274,688, 682,031, and 363,326, respectively, of outstanding
options were exercisable. The weighted average remaining life of the options
outstanding at March 28, 1997 is approximately 1.7 years. No compensation
expense has been recorded because the options were granted at fair market
value. As of March 28, 1997, approximately 2,388,000 shares of common stock
are available for issuance under the plan. The Company does not intend to
issue any more options under this plan.
Options Issued in Exchange for Former Taylor Medical Options
In conjunction with the acquisition of Taylor Medical, Inc., the Company
assumed the nonqualified Taylor Medical Stock Option Plans of 1986 and 1993.
The options outstanding at the time of acquisition were converted to allow
grantees the right to acquire the Company's common stock at a rate consistent
with the merger's stock pooling agreement. All options under this plan are
priced at $5.08 per common share and are not subject to future performance.
Information regarding these options is summarized below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Balance, March 31, 1994.......................................... 613,776
Granted........................................................ 15,747
Exercised...................................................... (5,118)
Canceled....................................................... (8,268)
--------
Balance, March 30, 1995.......................................... 616,137
Granted........................................................ 7,825
Exercised...................................................... (538,815)
Canceled....................................................... --
--------
Balance, March 29, 1996.......................................... 85,147
Granted........................................................ --
Exercised...................................................... (37,509)
Canceled....................................................... --
--------
Balance, March 28, 1997.......................................... 47,638
========
</TABLE>
F-23
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company does not intend to issue any more options under this plan.
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 1.8 years.
Long Term Stock Plan
In March 1994, the Company adopted the 1994 Long Term Stock Plan under which
the Compensation Committee has discretion to grant nonqualified stock options
and restricted stock to any employee of the Company. A total of 2,190,000
shares of the Company's common stock, as adjusted by stock splits,
consolidations, or other changes in capitalization, have been reserved for
issuance under this plan. The exercise price of options granted under this
plan may be no less than the fair market value of the Company's common stock
on the date of grant.
Information regarding the stock option component of this plan is summarized
below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Balance, March 31, 1994.......................... -- --
Granted........................................ 160,200 $ 5.32
Exercised...................................... -- --
Canceled....................................... -- --
------- ------
Balance, March 30, 1995.......................... 160,200 5.32
Granted........................................ 492,300 16.96
Exercised...................................... (37,500) 13.07
Canceled....................................... -- --
------- ------
Balance, March 29, 1996.......................... 615,000 14.17
Granted........................................ 203,179 23.90
Exercised...................................... (27,050) 13.35
Canceled....................................... (3,000) 5.79
------- ------
Balance, March 28, 1997.......................... 788,129 $16.52
======= ======
</TABLE>
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 5.6 years. As of March 28, 1997, approximately 1,340,000 shares
of common stock were available for issuance under the plan.
Long Term Incentive Plan
In March 1994, the Company adopted the 1994 Long Term Incentive Plan which
provides officers with performance awards, consisting of cash or registered
shares of common stock, or a combination thereof, based primarily upon the
Company's total shareholder return as ranked against the companies comprising
the NASDAQ Composite Index over a three-year period. The maximum payable under
this plan to an eligible employee, whether in the form of cash or common
stock, may not exceed $1 million per fiscal year. At March 28, 1997, the
Company has accrued approximately $448,000 related to awards granted under
this plan.
The plan also provides for nonqualified stock options or restricted stock to
be granted at the full discretion of the Compensation Committee of the Board
of Directors. The exercise price of options granted under this plan
F-24
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
may be no less than the fair market value of the Company's common stock on the
date of grant, and accordingly, no compensation expense is recorded on the
date the stock options are granted. The aggregate number of shares of common
stock, including shares reserved for issuance pursuant to the exercise of
options, which may be granted or issued may not exceed 730,000 shares.
Information regarding the stock option component of the plan is summarized
below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Balance, March 30, 1995.......................... -- --
Granted........................................ 350,643 $14.88
Exercised...................................... (32,406) 14.88
Canceled....................................... -- --
------- ------
Balance, March 29, 1996.......................... 318,237 14.88
Granted........................................ 68,364 23.94
Exercised...................................... (61,158) 14.88
Canceled....................................... -- --
------- ------
Balance, March 28, 1997.......................... 325,443 $16.78
======= ======
</TABLE>
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is
approximately 8.5 years. To date, no cash or restricted stock have been issued
under this plan.
Directors' Stock Plan
In March 1994, the Company adopted the Directors' Stock Plan under which
nonemployee directors receive an annual grant of an option to purchase 2,000
shares of common stock. A total of 200,000 shares of the Company's common
stock, as adjusted for stock splits, consolidations, or other changes in
capitalization, have been reserved for issuance under this plan. The exercise
price of options granted under this plan may be no less than the fair market
value of the Company's common stock on the date of grant, and accordingly, no
compensation expense has been recorded in connection with the stock options
granted. Each nonemployee director receives a grant of 2,000 restricted shares
upon initial election and reelection to the Board.
Information regarding the stock option component of this plan is summarized
below:
F-25
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Balance, March 31, 1994.......................... -- --
Granted........................................ 27,000 $ 5.48
Exercised...................................... -- --
Canceled....................................... -- --
------ ------
Balance, March 30, 1995.......................... 27,000 5.48
Granted........................................ 22,500 14.75
Exercised...................................... (4,500) 5.48
Canceled....................................... -- --
------ ------
Balance, March 29, 1996.......................... 45,000 10.12
Granted........................................ 12,000 23.94
Exercised...................................... (3,000) 5.48
Canceled....................................... -- --
------ ------
Balance, March 28, 1997.......................... 54,000 $13.44
====== ======
</TABLE>
All options are fully vested at the date of grant; therefore, all
outstanding options at the end of each period are exercisable. The weighted
average remaining life of the options outstanding at March 28, 1997 is 8.4
years. To date, 13,500 restricted shares have been issued under this plan.
Fair Value of Stock Options
Under SFAS No. 123, the fair value of stock options granted in the years
ended March 28, 1997 and March 29, 1996 have been estimated using a Black-
Scholes option pricing model with the following weighted average assumptions
for grants: risk-free interest rate ranging from 5.8% to 6.8%, expected option
life ranging from 3.5 to 5 years, expected volatility of 40% for 1996 and 55%
for 1997 and no expected dividend yield. Using these assumptions, the
estimated fair values of options granted for the years ended March 28, 1997
and March 29, 1996 were approximately $2.9 million and $6.0 million,
respectively, and such amounts would be included in compensation expense. Pro
forma net income and net income per share for the years ended March 28, 1997
and March 29, 1996, assuming the Company had accounted for the plans under the
fair value approach, are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Net income (loss):
As reported............................................... $4,427 $ 2,129
Pro forma................................................. $2,653 $(1,525)
Net income (loss) per share:
As reported............................................... $ 0.12 $ 0.06
Pro forma................................................. $ 0.07 $ (0.05)
</TABLE>
Because the fair value method of accounting has not been applied to options
granted prior to March 31, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Weighted average per share fair value of options granted:
Incentive Stock Option Plan............................... N/A N/A
Long Term Stock Plan...................................... $11.08 $6.91
</TABLE>
F-26
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Long Term Incentive Plan.................................. $11.08 $6.73
Directors' Stock Plan..................................... $13.22 $6.67
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company has an employee stock ownership plan ("ESOP") available to all
employees with at least one year of service. Effective January 1, 1996, the
Company amended the plan to allow participants to direct the investment of a
portion of their plan balances. Prior to this change, the trustees directed
the investment of the participants' balances. As of March 28, 1997, the ESOP
owns approximately 2,034,000 shares of the Company's common stock. Company
contributions to the plan were approximately $160,000, $120,000, and $85,000
for 1997, 1996, and 1995, respectively, and are made at the discretion of the
Company.
The Company also has an employee stock purchase plan available to employees
with at least one year of service. The plan allows eligible employees to
purchase company stock over the counter through payroll deductions.
S&W sponsors a leveraged employee stock ownership plan ("S&W ESOP") that
covers all employees with one year of service. Contributions to the plan are
deposited under a trust agreement in the form of cash or Company stock. The
number of shares of Company stock to be contributed or purchased is based upon
the fair market value of the common stock as determined by an independent
appraisal. The ESOP shares are pledged as collateral for its debt. As the debt
is repaid, shares are released from collateral and allocated to active
employees, based on the proportion of debt service paid in the year. The
Company accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the debt of the ESOP is recorded as debt and the shares pledged
as collateral are reported as unearned ESOP shares in the balance sheet. As
shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for the earnings-per-share (EPS) computation.
At March 28, 1997, March 29, 1996, and March 30, 1995, 561,496 shares of the
Company's common stock were held by the Employee Stock Ownership Trust (the
"Trust"), which was established to fund the plan. The Trust purchased these
shares with the proceeds of a $3,700,000 loan from S&W. S&W, in turn, obtained
a $3,700,000 loan from a bank.
The S&W ESOP shares were as follows:
<TABLE>
<CAPTION>
MARCH 28, 1997 MARCH 29, 1996 MARCH 30, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Allocated shares.................. 278,490 202,052 123,946
Shares released for allocation.... 120,237 76,438 78,106
Unreleased shares................. 162,769 283,006 359,444
---------- ---------- ----------
Total ESOP shares............... 561,496 561,496 561,496
========== ========== ==========
Fair value of unreleased shares... $1,512,495 $2,392,661 $2,885,589
========== ========== ==========
</TABLE>
Subsequent to March 28, 1997, the Company committed to release the remaining
shares to the S&W ESOP participants and it is management's intention to
terminate this plan. Accordingly, approximately $2.5 million of related
expense was recognized subsequent to year-end.
11. BUSINESS ACQUISITIONS
Pooling With S&W
On September 23, 1997, the Company acquired S&W in a merger pursuant to
which the Company issued 1,737,458 shares of common stock to the former
shareholders of S&W (of which 154,700 shares are being held in escrow) in
exchange for all of the outstanding shares of capital stock of S&W valued at
$26.0 million at the time of the merger. The merger has been accounted for as
a pooling-of-interests, and accordingly, the Company's consolidated financial
statements have been restated to include the accounts and operations of S&W
for all periods prior to the merger.
F-27
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Separate net sales, net income, and other changes in shareholders' equity of
the merged entities prior to the merger are presented in the following table:
<TABLE>
<CAPTION>
MARCH 28, 1997 MARCH 29, 1996 MARCH 30, 1995
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales
PSS, Taylor, and X-ray of Geogia
combined....................... $691,020 $529,024 $413,301
S&W............................. 72,034 60,096 58,684
-------- -------- --------
Total......................... $763,054 $589,120 $471,985
======== ======== ========
Net income (loss)
PSS, Taylor, and X-ray of Geogia
combined....................... $ 4,373 $ 1,339 $ (847)
S&W............................. 54 790 907
-------- -------- --------
Total......................... $ 4,427 $ 2,129 $ 60
======== ======== ========
Other changes in shareholders' eq-
uity
PSS, Taylor, and X-ray of Geor-
gia combined................... $ 1,677 $151,885 $ 23,585
S&W............................. 1,321 505 617
-------- -------- --------
Total......................... $ 2,998 $152,390 $ 24,202
======== ======== ========
</TABLE>
Pooling With X-ray Georgia
On December 20, 1996, the Company acquired X-ray Georgia in a merger
pursuant to which the Company issued 593,672 shares of common stock to the
former shareholders of X-ray Georgia (of which 52,675 shares are being held in
escrow as of March 28, 1997) in exchange for all of the outstanding shares of
capital stock of X-ray Georgia valued at $11.0 million at the time of the
merger. The merger has been accounted for as a pooling-of-interests, and
accordingly, the Company's consolidated financial statements have been
restated to include the accounts and operations of X-ray Georgia for all
periods prior to the merger.
X-ray Georgia was an S-Corporation for income tax purposes, and therefore,
did not pay U.S. federal income taxes. X-ray Georgia will be included in the
Company's U.S. federal income tax return subsequent to the date of
acquisition. Separate net sales, net income (loss) and related per share
amounts of merged entities are presented in the following table. In addition,
the table includes pro forma net income (loss) and net income (loss) per share
amounts which reflect pro forma adjustments to present income taxes of X-ray
Georgia on the basis on which they will be reported in future periods.
<TABLE>
<CAPTION>
MARCH 30 THROUGH
DECEMBER 31, 1996 MARCH 29, 1996 MARCH 30, 1995
----------------- -------------- --------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
Net sales
PSS and Taylor
combined.............. $470,357 $483,294 $366,285
X-ray Georgia.......... 33,182 45,730 47,016
-------- -------- --------
Total................ $503,539 $529,024 $413,301
======== ======== ========
Net income (loss)
PSS and Taylor
combined.............. $ 6,139 $ 186 $ (909)
X-ray Georgia.......... 938 1,153 62
-------- -------- --------
Net income (loss) as
reported................ $ 7,077 $ 1,339 $ (847)
Pro forma tax provision
for X-ray Georgia....... (357) (438) (23)
-------- -------- --------
</TABLE>
F-28
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
MARCH 30 THROUGH
DECEMBER 31, 1996 MARCH 29, 1996 MARCH 30, 1995
----------------- -------------- --------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
Pro forma net income
(loss).................. $6,720 $ 901 $ (870)
====== ======== =======
Net income (loss) per
share:
As reported............ $ 0.19 $ 0.04 $ (0.04)
Pro forma.............. $ 0.19 $ 0.03 $ (0.04)
Other changes in
shareholders' equity
PSS and Taylor
combined.............. $1,446 $152,340 $24,101
X-ray Georgia.......... (1,100) (455) (516)
------ -------- -------
Total................ $ 346 $151,885 $23,585
====== ======== =======
</TABLE>
Pooling With Taylor
On August 21, 1995, the Company issued approximately 3,790,000 shares of its
common stock in exchange for all of the outstanding common stock of Taylor,
including approximately 416,000 shares held in escrow to satisfy certain
obligations of Taylor related to its operations prior to the merger.
Subsequent to August 21, 1995, approximately 244,000 shares of common stock
were returned to the Company as settlement of the escrow and were canceled.
These canceled shares had no resulting impact on the net income per share
calculation. The merger has been accounted for as a pooling-of-interests, and
accordingly, the Company's consolidated financial statements have been
restated to include the accounts and operations of Taylor for all periods
prior to the merger.
Separate net sales, net income (loss), and other changes in shareholders'
equity of the merged entities prior to the merger are presented in the
following table:
<TABLE>
<CAPTION>
APRIL 1 THROUGH
JUNE 30, 1995 MARCH 30, 1995
--------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net sales
PSS......................................... $ 73,670 $236,188
Taylor...................................... 31,640 130,097
-------- --------
Combined.................................. $105,310 $366,285
======== ========
Net income (loss)
PSS......................................... $ 980 $ 3,680
Taylor...................................... 193 (4,589)
-------- --------
Combined...................................... $ 1,173 $ (909)
======== ========
Other changes in shareholders' equity
PSS......................................... $ 1,036 $ 24,075
Taylor...................................... 1 26
-------- --------
Combined...................................... $ 1,037 $ 24,101
======== ========
</TABLE>
Other Poolings
During fiscal year 1997, the Company merged with four other medical supply
and equipment distributors in stock mergers accounted for under the pooling-
of-interests method by issuing approximately 1,465,000 shares of PSS common
stock in exchange for all of the common stock of the acquired companies. The
accompanying
F-29
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
consolidated financial statements have not been restated for periods prior to
these poolings due to immateriality. Accordingly, the results of operations
have been reflected in the consolidated financial statements prospectively
from the acquisition date and the accumulated deficit as of their acquisition
dates of approximately $4.7 million has been recorded as an adjustment to the
retained earnings of the Company.
During fiscal year 1996, the Company merged with three other medical supply
and equipment distributors in stock mergers accounted for under the pooling-
of-interests method by issuing 290,586 shares of PSS common stock in exchange
for all of the common stock of the acquired companies. The accompanying
consolidated financial statements have not been restated for periods prior to
these poolings due to immateriality. Accordingly, the results of operations
have been reflected in the consolidated financial statements prospectively
from the acquisition date, and the accumulated retained earnings as of their
acquisition dates of approximately $1.3 million have been recorded as
adjustments to the retained earnings of the Company.
Asset Purchases
During fiscal year 1997, the Company acquired certain assets, accounted for
by the purchase method, including accounts receivable, inventories, equipment,
and other assets of five medical supplies and equipment distributors for
approximately $14.2 million. The aggregate purchase price paid consisted of
cash of approximately $6.8 million, assumption of accounts payable and accrued
liabilities of approximately $7.4 million, and the issuance of 2,700 shares of
common stock with a fair market value of approximately $40,000. The excess of
the purchase price over the estimated fair value of the net assets acquired of
approximately $2.8 million has been recorded as goodwill and will be amortized
over thirty years. In addition, the Company entered into noncompete agreements
with shareholders of the acquired companies which provide for payments of
approximately $220,000 through the year 2001. The operations of the acquired
companies have been included in the Company's results of operations subsequent
to the dates of acquisition.
During fiscal year 1996, the Company acquired certain assets, accounted for
by the purchase method, including accounts receivable, inventories, equipment,
and other assets of eight medical supplies and equipment distributors for
approximately $6.2 million. The aggregate purchase price paid consisted of
cash of approximately $3.3 million, assumption of accounts payable and accrued
liabilities of approximately $2.7 million, and the issuance of 5,700 shares of
common stock with a fair market value of $121,000. The excess of the purchase
price over the estimated fair value of the net assets acquired of
approximately $1.7 million has been recorded as goodwill and will be amortized
over thirty years. In addition, the Company entered into noncompete agreements
with shareholders of the acquired companies which provide for payments of $1.3
million through the year 2000. The operations of the acquired companies have
been included in the Company's results of operations subsequent to the dates
of acquisition.
During fiscal year 1995, the Company acquired certain assets, including
accounts receivable, inventories, equipment, and other assets, of nine medical
supplies and equipment distributors for approximately $11.6 million. The
aggregate purchase price paid consisted of cash of approximately $6.9 million,
assumption of accounts payable and accrued liabilities of approximately $4.2
million, and the issuance of approximately 70,000 shares of common stock with
a fair market value of approximately $0.5 million. The excess of the purchase
price over the estimated fair value of the net assets acquired of
approximately $4.0 million has been recorded as goodwill. In addition, the
Company entered into noncompete agreements with shareholders and an officer of
the acquired companies which provide for payments of approximately $2.3
million through the year 1998.
During fiscal year 1995, Taylor acquired certain assets of three medical
supplies and equipment distributors for approximately $2.2 million.
F-30
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For acquisitions accounted for as purchases, the results of operations
acquired have been included in the financial statements since the dates of
acquisition. Supplemental pro forma information is not presented because the
impact on the Company's results of operations would not be material.
12. COMMITMENTS AND CONTINGENCIES
Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability.
The Company has not experienced any significant product liability claims and
maintains product liability insurance coverage. In addition, the Company is
party to various legal and administrative proceedings and claims arising in
the normal course of business. While any litigation contains an element of
uncertainty, management believes that the outcome of any proceedings or claims
which are pending or known to be threatened will not have a material adverse
effect on the Company's consolidated financial position, liquidity, or results
of operations.
The Company has employment agreements with certain executive officers which
provide that in the event of their termination or resignation, under certain
conditions, the Company may be required to continue salary payments and
provide insurance for a period ranging from 12 to 36 months for the chief
executive officer and from 3 to 12 months for other executives and to
repurchase a portion or all of the shares of common stock held by the
executives upon their demand. The period of salary and insurance continuation
and the level of stock repurchases are based on the conditions of the
termination or resignation.
13. ABBOTT LABORATORIES DISTRIBUTION AGREEMENT
On March 27, 1995, the Company signed a Distribution Agreement with Abbott
Laboratories providing for the exclusive distribution of certain Abbott
diagnostic products. The Abbott Agreement, effective April 1, 1995, has a
five-year term, although it may be terminated earlier if the Company fails to
meet certain performance objectives. Under the Abbott Agreement, the Company
has become the exclusive distributor in the United States of certain Abbott
diagnostic products and reagents to office-based physician practices with 24
or fewer physicians per office site. The Abbott Agreement also provides the
Company's sales force with access to over 15,000 physician practices that were
not previously purchasing diagnostic products from the Company. Abbott
products constituted approximately 16% of the Company's sales in fiscal years
1997 and 1996. Simultaneous with the closing of the Abbott Agreement, Abbott
purchased 825,000 unregistered, restricted shares of PSS common stock. A
three-year irrevocable proxy to the PSS Board of Directors and a perpetual
stand still agreement were provided by Abbott in the Stock Purchase Agreement.
14. SALES OF ASSETS
On July 1, 1994, Taylor sold the assets of its Taylor Home Health division
for $12,000,000 in cash and an escrow receivable of $1,051,000 based on
subsequent receivables collections and other factors, resulting in a gain on
sale of assets of approximately $2,078,000. In March 1995, Taylor negotiated a
final settlement of the escrowed receivable which included the return to
Taylor of certain receivables. Taylor recorded a $600,000 reduction in the
gain originally recognized to record these receivables at their estimated net
realizable value. The net gain of approximately $1,478,000 is included in
other income for fiscal year 1995.
On November 30, 1994, Taylor sold the assets of its Labcare division, whose
principal business was the repair of medical equipment, for $1,100,000,
resulting in a loss of approximately $403,000. In March 1995, Taylor recorded
an additional loss on the sale of approximately $154,000 related to the write-
down of certain notes receivable issued in conjunction with the sale. The net
loss of approximately $558,000 is included in other income for fiscal year
1995.
F-31
<PAGE>
PHYSICIAN SALES & SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. MERGER COSTS AND EXPENSES AND RESTRUCTURING CHARGES
The Company recorded merger costs and expenses of approximately $12,100,000
and $15,700,000 in fiscal years 1997 and 1996, respectively, associated with
mergers accounted for as poolings-of-interests. Such costs include direct
merger costs consisting primarily of investment banking, legal, accounting,
and filing fees as well as consolidation costs from the closing of duplicate
service center locations, realigning regional and corporate functions, and
reducing personnel. At March 28, 1997, accrued merger costs were approximately
$3.0 million.
During fiscal year 1995, Taylor management concluded that recent industry
developments had affected Taylor's strategy and operations. Taylor assessed
its relative position in its major markets and determined that competitive
pressures on margins and cost structures in its Arizona, Indiana and
Massachusetts distribution centers as well as the prospects for its physician
consulting services and equipment repair businesses would not result in full
realization of the future benefits expected from the related intangible
assets. Accordingly, Taylor management concluded that the intangible assets
were impaired and recorded a $4,388,592 noncash charge to write off the
intangible assets associated with these markets and operations.
16. SUBSEQUENT EVENTS
Subsequent to March 28, 1997, the Company purchased three imaging and
equipment distributors with annual revenues of $76 million for aggregate
consideration of approximately $16.5 million comprised of approximately
868,000 shares of PSS common stock and approximately $2.5 million cash. In
addition, the Company acquired two physician supply businesses and one imaging
and equipment distributor with annual revenues of $18 million for aggregate
consideration of $4.4 million in stock-for-stock mergers accounted for using
the pooling of interests methods of accounting. The consolidated financial
statements have not been restated to account for these acquisitions.
During October 1997, the Company issued 8.5% senior subordinated notes due
in 2007 (the "Notes") in the amount of $125.0 million. Interest on the Notes
will accrue from their date of original issuance and will be payable semi-
annually on April 1 and October 1 of each year, commencing on April 1, 1998,
at a rate of 8.5% per annum.
During December 1997, the Company 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 by issuing approximately 28.5 million
shares of PSS common stock. Consummation of the Merger is subject to the
approval of the shareholders of both the Company and GSMS and various state
and federal regulatory agencies and other customary conditions.
F-32
<PAGE>
INDEX TO GULF SOUTH MEDICAL SUPPLY, INC. CONSOLIDATED 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....................................... F-34
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....................................................... F-35
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 1997 and 1996................................ F-36
Notes to Condensed Consolidated Financial Statements (unaudited)--
September 30, 1997...................................................... F-37
FINANCIAL STATEMENTS:
Report of Independent Auditors........................................... F-38
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-39
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994........................................................... F-40
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994........................................ F-41
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994..................................................... F-42
Notes to Consolidated Financial Statements............................... F-44
</TABLE>
F-33
<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.
F-34
<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.
F-35
<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.
F-36
<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.
F-37
<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. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the 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.
/s/ ERNST & YOUNG LLP
Jackson, Mississippi
February 7, 1997,
except for Note 8,
as to which the
date is December 14, 1997
F-38
<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.
F-39
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<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.
F-40
<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.
F-41
<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>
F-42
<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.
F-43
<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.
F-44
<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
F-45
<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,
F-46
<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.
F-47
<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
F-48
<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.
F-49
<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 (the "Merger") of Merger Corp. with and into the Company pursuant
to which the Company shareholders would receive 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.
The Company and certain of its current and former officers and directors
were named as defendants in two purported class action lawsuits filed on July
21, 1997 related to disclosures made in the prospectus issued by the Company
in connection with its public offering of common stock during 1996. The
Company believes that the allegations contained in the complaints are without
merit and intends to defend vigorously 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.
F-50
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PHYSICIAN SALES & SERVICE, INC.,
PSS MERGER CORP.,
AND
GULF SOUTH MEDICAL SUPPLY, INC.
DATED AS OF DECEMBER 14, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PARTIES.................................................................. A-1
PREAMBLE................................................................. A-1
ARTICLE 1--TRANSACTIONS AND TERMS OF MERGER.............................. A-1
1.1 Merger............................................................ A-1
1.2 Time and Placing of Closing....................................... A-1
1.3 Effective Time.................................................... A-1
1.4 Execution of Stock Option Agreements.............................. A-2
ARTICLE 2--TERMS OF MERGER............................................... A-2
2.1 Charter........................................................... A-2
2.2 Bylaws............................................................ A-2
2.3 Directors and Officers............................................ A-2
ARTICLE 3--MANNER OF CONVERTING SECURITIES............................... A-3
3.1 Conversion of Shares.............................................. A-3
3.2 Anti-Dilution Provisions.......................................... A-3
3.3 Shares Held by GSMS or PSS........................................ A-3
3.4 Fractional Shares................................................. A-3
3.5 Conversion of Stock Options....................................... A-3
3.6 GSMS Warrants..................................................... A-4
ARTICLE 4--EXCHANGE OF SHARES............................................ A-5
4.1 Exchange Procedures............................................... A-5
4.2 Rights of Former GSMS Stockholders................................ A-5
ARTICLE 5--REPRESENTATIONS AND WARRANTIES OF GSMS........................ A-6
5.1 Organization, Standing, and Power................................. A-6
5.2 Authority of GSMS; No Breach By Agreement......................... A-6
5.3 Capital Stock..................................................... A-7
5.4 GSMS Subsidiaries................................................. A-7
5.5 SEC Filings; Financial Statements................................. A-8
5.6 Absence of Undisclosed Liabilities................................ A-8
5.7 Absence of Certain Changes or Events.............................. A-8
5.8 Tax Matters....................................................... A-8
5.9 Assets............................................................ A-9
5.10 Intellectual Property............................................. A-10
5.11 Environmental Matters............................................. A-10
5.12 Compliance with Laws.............................................. A-11
5.13 Labor Relations................................................... A-11
5.14 Employee Benefit Plans............................................ A-11
5.15 Material Contracts................................................ A-13
5.16 Legal Proceedings................................................. A-13
5.17 Reports........................................................... A-13
5.18 Statements True and Correct....................................... A-14
5.19 Accounting, Tax and Regulatory Matters............................ A-14
5.20 State Takeover Laws............................................... A-14
5.21 Opinion of Financial Advisor...................................... A-14
5.22 Board Recommendation.............................................. A-14
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 6--REPRESENTATIONS AND WARRANTIES OF PSS........................ A-14
6.1 Organization, Standing, and Power................................ A-14
6.2 Authority of PSS; No Breach By Agreement......................... A-15
6.3 Capital Stock.................................................... A-15
6.4 PSS Subsidiaries................................................. A-16
6.5 SEC Filings; Financial Statements................................ A-16
6.6 Absence of Undisclosed Liabilities............................... A-17
6.7 Absence of Certain Changes or Events............................. A-17
6.8 Tax Matters...................................................... A-17
6.9 Assets........................................................... A-18
6.10 Intellectual Property............................................ A-19
6.11 Environmental Matters............................................ A-19
6.12 Compliance with Laws............................................. A-19
6.13 Labor Relations.................................................. A-20
6.14 Employee Benefit Plans........................................... A-20
6.15 Material Contracts............................................... A-21
6.16 Legal Proceedings................................................ A-22
6.17 Reports.......................................................... A-22
6.18 Statements True and Correct...................................... A-22
6.19 Authority of Merger Corp......................................... A-23
6.20 Accounting, Tax and Regulatory Matters........................... A-23
6.21 Opinion of Financial Advisor..................................... A-23
6.22 Board Recommendation............................................. A-23
ARTICLE 7--CONDUCT OF BUSINESS PENDING CONSUMMATION..................... A-23
7.1 Affirmative Covenants of GSMS.................................... A-23
7.2 Negative Covenants of GSMS....................................... A-24
7.3 Covenants of PSS................................................. A-25
7.4 Adverse Changes in Condition..................................... A-26
7.5 Reports.......................................................... A-26
ARTICLE 8--ADDITIONAL AGREEMENTS........................................ A-26
8.1 Registration Statement; Proxy Statement; Stockholder Approval.... A-26
8.2 Nasdaq Listing................................................... A-27
8.3 Applications; Antitrust Notification............................. A-27
8.4 Filings with State Offices....................................... A-27
8.5 Agreement as to Efforts to Consummate............................ A-27
8.6 Investigation and Confidentiality................................ A-27
8.7 Press Releases................................................... A-28
8.8 No Solicitation.................................................. A-28
8.9 Accounting and Tax Treatment..................................... A-28
8.10 State Takeover Laws.............................................. A-28
8.11 Agreements of Affiliates......................................... A-29
8.12 Employee Benefits and Contracts.................................. A-29
8.13 Indemnification and Insurance.................................... A-29
8.14 Voting Agreements................................................ A-30
8.15 Accountants' Letters............................................. A-30
ARTICLE 9--CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE............ A-31
9.1 Conditions to Obligations of Each Party.......................... A-31
9.2 Conditions to Obligations of PSS................................. A-32
9.3 Conditions to Obligations of GSMS................................ A-32
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 10--TERMINATION.................................................. A-33
10.1 Termination...................................................... A-33
10.2 Effect of Termination............................................ A-34
10.3 Non-Survival of Representations and Covenants.................... A-34
ARTICLE 11--MISCELLANEOUS................................................ A-35
11.1 Definitions...................................................... A-35
11.2 Expenses......................................................... A-41
11.3 Brokers and Finders.............................................. A-42
11.4 Entire Agreement................................................. A-42
11.5 Amendments....................................................... A-42
11.6 Waivers.......................................................... A-42
11.7 Assignment....................................................... A-43
11.8 Notices.......................................................... A-43
11.9 Governing Law.................................................... A-43
11.10 Counterparts..................................................... A-43
11.11 Captions; Articles and Sections.................................. A-43
11.12 Interpretations.................................................. A-44
11.13 Enforcement of Agreement......................................... A-44
11.14 Severability..................................................... A-44
</TABLE>
A-iii
<PAGE>
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of GSMS Stock Option Agreement ((S)(S) 1.4, 11.1).
1.2 Form of PSS Stock Option Agreement ((S)(S) 1.4, 11.1).
2.1 Form of agreement of affiliates of GSMS ((S)(S) 8.11, 9.2(G)).
2.2 Form of agreement of affiliates of PSS ((S)(S) 8.11, 9.2(G))).
Matters as to which Testa, Hurwitz & Thibeault LLP will opine ((S)
3 9.2(D)).
4 Matters as to which Alston & Bird LLP will opine ((S) 9.3(D)).
5.1 GSMS Voting Agreement ((S) 8.14).
5.2 PSS Voting Agreement ((S) 8.14).
6 Hixon Employment Agreement
</TABLE>
A-iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made and entered
into as of December 14, 1997, by and among Physician Sales & Service, Inc.
("PSS"), a Florida corporation; PSS Merger Corp. ("Merger Corp."), a Delaware
corporation; and Gulf South Medical Supply, Inc. ("GSMS"), a Delaware
corporation.
PREAMBLE
The respective Boards of Directors of GSMS, Merger Corp. and PSS are of the
opinion that the transactions described herein are in the best interests of
the parties to this Agreement and their respective stockholders. This
Agreement provides for the acquisition of GSMS by PSS pursuant to the merger
of Merger Corp. with and into GSMS. At the effective time of such merger, the
outstanding shares of capital stock of GSMS shall be converted into the right
to receive shares of common stock of PSS (except as provided herein). As a
result, stockholders of GSMS shall become stockholders of PSS and GSMS shall
continue to conduct its business and operations as a wholly owned subsidiary
of PSS. The transactions described in this Agreement are subject to the
approvals of the stockholders of GSMS, the stockholders of PSS, expiration of
the required waiting period under the HSR Act, and the satisfaction of certain
other conditions described in this Agreement. It is the intention of the
parties to this Agreement that, for federal income tax purposes, the Merger
shall qualify as a "reorganization" within the meaning of Section 368(a) of
the Internal Revenue Code, and for accounting purposes shall qualify for
treatment as a pooling of interests.
Immediately after the execution and delivery of this Agreement, and as a
condition and inducement to the willingness of PSS and GSMS to enter into this
Agreement, GSMS and PSS are entering into stock option agreements pursuant to
which GSMS is granting to PSS an option to purchase shares of GSMS Common
Stock and PSS is granting to GSMS an option to purchase shares of PSS Common
Stock.
Certain terms used in this Agreement are defined in Section 11.1 of this
Agreement.
Now, Therefore, in consideration of the above and the mutual
representations, warranties, covenants, and agreements set forth herein, the
parties agree as follows:
ARTICLE 1
Transactions and Terms of Merger
1.1 Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time, Merger Corp. shall be merged with and into GSMS in accordance
with the applicable provisions of the DGCL (the "Merger"). GSMS shall be the
Surviving Corporation resulting from the Merger and shall become a wholly
owned Subsidiary of PSS and shall continue to be governed by the Laws of the
State of Delaware. The Merger shall be consummated pursuant to the terms of
this Agreement, which has been approved and adopted by the respective Boards
of Directors of GSMS, Merger Corp. and PSS and by PSS, as the sole stockholder
of Merger Corp.
1.2 Time and Placing of Closing. The closing of the transactions
contemplated hereby (the "Closing") will take place at 9:00 A.M. on the date
that the Effective Time occurs (or the immediately preceding day if the
Effective Time is earlier than 9:00 A.M.), or at such other time as the
Parties, acting through their authorized officers, may mutually agree. The
Closing shall be held at such location as may be mutually agreed upon by the
Parties.
1.3 Effective Time. The Merger and other transactions contemplated by this
Agreement shall become effective on the date and at the time the Certificate
of Merger reflecting the Merger shall become effective with the Secretary of
State of the State of Delaware (the "Effective Time"). Subject to the terms
and conditions
A-1
<PAGE>
hereof, unless otherwise mutually agreed upon in writing by the authorized
officers of each Party, the Parties shall use their reasonable efforts to
cause the Effective Time to occur on the first business day following the last
to occur of (i) the effective date (including expiration of any applicable
waiting period) of the last required Consent of any Regulatory Authority
having authority over and approving or exempting the Merger, and (ii) the date
on which the stockholders of GSMS and PSS approve this Agreement.
1.4 Execution of Stock Option Agreements. Simultaneously with the execution
of this Agreement by the Parties and as a condition thereto, GSMS and PSS are
executing and delivering the GSMS Stock Option Agreement in substantially the
form of Exhibit 1.1 and the PSS Stock Option Agreement in substantially the
form of Exhibit 1.2.
ARTICLE 2
Terms of Merger
2.1 Charter. The Certificate of Incorporation of GSMS in effect immediately
prior to the Effective Time shall be the Certificate of Incorporation of the
Surviving Corporation until duly amended or repealed; provided that such
Certificate of Incorporation shall be amended at Closing to the satisfaction
of PSS.
2.2 Bylaws. The Bylaws of Merger Corp. in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation until duly
amended or repealed.
2.3 Directors and Officers.
(a) The directors of Merger Corp. in office immediately prior to the
Effective Time, together with such additional persons as may thereafter be
elected (which shall include those current directors of GSMS who shall not
become directors of PSS pursuant to Section 2.3(b)), shall serve as the
directors of the Surviving Corporation from and after the Effective Time in
accordance with the Bylaws of the Surviving Corporation. The officers of
Merger Corp. in office immediately prior to the Effective Time, together with
such additional persons as may thereafter be elected, shall serve as the
officers of the Surviving Corporation from and after the Effective Time in
accordance with the Bylaws of the Surviving Corporation.
(b) Immediately following the Effective Time, PSS shall take, or cause to be
taken, such action as may be required in order to (i) increase the size of its
Board of Directors from nine persons to ten persons, with four Class I
directors, three Class II directors and three Class III directors, (ii) accept
the resignations of four current PSS directors, (iii) appoint or cause to be
elected Thomas G. Hixon ("Hixon") and two additional Persons who are currently
directors of GSMS to be selected by the Board of Directors of GSMS as
directors of PSS to serve in Class I, Class II and Class III, respectively,
and (iv) appoint a Nominating Committee composed of Hixon and such other
persons as the PSS Board of Directors shall determine for the purpose of
designating two independent persons to fill the two vacancies on the PSS Board
of Directors as soon as reasonably practicable.
(c) Immediately following the Effective Time, PSS shall take, or cause to be
taken, such action as may be necessary to cause each of the Audit Committee
and Compensation Committee of the Board of Directors of PSS to include at
least one member who shall have served on the Board of Directors of GSMS
immediately prior to the Effective Time.
(d) Immediately following the Effective Time, Hixon shall be elected
President and Chief Operating Officer of PSS, pursuant to the terms of the
Hixon Employment Agreement.
A-2
<PAGE>
ARTICLE 3
Manner of Converting Securities
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at
the Effective Time, by virtue of the Merger and without any action on the part
of PSS, GSMS, Merger Corp. or the stockholders of any of the foregoing, the
shares of the constituent corporations shall be converted as follows:
(a) Each share of capital stock of PSS issued and outstanding immediately
prior to the Effective Time shall remain issued and outstanding from and
after the Effective Time.
(b) Each share of Merger Corp. Common Stock issued and outstanding
immediately prior to the Effective Time shall cease to be outstanding and
shall be converted into one share of GSMS Common Stock.
(c) Each share of GSMS Common Stock (excluding shares held by any GSMS
Entity or any PSS Entity) issued and outstanding immediately prior to the
Effective Time shall cease to be outstanding and shall be converted into
and exchanged for the right to receive 1.75 shares of PSS Common Stock (the
"Exchange Ratio").
3.2 Anti-Dilution Provisions. The Exchange Ratio shall be proportionately
adjusted to reflect fully the effect of any stock split, stock dividend
(including any dividend or distribution of securities convertible into PSS
Common Stock), recapitalization, reorganization or other like change with
respect to such stock if the record date therefor (in the case of a stock
dividend) or the effective date thereof (in the case of a stock split,
recapitalization, reorganization or similar change for which a record date is
not established) shall be prior to the Effective Time.
3.3 Shares Held by GSMS or PSS. Each of the shares of GSMS Common Stock held
by any GSMS Entity or by any PSS Entity shall be canceled and retired at the
Effective Time and no consideration shall be issued in exchange therefor.
3.4 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of GSMS Common Stock exchanged pursuant to
the Merger who would otherwise have been entitled to receive a fraction of a
share of PSS Common Stock (after taking into account all certificates
delivered by such holder) shall receive, in lieu thereof, cash (without
interest and rounded to the nearest whole cent) in an amount equal to such
fractional part of a share of PSS Common Stock multiplied by the market value
of one share of PSS Common Stock at the Effective Time. The market value of
one share of PSS Common Stock at the Effective Time shall be the average of
the last sale price of a share of such common stock on the Nasdaq National
Market (as reported by The Wall Street Journal or, if not reported thereby,
any other authoritative source selected by PSS) for the ten most recent days
that PSS Common Stock has traded, ending on the last trading day preceding the
Effective Time. No such holder will be entitled to dividends, voting rights,
or any other rights as a stockholder in respect of any fractional shares.
3.5 Conversion of Stock Options.
(a) At the Effective Time, each option granted by GSMS to purchase shares of
GSMS Common Stock, which is outstanding immediately prior thereto (an "Option"
or, collectively, the "Options"), granted by the GSMS under the GSMS Stock
Plans or otherwise, whether or not exercisable, shall be converted into and
become rights with respect to PSS Common Stock, and PSS shall assume each
Option, in accordance with the terms of the GSMS Stock Option Plan and stock
option agreement by which it is evidenced, except that from and after the
Effective Time, (i) PSS and its Compensation Committee shall be substituted
for GSMS and the Committee of GSMS's Board of Directors (including, if
applicable, the entire Board of Directors of GSMS) administering the GSMS
Stock Plans, (ii) each Option assumed by PSS may be exercised solely for
shares of PSS Common Stock, (iii) the number of shares of PSS Common Stock
subject to such Option shall be equal to the number of whole shares (rounded
down to the nearest whole share) of GSMS Common Stock subject to such Option
immediately prior to the Effective Time multiplied by the Exchange Ratio, and
(iv) the per share exercise price
A-3
<PAGE>
under each such Option shall be adjusted by dividing the per share exercise
price under each such Option by the Exchange Ratio and rounding up to the
nearest whole cent. Notwithstanding the provisions of clauses (iii) and (iv)
of the first sentence of this Section 3.5(a), each Option which is an
"incentive stock option" shall be adjusted as required by Section 424 of the
Code, and the regulations promulgated thereunder, so as not to constitute a
modification, extension or renewal of such Option, within the meaning of
Section 424(h) of the Code.
(b) Prior to the Effective Time, GSMS shall use its reasonable best efforts
to obtain all necessary consents or releases from holders of Options under any
of the GSMS Stock Plans or otherwise and take all such other lawful action as
may be necessary to give effect to the transactions contemplated by this
Section.
(c) As soon as practicable after the Effective Time, PSS shall deliver to
the holders of Options appropriate notices setting forth such holders' rights
pursuant to the GSMS Stock Plans and the agreements evidencing the grants of
such Options shall continue in effect on the same terms and conditions
(subject to adjustments required by this Section 3.5 after giving effect to
the Merger and the provisions set forth above). If necessary, PSS shall comply
with the terms of the GSMS Stock Plans and ensure, to the extent lawful and
practicable, and subject to the provisions of, the GSMS Stock Plans, that
Options which qualified as incentive stock options prior to the Effective Time
of the Merger continue to qualify as incentive stock options after the
Effective Time of the Merger.
(d) PSS shall take all corporate action necessary to reserve for issuance a
sufficient number of shares of PSS Common Stock for delivery upon the exercise
of Options. As soon as practicable after the Effective Time, PSS shall file a
registration statement on Form S-3 or Form S-8, as the case may be (or any
successor or other appropriate forms), with respect to the shares of PSS
Common Stock subject to such Options and shall use its reasonable best efforts
to maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such options remain outstanding. With
respect to those individuals who subsequent to the Merger will be subject to
the reporting requirements under Section 16(a) of the 1934 Act, where
applicable, PSS shall administer the GSMS Stock Plans in a manner that
complies with Rule 16b-3 promulgated under the 1934 Act to the extent the GSMS
Stock Plans complied with such rule prior to the Merger.
3.6 GSMS Warrants.
(a) At the Effective Time, PSS shall assume the obligations of GSMS under
the GSMS common stock purchase warrants outstanding at the Effective Time and
thereafter, upon exercise, the warrantholder shall receive the number of
shares of PSS Common Stock equal to the product of (i) the Exchange Ratio and
(ii) the number of shares of GSMS Common Stock for which such warrant could
have been exercised immediately prior to the Merger.
(b) As soon as practicable after the Effective Time of the Merger, PSS shall
deliver to the holders of the GSMS warrants appropriate notices setting forth
such holders' rights pursuant to the applicable warrant agreements with
respect thereto to the extent required by the terms of the warrant agreements
with respect thereto.
(c) PSS shall take all corporate action necessary to reserve for issuance a
sufficient number of shares of PSS Common Stock for delivery upon exercise of
the GSMS warrants. As soon as practicable after the Effective Time, PSS shall
file a registration statement or registration statements on Form S-3 (or any
successor or other appropriate form), with respect to the shares of PSS Common
Stock issuable upon exercise of the warrants and shall use its reasonable
efforts, subject to the terms of the warrant agreements, to maintain the
effectiveness of such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses contained
therein) for so long as the warrant agreements require.
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ARTICLE 4
Exchange of Shares
4.1 Exchange Procedures. Promptly after the Effective Time, PSS shall cause
the exchange agent selected by PSS (the "Exchange Agent") to mail to each
holder of record of a certificate or certificates which represented shares of
GSMS Common Stock immediately prior to the Effective Time (the "Certificates")
appropriate transmittal materials and instructions (which shall specify that
delivery shall be effected, and risk of loss and title to such Certificates
shall pass, only upon proper delivery of such Certificates to the Exchange
Agent). The Certificate or Certificates of GSMS Common Stock so delivered
shall be duly endorsed as the Exchange Agent may require. In the event of a
transfer of ownership of shares of GSMS Common Stock represented by
Certificates that are not registered in the transfer records of GSMS, the
consideration provided in Section 3.1 may be issued to a transferee if the
Certificates representing such shares are delivered to the Exchange Agent,
accompanied by all documents required to evidence such transfer and by
evidence satisfactory to the Exchange Agent that any applicable stock transfer
taxes have been paid. If any Certificate shall have been lost, stolen, mislaid
or destroyed, upon receipt of (i) an affidavit of that fact from the holder
claiming such Certificate to be lost, mislaid, stolen or destroyed, (ii) such
bond, security or indemnity as PSS and the Exchange Agent may reasonably
require and (iii) any other documents necessary to evidence and effect the
bona fide exchange thereof, the Exchange Agent shall issue to such holder the
consideration into which the shares represented by such lost, stolen, mislaid
or destroyed Certificate shall have been converted. The Exchange Agent may
establish such other reasonable and customary rules and procedures in
connection with its duties as it may deem appropriate. After the Effective
Time, each holder of shares of GSMS Common Stock (other than shares to be
canceled pursuant to Section 3.3) issued and outstanding at the Effective Time
shall surrender the Certificate or Certificates representing such shares to
the Exchange Agent and shall promptly upon surrender thereof receive in
exchange therefor the consideration provided in Section 3.1, together with all
undelivered dividends or distributions in respect of such shares (without
interest thereon) pursuant to Section 4.2. To the extent required by Section
3.4, each holder of shares of GSMS Common Stock issued and outstanding at the
Effective Time also shall receive, upon surrender of the Certificate or
Certificates, cash in lieu of any fractional share of PSS Common Stock to
which such holder may be otherwise entitled (without interest). PSS shall not
be obligated to deliver the consideration to which any former holder of GSMS
Common Stock is entitled as a result of the Merger until such holder
surrenders such holder's Certificate or Certificates for exchange as provided
in this Section 4.1. Any other provision of this Agreement notwithstanding,
neither PSS, the Surviving Corporation nor the Exchange Agent shall be liable
to a holder of GSMS Common Stock for any amounts paid or property delivered in
good faith to a public official pursuant to any applicable abandoned property,
escheat or similar Law. Adoption of this Agreement by the stockholders of GSMS
shall constitute ratification of the appointment of the Exchange Agent.
4.2 Rights of Former GSMS Stockholders. At the Effective Time, the stock
transfer books of GSMS shall be closed as to holders of GSMS Common Stock
immediately prior to the Effective Time and no transfer of GSMS Common Stock
by any such holder shall thereafter be made or recognized. Until surrendered
for exchange in accordance with the provisions of Section 4.1, each
Certificate theretofore representing shares of GSMS Common Stock (other than
shares to be canceled pursuant to Section 3.3) shall from and after the
Effective Time represent for all purposes only the right to receive the
consideration provided in Sections 3.1 and 3.4 in exchange therefor, subject,
however, to the Surviving Corporation's obligation to pay any dividends or
make any other distributions with a record date prior to the Effective Time
which have been declared or made by GSMS in respect of such shares of GSMS
Common Stock in accordance with the terms of this Agreement and which remain
unpaid at the Effective Time. To the extent permitted by Law, former
stockholders of record of GSMS shall be entitled to vote after the Effective
Time at any meeting of PSS stockholders the number of whole shares of PSS
Common Stock into which their respective shares of GSMS Common Stock are
converted, regardless of whether such holders have exchanged their
Certificates for certificates representing PSS Common Stock in accordance with
the provisions of this Agreement. Whenever a dividend or other distribution is
declared by PSS on the PSS Common Stock, the record date for which is at or
after the Effective Time, the declaration shall include dividends or other
distributions on all shares of PSS Common Stock issuable pursuant to this
Agreement,
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but no dividend or other distribution payable to the holders of record of PSS
Common Stock as of any time subsequent to the Effective Time shall be
delivered to the holder of any Certificate until such holder surrenders such
Certificate for exchange as provided in Section 4.1. However, upon surrender
of such Certificate, both the PSS Common Stock certificate (together with all
such undelivered dividends or other distributions without interest) and any
undelivered dividends and cash payments payable hereunder (without interest)
shall be delivered and paid with respect to each share represented by such
Certificate.
ARTICLE 5
Representations and Warranties of GSMS
GSMS hereby represents and warrants to PSS as follows:
5.1 Organization, Standing, and Power. GSMS is a corporation duly organized,
validly existing, and in good standing under the Laws of the State of
Delaware, and has the corporate power and authority to carry on its business
as now conducted and to own, lease and operate its material Assets. Except as
disclosed in Section 5.1 of the GSMS Disclosure Memorandum, GSMS is duly
qualified or licensed to transact business as a foreign corporation in good
standing in the States of the United States and foreign jurisdictions where
the character of its Assets or the nature or conduct of its business requires
it to be so qualified or licensed, except for such jurisdictions in which the
failure to be so qualified or licensed would not have, individually or in the
aggregate, a GSMS Material Adverse Effect. The minute book and other
organizational documents for GSMS have been made available to PSS for its
review and, except as disclosed in Section 5.1 of the GSMS Disclosure
Memorandum, are true and complete in all material respects as in effect as of
the date of this Agreement and accurately reflect in all material respects all
amendments thereto and all proceedings of the Board of Directors and
stockholders thereof.
5.2 Authority of GSMS; No Breach By Agreement.
(a) GSMS has the corporate power and authority necessary to execute,
deliver, and perform its obligations under this Agreement and to consummate
the transactions contemplated hereby. The execution, delivery, and performance
of this Agreement and the consummation of the transactions contemplated
herein, including the Merger, have been duly and validly authorized by all
necessary corporate action in respect thereof on the part of GSMS, subject to
the approval of this Agreement by the holders of a majority of the outstanding
shares of GSMS Common Stock, which is the only stockholder vote required for
approval of this Agreement and consummation of the Merger by GSMS. Subject to
such requisite stockholder approval, and assuming due authorization, execution
and delivery by PSS and Merger Corp., this Agreement represents a legal,
valid, and binding obligation of GSMS, enforceable against GSMS in accordance
with its terms (except in all cases as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, receivership,
conservatorship, moratorium, or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the
discretion of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by GSMS, nor the
consummation by GSMS of the transactions contemplated hereby, nor compliance
by GSMS with any of the provisions hereof, will (i) conflict with or result in
a breach of any provision of GSMS's Certificate of Incorporation or Bylaws or
the certificate or articles of incorporation or bylaws of any GSMS Subsidiary
or any resolution adopted by the board of directors or the stockholders of any
GSMS Entity, or (ii) except as disclosed in Section 5.2(b) of the GSMS
Disclosure Memorandum, constitute or result in a Default under, or require any
Consent pursuant to, or result in the creation of any Lien on any Asset of any
GSMS Entity under, any Contract or Permit of any GSMS Entity, where such
Default or Lien, or any failure to obtain such Consent, would have,
individually or in the aggregate, a GSMS Material Adverse Effect, or, (iii)
subject to receipt of the requisite Consents referred to in Section 9.1(b),
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constitute or result in a Default under, or require any Consent pursuant to,
any Law or Order applicable to any GSMS Entity or any of their respective
material Assets.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules of
the NASD, and other than Consents required from Regulatory Authorities, and
other than notices to or filings with the Internal Revenue Service, or under
the HSR Act, and other than Consents, filings, or notifications which, if not
obtained or made, would not have, individually or in the aggregate, a GSMS
Material Adverse Effect, no notice to, filing with, or Consent of, any public
body or authority is necessary for the consummation by GSMS of the Merger and
the other transactions contemplated in this Agreement.
5.3 Capital Stock.
(a) The authorized capital stock of GSMS consists of (i) 30,000,000 shares
of GSMS Common Stock, of which 16,347,064 shares are issued and outstanding as
of the date of this Agreement, and (ii) 1,000,000 shares of preferred stock,
par value $0.01 per share, none of which are issued and outstanding. All of
the issued and outstanding shares of capital stock of GSMS are duly and
validly issued and outstanding and are fully paid and non-assessable. None of
the outstanding shares of capital stock of GSMS has been issued in violation
of any preemptive rights of the current or past stockholders of GSMS.
(b) Except as set forth in Section 5.3(a), or as provided in the GSMS Stock
Option Agreement, or as disclosed in Section 5.3(b) of the GSMS Disclosure
Memorandum, there are no shares of capital stock or other equity securities of
GSMS outstanding and no outstanding Equity Rights relating to the capital
stock of GSMS.
5.4 GSMS Subsidiaries. GSMS has disclosed in Section 5.4 of the GSMS
Disclosure Memorandum all of the GSMS Subsidiaries that are corporations
(identifying with respect to each GSMS Subsidiary its jurisdiction of
incorporation, each jurisdiction in which it is qualified and/or licensed to
transact business, and the number of shares owned by GSMS and percentage
ownership interest represented by such share ownership) and all of the GSMS
Subsidiaries that are general or limited partnerships, limited liability
companies, or other non-corporate entities (identifying the Law under which
such entity is organized, each jurisdiction in which it is qualified and/or
licensed to transact business, and the amount and nature of the ownership
interest therein). Except as disclosed in Section 5.4 of the GSMS Disclosure
Memorandum, GSMS or one of its wholly owned Subsidiaries owns all of the
issued and outstanding shares of capital stock (or other equity interests) of
each GSMS Subsidiary. No capital stock (or other equity interest) of any GSMS
Subsidiary is or may become required to be issued (other than to another GSMS
Entity) by reason of any Equity Rights, and there are no Contracts by which
any GSMS Subsidiary is bound to issue (other than to another GSMS Entity)
additional shares of its capital stock (or other equity interests) or Equity
Rights or by which any GSMS Entity is or may be bound to transfer any shares
of the capital stock (or other equity interests) of any GSMS Subsidiary (other
than to another GSMS Entity). There are no Contracts relating to the rights of
any GSMS Entity to vote or to dispose of any shares of the capital stock (or
other equity interests) of any GSMS Subsidiary. All of the shares of capital
stock (or other equity interests) of each GSMS Subsidiary held by a GSMS
Entity are fully paid and non-assessable and are owned by the GSMS Entity free
and clear of any Lien. Except as disclosed in Section 5.4 of the GSMS
Disclosure Memorandum, each GSMS Subsidiary is a corporation, and each such
Subsidiary is duly organized, validly existing, and (as to corporations) in
good standing under the Laws of the jurisdiction in which it is incorporated
or organized, and has the corporate power and authority necessary for it to
own, lease, and operate its Assets and to carry on its business as now
conducted. Except as disclosed in Section 5.4 of the GSMS Disclosure
Memorandum, each GSMS Subsidiary is duly qualified or licensed to transact
business as a foreign corporation in good standing in the States of the United
States and foreign jurisdictions where the character of its Assets or the
nature or conduct of its business requires it to be so qualified or licensed,
except for such jurisdictions in which the failure to be so qualified or
licensed would not have, individually or in the aggregate, a GSMS Material
Adverse Effect. The minute book and other organizational documents for each
GSMS Subsidiary have been made available to PSS for its review, and, except as
disclosed in Section 5.4 of the GSMS Disclosure Memorandum, are true and
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complete in all material respects as in effect as of the date of this
Agreement and accurately reflect in all material respects all amendments
thereto and all proceedings of the Board of Directors and stockholders
thereof.
5.5 SEC Filings; Financial Statements.
(a) GSMS has timely filed and made available to PSS all SEC Documents
required to be filed by GSMS since it became subject to the periodic reporting
requirements of the Securities Laws (the "GSMS SEC Reports"). The GSMS SEC
Reports (i) at the time filed, complied in all material respects with the
applicable requirements of the Securities Laws and (ii) did not, at the time
they were filed (or, if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated in
such GSMS SEC Reports or necessary in order to make the statements in such
GSMS SEC Reports, in light of the circumstances under which they were made,
not misleading. No GSMS Subsidiary is required to file any SEC Documents.
(b) Each of the GSMS Financial Statements (including, in each case, any
related notes) contained in the GSMS SEC Reports, including any GSMS SEC
Reports filed after the date of this Agreement until the Effective Time,
complied or will comply as to form in all material respects with the
applicable published rules and regulations of the SEC with respect thereto,
was or will be prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to
such financial statements or, in the case of unaudited interim statements, as
permitted by Form 10-Q of the SEC), and fairly presented or will fairly
present in all material respects the consolidated financial position of GSMS
and its Subsidiaries as at the respective dates and the consolidated results
of operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be
material in amount or effect.
5.6 Absence of Undisclosed Liabilities. No GSMS Entity has any Liabilities
except Liabilities which are accrued or reserved against in the consolidated
balance sheets of GSMS as of December 31, 1996 and September 30, 1997,
included in the GSMS Financial Statements delivered prior to the date of this
Agreement or reflected in the notes thereto, or incurred since September 30,
1997 in the ordinary course of business consistent with past practices, except
those Liabilities which would not have a GSMS Material Adverse Effect. Except
as disclosed in Section 5.6 of the GSMS Disclosure Memorandum, no GSMS Entity
has incurred or paid any Liability since September 30, 1997, except for such
Liabilities incurred or paid (i) in the ordinary course of business consistent
with past business practice and which would not have, individually or in the
aggregate, a GSMS Material Adverse Effect or (ii) in connection with the
transactions contemplated by this Agreement. Except as disclosed in Section
5.6 of the GSMS Disclosure Memorandum, no GSMS Entity is directly or
indirectly liable, by guarantee, indemnity, or otherwise, upon or with respect
to, or obligated, by discount or repurchase agreement or in any other way, to
provide funds in respect to, or obligated to guarantee or assume any Liability
or any Person for any amount in excess of $250,000.
5.7 Absence of Certain Changes or Events. Except as disclosed in the GSMS
Financial Statements delivered prior to the date of this Agreement or as
disclosed in Section 5.7 of the GSMS Disclosure Memorandum, (i) since December
31, 1996, there has been no GSMS Material Adverse Effect, and (ii) since
September 30, 1997, the GSMS Entities have not taken any action, or failed to
take any action, prior to the date of this Agreement, which action or failure,
if taken after the date of this Agreement, would represent or result in a
material breach or violation of any of the covenants and agreements of GSMS
provided in Article 7.
5.8 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any of the GSMS
Entities have been timely filed or requests for extensions have been timely
filed, granted, and have not expired for periods ended on or before December
31, 1996, and on or before the date of the most recent fiscal year end
immediately preceding the Effective Time, and all Tax Returns filed are
complete and accurate in all material respects. All Taxes shown on filed Tax
Returns have been paid. There is no audit examination, deficiency, or refund
Litigation with respect to
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any Taxes, except as reserved against in the GSMS Financial Statements or as
disclosed in Section 5.8 of the GSMS Disclosure Memorandum. GSMS's federal
income Tax Returns have been audited by the IRS and accepted through December
31, 1995. All Taxes and other Liabilities due with respect to completed and
settled examinations or concluded Litigation have been paid. There are no
Liens with respect to Taxes upon any of the Assets of the GSMS Entities,
except for any such Liens which would not have a GSMS Material Adverse Effect.
(b) Except as set forth in Section 5.8 of the GSMS Disclosure Memorandum,
none of the GSMS Entities has executed an extension or waiver of any statute
of limitations on the assessment or collection of any Tax due (excluding such
statutes that relate to years currently under examination by the Internal
Revenue Service or other applicable taxing authorities) that is currently in
effect.
(c) The provision for any Taxes due or to become due for any of the GSMS
Entities for the period or periods through and including the date of the
respective GSMS Financial Statements that has been made and is reflected on
such GSMS Financial Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of the GSMS Entities have been provided for in accordance
with GAAP.
(e) None of the GSMS Entities is a party to any Tax allocation or sharing
agreement and none of the GSMS Entities has been a member of an affiliated
group filing a consolidated federal income Tax Return (other than a group the
common parent of which was GSMS) or has any Liability for Taxes of any Person
(other than GSMS and its Subsidiaries) under Treasury Regulation Section
1.1502-6 (or any similar provision of state, local or foreign Law) as a
transferee or successor or by Contract or otherwise.
(f) Each of the GSMS Entities is in compliance with, and its records contain
all information and documents (including properly completed IRS Forms W-9)
necessary to comply with, all applicable information reporting and Tax
withholding requirements under federal, state, and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code.
(g) Except as disclosed in Section 5.8 of the GSMS Disclosure Memorandum,
none of the GSMS Entities has made any payments, is obligated to make any
payments, or is a party to any Contract that could obligate it to make any
payments that would be disallowed as a deduction under Section 280G or 162(m)
of the Internal Revenue Code.
(h) There has not been an ownership change, as defined in Internal Revenue
Code Section 382(g), of the GSMS Entities that occurred during or after any
Taxable Period in which the GSMS Entities incurred a net operating loss that
carries over to any Taxable Period ending after December 31, 1996.
(i) No GSMS Entity has or has had in any foreign country a permanent
establishment, as defined in any applicable tax treaty or convention between
the United States and such foreign country.
5.9 Assets.
(a) Except as disclosed in Section 5.9 of the GSMS Disclosure Memorandum or
as disclosed or reserved against in the GSMS Financial Statements, the GSMS
Entities have good and marketable title, free and clear of all Liens, to all
of their respective Assets, except for any such Liens or other defects of
title which would not have a GSMS Material Adverse Effect. All tangible
properties used in the businesses of the GSMS Entities are in good condition,
reasonable wear and tear excepted, and are usable in the ordinary course of
business consistent with GSMS's past practices.
(b) All items of inventory, net of reserves, of the GSMS Entities reflected
on the most recent balance sheet included in the GSMS Financial Statements
delivered prior to the date of this Agreement and prior to the Effective Time
consisted and will consist, as applicable, of items of a quality and quantity
usable and saleable in the ordinary course of business consistent with past
practices and conform to generally accepted standards in the industry in which
the GSMS Entities are a part.
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(c) The accounts receivable of the GSMS Entities as set forth on the most
recent balance sheet included in the GSMS Financial Statements delivered prior
to the date of this Agreement or arising since the date thereof are valid and
genuine; have arisen solely out of bona fide sales and deliveries of goods,
performance of services and other business transactions in the ordinary course
of business consistent with past practice; are not subject to valid defenses,
set-offs or counterclaims; and are recorded at the full amount thereof less,
in the case of accounts receivable appearing on the most recent balance sheet
included in the GSMS Financial Statements delivered prior to the date of this
Agreement, the recorded allowance for collection losses on such balance sheet.
The allowance for collection losses on such balance sheet has been determined
in accordance with GAAP.
(d) Except as disclosed in Section 5.9 of the GSMS Disclosure Memorandum,
all Assets which are material to GSMS's business on a consolidated basis, held
under leases or subleases by any of the GSMS Entities, are held under valid
Contracts enforceable in accordance with their respective terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the
discretion of the court before which any proceedings may be brought), and each
such Contract is in full force and effect.
(e) The GSMS Entities currently maintain insurance similar in amounts,
scope, and coverage to that maintained by other peer organizations. None of
the GSMS Entities has received notice from any insurance carrier that (i) any
policy of insurance will be canceled or that coverage thereunder will be
reduced or eliminated, or (ii) premium costs with respect to such policies of
insurance will be substantially increased. Except as disclosed in Section 5.9
of the GSMS Disclosure Memorandum, there are presently no claims for amounts
exceeding in any individual case $50,000 pending under such policies of
insurance and no notices of claims in excess of such amounts have been given
by any GSMS Entity under such policies.
(f) The Assets of the GSMS Entities include all Assets required to operate
the business of the GSMS Entities as presently conducted.
5.10 Intellectual Property. Each GSMS Entity owns or has a license to use
all of the Intellectual Property used by such GSMS Entity in the course of its
business. Each GSMS Entity is the owner of or has a license to any
Intellectual Property sold or licensed to a third party by such GSMS Entity in
connection with such GSMS Entity's business operations, and such GSMS Entity
has the right to convey by sale or license any Intellectual Property so
conveyed. No GSMS Entity is in Default under any of its Intellectual Property
licenses. No proceedings have been instituted, or are pending or to the
Knowledge of GSMS threatened, which challenge the rights of any GSMS Entity
with respect to Intellectual Property used, sold or licensed by such GSMS
Entity in the course of its business, nor has any person claimed or alleged
any rights to such Intellectual Property. The conduct of the business of the
GSMS Entities does not infringe any Intellectual Property of any other person.
Except as disclosed in Section 5.10 of the GSMS Disclosure Memorandum, no GSMS
Entity is obligated to pay any recurring royalties to any Person with respect
to any such Intellectual Property.
5.11 Environmental Matters.
(a) Each GSMS Entity and its Properties are, and have been, in compliance
with all Environmental Laws, except for violations which would not have,
individually or in the aggregate, a GSMS Material Adverse Effect.
(b) There is no Litigation pending or threatened before any court,
governmental agency, or authority or other forum in which any GSMS Entity or
any of its Properties (or GSMS in respect of such Property) has been or, with
respect to threatened Litigation, may be named as a defendant (i) for alleged
noncompliance (including by any predecessor) with any Environmental Law or
(ii) relating to the release, discharge, spillage, or disposal into the
environment of any Hazardous Material, whether or not occurring at, on, under,
adjacent to, or affecting (or potentially affecting) a site owned, leased, or
operated by any GSMS Entity or any of its Properties, except for such
Litigation pending or threatened that would not have, individually or in the
aggregate, a GSMS Material
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Adverse Effect, nor is there any reasonable basis for any Litigation of a type
described in this sentence, except such as would not have, individually or in
the aggregate, a GSMS Material Adverse Effect.
(c) During the period of (i) any GSMS Entity's ownership or operation of any
of their respective current Properties, or (ii) any GSMS Entity's holding of a
security interest in a Property, there have been no releases, discharges,
spillages, or disposals of Hazardous Material in, on, under, adjacent to, or
affecting (or reasonably likely to affect) such properties, except such as
would not have, individually or in the aggregate, a GSMS Material Adverse
Effect. Prior to the period of (i) any GSMS Entity's ownership or operation of
any of their respective current properties, or (ii) any GSMS Entity's holding
of a security interest in a Property, to the Knowledge of GSMS, there were no
releases, discharges, spillages, or disposals of Hazardous Material in, on,
under, or affecting any such Property, except such as would not have,
individually or in the aggregate, a GSMS Material Adverse Effect.
5.12 Compliance with Laws. Except as disclosed in Section 5.12 of the GSMS
Disclosure Memorandum, each GSMS Entity has in effect all Permits necessary
for it to own, lease, or operate its material Assets and to carry on its
business as now conducted, except for those Permits the absence of which would
not have, individually or in the aggregate, a GSMS Material Adverse Effect,
and there has occurred no Default under any such Permit, other than Defaults
which would not have, individually or in the aggregate, a GSMS Material
Adverse Effect. Except as disclosed in Section 5.12 of the GSMS Disclosure
Memorandum, none of the GSMS Entities:
(a) is in Default under any of the provisions of its Certificate or
Articles of Incorporation or Bylaws (or other governing instruments);
(b) is in Default under any Laws, Orders, or Permits applicable to it or
by which its properties are bound, except for Defaults which would not
have, individually or in the aggregate, a GSMS Material Adverse Effect; or
(c) since January 1, 1993, has received any notification or communication
from any agency or department of federal, state, or local government or any
Regulatory Authority or the staff thereof (i)asserting that any GSMS Entity
is not in compliance with any of the Laws or Orders which such governmental
authority or Regulatory Authority enforces, where such noncompliance would
have, individually or in the aggregate, a GSMS Material Adverse Effect,
(ii) threatening to revoke any Permits, the revocation of which would have,
individually or in the aggregate, a GSMS Material Adverse Effect, or (iii)
requiring any GSMS Entity to enter into or consent to the issuance of a
cease and desist order, formal agreement, directive, commitment, or
memorandum of understanding, or to adopt any Board resolution or similar
undertaking.
Copies of all material reports, correspondence, notices and other documents
relating to any inspection, audit, monitoring or other form of review or
enforcement action by a Regulatory Authority have been made available to PSS.
5.13 Labor Relations. No GSMS Entity is the subject of any Litigation
asserting that it or any other GSMS Entity has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other GSMS Entity to bargain with
any labor organization as to wages or conditions of employment, nor is any
GSMS Entity party to any collective bargaining agreement, nor is there any
strike or other labor dispute involving any GSMS Entity, pending or
threatened, or to the Knowledge of GSMS, is there any activity involving any
GSMS Entity's employees seeking to certify a collective bargaining unit or
engaging in any other organization activity.
5.14 Employee Benefit Plans.
(a) GSMS has disclosed in Section 5.14 of the GSMS Disclosure Memorandum,
and has delivered or made available to PSS prior to the execution of this
Agreement copies in each case of, all pension, retirement, profit-sharing,
deferred compensation, stock option, employee stock ownership, severance pay,
vacation, bonus, or
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other incentive plan, all other written employee programs, arrangements, or
agreements, all medical, vision, dental, or other health plans, all life
insurance plans, and all other employee benefit plans or fringe benefit plans,
including "employee benefit plans" as that term is defined in Section 3(3) of
ERISA, currently adopted, maintained by, sponsored in whole or in part by, or
contributed to by any GSMS Entity or ERISA Affiliate thereof for the benefit
of employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries and under which employees, retirees,
dependents, spouses, directors, independent contractors, or other
beneficiaries are eligible to participate (collectively, the "GSMS Benefit
Plans"). Any of the GSMS Benefit Plans which is an "employee pension benefit
plan," as that term is defined in Section 3(2) of ERISA, is referred to herein
as a "GSMS ERISA Plan." Each GSMS ERISA Plan which is also a "defined benefit
plan" (as defined in Section 414(j) of the Internal Revenue Code) is referred
to herein as a "GSMS Pension Plan." No GSMS Pension Plan is or has been a
multiemployer plan within the meaning of Section 3(37) of ERISA.
(b) All GSMS Benefit Plans are in compliance with the applicable terms of
ERISA, the Internal Revenue Code, and any other applicable Laws the breach or
violation of which would have, individually or in the aggregate, a GSMS
Material Adverse Effect. Each GSMS ERISA Plan which is intended to be
qualified under Section 401(a) of the Internal Revenue Code has received a
favorable determination letter from the Internal Revenue Service, and GSMS is
not aware of any circumstances likely to result in revocation of any such
favorable determination letter. No GSMS Entity has engaged in a transaction
with respect to any GSMS Benefit Plan that, assuming the taxable period of
such transaction expired as of the date hereof, would subject any GSMS Entity
to a Tax imposed by either Section 4975 of the Internal Revenue Code or
Section 502(i) of ERISA.
(c) No GSMS Pension Plan has any "unfunded current liability," as that term
is defined in Section 302(d)(8)(A) of ERISA, based on actuarial assumptions
set forth for such plan's most recent actuarial valuation. Since the date of
the most recent actuarial valuation, there has been (i) no material change in
the financial position of a GSMS Pension Plan, (ii) no change in the actuarial
assumptions with respect to any GSMS Pension Plan, and (iii) no increase in
benefits under any GSMS Pension Plan as a result of plan amendments or changes
in applicable Law which would have, individually or in the aggregate, a GSMS
Material Adverse Effect or materially adversely affect the funding status of
any such plan. Neither any GSMS Pension Plan nor any "single-employer plan,"
within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any GSMS Entity, or the single-employer plan of any ERISA
Affiliate has an "accumulated funding deficiency" within the meaning of
Section 412 of the Internal Revenue Code or Section 302 of ERISA. No GSMS
Entity has provided, or is required to provide, security to a GSMS Pension
Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Internal Revenue Code.
(d) Within the six-year period preceding the Effective Time, no Liability
under Subtitle C or D of Title IV of ERISA has been or is expected to be
incurred by any GSMS Entity with respect to any ongoing, frozen, or terminated
single-employer plan or the single-employer plan of any ERISA Affiliate. No
GSMS Entity has incurred any withdrawal Liability with respect to a
multiemployer plan under Subtitle B of Title IV of ERISA (regardless of
whether based on contributions of an ERISA Affiliate). No notice of a
"reportable event," within the meaning of Section 4043 of ERISA for which the
30-day reporting requirement has not been waived, has been required to be
filed for any GSMS Pension Plan or by any ERISA Affiliate within the 12-month
period ending on the date hereof.
(e) Except as disclosed in Section 5.14 of the GSMS Disclosure Memorandum,
no GSMS Entity has any Liability for retiree health and life benefits under
any of the GSMS Benefit Plans and there are no restrictions on the rights of
such GSMS Entity to amend or terminate any such retiree health or benefit Plan
without incurring any Liability thereunder.
(f) Except as disclosed in Section 5.14 of the GSMS Disclosure Memorandum,
neither the execution and delivery of this Agreement nor the consummation of
the transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, or otherwise) becoming
due to any director or any employee of any GSMS Entity from any GSMS Entity
under any GSMS Benefit Plan or
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otherwise, (ii) increase any benefits otherwise payable under any GSMS Benefit
Plan, or (iii) result in any acceleration of the time of payment or vesting of
any such benefit.
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any GSMS Entity and their respective beneficiaries, other than
entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Internal Revenue Code or Section 302 of
ERISA, have been fully reflected on the GSMS Financial Statements to the
extent required by and in accordance with GAAP.
5.15 Material Contracts. Except as disclosed in Section 5.15 of the GSMS
Disclosure Memorandum or otherwise reflected in the GSMS Financial Statements,
none of the GSMS Entities, nor any of their respective Assets, businesses, or
operations, is a party to, or is bound or affected by, or receives benefits
under, (i) any employment, severance, termination, consulting, or retirement
Contract providing for aggregate payments to any Person in any calendar year
in excess of $75,000, (ii) any Contract relating to the borrowing of money by
any GSMS Entity or the guarantee by any GSMS Entity of any such obligation
(other than Contracts evidencing trade payables and Contracts relating to
borrowings or guarantees made in the ordinary course of business), (iii) any
Contract which prohibits or restricts any GSMS Entity from engaging in any
business activities in any geographic area, line of business or otherwise in
competition with any other Person, (iv) any Contract between or among GSMS
Entities, (v) any Contract relating to the purchase or sale of any goods or
services (other than Contracts entered into in the ordinary course of business
and involving payments under any individual Contract not in excess of
$250,000), and (vi) any other Contract or amendment thereto that would be
required to be filed as an exhibit to a Form 10-K filed by GSMS with the SEC
as of the date of this Agreement (together with all Contracts referred to in
Sections 5.9(d) and (e) and 5.14(a), the "GSMS Contracts"). With respect to
each GSMS Contract and except as disclosed in Section 5.15 of the GSMS
Disclosure Memorandum: (i) the Contract is in full force and effect; (ii) no
GSMS Entity is in Default thereunder, other than Defaults which would not
have, individually or in the aggregate, a GSMS Material Adverse Effect; (iii)
no GSMS Entity has repudiated or waived any material provision of any such
Contract; and (iv) no other party to any such Contract is, to the Knowledge of
GSMS, in Default in any respect, other than Defaults which would not have,
individually or in the aggregate, a GSMS Material Adverse Effect, or has
repudiated or waived any material provision thereunder. All of the
indebtedness of any GSMS Entity for money borrowed is prepayable at any time
by such GSMS Entity without penalty or premium.
5.16 Legal Proceedings. Except as disclosed in Section 5.16 of the GSMS
Disclosure Memorandum, there is no Litigation pending, or, to the Knowledge of
GSMS, threatened (or unasserted but considered probable of assertion and which
if asserted would have at least a reasonable probability of an unfavorable
outcome) against any GSMS Entity, or against any director, employee or
employee benefit plan of any GSMS Entity, or against any Asset, interest, or
right of any of them, that would have, individually or in the aggregate, a
GSMS Material Adverse Effect, nor are there any Orders of any Regulatory
Authorities, other governmental authorities, or arbitrators outstanding
against any GSMS Entity, that would have, individually or in the aggregate, a
GSMS Material Adverse Effect. Section 5.16 of the GSMS Disclosure Memorandum
contains a summary of all Litigation pending as of the date of this Agreement
to which any GSMS Entity is a party and which names a GSMS Entity as a
defendant or cross-defendant.
5.17 Reports. Since January 1, 1993, or the date of organization if later,
each GSMS Entity has timely filed all reports and statements, together with
any amendments required to be made with respect thereto, that it was required
to file with Regulatory Authorities (except failures to file which would not
have, individually or in the aggregate, a GSMS Material Adverse Effect). As of
their respective dates, each of such reports and documents, including the
financial statements, exhibits, and schedules thereto, complied in all
material respects with all applicable Laws. As of its respective date, each
such report and document did not, in all material respects, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading.
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5.18 Statements True and Correct. No statement, certificate, instrument, or
other writing furnished or to be furnished by any GSMS Entity or any Affiliate
thereof to PSS pursuant to this Agreement or any other document, agreement, or
instrument delivered pursuant hereto contains or will contain any untrue
statement of material fact or will omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. None of the information supplied or to be supplied
by any GSMS Entity or, to GSMS's Knowledge, any Affiliate thereof for
inclusion in the Joint Proxy Statement to be mailed to each Party's
stockholders in connection with the Stockholders' Meetings, and any other
documents to be filed by a GSMS Entity or any Affiliate thereof with the SEC
or any other Regulatory Authority in connection with the transactions
contemplated hereby, will, at the respective time such documents are filed,
and with respect to the Joint Proxy Statement, when first mailed to the
stockholders of GSMS and PSS, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or, in the case of the Joint Proxy Statement or any amendment
thereof or supplement thereto, at the time of the Stockholders' Meetings, be
false or misleading with respect to any material fact, or omit to state any
material fact necessary to correct any statement in any earlier communication
with respect to the solicitation of any proxy for the Stockholders' Meetings.
All documents that any GSMS Entity or any Affiliate thereof is responsible for
filing with any Regulatory Authority in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
provisions of applicable Law.
5.19 Accounting, Tax and Regulatory Matters. No GSMS Entity or, to GSMS's
Knowledge, any Affiliate thereof has taken or agreed to take any action that
will (i) prevent the Merger from qualifying for pooling-of-interests
accounting treatment or as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code, or (ii) materially impede or delay
receipt of any Consents of Regulatory Authorities referred to in Section
9.1(b) or result in the imposition of a condition or restriction of the type
referred to in the last sentence of such Section.
5.20 State Takeover Laws. Each GSMS Entity has taken all necessary action to
exempt the transactions contemplated by this Agreement from, or if necessary
to challenge the validity or applicability of, any applicable "moratorium,"
"fair price," "business combination," "control share," or other anti-takeover
Laws (collectively, "Takeover Laws") under the DGCL.
5.21 Opinion of Financial Advisor. GSMS has received the opinion of
NationsBanc Montgomery Securities, Inc., dated the date of this Agreement, to
the effect that, as of the date thereof, the Exchange Ratio is fair, from a
financial point of view, to the holders of GSMS Common Stock, a signed copy of
which will be delivered to PSS promptly after receipt thereof.
5.22 Board Recommendation. The Board of Directors of GSMS, at a meeting duly
called and held, has by unanimous vote of those directors present (who
constituted all of the directors then in office) (i) determined that this
Agreement and the transactions contemplated hereby, including the Merger, and
the GSMS Stock Option Agreement and the transactions contemplated thereby,
taken together, are fair to and in the best interests of the stockholders and
(ii) resolved to recommend that the holders of the shares of GSMS Common Stock
approve this Agreement.
ARTICLE 6
Representations and Warranties of PSS
PSS hereby represents and warrants to GSMS as follows:
6.1 Organization, Standing, and Power. PSS is a corporation duly organized,
validly existing, and in good standing under the Laws of the State of Florida,
and has the corporate power and authority to carry on its business as now
conducted and to own, lease and operate its material Assets. PSS is duly
qualified or licensed to transact business as a foreign corporation in good
standing in the States of the United States and foreign
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jurisdictions where the character of its Assets or the nature or conduct of
its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed would not
have, individually or in the aggregate, a PSS Material Adverse Effect. The
minute book and other organizational documents for PSS have been made
available to GSMS for its review and, except as disclosed in Section 6.1 of
the PSS Disclosure Memorandum, are true and complete in all material respects
as in effect as of the date of this Agreement and accurately reflect in all
material respects all amendments thereto and all proceedings of the Board of
Directors and stockholders thereof.
6.2 Authority of PSS; No Breach By Agreement
(a) PSS has the corporate power and authority necessary to execute, deliver
and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of PSS, subject to the
approval of (i) an amendment to the Articles of Incorporation of PSS to
increase the authorized capital stock of PSS, and (ii) the issuance of the
shares of PSS Common Stock pursuant to the Merger by a majority of the votes
cast at the PSS Stockholders' Meeting (assuming for such purpose that the
votes cast in respect of such proposal represent a majority of the outstanding
PSS Common Stock), which are the only stockholder votes required for approval
of this Agreement and consummation of the merger by PSS. Subject to such
requisite stockholder approval, and assuming due authorization, execution and
delivery by GSMS, this Agreement represents a legal, valid, and binding
obligation of PSS, enforceable against PSS in accordance with its terms
(except in all cases as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, receivership, conservatorship,
moratorium, or similar Laws affecting the enforcement of creditors' rights
generally and except that the availability of the equitable remedy of specific
performance or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by PSS or Merger
Corp., nor the consummation by PSS or Merger Corp. of the transactions
contemplated hereby, nor compliance by PSS or Merger Corp. with any of the
provisions hereof, will (i) subject to the approval of an amendment to the
Articles of Incorporation of PSS to increase the authorized capital stock of
PSS, conflict with or result in a breach of any provision of PSS's Articles of
Incorporation or Merger Corp.'s Certificate of Incorporation or either of
their Bylaws or any resolution adopted by the board of directors or the
stockholders of any PSS Entity, or (ii) except as disclosed in Section 6.2(b)
of the PSS Disclosure Memorandum, constitute or result in a Default under, or
require any Consent pursuant to, or result in the creation of any Lien on any
Asset of any PSS Entity under, any Contract or Permit of any PSS Entity, where
such Default or Lien, or any failure to obtain such Consent, would have,
individually or in the aggregate, a PSS Material Adverse Effect, or, (iii)
subject to receipt of the requisite Consents referred to in Section 9.1(b),
constitute or result in a Default under, or require any Consent pursuant to,
any Law or Order applicable to any PSS Entity or any of their respective
material Assets.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules of
the NASD, and other than Consents required from Regulatory Authorities, and
other than notices to or filings with the Internal Revenue Service, or under
the HSR Act, and other than Consents, filings, or notifications which, if not
obtained or made, would not have, individually or in the aggregate, a PSS
Material Adverse Effect, no notice to, filing with, or Consent of, any public
body or authority is necessary for the consummation by PSS or Merger Corp. of
the Merger and the other transactions contemplated in this Agreement.
6.3 Capital Stock
(a) The authorized capital stock of PSS consists of (i) 60,000,000 shares of
PSS Common Stock, of which 40,696,097 shares are issued and outstanding as of
the date of this Agreement, and (ii) 1,000,000 shares of PSS Preferred Stock,
none of which are issued and outstanding. All of the issued and outstanding
shares of PSS Capital Stock are, and all of the shares of PSS Common Stock to
be issued in exchange for shares of GSMS
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Common Stock upon consummation of the Merger, when issued in accordance with
the terms of this Agreement, will be, duly and validly issued and outstanding
and fully paid and non-assessable. None of the outstanding shares of PSS
Capital Stock has been, and none of the shares of PSS Common Stock to be
issued in exchange for shares of GSMS Common Stock upon consummation of the
Merger will be, issued in violation of any preemptive rights of the current or
past stockholders of PSS.
(b) Except as set forth in Section 6.3(a) or in the PSS Stock Option
Agreement, or as disclosed in Section 6.3(b) of the PSS Disclosure Memorandum,
there are no shares of capital stock or other equity securities of PSS
outstanding and no outstanding Equity Rights relating to the capital stock of
PSS.
6.4 PSS Subsidiaries. PSS has disclosed in Section 6.4 of the PSS Disclosure
Memorandum all of the PSS Subsidiaries as of the date of this Agreement that
are corporations (identifying its jurisdiction of incorporation, each
jurisdiction in which the character of its Assets or the nature or conduct of
its business requires it to be qualified and/or licensed to transact business,
and the number of shares owned and percentage ownership interest represented
by such share ownership) and all of the PSS Subsidiaries that are general or
limited partnerships or other non-corporate entities (identifying the Law
under which such entity is organized, each jurisdiction in which the character
of its Assets or the nature or conduct of its business requires it to be
qualified and/or licensed to transact business, and the amount and nature of
the ownership interest therein). Except as disclosed in Section 6.4 of the PSS
Disclosure Memorandum, PSS or one of its wholly owned Subsidiaries owns all of
the issued and outstanding shares of capital stock (or other equity interests)
of each PSS Subsidiary. No capital stock (or other equity interest) of any PSS
Subsidiary are or may become required to be issued (other than to another PSS
Entity) by reason of any Equity Rights, and there are no Contracts by which
any PSS Subsidiary is bound to issue (other than to another PSS Entity)
additional shares of its capital stock (or other equity interests) or Equity
Rights or by which any PSS Entity is or may be bound to transfer any shares of
the capital stock (or other equity interests) of any PSS Subsidiary (other
than to another PSS Entity). There are no Contracts relating to the rights of
any PSS Entity to vote or to dispose of any shares of the capital stock (or
other equity interests) of any PSS Subsidiary. All of the shares of capital
stock (or other equity interests) of each PSS Subsidiary held by a PSS Entity
are fully paid and non-assessable and are owned by the PSS Entity free and
clear of any Lien. Except as disclosed in Section 6.4 of the PSS Disclosure
Memorandum, each PSS Subsidiary is a corporation, and is duly organized,
validly existing, and (as to corporations) in good standing under the Laws of
the jurisdiction in which it is incorporated or organized, and has the
corporate power and authority necessary for it to own, lease and operate its
Assets and to carry on its business as now conducted. Each PSS Subsidiary is
duly qualified or licensed to transact business as a foreign corporation in
good standing in the States of the United States and foreign jurisdictions
where the character of its Assets or the nature or conduct of its business
requires it to be so qualified or licensed, except for such jurisdictions in
which the failure to be so qualified or licensed would not have, individually
or in the aggregate, a PSS Material Adverse Effect. The minute book and other
organizational documents for each PSS Subsidiary have been made available to
GSMS for its review, and, except as disclosed in Section 5.4 of the PSS
Disclosure Memorandum, are true and complete in all material respects as in
effect as of the date of this Agreement and accurately reflect in all material
respects all amendments thereto and all proceedings of the Board of Directors
and stockholders thereof.
6.5 SEC Filings; Financial Statements
(a) PSS has timely filed and made available to GSMS all SEC Documents
required to be filed by PSS since it became subject to the periodic reporting
requirements of the Securities Laws (the "PSS SEC Reports"). The PSS SEC
Reports (i) at the time filed, complied in all material respects with the
applicable requirements of the Securities Laws and (ii) did not, at the time
they were filed (or, if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated in
such PSS SEC Reports or necessary in order to make the statements in such PSS
SEC Reports, in light of the circumstances under which they were made, not
misleading. No PSS Subsidiary is required to file any SEC Documents.
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(b) Each of the PSS Financial Statements (including, in each case, any
related notes) contained in the PSS SEC Reports, including any PSS SEC Reports
filed after the date of this Agreement until the Effective Time, complied as
to form in all material respects with the applicable published rules and
regulations of the SEC with respect thereto, was prepared in accordance with
GAAP applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements or, in the case of
unaudited interim statements, as permitted by Form 10-Q of the SEC), and
fairly presented in all material respects the consolidated financial position
of PSS and its Subsidiaries as at the respective dates and the consolidated
results of operations and cash flows for the periods indicated, except that
the unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be
material in amount or effect.
6.6 Absence of Undisclosed Liabilities. No PSS Entity has any Liabilities
that are reasonably likely to have, individually or in the aggregate, a PSS
Material Adverse Effect, except Liabilities which are accrued or reserved
against in the consolidated balance sheets of PSS as of March 28, 1997 and
September 30, 1997, included in the PSS Financial Statements delivered prior
to the date of this Agreement or reflected in the notes thereto, or except as
disclosed in Section 6.6 of the PSS Disclosure Memorandum, incurred since
September 30, 1997 in the ordinary course of business consistent with past
practices, except those Liabilities which would not have a PSS Material
Adverse Effect. Except as disclosed in Section 6.6 of the PSS Disclosure
Memorandum, no PSS Entity has incurred or paid any Liability since September
30, 1997, except for such Liabilities incurred or paid (i) in the ordinary
course of business consistent with past business practice and which would
have, individually or in the aggregate, a PSS Material Adverse Effect or (ii)
in connection with the transactions contemplated by this Agreement.
6.7 Absence of Certain Changes or Events. Except as disclosed in the PSS
Financial Statements delivered prior to the date of this Agreement or as
disclosed in Section 6.7 of the PSS Disclosure Memorandum, (i) since March 28,
1997, there has been no PSS Material Adverse Effect, and (ii) since September
30, 1997, the PSS Entities have not taken any action, or failed to take any
action, prior to the date of this Agreement, which action or failure, if taken
after the date of this Agreement, would represent or result in a material
breach or violation of any of the covenants and agreements of PSS provided in
Article 7.
6.8 Tax Matters
(a) All Tax Returns required to be filed by or on behalf of any of the PSS
Entities have been timely filed or requests for extensions have been timely
filed, granted, and have not expired for periods ended on or before March 28,
1997, and on or before the date of the most recent fiscal year end immediately
preceding the Effective Time, and all Tax Returns filed are complete and
accurate in all material respects. All Taxes shown on filed Tax Returns have
been paid. There is no audit examination, deficiency, or refund Litigation
with respect to any Taxes, except as reserved against in the PSS Financial
Statements or as disclosed in Section 6.8 of the PSS Disclosure Memorandum.
PSS's federal income Tax Returns have been audited and accepted through March
31, 1994. All Taxes and other Liabilities due with respect to completed and
settled examinations or concluded Litigation have been paid. There are no
Liens with respect to Taxes upon any of the Assets of the PSS entities, except
for any such Liens which would not have a PSS Material Adverse Effect.
(b) None of the PSS Entities has executed an extension or waiver of any
statute of limitations on the assessment or collection of any Tax due
(excluding such statutes that relate to years currently under examination by
the Internal Revenue Service or other applicable taxing authorities) that is
currently in effect.
(c) The provision for any Taxes due or to become due for any of the PSS
Entities for the period or periods through and including the date of the
respective PSS Financial Statements that has been made and is reflected on
such PSS Financial Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of the PSS Entities have been provided for in accordance
with GAAP.
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(e) None of the PSS Entities is a party to any Tax allocation or sharing
agreement and none of the PSS Entities has been a member of an affiliated
group filing a consolidated federal income Tax Return (other than a group the
common parent of which was PSS) or has any Liability for Taxes of any Person
(other than PSS and its Subsidiaries) under Treasury Regulation Section
1.1502-6 (or any similar provision of state, local or foreign Law) as a
transferee or successor or by Contract or otherwise.
(f) Each of the PSS Entities is in compliance with, and its records contain
all information and documents (including properly completed IRS Forms W-9)
necessary to comply with, all applicable information reporting and Tax
withholding requirements under federal, state, and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code.
(g) Except as disclosed in Section 6.8 of the PSS Disclosure Memorandum,
none of the PSS Entities has made any payments, is obligated to make any
payments, or is a party to any Contract that could obligate it to make any
payments that would be disallowed as a deduction under Section 280G or 162(m)
of the Internal Revenue Code.
(h) There has not been an ownership change, as defined in Internal Revenue
Code Section 382(g), of the PSS Entities that occurred during or after any
Taxable Period in which the PSS Entities incurred a net operating loss that
carries over to any Taxable Period ending after December 31, 1996.
(i) Except as set forth in Section 6.8 of the PSS Disclosure Memorandum, no
PSS Entity has or has had in any foreign country a permanent establishment, as
defined in any applicable tax treaty or convention between the United States
and such foreign country.
6.9 Assets
(a) Except as disclosed in Section 6.9 of the PSS Disclosure Memorandum or
as disclosed or reserved against in the PSS Financial Statements, the PSS
Entities have good and marketable title, free and clear of all Liens, to all
of their respective Assets, except for any such Liens or other defects of
title which would not have a PSS Material Adverse Effect. All tangible
properties used in the businesses of the PSS Entities are in good condition,
reasonable wear and tear excepted, and are usable in the ordinary course of
business consistent with PSS's past practices.
(b) All items of inventory, net of reserves, of the PSS Entities reflected
on the most recent balance sheet included in the PSS Financial Statements
delivered prior to the date of this Agreement and prior to the Effective Time
consisted and will consist, as applicable, of items of a quality and quantity
usable and saleable in the ordinary course of business consistent with past
practices and conform to generally accepted standards in the industry in which
the PSS Entities are a part.
(c) The accounts receivable of the PSS Entities as set forth on the most
recent balance sheet included in the PSS Financial Statements delivered prior
to the date of this Agreement or arising since the date thereof are valid and
genuine; have arisen solely out of bona fide sales and deliveries of goods,
performance of services and other business transactions in the ordinary course
of business consistent with past practice; are not subject to valid defenses,
set-offs or counterclaims; and are recorded at the full amount thereof less,
in the case of accounts receivable appearing on the most recent balance sheet
included in the PSS Financial Statements delivered prior to the date of this
Agreement, the recorded allowance for collection losses on such balance sheet.
The allowance for collection losses on such balance sheet has been determined
in accordance with GAAP.
(d) All Assets which are material to PSS's business on a consolidated basis,
held under leases or subleases by any of the PSS Entities, are held under
valid Contracts enforceable in accordance with their respective terms (except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other Laws affecting the enforcement of
creditors' rights generally and except that the availability of the
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equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceedings may be brought), and
each such Contract is in full force and effect.
(e) The PSS Entities currently maintain insurance similar in amounts, scope
and coverage to that maintained by other peer organizations. None of the PSS
Entities has received notice from any insurance carrier that (i) such
insurance will be canceled or that coverage thereunder will be reduced or
eliminated, or (ii) premium costs with respect to such policies of insurance
will be substantially increased. Except as disclosed in Section 6.9 of the PSS
Disclosure Memorandum, there are presently no claims pending under such
policies of insurance and no notices have been given by any PSS Entity under
such policies.
(f) The Assets of the PSS Entities include all assets required to operate
the business of the PSS Entities as presently conducted.
6.10 Intellectual Property. Each PSS Entity owns or has a license to use all
of the Intellectual Property used by such PSS Entity in the course of its
business. Each PSS Entity is the owner of or has a license to any Intellectual
Property sold or licensed to a third party by such PSS Entity in connection
with such PSS Entity's business operations, and such PSS Entity has the right
to convey by sale or license any Intellectual Property so conveyed. No PSS
Entity is in Default under any of its Intellectual Property licenses. No
proceedings have been instituted, or are pending or to the Knowledge of PSS
threatened, which challenge the rights of any PSS Entity with respect to
Intellectual Property used, sold or licensed by such PSS Entity in the course
of its business, nor has any person claimed or alleged any rights to such
Intellectual Property. The conduct of the business of the PSS Entities does
not infringe any Intellectual Property of any other person. Except as
disclosed in Section 6.10 of the PSS Disclosure Memorandum, no PSS Entity is
obligated to pay any recurring royalties to any Person with respect to any
such Intellectual Property.
6.11 Environmental Matters
(a) Each PSS Entity and its Properties are, and have been, in compliance
with all Environmental Laws, except for violations which would not have,
individually or in the aggregate, a PSS Material Adverse Effect.
(b) There is no Litigation pending or threatened before any court,
governmental agency, or authority or other forum in which any PSS Entity or
any of its Properties (or PSS in respect of such Property) has been or, with
respect to threatened Litigation, may be named as a defendant (i) for alleged
noncompliance (including by any predecessor) with any Environmental Law or
(ii) relating to the release, discharge, spillage, or disposal into the
environment of any Hazardous Material, whether or not occurring at, on, under,
adjacent to, or affecting (or potentially affecting) a site owned, leased, or
operated by any PSS Entity or any of its Properties, except for such
Litigation pending or threatened that would not have, individually or in the
aggregate, a PSS Material Adverse Effect, nor is there any reasonable basis
for any Litigation of a type described in this sentence, except such as would
not have, individually or in the aggregate, a PSS Material Adverse Effect.
(c) During the period of (i) any PSS Entity's ownership or operation of any
of their respective current properties, or (ii) any PSS Entity's holding of a
security interest in a Property, there have been no releases, discharges,
spillages, or disposals of Hazardous Material in, on, under, adjacent to, or
affecting (or reasonably likely to affect) such Properties, except such as
would not have, individually or in the aggregate, a PSS Material Adverse
Effect. Prior to the period of (i) any PSS Entity's ownership or operation of
any of their respective current properties, or (ii) any PSS Entity's holding
of a security interest in a Property, to the Knowledge of PSS, there were no
releases, discharges, spillages, or disposals of Hazardous Material in, on,
under, or affecting any such Property, except such as would not have,
individually or in the aggregate, a GSMS Material Adverse Effect.
6.12 Compliance with Laws. Each PSS Entity has in effect all Permits
necessary for it to own, lease or operate its material Assets and to carry on
its business as now conducted, except for those Permits the absence of which
would not have, individually or in the aggregate, a PSS Material Adverse
Effect, and there has occurred no Default under any such Permit, other than
Defaults which would not have, individually or in the aggregate, a
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PSS Material Adverse Effect. Except as disclosed in Section 6.12 of the PSS
Disclosure Memorandum, none of the PSS Entities:
(a) is in Default under its Articles of Incorporation or Bylaws (or other
governing instruments); or
(b) is in Default under any Laws, Orders or Permits applicable to it or
by which its properties are bound, except for Defaults which would not
have, individually or in the aggregate, a PSS Material Adverse Effect; or
(c) since January 1, 1993, has received any notification or communication
from any agency or department of federal, state, or local government or any
Regulatory Authority or the staff thereof (i) asserting that any PSS Entity
is not in compliance with any of the Laws or Orders which such governmental
authority or Regulatory Authority enforces, where such noncompliance would
have, individually or in the aggregate, a PSS Material Adverse Effect, (ii)
threatening to revoke any Permits, the revocation of which would have,
individually or in the aggregate, a PSS Material Adverse Effect, or (iii)
requiring any PSS Entity to enter into or consent to the issuance of a
cease and desist order, formal agreement, directive, commitment or
memorandum of understanding, or to adopt any Board resolution or similar
undertaking, which restricts materially the conduct of its business.
Copies of all material reports, correspondence, notices and other documents
relating to any inspection, audit, monitoring or other form of review or
enforcement action by a Regulatory Authority have been made available to GSMS.
6.13 Labor Relations. No PSS Entity is the subject of any Litigation
asserting that it or any other PSS Entity has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other PSS Entity to bargain with any
labor organization as to wages or conditions of employment, nor is any PSS
Entity party to any collective bargaining agreement, nor is there any strike
or other labor dispute involving any PSS Entity, pending or threatened, or to
the Knowledge of PSS, is there any activity involving any PSS Entity's
employees seeking to certify a collective bargaining unit or engaging in any
other organization activity.
6.14 Employee Benefit Plans
(a) PSS has delivered or made available to GSMS prior to the execution of
this Agreement copies in each case of all pension, retirement, profit-sharing,
deferred compensation, stock option, employee stock ownership, severance pay,
vacation, bonus, or other incentive plan, all other written employee programs,
arrangements, or agreements, all medical, vision, dental, or other health
plans, all life insurance plans, and all other employee benefit plans or
fringe benefit plans, including "employee benefit plans" as that term is
defined in Section 3(3) of ERISA, currently adopted, maintained by, sponsored
in whole or in part by, or contributed to by any PSS Entity or ERISA Affiliate
thereof for the benefit of employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries and under which
employees, retirees, dependents, spouses, directors, independent contractors,
or other beneficiaries are eligible to participate (collectively, the "PSS
Benefit Plans"). Any of the PSS Benefit Plans which is an "employee pension
benefit plan," as that term is defined in Section 3(2) of ERISA, is referred
to herein as a "PSS ERISA Plan." Each PSS ERISA Plan which is also a "defined
benefit plan" (as defined in Section 414(j) of the Internal Revenue Code) is
referred to herein as a "PSS Pension Plan." No PSS Pension Plan is or has been
a multiemployer plan within the meaning of Section 3(37) of ERISA.
(b) All PSS Benefit Plans are in compliance with the applicable terms of
ERISA, the Internal Revenue Code, and any other applicable Laws the breach or
violation of which are reasonably likely to have, individually or in the
aggregate, a PSS Material Adverse Effect. Each PSS ERISA Plan which is
intended to be qualified under Section 401(a) of the Internal Revenue Code has
received a favorable determination letter from the Internal Revenue Service,
and PSS is not aware of any circumstances likely to result in revocation of
any such favorable determination letter. No PSS Entity has engaged in a
transaction with respect to any PSS Benefit Plan that,
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assuming the taxable period of such transaction expired as of the date hereof,
would subject any PSS Entity to a Tax imposed by either Section 4975 of the
Internal Revenue Code or Section 502(i) of ERISA.
(c) No PSS Pension Plan has any "unfunded current liability," as that term
is defined in Section 302(d)(8)(A) of ERISA, based on actuarial assumptions
set forth for such plan's most recent actuarial valuation. Since the date of
the most recent actuarial valuation, there has been (i) no material change in
the financial position of a PSS Pension Plan, (ii) no change in the actuarial
assumptions with respect to any PSS Pension Plan, and (iii) no increase in
benefits under any PSS Pension Plan as a result of plan amendments or changes
in applicable Law which would have, individually or in the aggregate, a PSS
Material Adverse Effect or materially adversely affect the funding status of
any such plan. Neither any PSS Pension Plan nor any "single-employer plan,"
within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any PSS Entity, or the single-employer plan of any ERISA
Affiliate has an "accumulated funding deficiency" within the meaning of
Section 412 of the Internal Revenue Code or Section 302 of ERISA. No PSS
Entity has provided, or is required to provide, security to a PSS Pension Plan
or to any single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Internal Revenue Code.
(d) Within the six-year period preceding the Effective Time, no Liability
under Subtitle C or D of Title IV of ERISA has been or is expected to be
incurred by any PSS Entity with respect to any ongoing, frozen or terminated
single-employer plan or the single-employer plan of any ERISA Affiliate. No
PSS Entity has incurred any withdrawal Liability with respect to a
multiemployer plan under Subtitle B of Title IV of ERISA (regardless of
whether based on contributions of an ERISA Affiliate). No notice of a
"reportable event," within the meaning of Section 4043 of ERISA for which the
30-day reporting requirement has not been waived, has been required to be
filed for any PSS Pension Plan or by any ERISA Affiliate within the 12-month
period ending on the date hereof.
(e) Except as disclosed in Section 6.14 of the PSS Disclosure Memorandum, no
PSS Entity has any Liability for retiree health and life benefits under any of
the PSS Benefit Plans and there are no restrictions on the rights of such PSS
Entity to amend or terminate any such retiree health or benefit Plan without
incurring any Liability thereunder.
(f) Except as disclosed in Section 6.14 of the PSS Disclosure Memorandum,
neither the execution and delivery of this Agreement nor the consummation of
the transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, or otherwise) becoming
due to any director or any employee of any PSS Entity from any PSS Entity
under any PSS Benefit Plan or otherwise, (ii) increase any benefits otherwise
payable under any PSS Benefit Plan, or (iii) result in any acceleration of the
time of payment or vesting of any such benefit.
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any PSS Entity and their respective beneficiaries, other than
entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Internal Revenue Code or Section 302 of
ERISA, have been fully reflected on the PSS Financial Statements to the extent
required by and in accordance with GAAP.
6.15 Material Contracts. Except as disclosed in Section 6.15 of the PSS
Disclosure Memorandum or otherwise reflected in the PSS Financial Statements,
none of the PSS Entities, nor any of their respective Assets, businesses, or
operations, is a party to, or is bound or affected by, or receives benefits
under, (i) any employment, severance, termination, consulting or retirement
Contract providing for aggregate payments to any Person in any calendar year
in excess of $75,000, (ii) any Contract relating to the borrowing of money by
any PSS Entity or the guarantee by any PSS Entity of any such obligation
(other than Contracts evidencing trade payables and Contracts relating to
borrowings or guarantees made in the ordinary course of business), (iii) any
Contract which prohibits or restricts any PSS Entity from engaging in any
business activities in any geographic area, line of business or otherwise in
competition with any other Person, (iv) any Contract relating to the purchase
or sale of
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any goods or services (other than Contracts entered into in the ordinary
course of business and involving payments under any individual contract not in
excess of $250,000, or (v) any other Contract or amendment thereto that would
be required to be filed as an exhibit to a Form 10-K filed by PSS with the SEC
as of the date of this Agreement that has not been filed as an exhibit to
PSS's Form 10-K filed for the fiscal year ended March 28, 1997, or in an SEC
Document and identified to GSMS (together with all Contracts referred to in
Sections 6.9(d) and (e) and 6.14(a), the "PSS Contracts"). With respect to
each PSS Contract and except as disclosed in Section 6.15 of the PSS
Disclosure Memorandum: (i) the Contract is in full force and effect; (ii) no
PSS Entity is in Default thereunder, other than Defaults which would not have,
individually or in the aggregate, a PSS Material Adverse Effect; (iii) no PSS
Entity has repudiated or waived any material provision of any such Contract;
and (iv) no other party to any such Contract is, to the Knowledge of PSS, in
Default in any respect, other than Defaults which would not have, individually
or in the aggregate, a PSS Material Adverse Effect, or has repudiated or
waived any material provision thereunder. All of the indebtedness of any PSS
Entity for money borrowed is prepayable at any time by such PSS Entity without
penalty or premium.
6.16 Legal Proceedings. There is no Litigation pending, or, to the Knowledge
of PSS, threatened (or unasserted but considered probable of assertion and
which if asserted would have at least a reasonable probability of an
unfavorable outcome) against any PSS Entity, or against any director, employee
or employee benefit plan of any PSS Entity, or against any Asset, interest, or
right of any of them, that is reasonably likely to have, individually or in
the aggregate, a PSS Material Adverse Effect, nor are there any Orders of any
Regulatory Authorities, other governmental authorities, or arbitrators
outstanding against any PSS Entity, that are reasonably likely to have,
individually or in the aggregate, a PSS Material Adverse Effect. Section 6.16
of the PSS Disclosure Memorandum contains a summary of all Litigation pending
as of the date of this Agreement to which any PSS Entity is a party and which
names a PSS Entity as a defendant or cross-defendant or for which any PSS
Entity has potential Liability.
6.17 Reports. Except as disclosed in Section 6.17 of the PSS Disclosure
Memorandum, since January 1, 1993, or the date of organization if later, each
PSS Entity has timely filed all reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with Regulatory Authorities. As of their respective dates, each of such
reports and documents, including the financial statements, exhibits, and
schedules thereto, complied in all material respects with all applicable Laws.
As of its respective date, each such report and document did not, in all
material respects, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
6.18 Statements True and Correct. No statement, certificate, instrument or
other writing furnished or to be furnished by any PSS Entity or any Affiliate
thereof to GSMS pursuant to this Agreement or any other document, agreement or
instrument delivered pursuant hereto contains or will contain any untrue
statement of material fact or will omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. None of the information supplied or to be supplied
by any PSS Entity or, to PSS's Knowledge, any Affiliate thereof for inclusion
in the Registration Statement to be filed by PSS with the SEC, will, when the
Registration Statement becomes effective, be false or misleading with respect
to any material fact, or omit to state any material fact necessary to make the
statements therein not misleading. None of the information supplied or to be
supplied by any PSS Entity or any Affiliate thereof for inclusion in the Joint
Proxy Statement to be mailed to each Party's stockholders in connection with
the Stockholders' Meetings, and any other documents to be filed by any PSS
Entity or any Affiliate thereof with the SEC or any other Regulatory Authority
in connection with the transactions contemplated hereby, will, at the
respective time such documents are filed, and with respect to the Joint Proxy
Statement, when first mailed to the stockholders of GSMS and PSS, be false or
misleading with respect to any material fact, or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, or, in the case of the Joint Proxy
Statement or any amendment thereof or supplement thereto, at the time of the
Stockholders' Meetings, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to correct any statement in
any earlier communication with respect to the solicitation
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of any proxy for the Stockholders' Meetings. All documents that any PSS Entity
or any Affiliate thereof is responsible for filing with any Regulatory
Authority in connection with the transactions contemplated hereby will comply
as to form in all material respects with the provisions of applicable Law.
6.19 Authority of Merger Corp. Merger Corp. was formed solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as
contemplated hereby. Merger Corp. is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Delaware as a
wholly owned Subsidiary of PSS. The authorized capital stock of Merger Corp.
shall consist of 1,000 shares of Merger Corp. Common Stock, all of which is
validly issued and outstanding, fully paid and nonassessable and is owned by
PSS free and clear of any Lien. Merger Corp. has the corporate power and
authority necessary to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein, including the Merger, have been duly and
validly authorized by all necessary corporate action in respect thereof on the
part of Merger Corp. This Agreement represents a legal, valid, and binding
obligation of Merger Corp., enforceable against Merger Corp. in accordance
with its terms (except in all cases as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or similar Laws
affecting the enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding
may be brought). PSS, as the sole stockholder of Merger Corp., will vote prior
to the Effective Time the shares of Merger Corp. Common Stock in favor of
approval of this Agreement, as and to the extent required by applicable Law
and no other vote of holders of securities of Merger Corp. is necessary.
6.20 Accounting, Tax and Regulatory Matters. No PSS Entity or any Affiliate
thereof has taken or agreed to take any action or has any Knowledge of any
fact or circumstance that is reasonably likely to (i) prevent the Merger from
qualifying for pooling-of-interests accounting treatment or as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, or (ii) materially impede or delay receipt of any Consents of Regulatory
Authorities referred to in Section 9.1(b) or result in the imposition of a
condition or restriction of the type referred to in the last sentence of such
Section.
6.21 Opinion of Financial Advisor. PSS has received the opinion of BT Alex.
Brown Incorporated, dated the date of this Agreement, to the effect that the
Exchange Ratio is fair, from a financial point of view, to PSS and its
shareholders, a signed copy of which will be delivered to GSMS promptly after
receipt thereof.
6.22 Board Recommendation. The Board of Directors of PSS, at a meeting duly
called and held, has by unanimous vote of those directors present (who
constituted all of the directors then in office) (i) determined that this
Agreement and the transactions contemplated hereby, including the Merger, and
the PSS Stock Option Agreement and the transactions contemplated thereby,
taken together, are fair to and in the best interests of the stockholders and
(ii) resolved to recommend that the holders of the shares of PSS Common Stock
approve this Agreement.
ARTICLE 7
Conduct of Business Pending Consummation
7.1 Affirmative Covenants of GSMS. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of PSS shall have been obtained, which consent will not
be unreasonably withheld, and except as otherwise expressly contemplated
herein or as disclosed in Section 7.1 of the GSMS Disclosure Memorandum, GSMS
shall and shall cause each of its Subsidiaries to (a) operate its business
only in the usual, regular, and ordinary course, (b) use commercially
reasonable efforts consistent with past practices and policies to preserve
intact its business organization and Assets, (c) use commercially reasonable
efforts consistent with past practices and policies to keep available the
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services of the present officers, employees and consultants of GSMS and its
subsidiaries and to preserve the present relationship of GSMS and its
Subsidiaries with customers, suppliers and other persons, and (d) take no
action which would (i) materially and adversely affect the ability of any
Party to obtain any material Consents required for the transactions
contemplated hereby without imposition of a condition or restriction of the
type referred to in the last sentences of Section 9.1(b) or 9.1(c), or (ii)
materially and adversely affect the ability of any Party to perform its
covenants and agreements under this Agreement.
7.2 Negative Covenants of GSMS. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of PSS shall have been obtained, which consent will not
be unreasonably withheld, and except as otherwise expressly contemplated
herein, GSMS covenants and agrees that it will not do or agree or commit to
do, or permit any of its Subsidiaries to do or agree or commit to do, any of
the following:
(a) amend the Certificate or Articles of Incorporation, Bylaws or other
governing instruments of any GSMS Entity, or
(b) incur any additional debt obligation or other obligation for borrowed
money (other than indebtedness of a GSMS Entity to another GSMS Entity) in
excess of an aggregate of $250,000 (for the GSMS Entities on a consolidated
basis) except in the ordinary course of the business consistent with past
practices, or impose, or suffer the imposition, on any material Asset of
any GSMS Entity of any Lien or permit any such Lien to exist (other than in
connection with Liens in effect as of the date hereof that are disclosed in
the GSMS Disclosure Memorandum); or
(c) repurchase, redeem, or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans), directly or
indirectly, any shares, or any securities convertible into any shares, of
the capital stock of any GSMS Entity, or declare or pay any dividend or
make any other distribution in respect of GSMS's capital stock; or
(d) except for this Agreement, or pursuant to the exercise of stock
options or common stock purchase warrants outstanding as of the date hereof
and pursuant to the terms thereof in existence on the date hereof, or
pursuant to the GSMS Stock Option Agreement, or as disclosed in Section
7.2(d) of the GSMS Disclosure Memorandum, issue, sell, pledge, encumber,
authorize the issuance of, enter into any Contract to issue, sell, pledge,
encumber, or authorize the issuance of, or otherwise permit to become
outstanding, any additional shares of GSMS Common Stock or any other
capital stock of any GSMS Entity, or any stock appreciation rights, or any
option, warrant, or other Equity Right; or
(e) adjust, split, combine or reclassify any capital stock of any GSMS
Entity or issue or authorize the issuance of any other securities in
respect of or in substitution for shares of GSMS Common Stock, or sell,
lease, mortgage or otherwise dispose of or otherwise encumber (x) any
shares of capital stock of any GSMS Subsidiary (unless any such shares of
stock are sold or otherwise transferred to another GSMS Entity) or (y) any
material Asset other than in the ordinary course of business for reasonable
and adequate consideration; or
(f) except for purchases of U.S. Treasury securities or U.S. Government
agency securities, which in either case have maturities of three years or
less, and except as set forth in Section 7.2(f) of the GSMS Disclosure
Memorandum, purchase any securities or make any material investment, either
by purchase of stock of securities, contributions to capital, Asset
transfers, or purchase of any Assets, in any Person other than a wholly
owned GSMS Subsidiary, or otherwise acquire direct or indirect control over
any Person, other than in connection with (i) foreclosures in the ordinary
course of business, or (iii) the creation of new wholly owned Subsidiaries
organized to conduct or continue activities otherwise permitted by this
Agreement; or
(g) grant any increase in compensation or benefits to the employees or
officers of any GSMS Entity, except as disclosed in Section 7.2(g) of the
GSMS Disclosure Memorandum or as required by Law; pay any severance or
termination pay or any bonus other than consistent with policies or with
written Contracts in effect on the date of this Agreement and disclosed in
Section 7.2(g) of the GSMS Disclosure Memorandum; and enter into or amend
any severance agreements with officers of any GSMS Entity; grant
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any material increase in fees or other increases in compensation or other
benefits to directors of any GSMS Entity except in accordance with past
practice disclosed in Section 7.2(g) of the GSMS Disclosure Memorandum; or
voluntarily accelerate the vesting of any stock options or other stock-
based compensation or employee benefits or other Equity Rights; or
(h) enter into or amend any employment Contract between any GSMS Entity
and any Person having a salary thereunder in excess of $50,000 per year
(unless such amendment is required by Law) that the GSMS Entity does not
have the unconditional right to terminate without Liability (other than
Liability for services already rendered), at any time on or after the
Effective Time; or
(i) adopt any new employee benefit plan of any GSMS Entity or terminate
or withdraw from, or make any material change in or to, any existing
employee benefit plans of any GSMS Entity other than as disclosed in
Section 7.2(i) of the GSMS Disclosure Memorandum or any such change that is
required by Law or that, in the opinion of counsel, is necessary or
advisable to maintain the tax qualified status of any such plan, or make
any distributions from such employee benefit plans, except as required by
Law, the terms of such plans or consistent with past practice; or
(j) make any significant change in any Tax or accounting methods or
systems of internal accounting controls, except as may be appropriate to
conform to changes in Tax Laws or regulatory accounting requirements or
GAAP; or
(k) commence any Litigation other than in accordance with past practice,
settle any Litigation involving any Liability of any GSMS Entity for
material money damages or restrictions upon the operations of any GSMS
Entity; or
(l) except in the ordinary course of business, enter into, modify, amend
or terminate any material Contract (including any loan Contract with an
unpaid balance exceeding $250,000) or waive, release, compromise or assign
any material rights or claims.
7.3 Covenants of PSS. From the date of this Agreement until the earlier of
the Effective Time or the termination of this Agreement, unless the prior
written consent of GSMS shall have been obtained, which consent will not be
unreasonably withheld, and except as otherwise expressly contemplated herein,
PSS covenants and agrees that it shall and shall cause each of its
Subsidiaries to (w) operate its business only in the usual, regular, and
ordinary course, (x) use commercially reasonable efforts consistent with past
practices and policies to preserve intact its business organization and Assets
and maintain its rights and franchises, (y) use commercially reasonable
efforts consistent with past practices and policies to keep available the
services of the present officers, employees and consultants of PSS and its
subsidiaries and to preserve the present relationship of PSS and its
Subsidiaries with customers, suppliers and other persons, and (z) take no
action which would (i) materially and adversely affect the ability of any
Party to obtain any material Consents required for the transactions
contemplated hereby without imposition of a condition or restriction of the
type referred to in the last sentences of Section 9.1(b) or 9.1(c), or (ii)
materially and adversely affect the ability of any Party to perform its
covenants and agreements under this Agreement; provided, that the foregoing
shall not prevent any PSS Entity from discontinuing or disposing of any of its
Assets or business which is not material if such action is, in the judgment of
PSS, desirable in the conduct of the business of PSS and its Subsidiaries. PSS
further covenants and agrees that it will not do or agree or commit to do, or
permit any of its Subsidiaries to do or agree or commit to do, any of the
following without the prior written consent of GSMS, which consent shall not
be unreasonably withheld:
(a) amend the Articles of Incorporation or Bylaws of PSS, in each case,
in any manner adverse to the holders of GSMS Common Stock;
(b) make any significant change in any Tax or accounting methods or
systems of internal accounting controls, except as may be appropriate to
conform to changes in applicable Tax Laws or regulatory accounting
requirements or GAAP;
(c) except for this Agreement, or pursuant to the PSS Stock Option
Agreement, issue, sell, pledge, encumber, authorize the issuance of, enter
into any Contract to issue, sell, pledge, encumber, or authorize the
issuance of, or otherwise permit to become outstanding, any additional
shares of PSS Common Stock or
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any other capital stock of any PSS Entity, or any stock appreciation
rights, or any option, warrant, or other Equity Right; provided, however,
that nothing contained herein shall prevent or limit PSS from issuing (i)
employee stock options in the ordinary course of business and consistent
with past practices, or (ii) issuing securities in connection with business
acquisitions of third parties, unless the issuance of such securities would
require the approval of the shareholders of PSS under applicable Law; or
(d) enter into any agreement with any Person to acquire the business of
such Person for a purchase price in excess of $75,000,000 whether payable
in shares of PSS Common Stock, cash, or notes.
Notwithstanding anything contained in Section 7.3 or elsewhere in this
Agreement to the contrary, PSS may adopt, prior to the Effective Time, a
shareholder protection rights agreement and declare a dividend of one right
thereunder for each share of PSS Common Stock outstanding as of a record date
and the adoption of such a shareholder protection rights agreement and the
declaration of such a dividend shall not constitute a breach or violation of
any representation, warranty, covenant or agreement of PSS contained in this
Agreement.
7.4 Adverse Changes in Condition. Each Party agrees to give written notice
promptly to the other Party upon becoming aware of the occurrence or impending
occurrence of any event or circumstance relating to it or any of its
Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a GSMS Material Adverse Effect or a PSS Material Adverse Effect, as
applicable, or (ii) would cause or constitute a material breach of any of its
representations, warranties, or covenants contained herein, and to use its
reasonable efforts to prevent or promptly to remedy the same.
7.5 Reports. Each Party and its Subsidiaries shall file all reports required
to be filed by it with Regulatory Authorities between the date of this
Agreement and the Effective Time and shall deliver to the other Party copies
of all such reports promptly after the same are filed. If financial statements
are contained in any such reports filed with the SEC, such financial
statements will fairly present the consolidated financial position of the
entity filing such statements as of the dates indicated and the consolidated
results of operations, changes in stockholders' equity, and cash flows for the
periods then ended in accordance with GAAP (subject in the case of interim
financial statements to normal recurring year-end adjustments that are not
material). As of their respective dates, such reports filed with the SEC will
comply in all material respects with the Securities Laws and will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Any financial statements contained in any other reports to another
Regulatory Authority shall be prepared in all material respects in accordance
with Laws applicable to such reports.
ARTICLE 8
Additional Agreements
8.1 Registration Statement; Proxy Statement; Stockholder Approval. As soon
as reasonably practicable after execution of this Agreement, PSS shall prepare
and file the Registration Statement with the SEC, and shall use its reasonable
efforts to cause the Registration Statement to become effective under the 1933
Act and take any action required to be taken under the applicable state Blue
Sky or securities Laws in connection with the issuance of the shares of PSS
Common Stock upon consummation of the Merger. GSMS shall cooperate in the
preparation and filing of the Registration Statement and shall furnish all
information concerning it and the holders of its capital stock as PSS may
reasonably request in connection with such action. GSMS shall call a
Stockholders' Meeting, to be held as soon as reasonably practicable after the
Registration Statement is declared effective by the SEC, for the purpose of
voting upon approval of this Agreement and the Merger and such other related
matters as it deems appropriate. PSS shall call a Stockholders' Meeting, to be
held as soon as reasonably practicable after the Registration Statement is
declared effective by the SEC, for the purpose of voting upon the issuance of
shares of PSS Common Stock pursuant to the Merger and such other related
matters as it deems appropriate, including an amendment to the Articles of
Incorporation of PSS to increase the authorized capital stock of PSS. In
connection with the Stockholders' Meetings, (i) GSMS and PSS shall prepare and
file with the
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SEC a Joint Proxy Statement and mail such Joint Proxy Statement to their
respective stockholders, (ii) the Parties shall furnish to each other all
information concerning them that they may reasonably request in connection
with such Joint Proxy Statement, (iii) the Board of Directors of GSMS and PSS
shall recommend to their respective stockholders the approval of the matters
submitted for approval (unless the Board of Directors of either PSS or GSMS,
after having consulted with and considered the advice of outside legal
counsel, determines in good faith that the making of such recommendation, or
the failure to withdraw or modify its recommendation, would constitute a
breach of fiduciary duties of the members of such Board of Directors to its
stockholders under applicable law), and (iv) the Board of Directors and
officers of GSMS and PSS shall use their commercially reasonable efforts to
obtain such stockholders' approval (unless the Board of Directors of GSMS or
PSS, after having consulted with and considered the advice of outside counsel,
determines in good faith that the taking of such actions would constitute a
breach of fiduciary duties of the members of such Board of Directors to GSMS's
stockholder under applicable law). PSS and GSMS shall make all necessary
filings with respect to the Merger under the Securities Laws.
8.2 Nasdaq Listing. PSS shall use its reasonable efforts to list on the
Nasdaq National Market, (i) prior to the Effective Time, the shares of PSS
Common Stock to be issued to the holders of GSMS Common Stock pursuant to the
Merger, and (ii) not later than the effective date of any registration
statement filed with the SEC pursuant to Section 3.5(d) hereof, the PSS Common
Stock underlying the Options and the GSMS common stock purchase warrants. PSS
shall give all notices and make all filings with the NASD required in
connection with the transactions contemplated herein.
8.3 Applications; Antitrust Notification. PSS shall promptly prepare and
file, and GSMS shall cooperate in the preparation and, where appropriate,
filing of, applications with all Regulatory Authorities having jurisdiction
over the transactions contemplated by this Agreement seeking the requisite
Consents necessary to consummate the transactions contemplated by this
Agreement. To the extent required by the HSR Act, each of the Parties will
promptly file with the United States Federal Trade Commission and the United
States Department of Justice the notification and report form required for the
transactions contemplated hereby and any supplemental or additional
information which may reasonably be requested in connection therewith pursuant
to the HSR Act and will comply in all material respects with the requirements
of the HSR Act. The Parties shall deliver to each other copies of all filings,
correspondence and orders to and from all Regulatory Authorities in connection
with the transactions contemplated hereby.
8.4 Filings with State Offices. Upon the terms and subject to the conditions
of this Agreement, GSMS shall execute and file the Certificate of Merger with
the Secretary of State of the State of Delaware in connection with the
Closing.
8.5 Agreement as to Efforts to Consummate. Subject to the terms and
conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its commercially reasonable efforts to take, or cause to
be taken, all actions, and to do, or cause to be done, all things necessary,
proper, or advisable under applicable Laws to consummate and make effective,
as soon as reasonably practicable after the date of this Agreement, the
transactions contemplated by this Agreement, including using its commercially
reasonable efforts to lift or rescind any Order adversely affecting its
ability to consummate the transactions contemplated herein and to cause to be
satisfied the conditions referred to in Article 9; provided, that nothing
herein shall preclude either Party from exercising its rights under this
Agreement or the GSMS Stock Option Agreement or the PSS Stock Option
Agreement, as applicable. Each Party shall use, and shall cause each of its
Subsidiaries to use, its commercially reasonable efforts to obtain all
material Consents necessary or desirable (in the good faith judgment of the
Board of Directors of such Party) for the consummation of the transactions
contemplated by this Agreement.
8.6 Investigation and Confidentiality.
(a) Prior to the Effective Time, each Party shall keep the other Party
advised of all material developments relevant to its business and to
consummation of the Merger and shall permit the other Party to make or cause
to be made such investigation of the business and properties of it and its
Subsidiaries and of their respective
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financial and legal conditions as the other Party reasonably requests,
provided that such investigation shall be reasonably related to the
transactions contemplated hereby and shall not interfere unnecessarily with
normal operations. No investigation by a Party shall affect the
representations and warranties of the other Party.
(b) The Parties' respective obligations under the Confidentiality Agreement
are hereby reaffirmed and adopted, and incorporated by reference herein.
(c) GSMS shall use its commercially reasonable efforts to exercise its
rights under confidentiality agreements entered into with Persons which were
considering an Acquisition Proposal with respect to GSMS to preserve the
confidentiality of the information relating to the GSMS Entities provided to
such Persons and their Affiliates and Representatives.
(d) Each Party agrees to give the other Party notice as soon as practicable
after any determination by it of any fact or occurrence relating to the other
Party which it has discovered through the course of its investigation and
which represents, or is reasonably likely to represent, either a material
breach of any representation, warranty, covenant or agreement of the other
Party or which has had or is reasonably likely to have a GSMS Material Adverse
Effect or a PSS Material Adverse Effect, as applicable.
8.7 Press Releases. Prior to the Effective Time, GSMS and PSS shall consult
with each other as to the form and substance of any press release or other
public disclosure materially related to this Agreement or any other
transaction contemplated hereby; provided, that nothing in this Section 8.7
shall be deemed to prohibit any Party from making any disclosure which its
counsel deems necessary or advisable in order to satisfy such Party's
disclosure obligations imposed by Law.
8.8 No Solicitation. Except with respect to this Agreement and the
transactions contemplated hereby, no GSMS Entity or PSS Entity nor any
Affiliate thereof nor any Representatives thereof retained by any GSMS Entity
or any PSS Entity shall directly or indirectly solicit any Acquisition
Proposal by any Person. Except to the extent the Board of Directors of GSMS or
PSS, as the case may be, after having consulted with and considered the advice
of outside counsel, determines in good faith that the failure to take such
actions would constitute a breach of fiduciary duties of the members of such
Board of Directors to its stockholders under applicable law, no GSMS Entity or
PSS Entity, as the case may be, or any Affiliate or Representative thereof
shall furnish any non-public information that it is not legally obligated to
furnish, negotiate with respect to, or enter into any Contract with respect
to, any Acquisition Proposal, but GSMS or PSS, as the case may be, may
communicate information about such an Acquisition Proposal to its stockholders
if and to the extent that it is required to do so in order to comply with its
legal obligations as advised by outside counsel. Any actions by a Party
pursuant to the preceding sentence will not constitute a breach of Section 8.8
or any other provision hereof. Either Party shall promptly advise the other
following the receipt of any Acquisition Proposal and the details thereof,
including, without limitation, the proposed acquisition price and acquiror,
and advise such other Party of any developments with respect to such
Acquisition Proposal promptly upon the occurrence thereof. Each Party shall
(i) immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any Persons conducted heretofore with respect
to any of the foregoing, and (ii) direct and use its reasonable efforts to
cause all of its Affiliates and Representatives not to engage in any of the
foregoing.
8.9 Accounting and Tax Treatment. Each of the Parties undertakes and agrees
to use its commercially reasonable efforts to cause the Merger, and to take no
action which would cause the Merger not, to qualify for treatment as a pooling
of interests for accounting purposes or as a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code for federal income tax
purposes.
8.10 State Takeover Laws. Each GSMS Entity and each Stockholder shall take
all necessary steps to exempt the transactions contemplated by this Agreement
from, or if necessary to challenge the validity or applicability of, any
applicable Takeover Law under the DGCL.
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8.11 Agreements of Affiliates. GSMS has disclosed in Section 8.11 of the
GSMS Disclosure Memorandum all Persons whom it reasonably believes is an
"affiliate" of GSMS for purposes of Rule 145 under the 1933 Act. GSMS shall
use its reasonable efforts to cause each such Person to deliver to PSS not
later than 10 days after the date of this Agreement, a written agreement,
substantially in the form of Exhibit 2.1, providing that such Person will not
sell, pledge, transfer, or otherwise dispose of the shares of GSMS Common
Stock held by such Person except as contemplated by such agreement or by this
Agreement and will not sell, pledge, transfer, or otherwise dispose of the
shares of PSS Common Stock to be received by such Person upon consummation of
the Merger except in compliance with applicable provisions of the 1933 Act and
the rules and regulations thereunder and, because the Merger is to be
accounted for by the pooling-of-interests method of accounting, until such
time as financial results covering at least 30 days of combined operations of
PSS and GSMS have been published within the meaning of Section 201.01 of the
SEC's Codification of Financial Reporting Policies. Because the Merger is to
be accounted for using the pooling-of-interests method of accounting, shares
of PSS Common Stock issued to such affiliates of GSMS in exchange for shares
of GSMS Common Stock shall not be transferable until such time as financial
results covering at least 30 days of combined operations of PSS and GSMS have
been published within the meaning of Section 201.01 of the SEC's Codification
of Financial Reporting Policies, regardless of whether each such affiliate has
provided the written agreement referred to in this Section 8.11 (and PSS shall
be entitled to place restrictive legends upon certificates for shares of PSS
Common Stock issued to affiliates of GSMS pursuant to this Agreement to
enforce the provisions of this Section 8.11). PSS shall not be required to
maintain the effectiveness of the Registration Statement under the 1933 Act
for the purposes of resale of PSS Common Stock by such affiliates. PSS has
disclosed in Section 8.11 of the PSS Disclosure Memorandum all Persons whom it
reasonably believes is an "affiliate" of PSS. PSS shall use its reasonable
efforts to cause each such Person to execute and deliver not later than 10
days after the date of this Agreement, a written agreement, substantially in
the form of Exhibit 2.2, providing that such Person shall not sell, pledge,
transfer or otherwise dispose of any shares of PSS Common Stock until such
time as financial results covering at least 30 days of combined operations of
PSS and GSMS have been published within the meaning of Section 201.01 of the
SEC's Codification of Financial Reporting Policies.
8.12 Employee Benefits and Contracts. Following the Effective Time, PSS
shall provide generally to officers and employees of the GSMS Entities
employee benefits under employee benefit and welfare plans (other than stock
option or other plans involving the potential issuance of PSS Common Stock),
on terms and conditions which when taken as a whole are substantially similar
to those currently provided by the PSS Entities to their similarly situated
officers and employees. For purposes of participation, vesting and (except in
the case of PSS retirement plans) benefit accrual under PSS's employee benefit
plans, the service of the employees of the GSMS Entities prior to the
Effective Time shall be treated as service with a PSS Entity participating in
such employee benefit plans. PSS also shall cause the Surviving Corporation
and its Subsidiaries to honor in accordance with their terms all employment,
severance, consulting and other compensation Contracts disclosed in Section
8.12 of the GSMS Disclosure Memorandum to PSS between any GSMS Entity and any
current or former director, officer, or employee thereof, and all provisions
for vested benefits or other vested amounts earned or accrued through the
Effective Time under the GSMS Benefit Plans.
8.13 Indemnification and Insurance
(a) The By-Laws of the Surviving Corporation shall contain the provisions
with respect to indemnification set forth in the By-Laws of GSMS on the date
hereof, which provisions shall not be amended, repealed or otherwise modified
for a period of six (6) years from the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who on or prior to the
Effective Time were directors, officers, employees or agents of GSMS, unless
such modification is required by law.
(b) After the Effective Time, PSS will, and will cause the Surviving
Corporation to, indemnify and hold harmless the present and former officers,
directors, employees and agents of GSMS (the "Indemnified Parties") in respect
of acts or omissions occurring on or prior to the Effective Time to the extent
and subject to the terms of GSMS's Certificate of Incorporation and Bylaws or
any indemnification agreement with GSMS officers and
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directors to which GSMS is a party, in each case in effect on the date hereof;
provided that such indemnification shall be subject to any limitation imposed
from time to time under applicable law. Without limitation of the foregoing,
and subject to GSMS's Certificate of Incorporation or Bylaws or any applicable
indemnification agreement in effect on this date, in the event any such
Indemnified Party is or becomes involved in any capacity in any action,
proceeding or investigation in connection with any matter relating to this
Agreement or the transactions contemplated hereby occurring on or prior to the
Effective Time, PSS shall, or cause the Surviving Corporation to, pay as
incurred such Indemnified Party's reasonable legal and other expenses
(including the cost of any investigation and preparation) incurred in
connection therewith.
(d) To the extent there is any claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time) against an
Indemnified Party that arises out of or pertains to any action or omission in
his or her capacity as a director, officer, employee, fiduciary or agent of
GSMS occurring prior to the Effective Time, or arises out of or pertains to
the transactions contemplated by this Agreement for a period of six years
after the Effective Time (whether arising before or after the Effective Time),
such Indemnified Party shall be entitled to be represented by counsel and
following the Effective Time, and subject to GSMS's Certificate of
Incorporation or Bylaws or any applicable indemnification agreement in effect
on this date, the Surviving Corporation and PSS shall pay the reasonable fees
and expenses of such counsel promptly after statements therefor are received
and the Surviving Corporation and PSS will cooperate in the defense of any
such matter; provided, however, that neither the Surviving Corporation not PSS
shall be liable for any settlement effected without its written consent (which
consent shall not be unreasonably withheld); and provided, further, that, in
the event that any claim or claims for indemnification are asserted or made
within such six-year period, all rights to indemnification in respect of any
such claim or claims shall continue until the disposition of any and all such
claims.
(e) PSS will cause the Surviving Corporation to obtain "tail" directors' and
officers' liability insurance to be effective for a period of six (6) years
following the Effective Time, covering those persons who are currently covered
by GSMS's directors' and officers' liability insurance policy (a copy of which
has been made available to PSS) on terms comparable to those now applicable to
directors and officers of GSMS; provided, that in no event shall the Surviving
Corporation be required to expend in excess of 150% of the annual premium
currently paid for such coverage; and provided, further, that if the premium
for such coverage exceeds such amount, the Surviving Corporation shall
purchase a policy with the greatest coverage available for such 150% of the
annual premium.
8.14 Voting Agreements. Simultaneously with execution and delivery of this
Agreement, PSS and certain shareholders of GSMS have entered into the GSMS
Voting Agreement in the form of Exhibit 5.1 hereto and GSMS and certain
shareholders of PSS have entered into the PSS Voting Agreement in the form of
Exhibit 5.2 hereto.
8.15 Accountants' Letters.
(a) GSMS shall cause PSS to receive from Ernst & Young LLP letters dated not
more than five days prior to (i) the date of the Joint Proxy Statement and
(ii) the Effective Time, with respect to certain financial information
regarding GSMS, in form and substance reasonably satisfactory to PSS, which
letters shall be based upon customary specified procedures undertaken by such
firm in accordance with Statement of Auditing Standard Nos. 72 and 75.
(b) PSS shall cause GSMS to receive from Arthur Andersen LLP letters dated
not more than five days prior to (i) the date of the Joint Proxy Statement and
(ii) the Effective Time, with respect to certain financial information
regarding PSS, in form and substance reasonably satisfactory to GSMS, which
letters shall be based upon customary specified procedures undertaken by such
firm in accordance with Statement of Auditing Standard Nos. 72 and 75.
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ARTICLE 9
Conditions Precedent to Obligations to Consummate
9.1 Conditions to Obligations of Each Party. The respective obligations of
each Party to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by both Parties pursuant to Section 11.6:
(a) Stockholder Approval. The stockholders of GSMS shall have approved
this Agreement, and the consummation of the transactions contemplated
hereby, including the Merger, as and to the extent required by Law, by the
provisions of any governing instruments, or by the rules of the NASD. The
stockholders of PSS shall have approved (i) the issuance of shares of PSS
Common Stock pursuant to the Merger, as and to the extent required by Law,
by the provisions of any governing instruments, or by the rules of the
NASD, and (ii) an amendment to the Articles of Incorporation of PSS to
increase the authorized capital stock of PSS.
(b) Regulatory Approvals. All Consents of, filings and registrations
with, and notifications to, all Regulatory Authorities required for
consummation of the Merger shall have been obtained or made and shall be in
full force and effect and all waiting periods required by Law shall have
expired. No Consent obtained from any Regulatory Authority which is
necessary to consummate the transactions contemplated hereby shall be
conditioned or restricted in a manner (including requirements relating to
the raising of additional capital or the disposition of Assets) which in
the reasonable judgment of the Board of Directors of PSS would so
materially and adversely impact the conduct of the combined businesses of
GSMS and PSS that, had such condition or requirement been known, such Party
would not, in its reasonable judgment, have entered into this Agreement.
(c) Consents and Approvals. Each Party shall have obtained any and all
Consents required for consummation of the Merger (other than those referred
to in Section 9.1(b)) or for the preventing of any Default under any
Contract or Permit of such Party which, if not obtained or made, would
have, individually or in the aggregate, a GSMS Material Adverse Effect or a
PSS Material Adverse Effect, as applicable.
(d) Legal Proceedings. No court or governmental or regulatory authority
of competent jurisdiction shall have enacted, issued, promulgated, enforced
or entered any Law or Order (whether temporary, preliminary or permanent)
or taken any other action which prohibits, restricts or makes illegal the
consummation of the transactions contemplated by this Agreement.
(e) Registration Statement. The Registration Statement shall be effective
under the 1933 Act, no stop orders suspending the effectiveness of the
Registration Statement shall have been issued, no action, suit, proceeding
or investigation by the SEC to suspend the effectiveness thereof shall have
been initiated and be continuing, and all necessary approvals under state
securities Laws or the 1933 Act or 1934 Act relating to the issuance or
trading of the shares of PSS Common Stock issuable pursuant to the Merger
shall have been received.
(f) Nasdaq Listing. The shares of PSS Common Stock issuable pursuant to
the Merger shall have been approved for listing on the Nasdaq National
Market, subject to official notice of issuance.
(g) Tax Matters. Each Party shall have received a written opinion of
counsel from Alston & Bird LLP, in form reasonably satisfactory to such
Parties (the "Tax Opinion"), to the effect that (i) the Merger will
constitute a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, (ii) the exchange in the Merger of GSMS Common Stock
for PSS Common Stock will not give rise to gain or loss to the stockholders
of GSMS with respect to such exchange (except to the extent of any cash
received), and (iii) none of GSMS, Merger Corp. or PSS will recognize gain
or loss as a consequence of the Merger (except for amounts resulting from
any required change in accounting methods and any income and deferred gain
recognized pursuant to Treasury regulations issued under Section 1502 of
the Internal Revenue Code). In rendering such Tax Opinion, such counsel
shall be entitled to rely upon representations of officers of GSMS and PSS
reasonably satisfactory in form and substance to such counsel.
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9.2 Conditions to Obligations of PSS. The obligations of PSS to perform this
Agreement and consummate the Merger and the other transactions contemplated
hereby are subject to the satisfaction of the following conditions, unless
waived by PSS pursuant to Section 11.6(a):
(a) Representations and Warranties. The representations and warranties of
GSMS contained in this Agreement shall be true and correct in all material
respects at and as of the Effective Time with the same force and effect as
if made at and as of such time, except for (i) changes contemplated by this
Agreement and (ii) those representations and warranties which address
matters only as of a particular date (which shall be true and correct as of
such date).
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of GSMS to be performed and complied with pursuant
to this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all
material respects.
(c) Certificates. GSMS shall have delivered to PSS (i) a certificate,
dated as of the Effective Time and signed on its behalf by its chief
executive officer and its chief financial officer, to the effect that the
conditions set forth in Section 9.1 as relates to GSMS and in Section
9.2(a) and 9.2(b) have been satisfied, and (ii) certified copies of
resolutions duly adopted by GSMS's Board of Directors and stockholders
evidencing the taking of all corporate action necessary to authorize the
execution, delivery and performance of this Agreement, and the consummation
of the transactions contemplated hereby, all in such reasonable detail as
PSS and its counsel shall request.
(d) Opinion of Counsel. PSS shall have received an opinion of Testa,
Hurwitz & Thibeault LLP, counsel to GSMS, dated as of the Effective Time,
in form reasonably acceptable to PSS, and substantially covering such
matters set forth in Exhibit 3.
(e) Pooling Letters. PSS shall have received letters, addressed to PSS,
in form and substance reasonably acceptable to PSS, from Arthur Andersen
LLP, dated the date of this Agreement to the effect that PSS and its
Subsidiaries qualify as an entity that may be a party to a business
combination for which the pooling-of-interests accounting method would be
available, and dated as of the Effective Time to the effect that the Merger
will qualify for pooling-of-interests accounting treatment. PSS also shall
have received letters, dated the date of this Agreement and as of the
Effective Time, addressed to PSS, in form and substance reasonably
acceptable to PSS, from Ernst & Young LLP to the effect that GSMS and its
Subsidiaries qualify as an entity that may be party to a business
combination for which the pooling-of-interest accounting method would be
available.
(f) Affiliates Agreements. PSS shall have received from each affiliate of
GSMS and each affiliate of PSS the affiliates letters referred to in
Section 8.11.
(g) Hixon Employment. Hixon shall have executed and delivered to PSS an
employment agreement in form and substance reasonably satisfactory to PSS
and on terms and conditions no less favorable to Hixon than those contained
in the Hixon Employment Agreement.
9.3 Conditions to Obligations of GSMS. The obligations of GSMS to perform
this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following
conditions, unless waived by GSMS pursuant to Section 11.6(b):
(a) Representations and Warranties. The representations and warranties of
PSS contained in this Agreement shall be true and correct in all material
respects at and as of the Effective Time with the same force and effect as
if made at and as of such time, except for (i) changes contemplated by this
Agreement and (ii) those representations and warranties which address
matters only as of a particular date (which shall be true and correct as of
such date).
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of PSS to be performed and complied with pursuant
to this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all
material respects.
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(c) Certificates. PSS shall have delivered to GSMS (i) a certificate,
dated as of the Effective Time and signed on its behalf by its chief
executive officer and its chief financial officer, to the effect that the
conditions set forth in Section 9.1 as relates to PSS and in Section 9.3(a)
and 9.3(b) have been satisfied, and (ii) certified copies of resolutions
duly adopted by PSS's Board of Directors and stockholders and Merger
Corp.'s Board of Directors and sole stockholder evidencing the taking of
all corporate action necessary to authorize the execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby, all in such reasonable detail as GSMS and its counsel
shall request.
(d) Opinion of Counsel. GSMS shall have received an opinion of Alston &
Bird LLP, counsel to PSS, dated as of the Effective Time, in form
reasonably acceptable to GSMS, and substantially covering such matters set
forth in Exhibit 4.
(e) Pooling Letters. GSMS shall have received letters, addressed to GSMS,
in form and substance reasonably acceptable to GSMS, from Arthur Andersen
LLP, dated the date of this Agreement to the effect that PSS and its
Subsidiaries qualify as an entity that may be a party to a business
combination for which the pooling-of-interests accounting method would be
available, and dated as of the Effective Time to the effect that the Merger
will qualify for pooling-of-interests accounting treatment. GSMS also shall
have received letters, dated the date of this Agreement and as of the
Effective Time, addressed to GSMS, in form and substance reasonably
acceptable to GSMS, from Ernst & Young LLP to the effect that GSMS and its
Subsidiaries qualify as a business entity that may be a party to a business
combination for which the pooling-of-interests method of accounting would
be available.
(f) Affiliates Agreements. GSMS shall have received from each affiliate
of GSMS and each affiliate of PSS the affiliates letters referred to in
Section 8.11.
ARTICLE 10
Termination
10.1 Termination. Termination; Notwithstanding any other provision of this
Agreement, and notwithstanding the approval of this Agreement by the
stockholders of GSMS and PSS or both, this Agreement may be terminated and the
Merger abandoned at any time prior to the Effective Time:
(a) By mutual consent of PSS and GSMS; or
(b) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event of a material breach by
the other Party of any representation or warranty contained in this
Agreement which cannot be or has not been cured within 30 days after the
giving of written notice to the breaching Party of such breach, such that
the conditions set forth in Sections 9.2(a) and 9.3(a), as applicable,
would not then be satisfied by the breaching Party; or
(c) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event of a material breach by
the other Party of any covenant or agreement contained in this Agreement
which cannot be or has not been cured within 30 days after the giving of
written notice to the breaching Party of such breach, such that the
conditions set forth in Sections 9.2(b) and 9.3(b), as applicable, would
not then be satisfied by the breaching Party; or
(d) By either Party (provided that the terminating Party in not then in
material breach of any representation, warranty, covenant or other
agreement contained in this Agreement) in the event (i) any Consent of any
Regulatory Authority required for consummation of the Merger and the other
transactions contemplated hereby shall have been denied by final non-
appealable action of such authority or if any action taken by such
authority is not appealed within the time limit for appeal such that the
conditions set forth in Section 9.1(c) would not be satisfied, or (ii) the
stockholders of GSMS or PSS fail to vote their approval of
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the matters relating to this Agreement and the transactions contemplated
hereby at the Stockholders' Meetings where such matters were presented to
such stockholders for approval and voted upon; or
(e) By either Party in the event that the Merger shall not have been
consummated by June 30, 1998, if the failure to consummate the transactions
contemplated hereby on or before such date is not caused by any breach of
this Agreement by the Party electing to terminate pursuant to this Section
10.1(e); or
(f) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event that any of the
conditions precedent to the obligations of such Party to consummate the
Merger cannot be satisfied or fulfilled by the date specified in Section
10.1(e); or
(g) by either Party, if: (i) the Board of Directors of GSMS shall have
authorized, recommended, publicly proposed or publicly announced an
intention to authorize, recommend or propose to the stockholders of GSMS,
or has entered into an agreement with any Person (other than PSS) to effect
an alternative Acquisition Proposal or (ii) a tender offer or exchange
offer for 25% or more of the outstanding shares of GSMS Common Stock is
commenced and the Board of Directors of GSMS recommends that the
stockholders of the Company tender their shares in such tender or exchange
offer; provided that GSMS shall not be entitled to exercise any termination
rights under clause (i) or (ii) of this Section 10.1(g) unless (x) any
action of the Board of Directors of GSMS is taken in good faith by the
Board of Directors of GSMS after consultation with and consideration of the
advice of its outside counsel and financial advisors, in order to discharge
properly its fiduciary duties to its stockholders and (y) such Party has
complied with its obligations in Section 8.8;
(h) by PSS, if the Board of Directors of GSMS shall withdraw, modify or
change its approval or recommendation of this Agreement or the Merger in a
manner adverse to PSS, provided that PSS is not then in material breach of
any representation, warranty, covenant or agreement contained in this
Agreement;
(i) by either Party, if: (i) the Board of Directors of PSS shall have
authorized, recommended, publicly proposed or publicly announced an
intention to authorize, recommend or propose to the stockholders of PSS, or
has entered into an agreement with any Person (other than GSMS) to effect
an Acquisition Proposal or (ii) a tender offer or exchange offer for 25% or
more of the outstanding shares of PSS Common Stock is commenced and the
Board of Directors of PSS recommends that the stockholders of PSS tender
their shares in such tender or exchange offer; provided that PSS shall not
be entitled to exercise any termination rights under clause (i) or (ii) of
this Section 10.1(g) unless (x) any such Acquisition Proposal is
conditioned upon the termination by PSS of this Agreement, (y) any action
of the Board of Directors of PSS is taken in good faith by the Board of
Directors of PSS after consultation with and consideration of the advice of
its outside counsel and financial advisors, in order to discharge properly
its fiduciary duties to its stockholders and (z) such Party has complied
with its obligations in Section 8.8; or
(j) By GSMS, if the Board of Directors of PSS shall withdraw, modify or
change its approval or recommendation of the issuance of the PSS Common
Stock pursuant to this Agreement, provided that GSMS is not then in
material breach of any representation, warranty, covenant or agreement
contained in this Agreement.
10.2 Effect of Termination. In the event of the termination and abandonment
of this Agreement pursuant to Section 10.1, this Agreement shall become void
and have no effect, except that (i) the provisions of this Section 10.2 and
Article 11 and Section 8.6(b) shall survive any such termination and
abandonment, and (ii) a termination pursuant to Sections 10.1(b), 10.1(c) or
10.1(f) shall not relieve the breaching Party from Liability for an uncured
willful breach of a representation, warranty, covenant, or agreement giving
rise to such termination. The Stock Option Agreements shall be governed by
their own terms as to their termination.
10.3 Non-Survival of Representations and Covenants. The respective
representations, warranties, obligations, covenants, and agreements of the
Parties shall not survive the Effective Time except this Section 10.3 and
Articles 1, 2, 3, 4 and 11 and Sections 8.12 and 8.13
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<PAGE>
ARTICLE 11
Miscellaneous
11.1 Definitions.
(a) Except as otherwise provided herein, the capitalized terms set forth
below shall have the following meanings:
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
"Acquisition Proposal" with respect to a Party shall mean (a) a merger,
consolidation or similar transaction in which the Party is not the surviving
corporation or shall become a subsidiary of another corporation, (b) except as
permitted pursuant to the terms of this Agreement, the disposition, by sale,
lease, exchange or otherwise, of Assets representing 15% or more of the
consolidated Assets of such Party, (c) the issuance, sale or other disposition
of (including by way of merger, consolidation, shares exchanged or any similar
transaction) securities representing 20% of more of the voting power of such
Party.
"Affiliate" of a Person shall mean: (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by or
under common control with such Person; or (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any 10% or greater equity
or voting interest of such Person.
"Agreement" shall mean this Agreement and Plan of Merger, including the
Exhibits (other than the Stock Option Agreements) delivered pursuant hereto
and incorporated herein by reference.
"Assets" of a Person shall mean all of the assets, properties, businesses
and rights of such Person of every kind, nature, character and description,
whether real, personal or mixed, tangible or intangible, accrued or
contingent, or otherwise relating to or utilized in such Person's business,
directly or indirectly, in whole or in part, whether or not carried on the
books and records of such Person, and whether or not owned in the name of such
Person or any Affiliate of such Person and wherever located.
"Certificate of Merger" shall mean the Certificate of Merger to be executed
by GSMS and filed with the Secretary of State of the State of Delaware
relating to the Merger as contemplated by Section 1.1.
"Closing Date" shall mean the date on which the Closing occurs.
"Confidentiality Agreement" shall mean that certain Confidentiality
Agreement, dated November 20, 1997, between GSMS and PSS.
"Consent" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order, or Permit.
"Contract" shall mean any written or oral agreement, arrangement,
authorization, commitment, contract, indenture, instrument, lease, obligation,
plan, practice, restriction, understanding, or undertaking of any kind or
character, or other document to which any Person is a party or that is binding
on any Person or its capital stock, Assets or business.
"Default" shall mean (i) any breach or violation of, default under,
contravention of, or conflict with, any Contract, Law, Order, or Permit, (ii)
any occurrence of any event that with the passage of time or the giving of
notice or both would constitute a breach or violation of, default under,
contravention of, or conflict with, any Contract, Law, Order, or Permit, or
(iii) any occurrence of any event that with or without the passage of time or
the giving of notice would give rise to a right of any Person to exercise any
remedy or obtain any relief under,
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<PAGE>
terminate or revoke, suspend, cancel, or modify or change the current terms
of, or renegotiate, or to accelerate the maturity or performance of, or to
increase or impose any Liability under, any Contract, Law, Order, or Permit,
where, in any such event, such Default is reasonably likely to have,
individually or in the aggregate, a GSMS Material Adverse Effect or a PSS
Material Adverse Effect, as applicable.
"DGCL" shall mean the Delaware General Corporation Law.
"Environmental Laws" shall mean all Laws relating to pollution or protection
of human health or the environment (including ambient air, surface water,
ground water, land surface, or subsurface strata) and which are administered,
interpreted, or enforced by the United States Environmental Protection Agency
and state and local agencies with jurisdiction over, and including common law
in respect of, pollution or protection of the environment, including the
Comprehensive Environmental Response Compensation and Liability Act, as
amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"), and other Laws
relating to emissions, discharges, releases, or threatened releases of any
Hazardous Material, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of any
Hazardous Material.
"Equity Rights" shall mean all arrangements, calls, commitments, Contracts,
options, rights to subscribe to, scrip, understandings, warrants, or other
binding obligations of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of the capital stock of a
Person or by which a Person is or may be bound to issue additional shares of
its capital stock or other Equity Rights.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exhibits" 1.1, 1.2, 2, 3 and 4 shall mean the Exhibits so marked, copies of
which are attached to this Agreement. Such Exhibits are hereby incorporated by
reference herein and made a part hereof, and may be referred to in this
Agreement and any other related instrument or document without being attached
hereto.
"FBCA" shall mean the Florida Business Corporation Act.
"GAAP" shall mean generally accepted accounting principles, consistently
applied during the periods involved.
"GSMS Common Stock" shall mean the $0.01 par value common stock of GSMS.
"GSMS Disclosure Memorandum" shall mean the written information entitled
"GSMS, Inc. Disclosure Memorandum" delivered prior to the date of this
Agreement to PSS describing in reasonable detail the matters contained therein
and, with respect to each disclosure made therein, specifically referencing
each Section of this Agreement under which such disclosure is being made.
Information disclosed with respect to one Section shall not be deemed to be
disclosed for purposes of any other Section not specifically referenced with
respect thereto.
"GSMS Entities" shall mean, collectively, GSMS and all GSMS Subsidiaries.
"GSMS Financial Statements" shall mean (i) the consolidated balance sheets
(including related notes and schedules, if any) of GSMS as of September 30,
1997, and as of December 31, 1996 and 1995, and the related statements of
income, changes in stockholders' equity, and cash flows (including related
notes and schedules, if any) for the nine months ended September 30, 1997, and
for each of the three fiscal years ended December 31, 1996, 1995 and 1994, as
filed by GSMS in SEC Documents, and (ii) the consolidated balance sheets of
GSMS (including related notes and schedules, if any) and related statements of
income, changes in stockholders' equity, and cash flows (including related
notes and schedules, if any) included in SEC Documents filed with respect to
periods ended subsequent to September 30, 1997.
"GSMS Material Adverse Effect" shall mean an event, change or occurrence
which, individually or in the aggregate, has a material adverse impact on (i)
the financial position, business, or results of operations of GSMS
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and its Subsidiaries, taken as a whole, or (ii) the ability of GSMS to perform
its obligations under this Agreement or to consummate the Merger or the other
transactions contemplated by this Agreement.
"GSMS Stock Option Agreement" shall mean the stock option agreement of even
date herewith substantially in the form of Exhibit 1.1 hereto.
"GSMS Stock Plans" shall mean the existing stock option and other stock-
based compensation plans of GSMS designated as follows: 1992 Stock Plan and
1997 Stock Plan.
"GSMS Subsidiaries" shall mean the Subsidiaries of GSMS, which shall include
the GSMS Subsidiaries described in Section 5.4 and any corporation or other
organization acquired as a Subsidiary of GSMS in the future and held as a
Subsidiary by GSMS at the Effective Time.
"GSMS Voting Agreement" shall mean the Voting Agreement in the form of
Exhibit 5.1 hereto executed and delivered as of the date of this Agreement by
GSMS and certain shareholders of PSS identified on Schedule I of such voting
agreement.
"Hazardous Material" shall mean (i) any hazardous substance, hazardous
material, hazardous waste, regulated substance, or toxic substance (as those
terms are defined by any applicable Environmental Laws) and (ii) any
chemicals, pollutants, contaminants, petroleum, petroleum products, or oil
(and specifically shall include asbestos requiring abatement, removal, or
encapsulation pursuant to the requirements of governmental authorities and any
polychlorinated biphenyls).
"Hixon Employment Agreement" shall mean an Employment Agreement, to be
negotiated in good faith by the parties, which shall be on terms no less
favorable to Hixon than those set forth in Exhibit 6 and which shall provide
for the payment of salary, bonus and benefits to Hixon which are not less that
those payable to Hixon by GSMS on the date of this Agreement.
"HSR Act" shall mean Section 7A of the Clayton Act, as added by Title II of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder.
"Intellectual Property" shall mean copyrights, patents, trademarks, service
marks, service names, trade names, applications therefor, technology rights
and licenses, computer software (including any source or object codes therefor
or documentation relating thereto), trade secrets, franchises, know-how,
inventions, and other intellectual property rights.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
"Joint Proxy Statement/Prospectus" shall mean the proxy statement used by
GSMS and PSS to solicit the approval of their respective stockholders of the
transactions contemplated by this Agreement, which shall include the
prospectus of PSS relating to the issuance of the PSS Common Stock to holders
of GSMS Common Stock.
"Knowledge" as used with respect to a Person (including references to such
Person being aware of a particular matter) shall mean those facts that are
known after due inquiry by the officers and directors of such Person.
"Law" shall mean any code, law (including common law), ordinance,
regulation, reporting or licensing requirement, rule, or statute applicable to
a Person or its Assets, Liabilities, or business, including those promulgated,
interpreted or enforced by any Regulatory Authority.
"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including costs
of investigation, collection and defense), claim, deficiency, guaranty or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for
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collection or deposit in the ordinary course of business) of any type, whether
accrued, absolute or contingent, liquidated or unliquidated, matured or
unmatured, or otherwise.
"Lien" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention
or other security arrangement, or any adverse right or interest, charge, or
claim of any nature whatsoever of, on, or with respect to any property or
property interest, other than (i) Liens for current property Taxes not yet due
and payable, and (iii) Liens which do not materially impair the use of or
title to the Assets subject to such Lien.
"Litigation" shall mean any action, arbitration, cause of action, claim,
complaint, criminal prosecution, governmental or other examination or
investigation, hearing, administrative or other proceeding relating to or
affecting a Party, its business, its Assets (including Contracts related to
it), or the transactions contemplated by this Agreement.
"Merger Corp. Common Stock" shall mean the $0.01 par value common stock of
Merger Corp.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Nasdaq National Market" shall mean the National Market System of the
National Association of Securities Dealers Automated Quotations System.
"Property" shall mean any property owned, leased, or operated by the Party
in question or by any of its Subsidiaries or in which such Party or Subsidiary
holds a security interest or other interest (including an interest in a
fiduciary capacity), and, where required by the context, includes the owner or
operator of such property, but only with respect to such property.
"Order" shall mean any administrative decision or award, decree, injunction,
judgment, order, quasi-judicial decision or award, ruling, or writ of any
federal, state, local or foreign or other court, arbitrator, mediator,
tribunal, administrative agency, or Regulatory Authority.
"Party" shall mean either GSMS or PSS, and "Parties" shall mean both GSMS
and PSS.
"Permit" shall mean any federal, state, local, and foreign governmental
approval, authorization, certificate, easement, filing, franchise, license,
notice, permit, or right to which any Person is a party or that is or may be
binding upon or inure to the benefit of any Person or its securities, Assets,
or business.
"Person" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in
a representative capacity.
"PSS Capital Stock" shall mean, collectively, the PSS Common Stock, the PSS
Preferred Stock and any other class or series of capital stock of PSS.
"PSS Common Stock" shall mean the $0.01 par value common stock of PSS,
together with any associated rights which may be granted under any shareholder
protection rights agreement which may be adopted by PSS after this date.
"PSS Disclosure Memorandum" shall mean the written information entitled
"PHYSICIAN SALES & SERVICE, INC. Disclosure Memorandum" delivered prior to the
date of this Agreement to GSMS describing in reasonable detail the matters
contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement under which such
disclosure is being made. Information disclosed with respect to one Section
shall not be deemed to be disclosed for purposes of any other Section not
specifically referenced with respect thereto.
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"PSS Entities" shall mean, collectively, PSS and all PSS Subsidiaries.
"PSS Financial Statements" shall mean (i) the consolidated balance sheets
(including related notes and schedules, if any) of PSS as of September 30,
1997, and as of March 28, 1997 and 1996, and the related statements of income,
changes in stockholders' equity, and cash flows (including related notes and
schedules, if any) for the six months ended September 30, 1997, and for each
of the three fiscal years ended March 28, 1997, March 29, 1996 and March 30,
1995, as filed by PSS in SEC Documents, and (ii) the consolidated balance
sheets of PSS (including related notes and schedules, if any) and related
statements of income, changes in stockholders' equity, and cash flows
(including related notes and schedules, if any) included in SEC Documents
filed with respect to periods ended subsequent to September 30, 1997.
"PSS Material Adverse Effect" shall mean an event, change or occurrence
which, individually or in the aggregate, has a material adverse impact on (i)
the financial position, business, or results of operations of PSS and its
Subsidiaries, taken as a whole, or (ii) the ability of PSS to perform its
obligations under this Agreement or to consummate the Merger or the other
transactions contemplated by this Agreement.
"PSS Preferred Stock" shall mean the $0.01 par value preferred stock of PSS.
"PSS Stock Option Agreement" shall mean the stock option agreement of even
date herewith substantially in the form of Exhibit 1.2 hereto.
"PSS Stock Plans" shall mean the existing stock option and other stock-based
compensation plans of PSS designated as follows: Amended and Restated 1994
Long-Term Stock Plan, Amended and Restated Long-Term Incentive Plan, Annual
Incentive Plan, Amended and Restated Directors' Stock Plan, Incentive Stock
Option Plan, Taylor Medical Stock Option Plans and the ELITE Deferred
Compensation Plan and Stock Option Grant Program.
"PSS Subsidiaries" shall mean the Subsidiaries of PSS, which shall include
the PSS Subsidiaries described in Section 6.4 and any corporation or other
organization acquired as a Subsidiary of PSS in the future and held as a
Subsidiary by PSS at the Effective Time.
"PSS Voting Agreement" shall mean the Voting Agreement in the form of
Exhibit 5.2 hereto executed and delivered as of the date of this Agreement by
GSMS and certain shareholders of PSS identified on Schedule I of such voting
agreement.
"Registration Statement" shall mean the Registration Statement on Form S-4,
or other appropriate form, including any pre-effective or post-effective
amendments or supplements thereto, filed with the SEC by PSS under the 1933
Act with respect to the shares of PSS Common Stock to be issued to the
stockholders of GSMS in connection with the transactions contemplated by this
Agreement.
"Regulatory Authorities" shall mean, collectively, the SEC, the NASD, the
Federal Trade Commission, the United States Department of Justice, and all
other federal, state, county, local or other governmental or regulatory
agencies, authorities (including self-regulatory authorities),
instrumentalities, commissions, boards or bodies having jurisdiction over the
Parties and their respective Subsidiaries.
"Representative" shall mean any investment banker, financial advisor,
attorney, accountant, consultant, or other representative engaged by a Person.
"SEC Documents" shall mean all forms, proxy statements, registration
statements, reports, schedules, and other documents filed, or required to be
filed, by a Party or any of its Subsidiaries with any Regulatory Authority
pursuant to the Securities Laws.
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"Securities Laws" shall mean the 1933 Act, the 1934 Act, the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, the Trust Indenture Act of 1939, as amended, and the rules and
regulations of any Regulatory Authority promulgated thereunder.
"Stock Option Agreements" shall mean the GSMS Stock Option Agreement and the
PSS Stock Option Agreement.
"Stockholders' Meetings" shall mean the respective meetings of the
stockholders of GSMS and PSS to be held pursuant to Section 8.1, including any
adjournment or adjournments thereof.
"Subsidiaries" shall mean all those corporations, associations, or other
business entities of which the entity in question either (i) owns or controls
50% or more of the outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 50% or more of the outstanding
equity securities is owned directly or indirectly by its parent (provided,
there shall not be included any such entity the equity securities of which are
owned or controlled in a fiduciary capacity), (ii) in the case of
partnerships, serves as a general partner, (iii) in the case of a limited
liability company, serves as a managing member, or (iv) otherwise has the
ability to elect a majority of the directors, trustees or managing members
thereof.
"Surviving Corporation" shall mean GSMS as the surviving corporation
resulting from the Merger.
"Tax Return" shall mean any report, return, information return, or other
information required to be supplied to a taxing authority in connection with
Taxes, including any return of an affiliated or combined or unitary group that
includes a Party or its Subsidiaries.
"Tax" or "Taxes" shall mean any federal, state, county, local, or foreign
taxes, charges, fees, levies, imposts, duties, or other assessments, including
income, gross receipts, excise, employment, sales, use, transfer, license,
payroll, franchise, severance, stamp, occupation, windfall profits,
environmental, federal highway use, commercial rent, customs duties, capital
stock, paid-up capital, profits, withholding, Social Security, single business
and unemployment, disability, real property, personal property, registration,
ad valorem, value added, alternative or add-on minimum, estimated, or other
tax or governmental fee of any kind whatsoever, imposes or required to be
withheld by the United States or any state, county, local or foreign
government or subdivision or agency thereof, including any interest,
penalties, and additions imposed thereon or with respect thereto.
(b) The terms set forth below shall have the meanings ascribed thereto in
the referenced sections:
<TABLE>
<S> <C>
Closing Section 1.2
Effective Time Section 1.3
ERISA Affiliate Section 5.14(b)
Exchange Agent Section 4.1
Exchange Ratio Section 3.1(c)
PSS Benefit Plans Section 6.14
PSS Contracts Section 6.15
PSS ERISA Plan Section 6.14
PSS Pension Plan Section 6.14
PSS SEC Reports Section 6.5(a)
GSMS Benefit Plans Section 5.14
GSMS Contracts Section 5.15
GSMS ERISA Plan Section 5.14
GSMS Options Section 3.6
GSMS Pension Plan Section 5.14
GSMS SEC Reports Section 5.5(a)
Merger Section 1.1
Takeover Laws Section 5.20
Tax Opinion Section 9.1(h)
</TABLE>
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(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 Expenses.
(a) Except as otherwise provided in this Section 11.2, each of the Parties
shall bear and pay all direct costs and expenses incurred by it or on its
behalf in connection with the transactions contemplated hereunder, including
filing, registration and application fees, printing fees, and fees and
expenses of its own financial or other consultants, investment bankers,
accountants, and counsel, except that each of the Parties shall bear and pay
one-half of the filing fees payable in connection with the Registration
Statement and the Joint Proxy Statement and printing costs incurred in
connection with the printing of the Registration Statement and the Joint Proxy
Statement.
(b) Notwithstanding the foregoing Section 11.2(a),
(i) if this Agreement is terminated by PSS pursuant to any of Sections
10.1(b), 10.1(c), 10.1(d)(ii) (as relates to approval of GSMS's
stockholders) or 10.1(f) (but only on the basis of the failure of GSMS to
satisfy any of the conditions enumerated in Section 9.2, other than Section
9.2(d), (e) (as relates to PSS), (f) or (g) (as relates to Affiliates of
PSS)), or
(ii) if the Merger is not consummated as a result of the failure of GSMS
to satisfy any of the conditions set forth in Section 9.1(a) (as such
section relates to approval by the stockholders of GSMS), Section 9.2
(other than Section 9.2(d), (e) (as relates to PSS), (f) or (g) (as relates
to Affiliates of PSS)), or
(iii) if this Agreement is terminated pursuant to Section 10.1(g) or (h),
then GSMS shall promptly pay PSS the sum of (x) $20,000,000, which amount
represents the Parties' best estimate of the value of the management time,
overhead, opportunity costs and other unallocated costs of PSS incurred by or
on behalf of PSS in connection with the transactions contemplated by this
Agreement which cannot be calculated with certainty, plus (y) all the out-of-
pocket costs and expenses of PSS, including costs of counsel, investment
bankers, actuaries and accountants up to but not exceeding an additional
$1,000,000; provided, however, that in no event shall the amount paid under
clause (x) plus the excess of (A) the "Section 8 Repurchase Consideration" (as
such term is defined in the GSMS Stock Option Agreement and regardless of
whether such repurchase option is exercised) over (B) (1) the aggregate
purchase price paid for such shares if the option has been exercised or (2)
the purchase price under the option if the option has not been exercised
exceed $24,000,000.
(c) Notwithstanding the foregoing Section 11.2(a),
(i) if this Agreement is terminated by GSMS pursuant to any of Sections
10.1(b), 10.1(c), 10.1(d)(ii) (as relates to approval of PSS's
stockholders) or 10.1(f) (but only on the basis of the failure of PSS to
satisfy any of the conditions enumerated in Section 9.3, other than Section
9.3(d), (e) (as relates to GSMS) or (f) (as relates to Affiliates of
GSMS)), or
(ii) if the Merger is not consummated as a result of the failure of PSS
to satisfy any of the conditions set forth in Section 9.1(a) (as such
section relates to approval by the stockholders of PSS), Section 9.3 (other
than Section 9.3(d), (e) (as relates to GSMS) or (f) (as relates to
Affiliates of GSMS)), or
(iii) if this Agreement is terminated pursuant to Section 10.1(i) or (j),
then PSS shall promptly pay GSMS the sum of (x) $20,000,000, which amount
represents the Parties' best estimate of the value of the management time,
overhead, opportunity costs and other unallocated costs of GSMS incurred by or
on behalf of GSMS in connection with the transactions contemplated by this
Agreement which cannot be calculated with certainty, plus (y) all the out-of-
pocket costs and expenses of GSMS, including costs of counsel, investment
bankers, actuaries and accountants up to but not exceeding an additional
$1,000,000; provided, however, that in no event shall the amount paid under
clause (x) plus the excess of (A) the "Section 8
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Repurchase Consideration" (as such term is defined in the GSMS Stock Option
Agreement and regardless of whether such repurchase option is exercised) over
(B) (1) the aggregate purchase price paid for such shares if the option has
been exercised or (2) the purchase price under the option if the option has
not been exercised exceed $24,000,000.
(d) Nothing contained in this Section 11.2 shall constitute or shall be
deemed to constitute liquidated damages for the willful breach by a Party of
the terms of this Agreement or otherwise limit the rights of the non-breaching
Party.
11.3 Brokers and Finders. Except for NationsBanc Montgomery Securities, Inc.
as to GSMS and except for BT Alex. Brown Incorporated as to PSS, each of the
Parties represents and warrants that neither it nor any of its officers,
directors, employees, or Affiliates has employed any broker or finder or
incurred any Liability for any financial advisory fees, investment bankers'
fees, brokerage fees, commissions, or finders' fees in connection with this
Agreement or the transactions contemplated hereby. In the event of a claim by
any broker or finder based upon his or its representing or being retained by
or allegedly representing or being retained by GSMS or by PSS, each of GSMS
and PSS, as the case may be, agrees to indemnify and hold the other Party
harmless of and from any Liability in respect of any such claim.
11.4 Entire Agreement. Except as otherwise expressly provided herein, this
Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral (except, as to Section
8.6(b), for the Confidentiality Agreement). Nothing in this Agreement
expressed or implied, is intended to confer upon any Person, other than the
Parties or their respective successors, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, other than as provided in
Sections 8.12 and 8.13.
11.5 Amendments. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the
approval of each of the Parties, whether before or after stockholder approval
of this Agreement has been obtained; provided, that after any such approval by
the holders of GSMS Common Stock, there shall be made no amendment that
requires further approval by such stockholders without the further approval of
such stockholders; and further provided, that after any such approval by the
holders of PSS Common Stock, the provisions of this Agreement relating to the
manner or basis in which shares of GSMS Common Stock will be exchanged for
shares of PSS Common Stock shall not be amended after the Stockholders'
Meetings in a manner adverse to the holders of PSS Common Stock without any
requisite approval of the holders of the issued and outstanding shares of PSS
Common Stock entitled to vote thereon.
11.6 Waivers.
(a) Prior to or at the Effective Time, PSS, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have the
right to waive any Default in the performance of any term of this Agreement by
GSMS, to waive or extend the time for the compliance or fulfillment by GSMS of
any and all of its obligations under this Agreement, and to waive any or all
of the conditions precedent to the obligations of PSS under this Agreement,
except any condition which, if not satisfied, would result in the violation of
any Law. No such waiver shall be effective unless in writing signed by a duly
authorized officer of PSS.
(b) Prior to or at the Effective Time, GSMS, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have the
right to waive any Default in the performance of any term of this Agreement by
PSS, to waive or extend the time for the compliance or fulfillment by PSS of
any and all of its obligations under this Agreement, and to waive any or all
of the conditions precedent to the obligations of GSMS under this Agreement,
except any condition which, if not satisfied, would result in the violation of
any Law. No such waiver shall be effective unless in writing signed by a duly
authorized officer of GSMS.
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(c) The failure of any Party at any time or times to require performance of
any provision hereof shall in no manner affect the right of such Party at a
later time to enforce the same or any other provision of this Agreement. No
waiver of any condition or of the breach of any term contained in this
Agreement in one or more instances shall be deemed to be or construed as a
further or continuing waiver of such condition or breach or a waiver of any
other condition or of the breach of any other term of this Agreement.
11.7 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise)
without the prior written consent of the other Party. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the Parties and their respective successors and assigns.
11.8 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand,
by facsimile transmission, by registered or certified mail, postage pre-paid,
or by courier or overnight carrier, to the persons at the addresses set forth
below (or at such other address as may be provided hereunder), and shall be
deemed to have been delivered as of the date so delivered:
GSMS: Gulf South Medical Supply, Inc.
One Woodgreen Place
Madison, MS 39110
Telecopy Number: (601) 853-4808
Attention: Stanton Keith Pritchard
Copy to Counsel: Testa, Hurwitz & Thibeault, LLP
125 High Street
High Street Tower
Boston, MA 02110
Telecopy Number: (617) 248-7100
Attention: William B. Asher, Jr.
PSS: Physician Sales & Service, Inc.
4345 Southpoint Boulevard
Jacksonville, FL 32216
Telecopy Number: (904) 332-3209
Attention: David A. Smith
Copy to Counsel: Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Telecopy Number: (404) 881-4777
Attention: J. Vaughan Curtis
11.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the State of Delaware, without regard to any
applicable conflicts of Laws.
11.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
11.11 Captions; Articles and Sections. The captions contained in this
Agreement are for reference purposes only and are not part of this Agreement.
Unless otherwise indicated, all references to particular Articles or Sections
shall mean and refer to the referenced Articles and Sections of this
Agreement.
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11.12 Interpretations. The parties acknowledge and agree that this Agreement
has been reviewed, negotiated, and accepted by all parties and their attorneys
and shall be construed and interpreted according to the ordinary meaning of
the words used so as fairly to accomplish the purposes and intentions of all
parties hereto. Both Parties contributed to the drafting of this Agreement.
11.13 Enforcement of Agreement. The Parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the Parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy
to which they are entitled at law or in equity.
11.14 Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
In Witness Whereof, each of the Parties has caused this Agreement to be
executed on its behalf by its duly authorized officers as of the day and year
first above written.
Physician Sales & Service, Inc.
/s/ Patrick Kelly
By: _________________________________
President & CEO
PSS Merger Corp.
/s/ Patrick Kelly
By: _________________________________
President
Gulf South Medical Supply, Inc.
/s/ Thomas Hixon
By: _________________________________
President
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ANNEX B
GULF SOUTH STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as
of December 14, 1997, by and between Gulf South Medical Supply, Inc., a
Delaware corporation ("Issuer"), and Physician Sales & Service, Inc., a
Florida corporation ("Grantee").
WHEREAS, Grantee and Issuer have entered into that certain Agreement and
Plan of Merger, dated as of December 14, 1997 (the "Merger Agreement"),
providing for, among other things, the merger of a wholly owned Subsidiary of
Grantee with and into Issuer, with Issuer as the surviving entity; and
WHEREAS, as a condition and inducement to Grantee's execution of the Merger
Agreement, Grantee has required that Issuer agree, and Issuer has agreed, to
grant Grantee the Option (as defined below);
NOW, THEREFORE, in consideration of the respective representations,
warranties, covenants and agreements set forth herein and in the Merger
Agreement, and intending to be legally bound hereby, Issuer and Grantee agree
as follows:
1. DEFINED TERMS. Capitalized terms which are used but not defined herein
shall have the meanings ascribed to such terms in the Merger Agreement.
2. GRANT OF OPTION. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to
purchase up to 3,253,066 shares (as adjusted as set forth herein, the "Option
Shares," which shall include the Option Shares before and after any transfer
of such Option Shares) of common stock, $.01 par value per share ("Issuer
Common Stock"), of Issuer at a purchase price per Option Share (subject to
adjustment as set forth herein, the "Purchase Price") equal to $29.06 per
share of Issuer Common Stock.
3. EXERCISE OF OPTION.
(a) Provided that (i) Grantee or Holder (as hereinafter defined), as
applicable, shall not be in material breach of its agreements or covenants
contained in this Agreement or the Merger Agreement, and (ii) no preliminary
or permanent injunction or other order against the delivery of shares covered
by the Option issued by any court of competent jurisdiction in the United
States shall be in effect, Holder may exercise the Option, in whole or in
part, at any time and from time to time following the occurrence of a Purchase
Event; provided that the Option shall terminate and be of no further force and
effect upon the earliest to occur of (A) the Effective Time, (B) termination
of the Merger Agreement in accordance with the terms thereof prior to the
occurrence of a Purchase Event or a Preliminary Purchase Event (other than a
termination of the Merger Agreement by Grantee pursuant to Section 10.1(b)
(but only if such termination was a result of a willful breach by Issuer) or
Section 10.1(c) thereof (each a "Default Termination")), (C) 120 days after a
Default Termination (provided, that if, within 120 days after such termination
of the Merger Agreement, a Purchase Event or a Preliminary Purchase Event
shall occur, then notwithstanding anything to the contrary contained herein
(including clause (D) of this sentence), this Option shall terminate 120 days
after the first occurrence of such an event), and (D) 120 days after any
termination of the Merger Agreement (other than a Default Termination)
following the occurrence of a Purchase Event or a Preliminary Purchase Event.
The term "Holder" shall mean the holder or holders of the Option from time to
time, and which initially is the Grantee. The rights set forth in Section 8
shall terminate when the right to exercise the Option terminates (other than
as a result of a complete exercise of the Option) as set forth herein.
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(b) As used herein, a "Purchase Event" means any of the following events
subsequent to the date of this Agreement:
(i) without Grantee's prior written consent, Issuer shall have
authorized, recommended, publicly proposed or publicly announced an
intention to authorize, recommend or propose, or entered into an agreement
with any person (other than Grantee or any Subsidiary of Grantee) to effect
an Acquisition Transaction (as defined below). As used herein, the term
Acquisition Transaction shall mean (A) a merger, consolidation or similar
transaction involving Issuer or any of its Subsidiaries (other than
transactions solely between Issuer's Subsidiaries), (B) except as permitted
pursuant to Section 7.1 of the Merger Agreement, the disposition, by sale,
lease, exchange or otherwise, of Assets of Issuer or any of its
Subsidiaries representing in either case 15% or more of the consolidated
assets of Issuer and its Subsidiaries, or (C) the issuance, sale or other
disposition of (including by way of merger, consolidation, share exchange
or any similar transaction) securities representing 25% or more of the
voting power of Issuer or any of its Subsidiaries (any of the foregoing, an
"Acquisition Transaction"); or
(ii) any person (other than Grantee or any Subsidiary of Grantee) shall
have acquired beneficial ownership (as such term is defined in Rule 13d-3
promulgated under the Exchange Act) of or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under the Exchange
Act), other than a group of which Grantee or any of its Subsidiaries of
Grantee is a member, shall have been formed which beneficially owns or has
the right to acquire beneficial ownership of, 25% or more of the then-
outstanding shares of Issuer Common Stock.
(c) As used herein, a "Preliminary Purchase Event" means any of the
following events:
(i) any person (other than Grantee or any Subsidiary of Grantee) shall
have commenced (as such term is defined in Rule 14d-2 under the Exchange
Act), or shall have filed a registration statement under the Securities Act
with respect to, a tender offer or exchange offer to purchase any shares of
Issuer Common Stock such that, upon consummation of such offer, such person
would own or control 25% or more of the then-outstanding shares of Issuer
Common Stock (such an offer being referred to herein as a "Tender Offer" or
an "Exchange Offer," respectively); or
(ii) the holders of Issuer Common Stock shall not have approved the
Merger Agreement at the meeting of such stockholders held for the purpose
of voting on the Merger Agreement, such meeting shall not have been held or
shall have been canceled prior to termination of the Merger Agreement, or
Issuer's Board of Directors shall have withdrawn or modified in a manner
adverse to Grantee the recommendation of Issuer's Board of Directors with
respect to the Merger Agreement, in each case after it shall have been
publicly announced that any person (other than Grantee or any Subsidiary of
Grantee) shall have (A) made, or disclosed an intention to make, a proposal
to engage in an Acquisition Transaction, (B) commenced a Tender Offer or
filed a registration statement under the Securities Act with respect to an
Exchange Offer, or (C) filed an application (or given a notice), whether in
draft or final form, under any federal or state statute or regulation
(including a notice filed under the HSR Act) seeking the Consent to an
Acquisition Transaction from any federal or state governmental or
regulatory authority or agency.
As used in this Agreement, "person" shall have the meaning specified in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
(d) In the event Holder wishes to exercise the Option, it shall send to
Issuer a written notice (the date of which being herein referred to as the
"Notice Date") specifying (i) the total number of Option Shares it intends to
purchase pursuant to such exercise and (ii) a place and date not earlier than
three business days nor later than 15 business days from the Notice Date for
the closing (the "Closing") of such purchase (the "Closing Date"). If prior
Consent of any governmental or regulatory agency or authority is required in
connection with such purchase, Issuer shall cooperate with Holder in the
filing of the required notice or application for such Consent and the
obtaining of such Consent and the Closing shall occur immediately following
receipt of such Consents (and expiration of any mandatory waiting periods).
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(e) Notwithstanding any other provision of this Agreement to the contrary,
in no event shall Holders (in the aggregate) purchase under the terms of this
Agreement that number of Option Shares which have a "Spread Value" in excess
of the remainder obtained by subtracting (A) all payments under Section
11.2(b) of the Merger Agreement from (B) $24,000,000 (the "Maximum Amount").
For purposes of this Agreement, "Spread Value" shall mean the difference
between (i) the product of (1) the sum of the total number of Option Shares
Holder (x) intends to purchase at the Closing Date pursuant to the exercise of
the Option and (y) previously purchased pursuant to the prior exercise of the
Option, and (2) the closing bid price of Issuer Common Stock as quoted on the
Nasdaq National Market on the last trading day immediately preceding the
Closing Date, and (ii) the product of (1) the total number of Option Shares
that Holder (x) intends to purchase at the Closing Date pursuant to the
exercise of the Option and (y) previously purchased pursuant to the prior
exercise of the Option and (2) the applicable Purchase Price of such Option
Shares. In the event the Spread Value exceeds the Maximum Amount, the number
of Option Shares which Holder is entitled to purchase at the Closing Date
shall be reduced to that number of shares necessary such that the Spread Value
equals or is less than the Maximum Amount.
4. PAYMENT AND DELIVERY OF CERTIFICATES.
(a) On each Closing Date, Holder shall (i) pay to Issuer, in immediately
available funds by wire transfer to a bank account designated by Issuer, an
amount equal to the Purchase Price multiplied by the number of Option Shares
to be purchased on such Closing Date, and (ii) present and surrender this
Agreement to the Issuer at the address of the Issuer specified in Section
13(f) hereof.
(b) At each Closing, simultaneously with the delivery of immediately
available funds and surrender of this Agreement as provided in Section 4(a),
(i) Issuer shall deliver to Holder (A) a certificate or certificates
representing the Option Shares to be purchased at such Closing, which Option
Shares shall be free and clear of all liens, claims, charges and encumbrances
of any kind whatsoever and subject to no pre-emptive rights, and (B) if the
Option is exercised in part only, an executed new agreement with the same
terms as this Agreement evidencing the right to purchase the balance of the
shares of Issuer Common Stock purchasable hereunder, and (ii) Holder shall
deliver to Issuer a letter agreeing that Holder shall not offer to sell or
otherwise dispose of such Option Shares in violation of applicable federal and
state law or of the provisions of this Agreement.
(c) In addition to any other legend that is required by applicable law,
certificates for the Option Shares delivered at each Closing shall be endorsed
with a restrictive legend which shall read substantially as follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF DECEMBER 14,
1997. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE HOLDER HEREOF
WITHOUT CHARGE UPON RECEIPT BY THE ISSUER OF A WRITTEN REQUEST THEREFOR.
It is understood and agreed that the above legend shall be removed by delivery
of substitute certificate(s) without such legend if Holder shall have
delivered to Issuer a copy of a letter from the staff of the SEC, or an
opinion of counsel in form and substance reasonably satisfactory to Issuer and
its counsel, to the effect that such legend is not required for purposes of
the Securities Act.
5. REPRESENTATIONS AND WARRANTIES OF ISSUER. Issuer hereby represents and
warrants to Grantee as follows:
(a) Issuer has all requisite corporate power and authority to enter into
this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Issuer. This Agreement has been duly executed and
delivered by Issuer. The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance by
Issuer with any of the provisions hereof will not (i) conflict with or
result in a breach of any provision of its Certificate of Incorporation or
Bylaws or a
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default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, condition or provisions of any note,
bond, debenture, mortgage, indenture, license, material agreement or other
material instrument or obligation to which Issuer is bound, or (ii) violate
any order, writ, injunction, decree, statute, rule or regulation applicable
to Issuer or any of its properties or assets. No Consent by any
governmental or regulatory agency or authority, other than compliance with
applicable federal and state securities laws or the filing of a
notification under the HSR Act, is required of Issuer in connection with
the execution and delivery by Issuer of this Agreement or the consummation
by Issuer of the transactions contemplated hereby.
(b) Issuer has taken all necessary corporate and other action to
authorize and reserve and to permit it to issue, and, at all times from the
date hereof until the obligation to deliver Issuer Common Stock upon the
exercise of the Option terminates, will have reserved for issuance, upon
exercise of the Option, the number of shares of Issuer Common Stock
necessary for Holder to exercise the Option, and Issuer will take all
necessary corporate action to authorize and reserve for issuance all
additional shares of Issuer Common Stock or other securities which may be
issued pursuant to Section 7 upon exercise of the Option. The shares of
Issuer Common Stock to be issued upon due exercise of the Option, including
all additional shares of Issuer Common Stock or other securities which may
be issuable pursuant to Section 7, upon issuance pursuant hereto, shall be
duly and validly issued, fully paid, and nonassessable, and shall be
delivered free and clear of all liens, claims, charges, and encumbrances of
any kind or nature whatsoever, including any preemptive rights of any
stockholder of Issuer.
(c) The authorized capital stock of Issuer consists of (i) 30,000,000
shares of Gazelle Common Stock, of which 16,347,064 shares are issued and
outstanding at this date, and (ii) 1,000,000 shares of preferred stock,
$.01 par value per share, none of which are issued and outstanding. Except
as disclosed in Section 5.3(b) of the Gazelle Disclosure Memorandum, there
are no other equity securities of Gazelle outstanding and no outstanding
Equity Rights relating to the capital stock of Gazelle.
6. REPRESENTATIONS AND WARRANTS OF GRANTEE. Grantee hereby represents and
warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter into
this Agreement and, subject to any approvals or Consents referred to
herein, to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Grantee. This Agreement has been duly executed and
delivered by Grantee.
(b) This Option is not being, and any Option Shares or other securities
acquired by Grantee upon exercise of the Option will not be, acquired with
a view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the Securities Laws.
7. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
(a) In the event of any change in Issuer Common Stock by reason of a stock
dividend, stock split, split-up, recapitalization, combination, exchange of
shares or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase Price therefor, shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transaction so that Holder shall receive, upon exercise of the Option,
the number and class of shares or other securities or property that Holder
would have received in respect of Issuer Common Stock if the Option had been
exercised immediately prior to such event, or the record date therefor, as
applicable. If any additional shares of Issuer Common Stock are issued after
the date of this Agreement (other than pursuant to an event described in the
first sentence of this Section 7(a)), the number of shares of Issuer Common
Stock subject to the Option shall be adjusted, without any further action by
or on behalf of the Issuer or Holder, so that, after such issuance, it,
together with any shares of Issuer Common Stock previously issued pursuant
hereto, equals 19.9% of the number of shares of Issuer Common Stock then
issued and outstanding, without giving effect to any shares subject to or
issued pursuant to the Option.
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(b) In the event that Issuer shall enter into an agreement: (i) to
consolidate with or merge into any person, other than Grantee or one of its
Subsidiaries, and shall not be the continuing or surviving corporation of such
consolidation or merger; (ii) to permit any person, other than Grantee or one
of its Subsidiaries, to merge into Issuer and Issuer shall be the continuing
or surviving corporation, but, in connection with such merger, the then
outstanding shares of Issuer Common Stock shall be changed into or exchanged
for stock or other securities of Issuer or any other person or cash or any
other property or the outstanding shares of Issuer Common Stock immediately
prior to such merger shall after such merger represent less than 50% of the
outstanding shares and share equivalents of the merged company; or (iii) to
sell or otherwise transfer all or substantially all of its Assets to any
person, other than Grantee or one of its Subsidiaries, then, and in each such
case, the agreement governing such transaction shall make proper provisions so
that the Option shall, upon the consummation of any such transaction and upon
the terms and conditions set forth herein, be converted into, or exchanged
for, an option (the "Substitute Option"), at the election of Holder, of either
(x) the Acquiring Corporation (as defined below), (y) any person that controls
the Acquiring Corporation, or (z) in the case of a merger described in clause
(ii), the Issuer (in each case, such person being referred to as the
"Substitute Option Issuer").
(c) The Substitute Option shall have the same terms as the Option, provided
that, if the terms of the Substitute Option cannot, for legal reasons, be the
same as the Option, such terms shall be as similar as possible and in no event
less advantageous to Holder. The Substitute Option Issuer shall also enter
into an agreement with each Holder of the Substitute Option in substantially
the same form as this Agreement, which shall be applicable to the Substitute
Option.
(d) The Substitute Option shall be exercisable for such number of shares of
the Substitute Common Stock (as hereinafter defined) as is equal to the
Assigned Value (as hereinafter defined) multiplied by the number of shares of
the Issuer Common Stock for which the Option was theretofore exercisable,
divided by the Average Price (as hereinafter defined). The exercise price of
the Substitute Option per share of the Substitute Common Stock (the
"Substitute Purchase Price") shall then be equal to the Purchase Price
multiplied by a fraction in which the numerator is the number of shares of the
Issuer Common Stock for which the Option was theretofore exercisable and the
denominator is the number of shares for which the Substitute Option is
exercisable.
(e) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (x) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than
Issuer), (y) Issuer in a merger in which Issuer is the continuing or
surviving person, and (z) the transferee of all or any substantial part of
the Issuer's assets (or the Assets of its Subsidiaries).
(ii) "Substitute Common Stock" shall mean the common stock having the
greatest voting rights to be issued by the Substitute Option Issuer upon
exercise of the Substitute Option.
(iii) "Assigned Value" shall mean the highest of (x) the price per share
of the Issuer Common Stock at which a Tender Offer or Exchange Offer
therefor has been made by any person (other than Grantee or any Subsidiary
of Grantee), (y) the price per share of the Issuer Common Stock to be paid
by any person (other than Grantee or any Subsidiary of Grantee) pursuant to
an agreement with Issuer, and (z) the highest closing sales price per share
of Issuer Common Stock quoted on the Nasdaq National Market (or if Issuer
Common Stock is not quoted on the Nasdaq National Market, the highest bid
price per share on any day as quoted on the principal trading market or
securities exchange on which such shares are traded as reported by a
recognized source chosen by Holder) within the 30-day period immediately
preceding the agreement; provided, that in the event of a sale of less than
all of Issuer's assets, the Assigned Value shall be the sum of the price
paid in such sale for such assets and the current market value of the
remaining assets of Issuer as determined by a nationally recognized
investment banking firm selected by Holder (or by a majority in interest of
the Holders if there shall be more than one Holder (a "Holder Majority")),
divided by the number of shares of the Issuer Common Stock outstanding at
the time of such sale. In the event that an exchange offer is made for the
Issuer Common Stock or an agreement is entered into for a merger or
consolidation involving consideration other than cash, the value of the
securities or other property issuable
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or deliverable in exchange for the Issuer Common Stock shall be determined
by a nationally recognized investment banking firm mutually selected by
Holder and Issuer (or if applicable, Acquiring Corporation), provided that
if a mutual selection cannot be made as to such investment banking firm, it
shall be selected by Holder. (If there shall be more than one Holder, any
such selection shall be made by a Holder Majority.)
(iv) "Average Price" shall mean the average closing price of a share of
the Substitute Common Stock for the one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of the Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is
the issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by Issuer, the person
merging into Issuer or by any company which controls or is controlled by
such merger person, as Holder may elect.
(f) In no event pursuant to any of the foregoing paragraphs shall the
Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of the Substitute Common Stock outstanding prior to exercise of the
Substitute Option. In the event that the Substitute Option would be
exercisable for more than 19.9% of the aggregate of the shares of Substitute
Common Stock but for this clause (f), the Substitute Option Issuer shall make
a cash payment to Holder equal to the excess of (i) the value of the
Substitute Option without giving effect to the limitation in this clause (f)
over (ii) the value of the Substitute Option after giving effect to the
limitation in this clause (f). This difference in value shall be determined by
a nationally recognized investment banking firm selected by Holder (or a
Holder Majority).
(g) Issuer shall not enter into any transaction described in subsection (b)
of this Section 7 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder and take all other actions that may be necessary so that the
provisions of this Section 7 are given full force and effect (including,
without limitation, any action that may be necessary so that the shares of
Substitute Common Stock are in no way distinguishable from or have lesser
economic value than other shares of common stock issued by the Substitute
Option Issuer).
(h) The provisions of Sections 8, 9 and 10 shall apply, with appropriate
adjustments, to any securities for which the Option becomes exercisable
pursuant to this Section 7 and, as applicable, references in such sections to
"Issuer," "Option," "Purchase Price" and "Issuer Common Stock" shall be deemed
to be references to "Substitute Option Issuer," "Substitute Option,"
"Substitute Purchase Price" and "Substitute Common Stock," respectively.
8. REPURCHASE AT THE OPTION OF HOLDER.
(a) Subject to the last sentence of Section 3(a), at the request of Holder
at any time commencing upon the first occurrence of a Repurchase Event (as
defined in Section 8(d)) and ending 12 months immediately thereafter, Issuer
shall repurchase from Holder the Option and all shares of Issuer Common Stock
purchased by Holder pursuant hereto with respect to which Holder then has
beneficial ownership. The date on which Holder exercises its rights under this
Section 8 is referred to as the "Request Date." Such repurchase shall be at an
aggregate price (the "Section 8 Repurchase Consideration") equal to the sum
of:
(i) the aggregate Purchase Price paid by Holder for any shares of Issuer
Common Stock acquired by Holder pursuant to the Option with respect to
which Holder then has beneficial ownership;
(ii) the excess, if any, of (x) the Applicable Price (as defined below)
for each share of Issuer Common Stock over (y) the Purchase Price (subject
to adjustment pursuant to Section 7), multiplied by the number of shares of
Issuer Common Stock with respect to which the Option has not been
exercised; and
(iii) the excess, if any, of the Applicable Price over the Purchase Price
(subject to adjustment pursuant to Section 7) paid (or, in the case of
Option Shares with respect to which the Option has been exercised but the
Closing Date has not occurred, payable) by Holder for each share of Issuer
Common Stock with respect to which the Option has been exercised and with
respect to which Holder then has beneficial ownership, multiplied by the
number of such shares.
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<PAGE>
Notwithstanding the foregoing, in no event shall the sum of (A) the remainder
obtained by subtracting (1) the aggregate Purchase Price paid from (2) the
Section 8 Repurchase Consideration plus (B) all payments received by Gator, if
any, under Section 11.2(b) of the Merger Agreement, exceed $24,000,000.
(b) If Holder exercises its rights under this Section 8, Issuer shall,
within ten business days after the Request Date, pay the Section 8 Repurchase
Consideration to Holder in immediately available funds, and contemporaneously
with such payment Holder shall surrender to Issuer the Option and the
certificates evidencing the shares of Issuer Common Stock purchased thereunder
with respect to which Holder then has beneficial ownership, and Holder shall
warrant that it has sole record and beneficial ownership of such shares and
that the same are then free and clear of all liens, claims, charges and
encumbrances of any kind whatsoever. Notwithstanding the foregoing, to the
extent that prior notification to or Consent of any governmental or regulatory
agency or authority is required in connection with the payment of all or any
portion of the Section 8 Repurchase Consideration, Holder shall have the
ongoing option to revoke its request for repurchase pursuant to Section 8, in
whole or in part, or to require that Issuer deliver from time to time that
portion of the Section 8 Repurchase Consideration that it is not then so
prohibited from paying and promptly file the required notice or application
for Consent and expeditiously process the same (and each party shall cooperate
with the other in the filing of any such notice or application and the
obtaining of any such Consent). If any governmental or regulatory agency or
authority disapproves of any part of Issuer's proposed repurchase pursuant to
this Section 8, Issuer shall promptly give notice of such fact to Holder. If
any governmental or regulatory agency or authority prohibits the repurchase in
part but not in whole, then Holder shall have the right (i) to revoke the
repurchase request or (ii) to the extent permitted by such agency or
authority, determine whether the repurchase should apply to the Option and/or
Option Shares and to what extent to each, and Holder shall thereupon have the
right to exercise the Option as to the number of Option Shares for which the
Option was exercisable at the Request Date less the sum of the number of
shares covered by the Option in respect of which payment has been made
pursuant to Section 8(a)(ii) and the number of shares covered by the portion
of the Option (if any) that has been repurchased. Holder shall notify Issuer
of its determination under the preceding sentence within five business days of
receipt of notice of disapproval of the repurchase.
(c) For purposes of this Agreement, the "Applicable Price" means the highest
of (i) the highest price per share of Issuer Common Stock paid for any such
share by the person or groups described in Section 8(d)(i), (ii) the price per
share of Issuer Common Stock received by holders of Issuer Common Stock in
connection with any merger or other business combination transaction described
in Section 7(b)(i), 7(b)(ii) or 7(b)(iii), or (iii) the highest closing sales
price per share of Issuer Common Stock quoted on the Nasdaq National Market
(or if Issuer Common Stock is not quoted on the Nasdaq National Market, the
highest bid price per share as quoted on the principal trading market or
securities exchange on which such shares are traded as reported by a
recognized source chosen by Holder) during the 60 business days preceding the
Request Date; provided, however, that in the event of a sale of less than all
of Issuer's Assets, the Applicable Price shall be the sum of the price paid in
such sale for such assets and the current market value of the remaining assets
of Issuer as determined by an independent nationally recognized investment
banking firm selected by Holder and reasonably acceptable to Issuer (which
determination shall be conclusive for all purposes of this Agreement), divided
by the number of shares of the Issuer Common Stock outstanding at the time of
such sale. If the consideration to be offered, paid or received pursuant to
either of the foregoing clauses (i) or (ii) shall be other than in cash, the
value of such consideration shall be determined in good faith by an
independent nationally recognized investment banking firm selected by Holder
and reasonably acceptable to Issuer, which determination shall be conclusive
for all purposes of this Agreement.
(d) As used herein, "Repurchase Event" shall occur if (i) any person (other
than Grantee or any Subsidiary of Grantee) shall have acquired beneficial
ownership (as such term is defined in Rule 13d-3 promulgated under the
Exchange Act), or the right to acquire beneficial ownership, or any "group"
(as such term is defined under the Exchange Act) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of 50% or
more of the then-outstanding shares of Issuer Common Stock, or (ii) any of the
transactions described in Section 7(b)(i), 7(b)(ii) or 7(b)(iii) shall be
consummated.
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<PAGE>
9. REGISTRATION RIGHTS.
(a) Following termination of the Merger Agreement, Issuer shall, subject to
the conditions of subparagraph (c) below, if requested by any Holder,
including Grantee and any permitted transferee ("Selling Holder"), as
expeditiously as possible prepare and file a registration statement under the
Securities Laws if necessary in order to permit the sale or other disposition
of any or all shares of Issuer Common Stock or other securities that have been
acquired by or are issuable to Selling Holder upon exercise of the Option in
accordance with the intended method of sale or other disposition stated by
Holder in such request, including, without limitation, a "shelf" registration
statement under Rule 415 under the Securities Act or any successor provision,
and Issuer shall use its best efforts to qualify such shares or other
securities for sale under any applicable state securities laws.
(b) If Issuer at any time after the exercise of the Option proposes to
register any shares of Issuer Common Stock under the Securities Laws in
connection with an underwritten public offering of such Issuer Common Stock,
Issuer will promptly give written notice to Holder of its intention to do so
and, upon the written request of Holder given within 30 days after receipt of
any such notice (which request shall specify the number of shares of Issuer
Common Stock intended to be included in such underwritten public offering by
Selling Holder), Issuer will cause all such shares, the holders of which shall
have requested participation in such registration, to be so registered and
included in such underwritten public offering; provided, that Issuer may elect
to not cause any such shares to be so registered (i) if the underwriters in
good faith object for valid business reasons, or (ii) in the case of a
registration solely to implement a dividend reinvestment or similar plan, an
employee benefit plan or a registration filed on Form S-4 or any successor
form, or a registration filed on a form which does not permit registrations of
resales; provided, further, that such election pursuant to clause (i) may only
be made two times. If some but not all the shares of Issuer Common Stock, with
respect to which Issuer shall have received requests for registration pursuant
to this subparagraph (b), shall be excluded from such registration, Issuer
shall make appropriate allocation of shares to be registered among Selling
Holders and any other person (other than Issuer or any person exercising
demand registration rights in connection with such registration) who or which
is permitted to register their shares of Issuer Common Stock in connection
with such registration pro rata in the proportion that the number of shares
requested to be registered by each Selling Holder bears to the total number of
shares requested to be registered by all persons then desiring to have Issuer
Common Stock registered for sale.
(c) Issuer shall use all reasonable efforts to cause each registration
statement referred to in subparagraph (a) above to become effective and to
obtain all consents or waivers of other parties which are required therefor
and to keep such registration statement effective, provided, that Issuer may
delay any registration of Option Shares required pursuant to subparagraph (a)
above for a period not exceeding 90 days provided Issuer shall in good faith
determine that any such registration would adversely affect an offering or
contemplated offering of other securities by Issuer, and Issuer shall not be
required to register Option Shares under the Securities Laws pursuant to
subparagraph (a) above:
(i) prior to the earliest of (a) termination of the Merger Agreement
pursuant to Section 10.1 thereof, (b) failure to obtain the requisite
stockholder approval pursuant to Section 9.1(a) of the Merger Agreement,
and (c) a Purchase Event or a Preliminary Purchase Event;
(ii) on more than two occasions;
(iii) more than once during any calendar year;
(iv) within 90 days after the effective date of a registration referred
to in subparagraph (b) above pursuant to which the Selling Holders
concerned were afforded the opportunity to register such shares under the
Securities Laws and such shares were registered as requested; and
(v) unless a request therefor is made to Issuer by Selling Holders
holding at least 25% or more of the aggregate number of Option Shares then
outstanding.
In addition to the foregoing, Issuer shall not be required to maintain the
effectiveness of any registration statement after the expiration of 120 days
from the effective date of such registration statement. Issuer shall use
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<PAGE>
all reasonable efforts to make any filings, and take all steps, under all
applicable state securities laws to the extent necessary to permit the sale or
other disposition of the Option Shares so registered in accordance with the
intended method of distribution for such shares, provided, that Issuer shall
not be required to consent to general jurisdiction or qualify to do business
in any state where it is not otherwise required to so consent to such
jurisdiction or to so qualify to do business.
(d) Except where applicable state law prohibits such payments, Issuer will
pay all expenses (including without limitation registration fees,
qualification fees, blue sky fees and expenses (including the fees and
expenses of counsel), accounting expenses, legal expenses including the
reasonable fees and expenses of one counsel to the Selling Holders, printing
expenses, expenses of underwriters, excluding discounts and commissions but
including liability insurance if Issuer so desires or the underwriters so
require, and the reasonable fees and expenses of any necessary special
experts) in connection with each registration pursuant to subparagraph (a) or
(b) above (including the related offerings and sales by Selling Holders) and
all other qualifications, notifications or exemptions pursuant to subparagraph
(a) or (b) above. Underwriting discounts and commissions relating to Option
Shares and any other expenses incurred by such Selling Holders in connection
with any such registration shall be borne by such Selling Holders.
(e) In connection with any registration under subparagraph (a) or (b) above
Issuer hereby indemnifies the Selling Holders, and each underwriter thereof,
including each person, if any, who controls such holder or underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, losses,
claims, damages and liabilities caused by any untrue, or alleged untrue,
statement of a material fact contained in any registration statement or
prospectus or notification or offering circular (including any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission,
or alleged omission, to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such expenses, losses, claims, damages or liabilities of such
indemnified party are caused by any untrue statement or alleged untrue
statement that was included by Issuer in any such registration statement or
prospectus or notification or offering circular (including any amendments or
supplements thereto) in reliance upon and in conformity with, information
furnished in writing to Issuer by such indemnified party expressly for use
therein, and Issuer and each officer, director and controlling person of
Issuer shall be indemnified by such Selling Holder, or by such underwriter, as
the case may be, for all such expenses, losses, claims, damages and
liabilities caused by any untrue, or alleged untrue, statement, that was
included by Issuer in any such registration statement or prospectus or
notification or offering circular (including any amendments or supplements
thereto) in reliance upon, and in conformity with, information furnished in
writing to Issuer by such holder or such underwriter, as the case may be,
expressly for such use.
Promptly upon receipt by a party indemnified under this subparagraph (e) of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party under this subparagraph (e), such indemnified party shall
notify the indemnifying party in writing of the commencement of such action,
but the failure so to notify the indemnifying party shall not relieve it of
any liability which it may otherwise have to any indemnified party under this
subparagraph (e). In case notice of commencement of any such action shall be
given to the indemnifying party as above provided, the indemnifying party
shall be entitled to participate in and, to the extent it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense of
such action at its own expense, with counsel chosen by it and satisfactory to
such indemnified party. The indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof,
but the fees and expenses of such counsel (other than reasonable costs of
investigation) shall be paid by the indemnified party unless (i) the
indemnifying party either agrees to pay the same, (ii) the indemnifying party
falls to assume the defense of such action with counsel' satisfactory to the
indemnified party, or (iii) the indemnified party has been advised by counsel
that one or more legal defenses may be available to the indemnifying party
that may be contrary to the interest of the indemnified party, in which case
the indemnifying party shall be entitled to assume the defense of such action
notwithstanding its obligation to bear fees and expenses of such counsel. No
indemnifying party shall be liable for any settlement entered into without its
consent, which consent may not be unreasonably withheld.
B-9
<PAGE>
If the indemnification provided for in this subparagraph (e) is unavailable
to a party otherwise entitled to be indemnified in respect of any expenses,
losses, claims, damages or liabilities referred to herein, then the
indemnifying party, in lieu of indemnifying such party otherwise entitled to
be indemnified, shall contribute to the amount paid or payable by such party
to be indemnified as a result of such expenses, losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the relative
benefits received by Issuer, all selling stockholders and the underwriters
from the offering of the securities and also the relative fault of Issuer, all
selling stockholders and the underwriters in connection with the statements or
omissions which resulted in such expenses, losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
amount paid or payable by a party as a result of the expenses, losses, claims,
damages and liabilities referred to above shall be deemed to include any legal
or other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim; provided, that in no case
shall any Selling Holder be responsible, in the aggregate, for any amount in
excess of the net offering proceeds attributable to its Option Shares included
in the offering. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Any obligation by any holder to indemnify shall be several
and not joint with other holders.
In connection with any registration pursuant to subparagraph (a) or (b)
above, Issuer and each Selling Holder (other than Grantee) shall enter into an
agreement containing the indemnification provisions of this subparagraph (e).
(f) Issuer shall comply with all reporting requirements and will do all such
other things as may be necessary to permit the expeditious sale at any time of
any Option Shares by Holder in accordance with and to the extent permitted by
any rule or regulation promulgated by the SEC from time to time, including,
without limitation, Rules 144 and 144A. Issuer shall at its expense provide
Holder with any information necessary in connection with the completion and
filing of any reports or forms required to be filed by them under the
Securities Laws, or required pursuant to any state securities laws or the
rules of any stock exchange.
(g) Issuer will pay all stamp taxes in connection with the issuance and the
sale of the Option Shares and in connection with the exercise of the Option,
and will save Holder harmless, without limitation as to time, against any and
all liabilities, with respect to all such taxes.
10. QUOTATION; LISTING. If Issuer Common Stock or any other securities to be
acquired upon exercise of the Option are then authorized for quotation or
trading or listing on the Nasdaq National Marketor any other securities
exchange, Issuer, upon the request of Holder, will promptly file an
application, if required, to authorize for quotation or trading or listing the
shares of Issuer Common Stock or other securities to be acquired upon exercise
of the Option on the Nasdaq National Market or any other securities exchange
and will use its best efforts to obtain approval, if required, of such
quotation or listing as soon as practicable.
11. DIVISION OF OPTION. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of Holder, upon presentation and
surrender of this Agreement at the principal office of Issuer for other
Agreements providing for Options of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of
Issuer Common Stock purchasable hereunder. The terms "Agreement" and "Option"
as used herein include any other Agreements and related Options for which this
Agreement (and the Option granted hereby) may be exchanged. Upon receipt by
Issuer of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Agreement, and (in the case of loss, theft
or destruction) of reasonably satisfactory indemnification, and upon surrender
and cancellation of this Agreement, if mutilated, Issuer will execute and
deliver a new Agreement of like tenor and date. Any such new Agreement
executed and delivered shall constitute an additional contractual obligation
on the part of Issuer, whether or not the Agreement so lost, stolen, destroyed
or mutilated shall at any time be enforceable by anyone.
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<PAGE>
12. MISCELLANEOUS.
(a) EXPENSES. Except as otherwise provided in Section 9, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its
behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
(b) WAIVER AND AMENDMENT. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon
the execution and delivery of a written agreement executed by the parties
hereto.
(c) ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARY; SEVERABILITY. This
Agreement, together with the Merger Agreement and the other documents and
instruments referred to herein and therein, between Grantee and Issuer (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and (b) is not intended to confer upon any person other
than the parties hereto (other than any transferees of the Option Shares or
any permitted transferee of this Agreement pursuant to Section 12(h)) any
rights or remedies hereunder. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or a federal or
state governmental or regulatory agency or authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. If for any reason such court
or regulatory agency determines that the Option does not permit Holder to
acquire, or does not require Issuer to repurchase, the full number of shares
of Issuer Common Stock as provided in Sections 3 and 8 (as adjusted pursuant
to Section 7), it is the express intention of Issuer to allow Holder to
acquire or to require Issuer to repurchase such lesser number of shares as may
be permissible without any amendment or modification hereof.
(d) GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware without regard to any
applicable conflicts of law rules.
(e) DESCRIPTIVE HEADINGS. The descriptive headings contained herein are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the addresses set forth in the Merger Agreement
(or at such other address for a party as shall be specified by like notice).
(g) COUNTERPARTS. This Agreement and any amendments hereto may be executed
in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed,
it being understood that both parties need not sign the same counterpart.
(h) ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party, except that Grantee may assign this
Agreement to a wholly owned Subsidiary of Grantee and Grantee may assign its
rights hereunder in whole or in part after the occurrence of a Purchase Event.
Subject to the preceding sentence, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties and their respective
successors and assigns.
(i) FURTHER ASSURANCES. In the event of any exercise of the Option by
Holder, Issuer and Holder shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in
order to consummate the transactions provided for by such exercise.
(j) SPECIFIC PERFORMANCE. The parties hereto agree that this Agreement may
be enforced by either party through specific performance, injunctive relief
and other equitable relief. Both parties further agree to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief
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<PAGE>
and that this provision is without prejudice to any other rights that the
parties hereto may have for any failure to perform this Agreement.
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
ATTEST: Gulf South Medical Supply, Inc.
/s/ Thomas Hixon
By: _________________________________ By: _________________________________
[CORPORATE SEAL]
ATTEST: Physician Sales & Service, Inc.
/s/ David A. Smith /s/ Patrick Kelly
By: _________________________________ By: _________________________________
[CORPORATE SEAL]
B-12
<PAGE>
ANNEX C
PSS STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as
of December 14, 1997, by and between Physician Sales & Service, Inc., a
Florida corporation ("Issuer"), and Gulf South Medical Supply, Inc., a
Delaware corporation ("Grantee").
WHEREAS, Grantee and Issuer have entered into that certain Agreement and
Plan of Merger, dated as of December 14, 1997 (the "Merger Agreement"),
providing for, among other things, the merger of a wholly owned Subsidiary of
Grantee with and into Issuer, with Issuer as the surviving entity; and
WHEREAS, as a condition and inducement to Grantee's execution of the Merger
Agreement, Grantee has required that Issuer agree, and Issuer has agreed, to
grant Grantee the Option (as defined below);
NOW, THEREFORE, in consideration of the respective representations,
warranties, covenants and agreements set forth herein and in the Merger
Agreement, and intending to be legally bound hereby, Issuer and Grantee agree
as follows:
1. DEFINED TERMS. Capitalized terms which are used but not defined herein
shall have the meanings ascribed to such terms in the Merger Agreement.
2. GRANT OF OPTION. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to
purchase up to 8,098,523 shares (as adjusted as set forth herein, the "Option
Shares," which shall include the Option Shares before and after any transfer
of such Option Shares) of common stock, $.01 par value per share ("Issuer
Common Stock"), of Issuer at a purchase price per Option Share (subject to
adjustment as set forth herein, the "Purchase Price") equal to $23.00 per
share of Issuer Common Stock.
3. EXERCISE OF OPTION.
(a) Provided that (i) Grantee or Holder (as hereinafter defined), as
applicable, shall not be in material breach of its agreements or covenants
contained in this Agreement or the Merger Agreement, and (ii) no preliminary
or permanent injunction or other order against the delivery of shares covered
by the Option issued by any court of competent jurisdiction in the United
States shall be in effect, Holder may exercise the Option, in whole or in
part, at any time and from time to time following the occurrence of a Purchase
Event; provided that the Option shall terminate and be of no further force and
effect upon the earliest to occur of (A) the Effective Time, (B) termination
of the Merger Agreement in accordance with the terms thereof prior to the
occurrence of a Purchase Event or a Preliminary Purchase Event (other than a
termination of the Merger Agreement by Grantee pursuant to Section 10.1(b)
(but only if such termination was a result of a willful breach by Issuer) or
Section 10.1(c) thereof (each a "Default Termination")), (C) 120 days after a
Default Termination (provided, that if, within 120 days after such termination
of the Merger Agreement, a Purchase Event or a Preliminary Purchase Event
shall occur, then notwithstanding anything to the contrary contained herein
(including clause (D) of this sentence), this Option shall terminate 120 days
after the first occurrence of such an event), and (D) 120 days after any
termination of the Merger Agreement (other than a Default Termination)
following the occurrence of a Purchase Event or a Preliminary Purchase Event.
The term "Holder" shall mean the holder or holders of the Option from time to
time, and which initially is the Grantee. The rights set forth in Section 8
shall terminate when the right to exercise the Option terminates (other than
as a result of a complete exercise of the Option) as set forth herein.
(b) As used herein, a "Purchase Event" means any of the following events
subsequent to the date of this Agreement:
(i) without Grantee's prior written consent, Issuer shall have
authorized, recommended, publicly proposed or publicly announced an
intention to authorize, recommend or propose, or entered into an
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<PAGE>
agreement with any person (other than Grantee or any Subsidiary of Grantee)
to effect an Acquisition Transaction (as defined below). As used herein,
the term Acquisition Transaction shall mean (A) a merger, consolidation or
similar transaction involving Issuer or any of its Subsidiaries (other than
transactions solely between Issuer's Subsidiaries), (B) except as permitted
pursuant to Section 7.1 of the Merger Agreement, the disposition, by sale,
lease, exchange or otherwise, of Assets of Issuer or any of its
Subsidiaries representing in either case 15% or more of the consolidated
assets of Issuer and its Subsidiaries, or (C) the issuance, sale or other
disposition of (including by way of merger, consolidation, share exchange
or any similar transaction) securities representing 25% or more of the
voting power of Issuer or any of its Subsidiaries (any of the foregoing, an
"Acquisition Transaction"); or
(ii) any person (other than Grantee or any Subsidiary of Grantee) shall
have acquired beneficial ownership (as such term is defined in Rule 13d-3
promulgated under the Exchange Act) of or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under the Exchange
Act), other than a group of which Grantee or any of its Subsidiaries of
Grantee is a member, shall have been formed which beneficially owns or has
the right to acquire beneficial ownership of, 25% or more of the then-
outstanding shares of Issuer Common Stock.
(c) As used herein, a "Preliminary Purchase Event" means any of the
following events:
(i) any person (other than Grantee or any Subsidiary of Grantee) shall
have commenced (as such term is defined in Rule 14d-2 under the Exchange
Act), or shall have filed a registration statement under the Securities Act
with respect to, a tender offer or exchange offer to purchase any shares of
Issuer Common Stock such that, upon consummation of such offer, such person
would own or control 25% or more of the then-outstanding shares of Issuer
Common Stock (such an offer being referred to herein as a "Tender Offer" or
an "Exchange Offer," respectively); or
(ii) the holders of Issuer Common Stock shall not have approved the
Merger Agreement and the amendment to the Articles of Incorporation of
Issuer to increase the authorized shares of Gator Common Stock at the
meeting of such stockholders held for such purposes, such meeting shall not
have been held or shall have been canceled prior to termination of the
Merger Agreement, or Issuer's Board of Directors shall have withdrawn or
modified in a manner adverse to Grantee the recommendation of Issuer's
Board of Directors with respect to the Merger Agreement, in each case after
it shall have been publicly announced that any person (other than Grantee
or any Subsidiary of Grantee) shall have (A) made, or disclosed an
intention to make, a proposal to engage in an Acquisition Transaction, (B)
commenced a Tender Offer or filed a registration statement under the
Securities Act with respect to an Exchange Offer, or (C) filed an
application (or given a notice), whether in draft or final form, under any
federal or state statute or regulation (including a notice filed under the
HSR Act) seeking the Consent to an Acquisition Transaction from any federal
or state governmental or regulatory authority or agency.
As used in this Agreement, "person" shall have the meaning specified in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
(d) In the event Holder wishes to exercise the Option, it shall send to
Issuer a written notice (the date of which being herein referred to as the
"Notice Date") specifying (i) the total number of Option Shares it intends to
purchase pursuant to such exercise and (ii) a place and date not earlier than
three business days nor later than 15 business days from the Notice Date for
the closing (the "Closing") of such purchase (the "Closing Date"). If prior
Consent of any governmental or regulatory agency or authority is required in
connection with such purchase, Issuer shall cooperate with Holder in the
filing of the required notice or application for such Consent and the
obtaining of such Consent and the Closing shall occur immediately following
receipt of such Consents (and expiration of any mandatory waiting periods).
(e) Notwithstanding any other provision of this Agreement to the contrary,
in no event shall Holders (in the aggregate) purchase under the terms of this
Agreement that number of Option Shares which have a "Spread Value" in excess
of the remainder obtained by subtracting (A) all payments under Section
11.2(c) of the Merger Agreement from (B) $24,000,000 (the "Maximum Amount").
For purposes of this Agreement, "Spread Value"
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shall mean the difference between (i) the product of (1) the sum of the total
number of Option Shares Holder (x) intends to purchase at the Closing Date
pursuant to the exercise of the Option and (y) previously purchased pursuant
to the prior exercise of the Option, and (2) the closing bid price of Issuer
Common Stock as quoted on the Nasdaq National Market on the last trading day
immediately preceding the Closing Date, and (ii) the product of (1) the total
number of Option Shares that Holder (x) intends to purchase at the Closing
Date pursuant to the exercise of the Option and (y) previously purchased
pursuant to the prior exercise of the Option and (2) the applicable Purchase
Price of such Option Shares. In the event the Spread Value exceeds the Maximum
Amount, the number of Option Shares which Holder is entitled to purchase at
the Closing Date shall be reduced to that number of shares necessary such that
the Spread Value equals or is less than the Maximum Amount.
4. PAYMENT AND DELIVERY OF CERTIFICATES.
(a) On each Closing Date, Holder shall (i) pay to Issuer, in immediately
available funds by wire transfer to a bank account designated by Issuer, an
amount equal to the Purchase Price multiplied by the number of Option Shares
to be purchased on such Closing Date, and (ii) present and surrender this
Agreement to the Issuer at the address of the Issuer specified in Section
13(f) hereof.
(b) At each Closing, simultaneously with the delivery of immediately
available funds and surrender of this Agreement as provided in Section 4(a),
(i) Issuer shall deliver to Holder (A) a certificate or certificates
representing the Option Shares to be purchased at such Closing, which Option
Shares shall be free and clear of all liens, claims, charges and encumbrances
of any kind whatsoever and subject to no pre-emptive rights, and (B) if the
Option is exercised in part only, an executed new agreement with the same
terms as this Agreement evidencing the right to purchase the balance of the
shares of Issuer Common Stock purchasable hereunder, and (ii) Holder shall
deliver to Issuer a letter agreeing that Holder shall not offer to sell or
otherwise dispose of such Option Shares in violation of applicable federal and
state law or of the provisions of this Agreement.
(c) In addition to any other legend that is required by applicable law,
certificates for the Option Shares delivered at each Closing shall be endorsed
with a restrictive legend which shall read substantially as follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF DECEMBER
14, 1997. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE HOLDER
HEREOF WITHOUT CHARGE UPON RECEIPT BY THE ISSUER OF A WRITTEN REQUEST
THEREFOR.
It is understood and agreed that the above legend shall be removed by delivery
of substitute certificate(s) without such legend if Holder shall have
delivered to Issuer a copy of a letter from the staff of the SEC, or an
opinion of counsel in form and substance reasonably satisfactory to Issuer and
its counsel, to the effect that such legend is not required for purposes of
the Securities Act.
5. REPRESENTATIONS AND WARRANTIES OF ISSUER. Issuer hereby represents and
warrants to Grantee as follows:
(a) Issuer has all requisite corporate power and authority to enter into
this Agreement and, subject to any approvals or consents referred to herein,
to consummate the transactions contemplated hereby. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of
Issuer. This Agreement has been duly executed and delivered by Issuer. The
execution and delivery of this Agreement, the consummation of the transactions
contemplated hereby and compliance by Issuer with any of the provisions hereof
will not (i) conflict with or result in a breach of any provision of its
Certificate of Incorporation or Bylaws or a default (or give rise to any right
of termination, cancellation or acceleration) under any of the terms,
condition or provisions of any note, bond, debenture, mortgage, indenture,
license, material agreement or other material instrument or obligation to
which Issuer is bound, or (ii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Issuer or any of its properties or
assets. No Consent by any governmental or regulatory agency or authority,
other than compliance with applicable federal and state securities laws or the
filing of a notification under the HSR
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Act, is required of Issuer in connection with the execution and delivery by
Issuer of this Agreement or the consummation by Issuer of the transactions
contemplated hereby.
(b) Issuer has taken all necessary corporate and other action to authorize
and reserve and to permit it to issue, and, at all times from the date hereof
until the obligation to deliver Issuer Common Stock upon the exercise of the
Option terminates, will have reserved for issuance, upon exercise of the
Option, the number of shares of Issuer Common Stock necessary for Holder to
exercise the Option, and Issuer will take all necessary corporate action to
authorize and reserve for issuance all additional shares of Issuer Common
Stock or other securities which may be issued pursuant to Section 7 upon
exercise of the Option. The shares of Issuer Common Stock to be issued upon
due exercise of the Option, including all additional shares of Issuer Common
Stock or other securities which may be issuable pursuant to Section 7, upon
issuance pursuant hereto, shall be duly and validly issued, fully paid, and
nonassessable, and shall be delivered free and clear of all liens, claims,
charges, and encumbrances of any kind or nature whatsoever, including any
preemptive rights of any stockholder of Issuer.
(c) The authorized capital stock of Issuer consists of (i) 60,000,000 shares
of Gator Common Stock, of which 40,696,097 shares are issued and outstanding
at this date, and (ii) 1,000,000 shares of Gator Preferred Stock, none of
which are issued and outstanding. Except as disclosed in Section 6.3(b) of the
Gator Disclosure Memorandum, there are no other equity securities of Gator
outstanding and no outstanding Equity Rights relating to the capital stock of
Gator.
6. REPRESENTATIONS AND WARRANTS OF GRANTEE. Grantee hereby represents and
warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter into
this Agreement and, subject to any approvals or Consents referred to herein,
to consummate the transactions contemplated hereby. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of
Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) This Option is not being, and any Option Shares or other securities
acquired by Grantee upon exercise of the Option will not be, acquired with a
view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the Securities Laws.
7. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
(a) In the event of any change in Issuer Common Stock by reason of a stock
dividend, stock split, split-up, recapitalization, combination, exchange of
shares or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase Price therefor, shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transaction so that Holder shall receive, upon exercise of the Option,
the number and class of shares or other securities or property that Holder
would have received in respect of Issuer Common Stock if the Option had been
exercised immediately prior to such event, or the record date therefor, as
applicable. If any additional shares of Issuer Common Stock are issued after
the date of this Agreement (other than pursuant to an event described in the
first sentence of this Section 7(a)), the number of shares of Issuer Common
Stock subject to the Option shall be adjusted, without any further action by
or on behalf of the Issuer or Holder, so that, after such issuance, it,
together with any shares of Issuer Common Stock previously issued pursuant
hereto, equals 19.9% of the number of shares of Issuer Common Stock then
issued and outstanding, without giving effect to any shares subject to or
issued pursuant to the Option.
(b) In the event that Issuer shall enter into an agreement: (i) to
consolidate with or merge into any person, other than Grantee or one of its
Subsidiaries, and shall not be the continuing or surviving corporation of such
consolidation or merger; (ii) to permit any person, other than Grantee or one
of its Subsidiaries, to merge into Issuer and Issuer shall be the continuing
or surviving corporation, but, in connection with such merger, the then
outstanding shares of Issuer Common Stock shall be changed into or exchanged
for stock or other securities of Issuer or any other person or cash or any
other property or the outstanding shares of Issuer Common Stock immediately
prior to such merger shall after such merger represent less than 50% of the
outstanding shares and
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share equivalents of the merged company; or (iii) to sell or otherwise
transfer all or substantially all of its Assets to any person, other than
Grantee or one of its Subsidiaries, then, and in each such case, the agreement
governing such transaction shall make proper provisions so that the Option
shall, upon the consummation of any such transaction and upon the terms and
conditions set forth herein, be converted into, or exchanged for, an option
(the "Substitute Option"), at the election of Holder, of either (x) the
Acquiring Corporation (as defined below), (y) any person that controls the
Acquiring Corporation, or (z) in the case of a merger described in clause
(ii), the Issuer (in each case, such person being referred to as the
"Substitute Option Issuer").
(c) The Substitute Option shall have the same terms as the Option, provided
that, if the terms of the Substitute Option cannot, for legal reasons, be the
same as the Option, such terms shall be as similar as possible and in no event
less advantageous to Holder. The Substitute Option Issuer shall also enter
into an agreement with each Holder of the Substitute Option in substantially
the same form as this Agreement, which shall be applicable to the Substitute
Option.
(d) The Substitute Option shall be exercisable for such number of shares of
the Substitute Common Stock (as hereinafter defined) as is equal to the
Assigned Value (as hereinafter defined) multiplied by the number of shares of
the Issuer Common Stock for which the Option was theretofore exercisable,
divided by the Average Price (as hereinafter defined). The exercise price of
the Substitute Option per share of the Substitute Common Stock (the
"Substitute Purchase Price") shall then be equal to the Purchase Price
multiplied by a fraction in which the numerator is the number of shares of the
Issuer Common Stock for which the Option was theretofore exercisable and the
denominator is the number of shares for which the Substitute Option is
exercisable.
(e) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (x) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than
Issuer), (y) Issuer in a merger in which Issuer is the continuing or
surviving person, and (z) the transferee of all or any substantial part of
the Issuer's assets (or the Assets of its Subsidiaries).
(ii) "Substitute Common Stock" shall mean the common stock having the
greatest voting rights to be issued by the Substitute Option Issuer upon
exercise of the Substitute Option.
(iii) "Assigned Value" shall mean the highest of (x) the price per share
of the Issuer Common Stock at which a Tender Offer or Exchange Offer
therefor has been made by any person (other than Grantee or any Subsidiary
of Grantee), (y) the price per share of the Issuer Common Stock to be paid
by any person (other than Grantee or any Subsidiary of Grantee) pursuant to
an agreement with Issuer, and (z) the highest closing sales price per share
of Issuer Common Stock quoted on the Nasdaq National Market (or if Issuer
Common Stock is not quoted on the Nasdaq National Market, the highest bid
price per share on any day as quoted on the principal trading market or
securities exchange on which such shares are traded as reported by a
recognized source chosen by Holder) within the 30-day period immediately
preceding the agreement; provided, that in the event of a sale of less than
all of Issuer's assets, the Assigned Value shall be the sum of the price
paid in such sale for such assets and the current market value of the
remaining assets of Issuer as determined by a nationally recognized
investment banking firm selected by Holder (or by a majority in interest of
the Holders if there shall be more than one Holder (a "Holder Majority")),
divided by the number of shares of the Issuer Common Stock outstanding at
the time of such sale. In the event that an exchange offer is made for the
Issuer Common Stock or an agreement is entered into for a merger or
consolidation involving consideration other than cash, the value of the
securities or other property issuable or deliverable in exchange for the
Issuer Common Stock shall be determined by a nationally recognized
investment banking firm mutually selected by Holder and Issuer (or if
applicable, Acquiring Corporation), provided that if a mutual selection
cannot be made as to such investment banking firm, it shall be selected by
Holder. (If there shall be more than one Holder, any such selection shall
be made by a Holder Majority.)
(iv) "Average Price" shall mean the average closing price of a share of
the Substitute Common Stock for the one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of the Substitute Common Stock on the day
preceding such
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consolidation, merger or sale; provided that if Issuer is the issuer of the
Substitute Option, the Average Price shall be computed with respect to a
share of common stock issued by Issuer, the person merging into Issuer or
by any company which controls or is controlled by such merger person, as
Holder may elect.
(f) In no event pursuant to any of the foregoing paragraphs shall the
Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of the Substitute Common Stock outstanding prior to exercise of the
Substitute Option. In the event that the Substitute Option would be
exercisable for more than 19.9% of the aggregate of the shares of Substitute
Common Stock but for this clause (f), the Substitute Option Issuer shall make
a cash payment to Holder equal to the excess of (i) the value of the
Substitute Option without giving effect to the limitation in this clause (f)
over (ii) the value of the Substitute Option after giving effect to the
limitation in this clause (f). This difference in value shall be determined by
a nationally recognized investment banking firm selected by Holder (or a
Holder Majority).
(g) Issuer shall not enter into any transaction described in subsection (b)
of this Section 7 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder and take all other actions that may be necessary so that the
provisions of this Section 7 are given full force and effect (including,
without limitation, any action that may be necessary so that the shares of
Substitute Common Stock are in no way distinguishable from or have lesser
economic value than other shares of common stock issued by the Substitute
Option Issuer).
(h) The provisions of Sections 8, 9 and 10 shall apply, with appropriate
adjustments, to any securities for which the Option becomes exercisable
pursuant to this Section 7 and, as applicable, references in such sections to
"Issuer," "Option," "Purchase Price" and "Issuer Common Stock" shall be deemed
to be references to "Substitute Option Issuer," "Substitute Option,"
"Substitute Purchase Price" and "Substitute Common Stock," respectively.
8. REPURCHASE AT THE OPTION OF HOLDER.
(a) Subject to the last sentence of Section 3(a), at the request of Holder
at any time commencing upon the first occurrence of a Repurchase Event (as
defined in Section 8(d)) and ending 12 months immediately thereafter, Issuer
shall repurchase from Holder the Option and all shares of Issuer Common Stock
purchased by Holder pursuant hereto with respect to which Holder then has
beneficial ownership. The date on which Holder exercises its rights under this
Section 8 is referred to as the "Request Date." Such repurchase shall be at an
aggregate price (the "Section 8 Repurchase Consideration") equal to the sum
of:
(i) the aggregate Purchase Price paid by Holder for any shares of Issuer
Common Stock acquired by Holder pursuant to the Option with respect to
which Holder then has beneficial ownership;
(ii) the excess, if any, of (x) the Applicable Price (as defined below)
for each share of Issuer Common Stock over (y) the Purchase Price (subject
to adjustment pursuant to Section 7), multiplied by the number of shares of
Issuer Common Stock with respect to which the Option has not been
exercised; and
(iii) the excess, if any, of the Applicable Price over the Purchase Price
(subject to adjustment pursuant to Section 7) paid (or, in the case of
Option Shares with respect to which the Option has been exercised but the
Closing Date has not occurred, payable) by Holder for each share of Issuer
Common Stock with respect to which the Option has been exercised and with
respect to which Holder then has beneficial ownership, multiplied by the
number of such shares.
Notwithstanding the foregoing, in no event shall the sum of (A) the remainder
obtained by subtracting (1) the aggregate Purchase Price paid from (2) the
Section 8 Repurchase Consideration plus (B) all payments received by Gazelle,
if any, under Section 11.2(c) of the Merger Agreement, exceed $24,000,000.
(b) If Holder exercises its rights under this Section 8, Issuer shall,
within ten business days after the Request Date, pay the Section 8 Repurchase
Consideration to Holder in immediately available funds, and contemporaneously
with such payment Holder shall surrender to Issuer the Option and the
certificates evidencing the shares of Issuer Common Stock purchased thereunder
with respect to which Holder then has beneficial
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ownership, and Holder shall warrant that it has sole record and beneficial
ownership of such shares and that the same are then free and clear of all
liens, claims, charges and encumbrances of any kind whatsoever.
Notwithstanding the foregoing, to the extent that prior notification to or
Consent of any governmental or regulatory agency or authority is required in
connection with the payment of all or any portion of the Section 8 Repurchase
Consideration, Holder shall have the ongoing option to revoke its request for
repurchase pursuant to Section 8, in whole or in part, or to require that
Issuer deliver from time to time that portion of the Section 8 Repurchase
Consideration that it is not then so prohibited from paying and promptly file
the required notice or application for Consent and expeditiously process the
same (and each party shall cooperate with the other in the filing of any such
notice or application and the obtaining of any such Consent). If any
governmental or regulatory agency or authority disapproves of any part of
Issuer's proposed repurchase pursuant to this Section 8, Issuer shall promptly
give notice of such fact to Holder. If any governmental or regulatory agency
or authority prohibits the repurchase in part but not in whole, then Holder
shall have the right (i) to revoke the repurchase request or (ii) to the
extent permitted by such agency or authority, determine whether the repurchase
should apply to the Option and/or Option Shares and to what extent to each,
and Holder shall thereupon have the right to exercise the Option as to the
number of Option Shares for which the Option was exercisable at the Request
Date less the sum of the number of shares covered by the Option in respect of
which payment has been made pursuant to Section 8(a)(ii) and the number of
shares covered by the portion of the Option (if any) that has been
repurchased. Holder shall notify Issuer of its determination under the
preceding sentence within five business days of receipt of notice of
disapproval of the repurchase.
(c) For purposes of this Agreement, the "Applicable Price" means the highest
of (i) the highest price per share of Issuer Common Stock paid for any such
share by the person or groups described in Section 8(d)(i), (ii) the price per
share of Issuer Common Stock received by holders of Issuer Common Stock in
connection with any merger or other business combination transaction described
in Section 7(b)(i), 7(b)(ii) or 7(b)(iii), or (iii) the highest closing sales
price per share of Issuer Common Stock quoted on the Nasdaq National Market
(or if Issuer Common Stock is not quoted on the Nasdaq National Market, the
highest bid price per share as quoted on the principal trading market or
securities exchange on which such shares are traded as reported by a
recognized source chosen by Holder) during the 60 business days preceding the
Request Date; provided, however, that in the event of a sale of less than all
of Issuer's Assets, the Applicable Price shall be the sum of the price paid in
such sale for such assets and the current market value of the remaining assets
of Issuer as determined by an independent nationally recognized investment
banking firm selected by Holder and reasonably acceptable to Issuer (which
determination shall be conclusive for all purposes of this Agreement), divided
by the number of shares of the Issuer Common Stock outstanding at the time of
such sale. If the consideration to be offered, paid or received pursuant to
either of the foregoing clauses (i) or (ii) shall be other than in cash, the
value of such consideration shall be determined in good faith by an
independent nationally recognized investment banking firm selected by Holder
and reasonably acceptable to Issuer, which determination shall be conclusive
for all purposes of this Agreement.
(d) As used herein, "Repurchase Event" shall occur if (i) any person (other
than Grantee or any Subsidiary of Grantee) shall have acquired beneficial
ownership (as such term is defined in Rule 13d-3 promulgated under the
Exchange Act), or the right to acquire beneficial ownership, or any "group"
(as such term is defined under the Exchange Act) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of 50% or
more of the then-outstanding shares of Issuer Common Stock, or (ii) any of the
transactions described in Section 7(b)(i), 7(b)(ii) or 7(b)(iii) shall be
consummated.
9. REGISTRATION RIGHTS.
(a) Following termination of the Merger Agreement, Issuer shall, subject to
the conditions of subparagraph (c) below, if requested by any Holder,
including Grantee and any permitted transferee ("Selling Holder"), as
expeditiously as possible prepare and file a registration statement under the
Securities Laws if necessary in order to permit the sale or other disposition
of any or all shares of Issuer Common Stock or other securities that have been
acquired by or are issuable to Selling Holder upon exercise of the Option in
accordance with the intended method of sale or other disposition stated by
Holder in such request, including, without limitation, a "shelf"
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registration statement under Rule 415 under the Securities Act or any
successor provision, and Issuer shall use its best efforts to qualify such
shares or other securities for sale under any applicable state securities
laws.
(b) If Issuer at any time after the exercise of the Option proposes to
register any shares of Issuer Common Stock under the Securities Laws in
connection with an underwritten public offering of such Issuer Common Stock,
Issuer will promptly give written notice to Holder of its intention to do so
and, upon the written request of Holder given within 30 days after receipt of
any such notice (which request shall specify the number of shares of Issuer
Common Stock intended to be included in such underwritten public offering by
Selling Holder), Issuer will cause all such shares, the holders of which shall
have requested participation in such registration, to be so registered and
included in such underwritten public offering; provided, that Issuer may elect
to not cause any such shares to be so registered (i) if the underwriters in
good faith object for valid business reasons, or (ii) in the case of a
registration solely to implement a dividend reinvestment or similar plan, an
employee benefit plan or a registration filed on Form S-4 or any successor
form, or a registration filed on a form which does not permit registrations of
resales; provided, further, that such election pursuant to clause (i) may only
be made two times. If some but not all the shares of Issuer Common Stock, with
respect to which Issuer shall have received requests for registration pursuant
to this subparagraph (b), shall be excluded from such registration, Issuer
shall make appropriate allocation of shares to be registered among Selling
Holders and any other person (other than Issuer or any person exercising
demand registration rights in connection with such registration) who or which
is permitted to register their shares of Issuer Common Stock in connection
with such registration pro rata in the proportion that the number of shares
requested to be registered by each Selling Holder bears to the total number of
shares requested to be registered by all persons then desiring to have Issuer
Common Stock registered for sale.
(c) Issuer shall use all reasonable efforts to cause each registration
statement referred to in subparagraph (a) above to become effective and to
obtain all consents or waivers of other parties which are required therefor
and to keep such registration statement effective, provided, that Issuer may
delay any registration of Option Shares required pursuant to subparagraph (a)
above for a period not exceeding 90 days provided Issuer shall in good faith
determine that any such registration would adversely affect an offering or
contemplated offering of other securities by Issuer, and Issuer shall not be
required to register Option Shares under the Securities Laws pursuant to
subparagraph (a) above:
(i) prior to the earliest of (a) termination of the Merger Agreement
pursuant to Section 10.1 thereof, (b) failure to obtain the requisite
stockholder approval pursuant to Section 9.1(a) of the Merger Agreement,
and (c) a Purchase Event or a Preliminary Purchase Event;
(ii) on more than two occasions;
(iii) more than once during any calendar year;
(iv) within 90 days after the effective date of a registration referred
to in subparagraph (b) above pursuant to which the Selling Holders
concerned were afforded the opportunity to register such shares under the
Securities Laws and such shares were registered as requested; and
(v) unless a request therefor is made to Issuer by Selling Holders
holding at least 25% or more of the aggregate number of Option Shares then
outstanding.
In addition to the foregoing, Issuer shall not be required to maintain the
effectiveness of any registration statement after the expiration of 120 days
from the effective date of such registration statement. Issuer shall use all
reasonable efforts to make any filings, and take all steps, under all
applicable state securities laws to the extent necessary to permit the sale or
other disposition of the Option Shares so registered in accordance with the
intended method of distribution for such shares, provided, that Issuer shall
not be required to consent to general jurisdiction or qualify to do business
in any state where it is not otherwise required to so consent to such
jurisdiction or to so qualify to do business.
(d) Except where applicable state law prohibits such payments, Issuer will
pay all expenses (including without limitation registration fees,
qualification fees, blue sky fees and expenses (including the fees and
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expenses of counsel), accounting expenses, legal expenses including the
reasonable fees and expenses of one counsel to the Selling Holders, printing
expenses, expenses of underwriters, excluding discounts and commissions but
including liability insurance if Issuer so desires or the underwriters so
require, and the reasonable fees and expenses of any necessary special
experts) in connection with each registration pursuant to subparagraph (a) or
(b) above (including the related offerings and sales by Selling Holders) and
all other qualifications, notifications or exemptions pursuant to subparagraph
(a) or (b) above. Underwriting discounts and commissions relating to Option
Shares and any other expenses incurred by such Selling Holders in connection
with any such registration shall be borne by such Selling Holders.
(e) In connection with any registration under subparagraph (a) or (b) above
Issuer hereby indemnifies the Selling Holders, and each underwriter thereof,
including each person, if any, who controls such holder or underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, losses,
claims, damages and liabilities caused by any untrue, or alleged untrue,
statement of a material fact contained in any registration statement or
prospectus or notification or offering circular (including any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission,
or alleged omission, to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such expenses, losses, claims, damages or liabilities of such
indemnified party are caused by any untrue statement or alleged untrue
statement that was included by Issuer in any such registration statement or
prospectus or notification or offering circular (including any amendments or
supplements thereto) in reliance upon and in conformity with, information
furnished in writing to Issuer by such indemnified party expressly for use
therein, and Issuer and each officer, director and controlling person of
Issuer shall be indemnified by such Selling Holder, or by such underwriter, as
the case may be, for all such expenses, losses, claims, damages and
liabilities caused by any untrue, or alleged untrue, statement, that was
included by Issuer in any such registration statement or prospectus or
notification or offering circular (including any amendments or supplements
thereto) in reliance upon, and in conformity with, information furnished in
writing to Issuer by such holder or such underwriter, as the case may be,
expressly for such use.
Promptly upon receipt by a party indemnified under this subparagraph (e) of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party under this subparagraph (e), such indemnified party shall
notify the indemnifying party in writing of the commencement of such action,
but the failure so to notify the indemnifying party shall not relieve it of
any liability which it may otherwise have to any indemnified party under this
subparagraph (e). In case notice of commencement of any such action shall be
given to the indemnifying party as above provided, the indemnifying party
shall be entitled to participate in and, to the extent it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense of
such action at its own expense, with counsel chosen by it and satisfactory to
such indemnified party. The indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof,
but the fees and expenses of such counsel (other than reasonable costs of
investigation) shall be paid by the indemnified party unless (i) the
indemnifying party either agrees to pay the same, (ii) the indemnifying party
falls to assume the defense of such action with counsel satisfactory to the
indemnified party, or (iii) the indemnified party has been advised by counsel
that one or more legal defenses may be available to the indemnifying party
that may be contrary to the interest of the indemnified party, in which case
the indemnifying party shall be entitled to assume the defense of such action
notwithstanding its obligation to bear fees and expenses of such counsel. No
indemnifying party shall be liable for any settlement entered into without its
consent, which consent may not be unreasonably withheld.
If the indemnification provided for in this subparagraph (e) is unavailable
to a party otherwise entitled to be indemnified in respect of any expenses,
losses, claims, damages or liabilities referred to herein, then the
indemnifying party, in lieu of indemnifying such party otherwise entitled to
be indemnified, shall contribute to the amount paid or payable by such party
to be indemnified as a result of such expenses, losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the relative
benefits received by Issuer, all selling stockholders and the underwriters
from the offering of the securities and also the relative fault of Issuer, all
selling stockholders and the underwriters in connection with the statements or
omissions which resulted in such expenses, losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
C-9
<PAGE>
amount paid or payable by a party as a result of the expenses, losses, claims,
damages and liabilities referred to above shall be deemed to include any legal
or other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim; provided, that in no case
shall any Selling Holder be responsible, in the aggregate, for any amount in
excess of the net offering proceeds attributable to its Option Shares included
in the offering. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Any obligation by any holder to indemnify shall be several
and not joint with other holders.
In connection with any registration pursuant to subparagraph (a) or (b)
above, Issuer and each Selling Holder (other than Grantee) shall enter into an
agreement containing the indemnification provisions of this subparagraph (e).
(f) Issuer shall comply with all reporting requirements and will do all such
other things as may be necessary to permit the expeditious sale at any time of
any Option Shares by Holder in accordance with and to the extent permitted by
any rule or regulation promulgated by the SEC from time to time, including,
without limitation, Rules 144 and 144A. Issuer shall at its expense provide
Holder with any information necessary in connection with the completion and
filing of any reports or forms required to be filed by them under the
Securities Laws, or required pursuant to any state securities laws or the
rules of any stock exchange.
(g) Issuer will pay all stamp taxes in connection with the issuance and the
sale of the Option Shares and in connection with the exercise of the Option,
and will save Holder harmless, without limitation as to time, against any and
all liabilities, with respect to all such taxes.
10. QUOTATION; LISTING. If Issuer Common Stock or any other securities to be
acquired upon exercise of the Option are then authorized for quotation or
trading or listing on the Nasdaq National Marketor any other securities
exchange, Issuer, upon the request of Holder, will promptly file an
application, if required, to authorize for quotation or trading or listing the
shares of Issuer Common Stock or other securities to be acquired upon exercise
of the Option on the Nasdaq National Market or any other securities exchange
and will use its best efforts to obtain approval, if required, of such
quotation or listing as soon as practicable.
11. DIVISION OF OPTION. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of Holder, upon presentation and
surrender of this Agreement at the principal office of Issuer for other
Agreements providing for Options of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of
Issuer Common Stock purchasable hereunder. The terms "Agreement" and "Option"
as used herein include any other Agreements and related Options for which this
Agreement (and the Option granted hereby) may be exchanged. Upon receipt by
Issuer of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Agreement, and (in the case of loss, theft
or destruction) of reasonably satisfactory indemnification, and upon surrender
and cancellation of this Agreement, if mutilated, Issuer will execute and
deliver a new Agreement of like tenor and date. Any such new Agreement
executed and delivered shall constitute an additional contractual obligation
on the part of Issuer, whether or not the Agreement so lost, stolen, destroyed
or mutilated shall at any time be enforceable by anyone.
12. MISCELLANEOUS.
(a) EXPENSES. Except as otherwise provided in Section 9, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its
behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
(b) WAIVER AND AMENDMENT. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon
the execution and delivery of a written agreement executed by the parties
hereto.
(c) ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARY; SEVERABILITY. This
Agreement, together with the Merger Agreement and the other documents and
instruments referred to herein and therein, between Grantee and
C-10
<PAGE>
Issuer (a) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof and (b) is not intended to confer upon
any person other than the parties hereto (other than any transferees of the
Option Shares or any permitted transferee of this Agreement pursuant to
Section 12(h)) any rights or remedies hereunder. If any term, provision,
covenant or restriction of this Agreement is held by a court of competent
jurisdiction or a federal or state governmental or regulatory agency or
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated. If
for any reason such court or regulatory agency determines that the Option does
not permit Holder to acquire, or does not require Issuer to repurchase, the
full number of shares of Issuer Common Stock as provided in Sections 3 and 8
(as adjusted pursuant to Section 7), it is the express intention of Issuer to
allow Holder to acquire or to require Issuer to repurchase such lesser number
of shares as may be permissible without any amendment or modification hereof.
(d) GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware without regard to any
applicable conflicts of law rules.
(e) DESCRIPTIVE HEADINGS. The descriptive headings contained herein are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the addresses set forth in the Merger Agreement
(or at such other address for a party as shall be specified by like notice).
(g) COUNTERPARTS. This Agreement and any amendments hereto may be executed
in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed,
it being understood that both parties need not sign the same counterpart.
(h) ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party, except that Grantee may assign this
Agreement to a wholly owned Subsidiary of Grantee and Grantee may assign its
rights hereunder in whole or in part after the occurrence of a Purchase Event.
Subject to the preceding sentence, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties and their respective
successors and assigns.
(i) FURTHER ASSURANCES. In the event of any exercise of the Option by
Holder, Issuer and Holder shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in
order to consummate the transactions provided for by such exercise.
(j) SPECIFIC PERFORMANCE. The parties hereto agree that this Agreement may
be enforced by either party through specific performance, injunctive relief
and other equitable relief. Both parties further agree to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief and that this provision is without
prejudice to any other rights that the parties hereto may have for any failure
to perform this Agreement.
C-11
<PAGE>
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
Attest: Physician Sales & Service, Inc.
/s/ David A. Smith /s/ Patrick Kelly
By: _________________________________ By: _________________________________
[Corporate Seal]
Attest: Gulf South Medical Supply, Inc.
/s/ Thomas Hixon
By: _________________________________ By: _________________________________
[Corporate Seal]
C-12
<PAGE>
ANNEX D
GULF SOUTH VOTING AGREEMENT
VOTING AGREEMENT
THIS VOTING AGREEMENT, dated as of December 14, 1997 (this "Agreement"), is
made and entered into by and among Physician Sales & Service, Inc., a Florida
corporation ("PSS") and the other parties signatory hereto (each a
"Stockholder").
PREAMBLE
The Stockholder is a stockholder of Gulf South Medical Supply, Inc. ("GSMS")
and desires that PSS, PSS Merger Corp., a wholly owned subsidiary of PSS
("Merger Corp."), and GSMS enter into an Agreement and Plan of Merger dated
the date hereof (as the same may be amended or supplemented, the "Merger
Agreement") with respect to the merger of Merger Corp. with and into GSMS (the
"Merger"), with the result that GSMS becomes a wholly owned subsidiary of PSS.
The Stockholder is executing this Agreement as an inducement to PSS to enter
into and execute, and to cause Merger Corp. to enter into and execute, the
Merger Agreement.
All capitalized terms used herein which are not defined herein shall have
the same meanings as ascribed to them in the Merger Agreement.
NOW, THEREFORE, in consideration of the execution and delivery by PSS and
Merger Corp. of the Merger Agreement and the mutual covenants, conditions and
agreements contained herein and therein, the parties agree as follows:
1. REPRESENTATIONS AND WARRANTIES. (a) The Stockholder severally and not
jointly represents and warrants to PSS as follows:
(i) As of the date hereof, the Stockholder is the record owner of the
GSMS Common Stock set forth on Schedule 1 to this Agreement (such
Stockholder's "Shares"). Except for the Stockholder's Shares, the
Stockholder is not the record owner of any shares of GSMS Common Stock
(except to the extent the Stockholder disclaims beneficial ownership in
accordance with applicable law). This Agreement has been duly authorized,
executed and delivered by, and constitutes a valid and binding agreement
of, the Stockholder, enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency or
similar laws affecting creditors rights generally or the availability of
equitable remedies, and the execution and delivery of this Agreement will
not violate or result in a default under any agreement to which Stockholder
is a party.
(ii) Such Stockholder's Shares and the certificates representing such
Shares are now and at all times during the term hereof will be held by such
Stockholder, free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements, understandings or arrangements or any
other encumbrances whatsoever that would interfere with the voting of the
Shares or the granting of any proxy, except for any such encumbrances or
proxies arising hereunder.
(iii) The Stockholder understands and acknowledges that PSS and Merger
Corp. are entering the Merger Agreement in reliance upon the Stockholder's
execution and delivery of this Agreement. The Stockholder acknowledges that
the irrevocable proxy set forth in Section 4 is granted in consideration
for the execution and delivery of the Merger Agreement by PSS and Merger
Corp.
(b) PSS represents and warrants to Stockholder that this Agreement has been
duly authorized, executed and delivered by and constitutes a valid and binding
agreement of, PSS, enforceable in accordance with its terms except as
enforceability may be limited by applicable bankruptcy, insolvency or similar
laws affecting creditors rights generally or the availability of equitable
remedies, and the execution and delivery of this Agreement will not violate or
result in a default under any agreement to which PSS is a party.
D-1
<PAGE>
2. VOTING AGREEMENT.
(a) The Stockholder severally agrees with, and covenants to, PSS that at any
meeting of stockholders of GSMS called to vote upon the Merger, the Merger
Agreement, and any other matters related thereto, or at any adjournment
thereof or in any other circumstances upon which a vote, consent or other
approval with respect to the Merger and the Merger Agreement is sought, the
Stockholder shall vote (or cause to be voted) the Stockholder's Shares in
favor of the Merger and the approval of the terms thereof and each of the
other transactions contemplated by the Merger Agreement, provided that the
terms of the Merger Agreement shall not have been amended to reduce the
Exchange Ratio payable in the Merger to a lesser amount of PSS Common Stock or
otherwise to materially and adversely impair the Stockholder's rights or
increase the Stockholder's obligations thereunder. Stockholder, as a holder of
GSMS Common Stock, shall be present in person or by proxy at all meetings of
stockholders of GSMS so that all Shares are counted for purposes of
determining the presence of a quorum at such meetings.
(b) This Agreement is intended to bind Stockholder only with respect to the
specific matters set forth herein and solely in his or her capacity as
stockholder, and shall not prohibit, limit or restrict in any manner
Stockholder from acting in Stockholder's capacity as an officer or director of
GSMS or exercising or observing Stockholder's fiduciary duties and
responsibilities as an officer or director of GSMS.
3. COVENANTS. The Stockholder severally agrees with, and covenants to, PSS
as follows:
(a) Prior the termination of this Agreement, the Stockholder shall not
(i) transfer (which term shall include, without limitation, for the
purposes of this Agreement, any sale, gift, pledge, or consent to any
transfer of), any or all of the Stockholder's Shares or any interest
therein, except pursuant to the Merger; (ii) enter into any contract,
option or other agreement or understanding with respect to any transfer of
any or all of such Shares or any interest therein, (iii) grant any proxy,
power of attorney or other authorization in or with respect to such Shares,
except for this Agreement or (iv) deposit such Shares into a voting trust
or enter into a voting agreement or arrangement with respect to such
Shares.
(b) The Stockholder hereby waives any rights of appraisal, or rights to
dissent from the Merger, that such Stockholder may have.
4. GRANT OF IRREVOCABLE PROXY; APPOINTMENT OF PROXY.
(a) The Stockholder hereby irrevocably grants to, and appoints, Patrick C.
Kelly, Chief Executive Officer of PSS, and David A. Smith, Chief Financial
Officer of PSS, in their respective capacities as officers of PSS, and any
individual who shall hereafter succeed to any such office of PSS, and each of
them individually, the Stockholder's proxy and attorney-in-fact (with full
power of substitution), for and in the name, place and stead of the
Stockholder, to vote the Stockholder's Shares or grant a consent or approval
in respect of such Shares in favor of the Merger, the execution and delivery
of the Merger Agreement and approval of the terms thereof, and each of the
other transactions contemplated by the Merger Agreement, provided that the
terms of the Merger Agreement shall not have been amended to reduce the
Exchange Ratio payable in the Merger to a lesser amount of PSS Common Stock or
otherwise to adversely impair the Stockholder's rights or increase the
Stockholder's obligations thereunder, whether in his capacity as a stockholder
or in any other capacity.
(b) The Stockholder represents that any proxies heretofore given in respect
of the Stockholder's Shares are not irrevocable, and that any such proxies are
hereby revoked.
(c) The Stockholder hereby affirms that the irrevocable proxy set forth in
this Section 4 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the performance
of the duties of the Stockholder under this Agreement. The Stockholder hereby
further affirms that the irrevocable proxy is coupled with an interest and may
under no circumstances be revoked. The Stockholder hereby ratifies and
confirms all that such irrevocable proxy may lawfully do or cause to be done
by virtue hereof.
5. CERTAIN EVENTS. The Stockholder agrees that this Agreement and the
obligations hereunder shall attach to the Stockholder's Shares and shall be
binding upon any person or entity to which legal or beneficial ownership
D-2
<PAGE>
of such Shares shall pass, whether by operation of law or otherwise, including
without limitation the Stockholder's successors or assigns. In the event of
any stock split, stock dividend, merger, reorganization, recapitalization or
other change in the capital structure of GSMS, or the acquisition of
additional shares of GSMS Common Stock or other voting securities of GSMS by
any Stockholder, the number of Shares subject to the terms of this Agreement
shall be adjusted appropriately and this Agreement and the obligations
hereunder shall attach to any additional shares of GSMS Common Stock or other
voting securities of GSMS issued to or acquired by the Stockholder.
6. FURTHER ASSURANCES. The Stockholder shall, upon request of PSS, execute
and deliver any additional documents and take such further actions as may
reasonably be deemed by PSS to be necessary or desirable to carry out the
provisions hereof and to vest the power to vote such Stockholder's Shares as
contemplated by Section 4 in PSS and the other irrevocable proxies described
therein at the expense of PSS.
7. TERMINATION. This Agreement, and all rights and obligations of the
parties hereunder; including without limitation, the proxy set forth in
Section 4, shall terminate upon the first to occur of (i) the Effective Time
of the Merger or (ii) the date upon which the Merger Agreement is terminated
in accordance with its terms.
8. MISCELLANEOUS.
(a) This Agreement may be executed in two or more counterparts, all of which
shall be considered one and the same agreement.
(b) This Agreement (including the documents and instruments referred to
herein) constitutes the entire agreement, and supersedes all prior agreements
and understandings, both written and oral, among the parties with respect to
the subject matter hereof.
(c) This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Delaware, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof.
(d) Neither this Agreement nor any of the rights, interests or obligations
under this Agreement shall be assigned, in whole or in part, by operation of
law or otherwise, by any of the parties without the prior written consent of
the other parties, except as expressly contemplated by Section 3(a). Any
assignment in violation of the foregoing shall be void.
(e) The Stockholder agrees that irreparable damage would occur and that PSS
would not have any adequate remedy at law in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that PSS
shall be entitled to an injunction or injunctions to prevent breaches by the
Stockholder of this Agreement and to enforce specifically the terms and
provisions of this Agreement, this being in addition to any other remedy to
which they are entitled at law or in equity.
(f) If any term, provision, covenant or restriction herein, or the
application thereof to any circumstance, shall, to any extent, (i) be held by
a court of competent jurisdiction to be invalid, void or unenforceable or (ii)
would preclude the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, or
prevent PSS or GSMS from accounting for the Merger as a pooling of interests,
such term, provision, covenant or restriction shall be modified or voided, as
may be necessary to achieve the intent of the parties to the extent possible,
and the remainder of the terms, provisions, covenants and restrictions herein
and the application thereof to any other circumstances, shall remain in full
force and effect, shall not in any way be affected, impaired or invalidated,
and shall be enforced to the fullest extent permitted by law.
(g) No amendment, modification or waiver in respect of this Agreement shall
be effective against any party unless it shall be in writing and signed by
such party.
D-3
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have executed and delivered this
Voting Agreement as of the day and year first above written.
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
By: _________________________________
EVP & CFO
Title: ______________________________
"STOCKHOLDER"
/s/ William W. McInnes
_____________________________________
William W. McInnes
Print Name: _________________________
D-4
<PAGE>
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
By: _________________________________
EVP & CFO
Title: ______________________________
"STOCKHOLDER"
/s/ Edward Shulman
_____________________________________
Edward Shulman
Print Name: _________________________
D-5
<PAGE>
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
By: _________________________________
EVP & CFO
Title: ______________________________
"STOCKHOLDER"
/s/ Donna C.E. Williamson
_____________________________________
Donna C.E. Williamson
Print Name: _________________________
D-6
<PAGE>
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
By: _________________________________
EVP & CFO
Title: ______________________________
"STOCKHOLDER"
/s/ David L. Bogetz
_____________________________________
David L. Bogetz
Print Name: _________________________
D-7
<PAGE>
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
By: _________________________________
EVP & CFO
Title: ______________________________
"STOCKHOLDER"
/s/ Melvin L. Hecktman
_____________________________________
Melvin L. Hecktman
Print Name: _________________________
D-8
<PAGE>
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
By: _________________________________
EVP & CFO
Title: ______________________________
"STOCKHOLDER"
/s/ Thomas G. Hixon
_____________________________________
Thomas G. Hixon
Print Name: _________________________
D-9
<PAGE>
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
By: _________________________________
EVP & CFO
Title: ______________________________
"STOCKHOLDER"
/s/ Steve Richardson
_____________________________________
Steve Richardson
Print Name: _________________________
D-10
<PAGE>
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
By: _________________________________
EVP & CFO
Title: ______________________________
"STOCKHOLDER"
/s/ Guy W. Edwards
_____________________________________
Guy W. Edwards
Print Name: _________________________
D-11
<PAGE>
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
By: _________________________________
EVP & CFO
Title: ______________________________
"STOCKHOLDER"
/s/ Stanton Keith Pritchard
_____________________________________
Stanton Keith Pritchard
Print Name: _________________________
D-12
<PAGE>
PHYSICIAN SALES & SERVICE, INC.
/s/ David A. Smith
By: _________________________________
EVP & CFO
Title: ______________________________
"STOCKHOLDER"
/s/ Louie Vaughan
_____________________________________
Louie Vaughan
Print Name: _________________________
D-13
<PAGE>
ANNEX E
PSS VOTING AGREEMENT
VOTING AGREEMENT
THIS VOTING AGREEMENT, dated as of December 14, 1997 (this "Agreement"), is
made and entered into by and among Gulf South Medical Supply, Inc., a Delaware
corporation ("GSMS") and the other parties signatory hereto (each a
"Stockholder").
PREAMBLE
The Stockholder is a stockholder of Physician Sales & Service, Inc. ("PSS")
and desires that PSS, PSS Merger Corp., a wholly owned subsidiary of PSS
("Merger Corp."), and GSMS enter into an Agreement and Plan of Merger dated
the date hereof (as the same may be amended or supplemented, the "Merger
Agreement") with respect to the merger of Merger Corp. with and into GSMS (the
"Merger"), with the result that GSMS becomes a wholly owned subsidiary of PSS.
The Stockholder is executing this Agreement as an inducement to GSMS to enter
into and execute the Merger Agreement.
All capitalized terms used herein which are not defined herein shall have
the same meanings as ascribed to them in the Merger Agreement.
NOW, THEREFORE, in consideration of the execution and delivery by GSMS of
the Merger Agreement and the mutual covenants, conditions and agreements
contained herein and therein, the parties agree as follows:
1. Representations and Warranties. (a) The Stockholder severally and not
jointly represents and warrants to GSMS as follows:
(i) As of the date hereof, the Stockholder is the record owner of the
PSS Common Stock set forth on Schedule 1 to this Agreement (such
Stockholder's "Shares"). Except for the Stockholder's Shares, the
Stockholder is not the record owner of any shares of PSS Common Stock
(except to the extent the Stockholder disclaims beneficial ownership in
accordance with applicable law). This Agreement has been duly
authorized, executed and delivered by, and constitutes a valid and
binding agreement of, the Stockholder, enforceable in accordance with
its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency or similar laws affecting creditors rights
generally or the availability of equitable remedies, and the execution
and delivery of this Agreement will not violate or result in a default
under any agreement to which Stockholder is a party.
(ii) Such Stockholder's Shares and the certificates representing such
Shares are now and at all times during the term hereof will be held by
such Stockholder, free and clear of all liens, claims, security
interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances whatsoever that would interfere
with the voting of the Shares or the granting of any proxy, except for
any such encumbrances or proxies arising hereunder.
(iii) The Stockholder understands and acknowledges that GSMS is
entering the Merger Agreement in reliance upon the Stockholder's
execution and delivery of this Agreement. The Stockholder acknowledges
that the irrevocable proxy set forth in Section 4 is granted in
consideration for the execution and delivery of the Merger Agreement by
GSMS.
(b) GSMS represents and warrants to Stockholder that this Agreement has
been duly authorized, executed and delivered by and constitutes a valid and
binding agreement of, GSMS, enforceable in accordance with its terms except
as enforceability may be limited by applicable bankruptcy, insolvency or
similar laws affecting creditors rights generally or the availability of
equitable remedies, and the execution and delivery of this Agreement will
not violate or result in a default under any agreement to which GSMS is a
party.
E-1
<PAGE>
2. Voting Agreement.
(a) The Stockholder severally agrees with, and covenants to, GSMS that at
any meeting of stockholders of PSS called to vote upon the Merger, the
Merger Agreement, and any other matters related thereto, including the
amendment to the Articles of Incorporation to increase the number of
authorized shares of PSS Common Stock (the "Amendment"), or at any
adjournment thereof or in any other circumstances upon which a vote,
consent or other approval with respect to the Merger, the Merger Agreement
and the Amendment is sought, the Stockholder shall vote (or cause to be
voted) the Stockholder's Shares in favor of (i) the Amendment and (ii) the
Merger and the approval of the terms thereof and each of the other
transactions contemplated by the Merger Agreement, provided that the terms
of the Merger Agreement shall not have been amended to increase the
Exchange Ratio payable in the Merger to a greater amount of PSS Common
Stock or otherwise to materially and adversely impair the Stockholder's
rights or increase the Stockholder's obligations thereunder. Stockholder,
as a holder of PSS Common Stock, shall be present in person or by proxy at
all meetings of stockholders of PSS so that all Shares are counted for
purposes of determining the presence of a quorum at such meetings.
(b) This Agreement is intended to bind Stockholder only with respect to
the specific matters set forth herein and solely in his or her capacity as
stockholder, and shall not prohibit, limit or restrict in any manner
Stockholder from acting in Stockholder's capacity as an officer or director
of PSS or exercising or observing Stockholder's fiduciary duties and
responsibilities as an officer and director of PSS.
3. Covenants. The Stockholder severally agrees with, and covenants to, GSMS
as follows:
(a) Prior to the termination of this Agreement, the Stockholder shall not
(i) transfer (which term shall include, without limitation, for the
purposes of this Agreement, any sale, gift, pledge, or consent to any
transfer of), any or all of the Stockholder's Shares or any interest
therein, except pursuant to the Merger; (ii) enter into any contract,
option or other agreement or understanding with respect to any transfer of
any or all of such Shares or any interest therein, (iii) grant any proxy,
power of attorney or other authorization in or with respect to such Shares,
except for this Agreement or (iv) deposit such Shares into a voting trust
or enter into a voting agreement or arrangement with respect to such
Shares.
(b) The Stockholder hereby waives any rights of appraisal, or rights to
dissent from the Merger, that such Stockholder may have.
4. Grant of Irrevocable Proxy; Appointment of Proxy.
(a) The Stockholder hereby irrevocably grants to, and appoints, Thomas G.
Hixon, Chief Executive Officer of GSMS, and Stanton Keith Pritchard, Vice
President of GSMS, in their respective capacities as officers of GSMS, and
any individual who shall hereafter succeed to any such office of GSMS, and
each of them individually, the Stockholder's proxy and attorney-in-fact
(with full power of substitution), for and in the name, place and stead of
the Stockholder, to vote the Stockholder's Shares, or grant a consent or
approval in respect of such Shares in favor of (i) the Amendment and (ii)
the Merger; the execution and delivery of the Merger Agreement and approval
of the terms thereof, and each of the other transactions contemplated by
the Merger Agreement, provided that the terms of the Merger Agreement shall
not have been amended to increase the Exchange Ratio payable in the Merger
to a greater amount of PSS Common Stock or otherwise to adversely impair
the Stockholder's rights or increase the Stockholder's obligations
thereunder, whether in his capacity as a stockholder or in any other
capacity.
(b) The Stockholder represents that any proxies heretofore given in
respect of the Stockholder's Shares are not irrevocable, and that any such
proxies are hereby revoked.
(c) The Stockholder hereby affirms that the irrevocable proxy set forth
in this Section 4 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the
performance of the duties of the Stockholder under this Agreement. The
Stockholder hereby further affirms that the irrevocable proxy is coupled
with an interest and may under no circumstances be revoked. The Stockholder
hereby ratifies and confirms all that such irrevocable proxy may lawfully
do or cause to be done by virtue hereof.
E-2
<PAGE>
5. Certain Events. The Stockholder agrees that this Agreement and the
obligations hereunder shall attach to the Stockholder's Shares and shall be
binding upon any person or entity to which legal or beneficial ownership of
such Shares shall pass, whether by operation of law or otherwise, including
without limitation the Stockholder's successors or assigns. In the event of
any stock split, stock dividend, merger, reorganization, recapitalization or
other change in the capital structure of PSS, or the acquisition of additional
shares of PSS Common Stock or other voting securities of PSS by any
Stockholder, the number of Shares subject to the terms of this Agreement shall
be adjusted appropriately and this Agreement and the obligations hereunder
shall attach to any additional shares of PSS Common Stock or other voting
securities of PSS issued to or acquired by the Stockholder.
6. Further Assurances. The Stockholder shall, upon request of GSMS, execute
and deliver any additional documents and take such further actions as may
reasonably be deemed by GSMS or to be necessary or desirable to carry out the
provisions hereof and to vest the power to vote such Stockholder's Shares as
contemplated by Section 4 in GSMS and the other irrevocable proxies described
therein at the expense of GSMS.
7. Termination. This Agreement, and all rights and obligations of the
parties hereunder; including without limitation, the proxy set forth in
Section 4, shall terminate upon the first to occur of (i) the Effective Time
of the Merger or (ii) the date upon which the Merger Agreement is terminated
in accordance with its terms.
8. Miscellaneous.
(a) This Agreement may be executed in two or more counterparts, all of
which shall be considered one and the same agreement.
(b) This Agreement (including the documents and instruments referred to
herein) constitutes the entire agreement, and supersedes all prior
agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof.
(c) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Delaware, regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws thereof.
(d) Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise, by any of the parties without the prior
written consent of the other parties, except as expressly contemplated by
Section 3(a). Any assignment in violation of the foregoing shall be void.
(e) The Stockholder agrees that irreparable damage would occur and that
GSMS would not have any adequate remedy at law in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that
GSMS shall be entitled to an injunction or injunctions to prevent breaches
by the Stockholder of this Agreement and to enforce specifically the terms
and provisions of this Agreement , this being in addition to any other
remedy to which they are entitled at law or in equity.
(f) If any term, provision, covenant or restriction herein, or the
application thereof to any circumstance, shall, to any extent, (i) be held
by a court of competent jurisdiction to be invalid, void or unenforceable
or (ii) would preclude the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986,
as amended, or prevent PSS or GSMS from accounting for the Merger as a
pooling of interests, such term, provision, covenant or restriction shall
be modified or voided, as may be necessary to achieve the intent of the
parties to the extent possible, and the remainder of the terms, provisions,
covenants and restrictions herein and the application thereof to any other
circumstances, shall remain in full force and effect, shall not in any way
be affected, impaired or invalidated, and shall be enforced to the fullest
extent permitted by law.
(g) No amendment, modification or waiver in respect of this Agreement
shall be effective against any party unless it shall be in writing and
signed by such party.
E-3
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have executed and delivered this
Voting Agreement as of the day and year first above written.
GULF SOUTH MEDICAL SUPPLY, INC.
/s/ Thomas G. Hixon
By: _________________________________
President & CEO
Title: ______________________________
"STOCKHOLDER"
/s/ Delmer W. Dallas
_____________________________________
Delmer W. Dallas
Print Name: _________________________
E-4
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
/s/ Thomas G. Hixon
By: _________________________________
President & CEO
Title: ______________________________
"STOCKHOLDER"
/s/ James L.L. Tullis
_____________________________________
James L.L. Tullis
Print Name: _________________________
E-5
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
/s/ Thomas G. Hixon
By: _________________________________
President & CEO
Title: ______________________________
"STOCKHOLDER"
/s/ William C. Mason
_____________________________________
William C. Mason
Print Name: _________________________
E-6
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
/s/ Thomas G. Hixon
By: _________________________________
President & CEO
Title: ______________________________
"STOCKHOLDER"
/s/ David A. Smith
_____________________________________
David A. Smith
Print Name: _________________________
E-7
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
/s/ Thomas G. Hixon
By: _________________________________
President & CEO
Title: ______________________________
"STOCKHOLDER"
/s/ Patrick C. Kelly
_____________________________________
Patrick C. Kelly
Print Name: _________________________
E-8
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
/s/ Thomas G. Hixon
By: _________________________________
President & CEO
Title: ______________________________
"STOCKHOLDER"
/s/ Fred Elefant
_____________________________________
Fred Elefant
Print Name: _________________________
E-9
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
/s/ Thomas G. Hixon
By: _________________________________
President & CEO
Title: ______________________________
"STOCKHOLDER"
/s/ John F. Sasen, Sr.
_____________________________________
John F. Sasen, Sr.
Print Name: _________________________
E-10
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
/s/ Thomas G. Hixon
By: _________________________________
President & CEO
Title: ______________________________
"STOCKHOLDER"
/s/ T. O'Neal Douglas
_____________________________________
T. O'Neal Douglas
Print Name: _________________________
E-11
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
/s/ Thomas G. Hixon
By: _________________________________
President & CEO
Title: ______________________________
"STOCKHOLDER"
/s/ Frederick E. Dell
_____________________________________
Frederick E. Dell
Print Name: _________________________
E-12
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
/s/ Thomas G. Hixon
By: _________________________________
President & CEO
Title: ______________________________
"STOCKHOLDER"
/s/ Delores Kesler
_____________________________________
Delores Kesler
Print Name: _________________________
E-13
<PAGE>
GULF SOUTH MEDICAL SUPPLY, INC.
/s/ Thomas G. Hixon
By: _________________________________
President & CEO
Title: ______________________________
"STOCKHOLDER"
/s/ James Stallings
_____________________________________
James Stallings
Print Name: _________________________
E-14
<PAGE>
ANNEX F
OPINION OF BT ALEX. BROWN INCORPORATED
LOGO
[Logo of BT Alex. Brown appears here]
LOGO
[Logo of Bankers Trust appears here]
December 14, 1997
Board of Directors
Physician Sales & Service, Inc.
4345 Southpoint Boulevard
Jacksonville, FL 32216
Members of the Board:
Physician Sales & Service, Inc. ("PSS"), PSS Merger Corp., a wholly owned
subsidiary of PSS ("Merger Corp."), and Gulf South Medical Supply, Inc. ("Gulf
South") have proposed to enter into an Agreement and Plan of Merger dated as
of December 14, 1997 (the "Merger Agreement"). Pursuant to the Merger
Agreement, the implementation of which is contingent on approval by the
stockholders of PSS and Gulf South, Merger Corp. will be merged with and into
Gulf South (the "Merger"), and each outstanding share of the common stock, par
value $.01 per share, of Gulf South (the "Gulf South Common Stock") will be
converted into the right to receive 1.75 shares (the "Exchange Ratio") of the
common stock, par value $.01 per share, of PSS (the "PSS Common Stock"). You
have requested our opinion as to whether the Exchange Ratio is fair, from a
financial point of view, to PSS.
BT Alex. Brown Incorporated ("BT Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Board of Directors
of PSS in connection with the Merger and will receive a fee for our services,
a significant portion of which is contingent upon the consummation of the
Merger and a portion of which is payable upon delivery of this opinion. We
previously have provided various financing and financial advisory services to
PSS, for which services we have received compensation. BT Alex. Brown
maintains a market in PSS Common Stock and regularly publishes research
reports regarding the health care industry and the businesses and securities
of PSS and other publicly owned companies in the health care industry. In the
ordinary course of business, BT Alex. Brown and its affiliates may actively
trade or hold the securities of both PSS and Gulf South for their own account
and the account of customers and, accordingly, may at any time hold a long or
short position in securities of PSS and Gulf South.
In connection with this opinion, we have reviewed certain publicly available
financial information and other information concerning PSS and Gulf South and
certain internal analyses and other information furnished to us by PSS and
Gulf South. We have also held discussions with the members of the senior
management of PSS and Gulf South regarding the business and prospects of PSS
and Gulf South and the joint prospects of a combined company. In addition, we
have (i) reviewed the reported prices and trading activity for PSS Common
Stock and Gulf South Common Stock, (ii) compared certain financial and stock
market information for PSS and Gulf South with similar information for certain
publicly traded companies, (iii) reviewed the financial terms of certain
recent business combinations which we deemed comparable in whole or in part,
(iv) reviewed the terms of the Merger Agreement and certain related documents,
and (v) performed such other studies and analyses and considered such other
factors as we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to the information relating to the prospects of PSS,
Gulf South and the combined company, we have assumed that such information
reflects the best currently available judgments and estimates of the
management of PSS and Gulf South as to the likely future
F-1
<PAGE>
financial performance of their respective companies and of the combined
company. In addition, we have not made an independent evaluation or appraisal
of the assets or liabilities of PSS or Gulf South, nor have we been furnished
with any such evaluations or appraisals. We are expressing no opinion as to
the price at which the PSS Common Stock actually will trade at any time. We
have assumed, with your consent, that the Merger will qualify for pooling-of-
interests accounting treatment. Our opinion is based on market, economic and
other conditions as they exist and can be evaluated as of the date of this
letter.
Our advisory services and the opinion expressed herein are for the use of
the Board of Directors of PSS and do not constitute a recommendation to any
stockholder as to how such stockholder should vote with respect to matters
relating to the proposed Merger. We hereby consent, however, to the inclusion
of this opinion in its entirety as an exhibit to the proxy or registration
statement of PSS and Gulf South relating to the proposed Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Exchange Ratio is fair, from a financial point of
view, to PSS.
Very truly yours,
/s/ BT Alex. Brown Incorporated
BT ALEX. BROWN INCORPORATED
F-2
<PAGE>
ANNEX G
OPINION OF NATIONSBANC MONTGOMERY SECURITIES LLC
NATIONSBANC MONTGOMERY SECURITIES, INC.
December 14, 1997
Board of Directors
Gulf South Medical Supply, Inc.
One Woodgreen Place
Madison, Mississippi 39110
Ladies and Gentlemen:
We understand that Physician Sales & Service, Inc., a Florida corporation
("PSS"), PSS Merger Corp., a Delaware corporation and a wholly-owned
subsidiary of PSS ("Merger Corp."), and Gulf South Medical Supply, Inc., a
Delaware corporation ("GSMS"), have entered into an Agreement and Plan of
Merger dated December 14, 1997 (the "Merger Agreement"), pursuant to which
Merger Corp. will be merged with and into GSMS, which will be the surviving
corporation and will become a wholly owned subsidiary of PSS (the "Merger").
Pursuant to the Merger, as more fully described in the Merger Agreement, we
understand that each issued and outstanding share of the common stock, $0.01
par value per share ("GSMS Common Stock"), of GSMS will be converted into and
exchanged for the right to receive 1.75 shares of the common stock, $0.01 par
value per share ("PSS Common Stock"), of PSS, subject to certain adjustments
(the "Consideration"). The terms and conditions of the Merger are set forth in
more detail in the Merger Agreement.
You have asked for our opinion as investment bankers as to whether the
Consideration to be received by the stockholders of Seller pursuant to the
Merger is fair to such stockholders from a financial point of view, as of the
date hereof.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to GSMS and
PSS, including the consolidated financial statements for recent years and
interim periods to September 30, 1997 and certain other relevant financial and
operating data relating to GSMS and PSS made available to us from published
sources and from the internal records of GSMS and PSS; (ii) reviewed the
financial terms and conditions of the Merger Agreement; (iii) reviewed certain
publicly available information concerning the trading of; and the trading
market for, GSMS Common Stock and PSS Common Stock; (iv) compared GSMS and PSS
from a financial point of view with certain other companies in the medical
products distribution industry which we deemed to be relevant; (v) considered
the financial terms, to the extent publicly available, of selected recent
business combinations of companies in the medical products distribution
industry which we deemed to be comparable, in whole or in part, to the Merger;
(vi) reviewed and discussed with representatives of the management of GSMS and
PSS certain information of a business and financial nature regarding GSMS and
PSS, furnished to us by them, including financial forecasts and related
assumptions of GSMS and PSS; (vii) made inquiries regarding and discussed the
Merger and the Merger Agreement and other matters related thereto with GSMS's
counsel; and (viii) performed such other analyses and examinations as we have
deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for GSMS and PSS provided to us by their respective managements,
upon their advice and with your consent we have assumed for purposes of our
opinion that the forecasts, including the assumptions
G-1
<PAGE>
regarding synergies, have been reasonably prepared on bases reflecting the
best available estimates and judgments of their respective managements at the
time of preparation as to the future financial performance of GSMS and PSS and
that they provide a reasonable basis upon which we can form our opinion. We
have also assumed that there have been no material changes in GSMS's or PSS's
assets, financial condition, results of operations, business or prospects
since the respective dates of their last financial statements made available
to us. We have assumed that the Merger will be consummated in a manner that
complies in all respects with the applicable provisions of the Securities Act
of 1933, as amended (the "Securities Act"), the Securities Exchange Act of
1934 and all other applicable federal and state statutes, rules and
regulations. In addition, we have not assumed responsibility for making an
independent evaluation, appraisal or physical inspection of any of the assets
or liabilities (contingent or otherwise) of GSMS or PSS, nor have we been
furnished with any such appraisals. You have informed us, and we have assumed,
that the Merger will be recorded as a pooling of interests under generally
accepted accounting principles. Finally, our opinion is based on economic,
monetary and market and other conditions as in effect on, and the information
made available to us as of, the date hereof. Accordingly, although subsequent
developments may affect this opinion, we have not assumed any obligation to
update, revise or reaffirm this opinion.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Merger Agreement,
without any further amendments thereto, and without waiver by GSMS of any of
the conditions to its obligations thereunder.
We have acted as financial advisor to GSMS in connection with the Merger and
will receive a fee for our services, including rendering this opinion, a
significant portion of which is contingent upon the consummation of the
Merger. In the ordinary course of our business, we actively trade the equity
securities of GSMS for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
We have also acted as an underwriter in connection with offerings of
securities of GSMS and PSS and performed various other investment banking
services for GSMS.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the stockholders
of GSMS pursuant to the Merger is fair to such stockholders from a financial
point of view, as of the date hereof.
We are not expressing an opinion regarding the price at which the PSS Common
Stock may trade at any future time. The Consideration to be received by the
stockholders of GSMS pursuant to the Merger is based upon a fixed exchange
ratio and, accordingly, the market value of the Consideration may vary
significantly.
This opinion is directed to the Board of Directors of GSMS in its
consideration of the Merger and is not a recommendation to any stockholder as
to how such stockholder should vote with respect to the Merger. Further, this
opinion addresses only the financial fairness of the Exchange Ratio to the
stockholders and does not address the relative merits of the Merger and any
alternatives to the Merger, GSMS's underlying decision to proceed with or
effect the Merger, or any other aspect of the Merger. This opinion may not be
used or referred to by GSMS, or quoted or disclosed to any person in any
manner, without our prior written consent, which consent is hereby given to
the inclusion of this opinion in any proxy statement or registration statement
to be filed with the Securities and Exchange Commission in connection with the
Merger. In furnishing this opinion, we do not admit that we are experts within
the meaning of the term "experts" as used in the Securities Act and the rules
and regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act.
Very truly yours,
/s/ Nationsbanc Montgomery Securities
NATIONSBANC MONTGOMERY SECURITIES, INC.
G-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Articles of Incorporation, as amended, and the
Amended and Restated Bylaws (the "Bylaws") of the Registrant set forth the
extent to which the Registrant's directors and officers may be indemnified
against liabilities they may incur while serving in such capacities. Such
indemnification will be provided to the fullest extent allowed by the Florida
Business Corporation Act, as amended from time to time (the "FBCA"), and
judicial or administrative decisions. Under these indemnification provisions,
the Registrant is required to indemnify any of its directors and officers
against any reasonable expenses (including attorneys' fees) incurred by him in
the defense of any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which he was made a party, or in defense
of any claim, issue or matter therein, by reason of the fact that he is or was
a director or officer of the Registrant or who, while a director or officer of
the Registrant, is or was serving at the Registrant's request as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
to the extent that such director or officer has been successful, on the merits
or otherwise, in such defense. The Registrant also may indemnify any of its
directors or officers against any liability incurred in connection with any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Registrant, in which event, additional determinations must be
made before indemnification is provided) by reason of the fact that he is or
was a director or officer of the Registrant who, while a director or officer
of the Registrant, is or was serving at the Registrant's request as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
if such director or officer acted in good faith and in a manner he believed to
be in, or not opposed to, the best interests of the Registrant, and with
respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. The Registrant may also provide advancement of expenses
incurred by a director or officer in defending any such action, suit or
proceeding upon receipt of a written affirmation of such officer or director
that he has met certain standards of conduct and an understanding by or on
behalf of such officer or director to repay such advances unless it is
ultimately determined that he is entitled to indemnification by the
Registrant. Notwithstanding the foregoing, the Bylaws of the Registrant
provide that the Registrant shall not be required to indemnify any of its
directors or officers in connection with a proceeding initiated by such person
unless such authorization for such proceeding was not denied by the Board of
Directors of the Registrant prior to 60 days after receipt of notice thereof
from such person stating his or her intent to initiate such proceeding and
only upon such terms and conditions as the Board of Directors may deem
appropriate.
The FBCA contains a provision which limits the personal liability for
monetary damages to the corporation or any other person for any statement,
vote, decision, or failure to act, regarding corporate management or policy,
by a director, unless the director breached or failed to perform his duties as
a director and such breach constitutes (i) a violation of criminal law, unless
the director has reasonable cause to believe his conduct was unlawful; (ii) a
transaction from which the director received an improper personal benefit;
(iii) an unlawful distribution under Florida law, (iv) in a proceeding by or
in the right of a corporation to procure a judgment in its favor or by or in
the right of a shareholder, conscious disregard for the best interest of the
corporation, or willful misconduct; or (v) in a proceeding by or in the right
of someone other that the corporation or a shareholder, recklessness or an act
or omission which was committed in bad faith or with malicious purpose or in a
manner exhibiting wanton or willful disregard of human rights, safety or
property. The Registrant maintains an insurance policy insuring the Registrant
and directors and officers of the Registrant against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated December 14, 1997, by and among
the Registrant, PSS Merger Corp. and Gulf South Medical Supply, Inc.
(included as Annex A to the Joint Proxy Statement/Prospectus and
incorporated by reference herein).
3.1 Amended and Restated Articles of Incorporation, as amended, of the
Registrant (incorporated by reference from the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-76580)).
3.2 Amended and Restated Bylaws of the Registrant (incorporated by
reference from the Registrant's Registration Statement on Form S-1
(Reg. No. 33-76580)).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws of the Registrant defining the rights of
holders of common stock of the Registrant.
5.1 Opinion of Fred Elefant, P.A.
8.1 Opinion of Alston & Bird LLP.
23.1 Consent of Alston & Bird LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Ernst & Young LLP.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of Thomas G. Hixon.
24.1 Power of Attorney (contained on signature page of this filing).*
99.1 Form of proxy for holders of the Registrant's common stock.*
99.2 Form of proxy for holders of Gulf South Medical Supply, Inc. common
stock.*
99.3 Stock Option Agreement, dated December 14, 1997, by and between Gulf
South Medical Supply, Inc. and the Registrant (included as Annex B to
the Joint Proxy Statement/Prospectus and incorporated by reference
herein).
99.4 Stock Option Agreement, dated December 14, 1997, by and between the
Registrant and Gulf South Medical Supply, Inc. (included as Annex C to
the Joint Proxy Statement/Prospectus and incorporated by reference
herein).
99.5 Voting Agreement, dated December 14, 1997, by and among the Registrant
and certain stockholders of Gulf South Medical Supply, Inc. (included
as Annex D to the Joint Proxy Statement/Prospectus and incorporated by
reference herein).
99.6 Voting Agreement, dated December 14, 1997, by and among Gulf South
Medical Supply, Inc. and certain stockholders of the Registrant
(included as Annex E to the Joint Proxy Statement/Prospectus and
incorporated by reference herein).
99.7 Form of Affiliate Agreement, dated December 14, 1997, by and between
Gulf South Medical Supply, Inc. and certain stockholders of the
Registrant (incorporated by reference from Exhibit 6 to the
Registrant's Schedule 13D dated December 14, 1997).
99.8 Form of Affiliate Agreement, dated December 14, 1997, by and between
the Registrant and certain stockholders of Gulf South Medical Supply,
Inc. (incorporated by reference from Exhibit 7 to the Registrant's
Schedule 13D dated December 14, 1997).
99.9 Consent of BT Alex. Brown Incorporated.*
99.10 Consent of NationsBanc Montgomery Securities LLC.*
</TABLE>
- --------
* Previously filed.
II-2
<PAGE>
(b) Financial Statement Schedules
Schedules are omitted because they are not required or are not applicable,
or the required information is shown in the financial statements or notes
thereto.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers for sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the Registrant's Certificate of Incorporation or
Bylaws, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefor,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment for the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the
II-3
<PAGE>
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(f) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(g) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Jacksonville, State of Florida, on February 24, 1998.
Physician Sales & Service, Inc.
/s/ Patrick C. Kelly
By: _________________________________
Patrick C. Kelly
Chairman of the Board and
Chief Executive Officer
II-5
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO ITS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES INDICATED ON FEBRUARY 24, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ Patrick C. Kelly Chairman of the Board and Chief
- ------------------------------------- Executive Officer (principal
PATRICK C. KELLY executive officer)
/s/ David A. Smith Executive Vice President, Chief
- ------------------------------------- Financial Officer and Director
DAVID A. SMITH (principal financial and accounting
officer)
/s/ John F. Sasen, Sr. President and
- ------------------------------------- Director
JOHN F. SASEN, SR.
/s/ Delmer W. Dallas Director
- -------------------------------------
DELMER W. DALLAS
/s/ T. O'Neal Douglas Director
- -------------------------------------
T. O'NEAL DOUGLAS
/s/ Fred Elefant Director
- -------------------------------------
FRED ELEFANT
/s/ Delores Kesler Director
- -------------------------------------
DELORES KESLER
/s/ William C. Mason Director
- -------------------------------------
WILLIAM C. MASON
/s/ James L. L. Tullis Director
- -------------------------------------
JAMES L. L. TULLIS
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
2.1 Agreement and Plan of Merger, dated December 14, 1997, by and
among the Registrant, PSS Merger Corp. and Gulf South Medical
Supply, Inc. (included as Annex A to the Joint Proxy
Statement/Prospectus and incorporated by reference herein).
3.1 Amended and Restated Articles of Incorporation, as amended, of
the Registrant (incorporated by reference from the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-76580)).
3.2 Amended and Restated Bylaws of the Registrant (incorporated by
reference from the Registrant's Registration Statement on Form
S-1 (Reg. No. 33-76580)).
4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws of the Registrant defining the rights
of holders of common stock of the Registrant.
5.1 Opinion of Fred Elefant, P.A.
8.1 Opinion of Alston & Bird LLP.
23.1 Consent of Alston & Bird LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Ernst & Young LLP.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of Thomas G. Hixon.
24.1 Power of Attorney (contained on signature page of this
filing).*
99.1 Form of proxy for holders of the Registrant's common stock.*
99.2 Form of proxy for holders of Gulf South Medical Supply, Inc.
common stock.*
99.3 Stock Option Agreement, dated December 14, 1997, by and between
Gulf South Medical Supply, Inc. and the Registrant (included as
Annex B to the Joint Proxy Statement/Prospectus and
incorporated by reference herein).
99.4 Stock Option Agreement, dated December 14, 1997, by and between
the Registrant and Gulf South Medical Supply, Inc. (included as
Annex C to the Joint Proxy Statement/Prospectus and
incorporated by reference herein).
99.5 Voting Agreement, dated December 14, 1997, by and among the
Registrant and certain stockholders of Gulf South Medical
Supply, Inc. (included as Annex D to the Joint Proxy
Statement/Prospectus and incorporated by reference herein).
99.6 Voting Agreement, dated December 14, 1997, by and among Gulf
South Medical Supply, Inc. and certain stockholders of the
Registrant (included as Annex E to the Joint Proxy
Statement/Prospectus and incorporated by reference herein).
99.7 Form of Affiliate Agreement, dated December 14, 1997, by and
between Gulf South Medical Supply, Inc. and certain
stockholders of the Registrant (incorporated by reference from
Exhibit 6 to the Registrant's Schedule 13D dated December 14,
1997).
99.8 Form of Affiliate Agreement, dated December 14, 1997, by and
between the Registrant and certain stockholders of Gulf South
Medical Supply, Inc. (incorporated by reference from Exhibit 7
to the Registrant's Schedule 13D dated December 14, 1997).
99.9 Consent of BT Alex. Brown Incorporated.*
99.10 Consent of NationsBanc Montgomery Securities LLC.*
</TABLE>
- --------
* Previously filed.
<PAGE>
Exhibit 5.1
FRED ELEFANT, P.A.
1650 Prudential Drive, Suite 105
Jacksonville, Florida 32207
February 19, 1998
Physician Sales & Service, Inc.
4345 Southpoint Boulevard
Jacksonville, Florida 32216
Ladies and Gentlemen:
This opinion is given in connection with the filing of a Registration
Statement on Form S-4 (the "Registration Statement") with the Securities and
Exchange Commission, by Physician Sales & Service, Inc., a corporation organized
and existing under the laws of the State of Florida ("PSS"), with respect to the
registration under the Securities Act of 1933, as amended, of 31,036,458 shares
of common stock, par value $.01 per share, of PSS (the "PSS Common Stock").
In rendering this opinion, I have examined such corporate records and
documents as I have deemed relevant and necessary as the basis for the opinion
set forth herein. In connection with the issuance of the shares of PSS Common
Stock, PSS plans to file an amendment to the Amended and Restated Articles of
Incorporation of PSS to increase the number of authorized shares of PSS from
60,000,000 to 150,000,000 (the "Amendment").
Based upon the foregoing, it is my opinion that, when the Amendment has
become effective, the shares of PSS Common Stock will, upon their issuance and
sale in accordance with the Registration Statement, be duly authorized, validly
issued, fully paid, and non-assessable under the Florida Business Corporation
Act as in effect on the date hereof.
This opinion is provided to you for your benefit and for the benefit of the
Commission, in each case, solely with regard to the Registration Statement, may
be relied upon by you and the Commission only in connection with the
Registration Statement, and may not be relied upon by any other person or for
any other purpose without my prior written consent.
I consent to the use of this opinion and to the reference made to my firm
under the caption "Legal Matters" in the Prospectus constituting part of the
Registration Statement.
FRED ELEFANT, P.A.
By: /s/ Fred Elefant
---------------------
Fred Elefant
<PAGE>
EXHIBIT 8.1
-----------
[LETTERHEAD OF ALSTON & BIRD]
February 19, 1998
Physician Sales & Service, Inc.
4345 Southpoint Boulevard
Jacksonville, Florida 32216
Gulf South Medical Supply, Inc.
One Woodgreen Place
Madison, Mississippi 39110
Re: Proposed Plan of Merger Involving Physician Sales & Service, Inc.
-----------------------------------------------------------------
and Gulf South Medical Supply, Inc.
-----------------------------------
Ladies and Gentlemen:
We have acted as counsel to Physician Sales & Service, Inc. ("PSS"), a
corporation organized and existing under the laws of the State of Florida, in
connection with the proposed merger of PSS Merger Corp ("Merger Corp"), a newly-
formed wholly-owned subsidiary of PSS, with and into Gulf South Medical Supply,
Inc. ("Gulf South"), a Delaware corporation, with Gulf South as the surviving
entity (the "Merger"). The Merger will be effected pursuant to the Agreement
and Plan of Merger by and among PSS, Merger Corp and Gulf South, made and
entered into as of December 14, 1997 (the "Agreement"). In our capacity as
counsel to PSS, our opinion has been requested with respect to certain of the
federal income tax consequences of the proposed Merger.
In rendering this opinion, we have examined (i) the Internal Revenue Code
of 1986, as amended (the "Code") and Treasury regulations, (ii) the legislative
history of applicable sections of the Code, and (iii) appropriate Internal
Revenue Service and court decisional authority. In addition, we have relied
upon certain information made known to us as more fully described below. All
capitalized terms used herein without definition shall have the respective
meanings specified in the Agreement, and unless otherwise specified, all section
references herein are to the Code.
INFORMATION RELIED UPON
-----------------------
In rendering the opinions expressed herein, we have examined such documents
as we have deemed appropriate, including:
(1) the Agreement;
(2) the Joint Proxy Statement/Prospectus of PSS and Gulf South included in
Registration Statement on Form S-4; and
(3) such additional documents as we have considered relevant.
In our examination of such documents, we have assumed, with your consent,
that all documents submitted to us as photocopies faithfully reproduce the
originals thereof, that such originals are authentic, that all such documents
have been or will be duly executed to the extent required, and that all
statements set forth in such documents are accurate. We have also obtained such
additional information and
<PAGE>
Page 2
February 19, 1998
representations as we have deemed relevant and necessary through consultation
with various officers and representatives of PSS and Gulf South.
You have advised us that the proposed transaction will enable the combined
organization to realize certain economies of scale and provide the combined
organization with expanded geographic markets. To achieve these goals, the
following will occur pursuant to the Agreement:
(1) Subject to the terms and conditions of the Agreement, at the
Effective Time, Merger Corp shall be merged with and into Gulf South in
accordance with the applicable provisions of the DGCL (the "Merger"). Gulf South
shall be the Surviving Corporation resulting from the Merger and shall become a
wholly owned Subsidiary of PSS and shall continue to be governed by the Laws of
the State of Delaware. The Merger shall be consummated pursuant to the terms of
the Agreement, which has been approved and adopted by the respective Boards of
Directors of PSS, Merger Corp and Gulf South and by PSS, as the sole stockholder
of Merger Corp.
(2) Subject to the provisions of Article 3 of the Agreement, at the
Effective Time, by virtue of the Merger and without any action on the part of
PSS, Gulf South, or the shareholders of either of the foregoing, the shares of
the constituent corporations shall be converted as follows:
(a) Each share of capital stock of PSS issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding
from and after the Effective Time.
(b) Each share of Merger Corp Common Stock issued and outstanding
immediately prior to the Effective Time shall cease to be outstanding and
shall be converted into one share of Gulf South Common Stock.
(c) Each share of Gulf South Common Stock (excluding shares held by
any Gulf South Entity or any PSS Entity) issued and outstanding immediately
prior to the Effective Time shall cease to be outstanding and shall be
converted into and exchanged for the right to receive 1.75 shares of PSS
Common Stock (the "Exchange Ratio").
(3) The Exchange Ratio shall be proportionately adjusted to reflect
fully the effect of any stock split, stock dividend (including any dividend or
distribution of securities convertible into PSS Common Stock), recapitalization,
reorganization or other like change with respect to such stock if the record
date therefor (in the case of a stock dividend) or the effective date thereof
(in the case of a stock split, recapitalization, reorganization or similar
change for which a record date is not established) shall be prior to the
Effective Time.
(4) Each of the shares of Gulf South Common Stock held by any Gulf
South Entity or by any PSS Entity shall be canceled and retired at the Effective
Time and no consideration shall be issued in exchange therefor.
(5) Neither the holders of Gulf South Common Stock nor the holders
of PSS Common Stock shall be entitled to dissenters' rights in connection with
the Merger.
(6) Notwithstanding any other provision of the Agreement, each
holder of shares of Gulf South Common Stock exchanged pursuant to the Merger who
would otherwise have been entitled to receive a fraction of a share of PSS
Common Stock (after taking into account all certificates delivered by such
holder) shall receive, in lieu thereof, cash (without interest and rounded to
the nearest whole cent) in an amount equal to such fractional part of a share of
PSS Common Stock multiplied by the market value of one share of PSS Common Stock
at the Effective Time. The market value of one share of PSS
<PAGE>
Page 3
February 19, 1998
Common Stock at the Effective Time shall be the average of the last sale price
of such common stock on the NASDAQ National Market (as reported by The Wall
Street Journal or, if not reported thereby, any other authoritative source
selected by PSS) for the ten most recent days that PSS Common Stock has traded,
ending on the last trading day preceding the Effective Time. No such holder will
be entitled to dividends, voting rights, or any other rights as a shareholder in
respect of any fractional shares.
(7) At the Effective Time, each option granted by Gulf South to
purchase shares of Gulf South Common Stock, which is outstanding immediately
prior thereto (an "Option" or, collectively, the "Options"), granted by Gulf
South under the Gulf South Stock Plans or otherwise, whether or not exercisable,
shall be converted into and become rights with respect to PSS Common Stock, and
PSS shall assume each Option, in accordance with the terms of the Gulf South
Stock Option Plan and stock option agreement by which it is evidenced, except
that from and after the Effective Time, (i) PSS and its Compensation Committee
shall be substituted for Gulf South and the Committee of Gulf South's Board of
Directors (including, if applicable, the entire Board of Directors of Gulf
South) administering the Gulf South Stock Plans, (ii) each Option assumed by PSS
may be exercised solely for shares of PSS Common Stock, (iii) the number of
shares of PSS Common Stock subject to such Option shall be equal to the number
of whole shares (rounded down to the nearest whole share) of Gulf South Common
Stock subject to such Option immediately prior to the Effective Time multiplied
by the Exchange Ratio, and (iv) the per share exercise price under each such
Option shall be adjusted by dividing the per share exercise price under each
such Option by the Exchange Ratio and rounding up to the nearest whole cent.
Notwithstanding the provisions of clauses (iii) and (iv) of the first sentence
of this paragraph, each Option which is an "incentive stock option" shall be
adjusted as required by Section 424 of the Code, and the regulations promulgated
thereunder, so as not to constitute a modification, extension or renewal of such
Option, within the meaning of Section 424(h) of the Code.
(8) At the Effective Time, PSS shall assume the obligations of Gulf
South under the Gulf South common stock purchase warrants outstanding at the
Effective Time, and thereafter, upon exercise, the warrantholder shall receive
the number of shares of PSS Common Stock equal to the product of (i) the
Exchange Ratio and (ii) the number of shares of Gulf South Common Stock for
which such warrant could have been exercised prior to the Merger.
With your consent, we have also assumed that the following statements are
true on the date hereof and will be true on the date on which the Merger is
consummated:
(a) The fair market value of the PSS Common Stock, and other
consideration, if any, received by each Gulf South shareholder will, in each
instance, be approximately equal to the fair market value of the Gulf South
Common Stock surrendered in exchange therefor.
(b) There is no plan or intention by the shareholders of Gulf South
who own five percent (5%) or more of the Gulf South Common Stock, and to the
best of the knowledge of the management of Gulf South, there is no plan or
intention on the part of the remaining shareholders of Gulf South to sell,
exchange, or otherwise dispose of a number of shares of Gulf South Common Stock
received in the Merger that would reduce the Gulf South shareholders' ownership
of PSS Common Stock to a number of shares having a value, as of the date of the
Merger, of less than fifty percent (50%) of the value of all of the formerly
outstanding PSS Common Stock as of the same date. For purposes of this
assumption, shares of PSS Common Stock exchanged for cash or other property, or
exchanged for cash in lieu of fractional shares of PSS Common Stock will be
treated as outstanding Gulf South Common Stock on the date of the Merger.
Moreover, shares of Gulf South Common Stock and shares of PSS Common Stock held
by Gulf South shareholders and otherwise sold, redeemed, or disposed of prior to
and in a transaction that may be considered in connection with the Merger, or
subsequent to the Merger will be considered in making this representation.
<PAGE>
Page 4
February 19, 1998
(c) Following the Merger, Gulf South will hold at least ninety
percent (90%) of the fair market value of its net assets and at least seventy
percent (70%) of the fair market value of its gross assets held immediately
prior to the Merger and at least ninety percent (90%) of the fair market value
of Merger Corp's net assets and at least seventy percent (70%) of the fair
market value of Merger Corp's gross assets held immediately prior to the Merger.
For purposes of this assumption, amounts paid by Gulf South or Merger Corp to
shareholders who receive cash or other property, amounts used by Gulf South or
Merger Corp to pay reorganization expenses, and all redemptions and
distributions (except for regular, normal dividends) made by Gulf South will be
included as assets of Gulf South or Merger Corp, respectively, immediately prior
to the Merger.
(d) Prior to the Merger, PSS will be in control of Merger Corp. For
purposes of this Tax Opinion, "control" means ownership of eighty percent (80%)
of the total combined voting power of all classes of stock entitled to vote and
at least eighty percent (80%) of the total number of shares of all other classes
of stock.
(e) Gulf South has no plan or intention to issue additional shares
of Gulf South Common Stock after the Merger that would result in PSS losing
control of Gulf South.
(f) PSS has no plan or intention to reacquire any PSS Common Stock
issued in the Merger.
(g) PSS has no plan or intention to liquidate Gulf South; to merge
Gulf South with or into another corporation; to sell or otherwise dispose of the
Gulf South Common Stock except for transfers of stock to corporations controlled
by PSS; or to cause Gulf South to sell or otherwise dispose of any of its assets
or of any of the assets acquired from Merger Corp, except for dispositions made
in the ordinary course of business or transfers of assets to a corporation
controlled by Gulf South.
(h) The liabilities of Merger Corp assumed by Gulf South (including
the liabilities to which the transferred assets of Merger Corp are subject), if
any, were incurred by Merger Corp in the ordinary course of its business.
(i) Following the Merger, Gulf South will continue its historic
business or use a significant portion of its historic business assets in a
business.
(j) PSS, Merger Corp, Gulf South, and the shareholders of Gulf South
will pay their respective expenses, if any, incurred in connection with the
Merger.
(k) There is no intercorporate indebtedness existing between PSS and
Gulf South or between Merger Corp and Gulf South that was issued, acquired, or
will be settled at a discount.
(l) In the Merger, shares of Gulf South Common Stock representing
control of Gulf South will be exchanged solely for PSS Common Stock. For
purposes of this assumption, shares of Gulf South Common Stock exchanged for
cash or other property originating with PSS will be treated as outstanding Gulf
South Common Stock on the date of the Merger.
(m) At the time of the Merger, Gulf South will not have outstanding
any warrants, options, convertible securities, or any other type of right
pursuant to which any person could acquire stock in Gulf South that, if
exercised or converted, would affect PSS's acquisition or retention of control
of Gulf South.
<PAGE>
Page 5
February 19, 1998
(n) PSS does not own, nor has it owned during the past five years,
any Gulf South Common Stock.
(o) Neither PSS nor Gulf South are investment companies. For
purposes of the foregoing, an "investment company" is a corporation that is a
regulated investment company, a real estate investment trust, or a corporation
fifty percent (50%) or more of the value of whose total assets are stock and
securities and eighty percent (80%) or more of the value of whose total assets
are assets held for investment. In making the fifty percent (50%) and eighty
percent (80%) determinations under the preceding sentence, stock and securities
in any subsidiary corporation shall be disregarded and the parent corporation
shall be deemed to own its ratable share of the subsidiary's assets, and a
corporation shall be considered a subsidiary if the parent owns fifty percent
(50%) or more of the combined voting power of all classes of stock entitled to
vote, or fifty percent (50%) or more of the total value of shares of all classes
of stock outstanding.
(p) On the date of the Merger, the fair market value of the assets
of Gulf South will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which the assets are subject.
(q) Gulf South is not under the jurisdiction of a court in a case
under Title 11 of the United States Code or a receivership, foreclosure or
similar proceeding in a federal or state court.
(r) The payment of cash to Gulf South shareholders in lieu of
fractional shares of PSS Common Stock will not be a separately bargained for
consideration, but rather will represent a mere mechanical rounding of the
fractional share interests that may result from the Merger, and will be
undertaken solely for the purpose of avoiding the expense and inconvenience of
issuing and transferring fractional shares. The total cash consideration that
will be paid to Gulf South shareholders in lieu of fractional shares of PSS
Common Stock will represent less than one percent (1%) of the total
consideration issued in the Merger. No shareholder of Gulf South will receive an
amount in cash greater than the value of one full share of PSS Common Stock in
lieu of fractional shares.
(s) None of the compensation received by any shareholder-employees
of Gulf South will be separate consideration for, or allocable to, any of their
shares of Gulf South Common Stock. None of the shares of PSS Common Stock
received by any shareholder-employees in exchange for their shares of Gulf South
Common Stock pursuant to the Merger will be separate consideration for, or
allocable to, any employment agreement. Any compensation paid to a Gulf South
shareholder-employee who continues as an employee of PSS subsequent to the
Merger will be for services actually rendered and will be commensurate with
amounts paid to third parties bargaining at arm's length for similar services.
(t) At all times during the five-year period ending on the effective
date of the Merger, the fair market value of all of Gulf South's United States
real property interests was and will have been less than fifty percent (50%) of
the total fair market value of (a) its United States real property interests,
(b) its interests in real property located outside the United States, and (c)
its other assets used or held for use in a trade or business. For purposes of
the preceding sentence, (x) United States real property interests include all
interests (other than an interest solely as a creditor) in real property and
associated personal property (such as movable walls and furnishings) located in
the United States or the Virgin Islands and interests in any corporation (other
than a controlled corporation) owning any United States real property interest,
(y) Gulf South is treated as owning its proportionate share (based on the
relative fair market value of its ownership interest to all ownership interests)
of the assets owned by any controlled corporation or any partnership, trust, or
estate in which Gulf South is a partner or beneficiary, and (z) any such entity
in turn is treated as owning its proportionate share of the assets owned by any
controlled corporation or any partnership, trust, or estate in which the entity
is a partner or beneficiary. As used in this paragraph, "controlled corporation"
means any corporation at least fifty percent (50%) of the fair
<PAGE>
Page 6
February 19, 1998
market value of the stock of which is owned by Gulf South, in the case of a
first-tier subsidiary of Gulf South, or by a controlled corporation, in the case
of a lower-tier subsidiary.
(u) The Agreement represents the entire understanding of PSS, Gulf
South, and Merger Corp with respect to the Merger.
OPINIONS
--------
Based solely on the information submitted and the representations set forth
above, we are of the opinion that:
(1) The Merger will qualify as a reorganization within the meaning
of Section 368(a) of the Code. Each of PSS, Merger Corp, and Gulf South will be
a party to a reorganization within the meaning of Section 368(b).
(2) No gain or loss will be recognized by PSS, Merger Corp or Gulf
South as a consequence of the Merger.
(3) No gain or loss will be recognized by any Gulf South shareholder
upon the receipt of PSS Common Stock solely in exchange for its shares of Gulf
South Common Stock.
(4) The basis of the PSS Common Stock received by a Gulf South
shareholder in the transaction will be the same as the basis of the Gulf South
Common Stock surrendered in exchange therefor less the basis allocated to any
fractional share of PSS Common Stock settled by cash payment.
(5) The holding period of the PSS Common Stock received by a Gulf
South shareholder (including the holding period of any fractional share
interest) will include the holding period of the Gulf South Common Stock
surrendered in exchange therefor, provided the Gulf South Common Stock was held
as a capital asset on the date of the exchange.
(6) The payment of cash to the Gulf South shareholders in lieu of
fractional shares of PSS Common Stock will be treated as if the fractional
shares were issued as part of the exchange and then redeemed by PSS. These cash
payments will be treated as having been received as distributions in full
payment in exchange for the fractional shares of PSS Common Stock redeemed as
provided in Section 302(a).
The opinions expressed herein are based upon existing statutory,
regulatory, and judicial authority, any of which may be changed at any time with
retroactive effect. In addition, our opinions are based solely on the documents
that we have examined, the additional information that we have obtained, and the
statements set out herein, which we have assumed are true on the date the Merger
is consummated. Our opinions cannot be relied upon if any of the facts
contained in such documents or if such additional information is, or later
becomes, inaccurate, or if any of the statements set out herein is, or later
becomes, inaccurate. Finally, our opinions are limited to the tax matters
specifically covered thereby, and we have not been asked to address, nor have we
addressed, any other tax consequences of the proposed Merger, including for
example any issues related to accounting methods or any income or gain
recognition pursuant to Treasury Regulations issued under Section 1502 of the
Code.
This opinion is being provided solely for the use of Physician Sales &
Service, Inc., Gulf South Medical Supply, Inc. and the shareholders of Gulf
South Medical Supply, Inc. No other person or party shall be entitled to rely
on this opinion.
<PAGE>
Page 7
February 19, 1998
Very truly yours,
ALSTON & BIRD LLP
By: /s/ Pinney L. Allen
---------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF ALSTON & BIRD LLP
We hereby consent to the references to the firm and the use of our opinion
letter, dated February 19, 1998 and addressed to Physician Sales & Service, Inc.
and Gulf South Medical Supply, Inc., in the Joint Proxy Statement/Prospectus
constituting part of the Registration Statement on Form S-4 relating to the
proposed merger of Physician Sales & Service, Inc. and Gulf South Medical
Supply, Inc.
/s/ ALSTON & BIRD LLP
Atlanta, Georgia
February 19, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
report dated December 18, 1997 (and to all references to our Firm) included in
or made a part of this registration statement.
/s/ Arthur Andersen LLP
Jacksonville, Florida
February 23, 1998
<PAGE>
Exhibit 23.3
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use 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
of Gulf South Medical Supply, Inc. for the year ended December 31, 1996,
included in the Joint Proxy Statement/Prospectus of Physician Sales and Service,
Inc. and Gulf South Medical Supply, Inc. that is made a part of this
Registration Statement.
/s/ Ernst & Young LLP
Jackson, Mississippi
February 20, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Gulf South Medical Supply:
We consent to the incorporation by reference in the Joint Proxy Statement/
Prospectus of Physician Sales and Service, Inc. and of Gulf South Medical
Supply, Inc. that is made a part of this registration statement (No. 333-44323)
on Form S-4, of our report dated April 10, 1996, with respect to the
consolidated balance sheets of Gateway Healthcare Corporation and subsidiary, a
then majority-owned subsidiary of North American Fund II, as of December 31,
1995 and 1994, and the related consolidated statements of operations, changes in
stockholder's equity, and cash flows for the years then ended, which report
appears in the Form 8-K/A of Gulf South Medical Supply dated March 11, 1997, and
to the reference to our firm under the caption "Experts."
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
February 20, 1998
<PAGE>
Exhibit 23.5
CONSENT OF THOMAS G. HIXON
The undersigned hereby consents, pursuant to Rule 438 of the Securities
Act of 1933, as amended, to the references to him in the Joint Proxy
Statement/Prospectus constituting part of the Registration Statement on Form S-4
relating to the proposed merger of Physician Sales & Service, Inc. and Gulf
South Medical Supply, Inc., with respect to his being elected or appointed as a
director of Physician Sales & Service, Inc., under the circumstances described
therein.
/s/ Thomas G. Hixon
--------------------------
Thomas G. Hixon
Madison, Mississippi
February 24, 1998
