-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Og5ECYbbQq2c03g45cHtyP7GwrRY/VIDPK990mf5cUgOMz+1r/cTbupAy/q/DZAm ZDZSH/J0zOZd5IOdLUMCtA== 0000950134-97-002034.txt : 19970324 0000950134-97-002034.hdr.sgml : 19970324 ACCESSION NUMBER: 0000950134-97-002034 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GULF SOUTH MEDICAL SUPPLY INC CENTRAL INDEX KEY: 0000889885 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 640831411 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-23540 FILM NUMBER: 97560567 BUSINESS ADDRESS: STREET 1: 426 CHRISTINE DR CITY: RIDGELAND STATE: MS ZIP: 39157 BUSINESS PHONE: 6018565900 MAIL ADDRESS: STREET 1: 426 CHRISTINE DR CITY: RIDGELAND STATE: MS ZIP: 39157 10-K405 1 FORM 10-K405 FOR FISCAL YEAR END DECEMBER 31, 1996 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________________ to _______________. Commission File Number 0-21354 GULF SOUTH MEDICAL SUPPLY, INC. (Exact name of registrant as specified in its charter) DELAWARE 64-0831411 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) ONE WOODGREEN PLACE 39110 MADISON, MISSISSIPPI (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (601) 856-5900 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.01 Par Value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- 2 -2- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value as of March 11, 1997, of Common Stock held by non-affiliates of the Registrant: $212,434,354 based on the last reported sale price on that date on The Nasdaq Stock Market. Number of shares of Common Stock outstanding at March 11, 1997: 16,308,564. DOCUMENTS INCORPORATED BY REFERENCE The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 1996. Portions of such proxy statement are incorporated by reference in Part III of this Report. 3 -3- ITEM 1. BUSINESS. GENERAL Gulf South is a leading national distributor of medical supplies and related products to the long-term care industry. The Company provides products and services to approximately 10,500 long-term care facilities in all 50 states. The Company's customers range from independent nursing home operators to large national chains offering a broad range of healthcare services, such as Beverly Enterprises, Multicare, Grancare, National Healthcare and Sun Healthcare Group, as well as home healthcare providers, hospices and sub-acute, rehabilitative and transitional care providers. Through its 18 full-service regional distribution centers, the Company offers both national coverage to multi-facility customers and local service to individual facilities and independent operators. Gulf South believes that it has achieved its success to date due to the expertise gained from more than 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 the Company estimates that such sales are growing at an annual rate in excess of 10%. The Company believes that the home healthcare and sub-acute care segments are growing at a faster rate than the nursing home segment of the long-term care industry. Medical supplies and related products are distributed to healthcare providers through two primary channels of distribution. Distribution to hospitals and surgical clinics generally is made through several large national hospital distributors or directly by manufacturers. In contrast, distribution to long-term care facilities typically is made through many local and regional distributors as well as several national distributors. Hospital Distribution. The hospital distribution market is characterized by customers that have physical plants with large inventory storage capacity and that serve large numbers of patients primarily with short-term acute-level medical care. In order to service this market and maintain economies of scale, the large national hospital distribution companies have established multiple warehouse facilities near the largest concentrations of customers, generally in urban or metropolitan areas, with an infrastructure that allows them to deliver goods in bulk volume with frequent, and in many cases same day, service. Hospital distributors typically maintain their own trucking fleets to deliver products. Because of the specialized acute care services performed by hospitals, hospital distributors must handle an extremely broad and diverse range of products that focus on the short-term medical and surgical needs of hospital patients. Distribution to Long-Term Care Industry. Distributors serving the long-term care market must address a different set of customer needs. The long-term care market is highly fragmented, consisting of large numbers of independent operators, small to mid-sized local and regional chains and several national chains. Facilities are typically located in suburban and rural areas, often at considerable distances from one another. Long-term care facilities generally serve a limited patient population (typically from 20 to 200 beds) and have relatively small physical plants with limited inventory storage capacity. Although long-term care facilities do not demand immediate same-day delivery, they require distributors to deliver products in small quantities (including "broken case" shipments) on a consistent and reliable basis. Distributors serving the long-term care market must generally have the capability to tailor their ordering, shipping and billing processes to suit customers' individualized needs. Because of the fragmented structure and the specialized service needs of the long-term care market, long-term care facilities have traditionally been served by locally- or regionally-based distributors which maintain supply relationships with a limited number of customers within a finite geographic area. However, these local and regional distributors are increasingly subject to intense competitive pressures as a result of the consolidation of independent long-term care operators by large national chains and a growing trend by manufacturers to deal with fewer and larger distributors in this market. Certain Trends Affecting the Long-Term Care Market. Economic, regulatory, political and demographic pressures are combining to cause significant changes in the long-term care industry. Cost containment pressures 4 -4- 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. The Company believes that the following factors have been of principal importance in its ability to achieve its present market position: Focus on Long-Term Care Industry. Since its founding more than twelve years ago, Gulf South has focused primarily on serving the long-term care market. Based on its industry experience and expertise, the Company has developed the necessary distribution systems and services that assist operators of long-term care facilities to source products, manage inventory usage and control costs. The Company believes that its long-standing focus on the needs of the long-term care industry has enabled it to develop and execute a consistent management strategy and to foster stable, long-term relationships with its customers. Consistent and Reliable Customer Service. The Company offers customers a high level of service and support which it believes differentiates it from its competitors, particularly small to medium-sized local and regional distributors. The Company's objective is to enable customers to place orders easily and conveniently, to fill orders accurately and completely and to deliver orders with prompt, consistent and reliable service. As of December 31, 1996, the Company 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, the Company offers customers various value-added services, including monthly usage reports, inventory control/ancillary billing software programs, next-day invoicing and customized programs designed to assist customers to manage inventory usage and control costs. The Company centralizes all customer ordering and invoicing and the delivery of value-added services through its Jackson facility enabling the Company to provide consistent levels of customer service to each individual facility within multi-location chains. Broad Product Offering at Competitive Prices. Gulf South presently offers over 10,000 medical supplies and related products and updates its product offerings regularly to meet its customers' changing needs. The Company's sales volume, national coverage and stable vendor relationships enable it to obtain products from suppliers at favorable negotiated prices. Through the breadth of its product offerings and effective use of its purchasing leverage with vendors, the Company has the capability to serve as a competitively priced, single source of supply to a wide variety of long-term care facilities. 5 -5- National Coverage With a Local Presence. With 18 full-service regional distribution centers, each supported by a team of direct sales representatives, the Company is able to provide consistent and reliable coverage to mid-sized and large chains that operate in different geographic areas. The Company also maintains a strong local presence in each region to support independent operators and individual facilities within multi-location chains. GROWTH STRATEGY The Company believes that the continuing implementation of the business strategies described above, coupled with a focus on the following growth strategies, will enhance its ability to expand its sales to existing and new customers: Emphasis on Attracting New Customers. The Company's strategy is to increase its emphasis on attracting large regional and national chains as well as to target both small chains and independent operators. The Company believes that it can increase sales to large regional and national chains by adding new distribution centers, expanding its existing distribution centers and by hiring additional direct sales or other personnel and through national account sales efforts. The Company believes that it can increase its penetration of small chains and independent operators, particularly in rural areas, by increasing its direct sales force and utilizing group purchase organizations. The Company believes that its high levels of customer service and value-added support, breadth of its product offerings and competitive pricing afford it a competitive advantage over the regional and local distributors that typically target these customers. Increased Penetration of Existing Customer Base. The Company intends to capitalize on opportunities to expand sales to existing customers. The Company believes that continuing industry consolidation will result in an increase in the number of facilities operated by mid-sized and large chains presently served by the Company. In addition, rising acuity levels within the patient population of long-term care facilities are expected to increase the breadth and amount of products required by the Company's existing customers. The Company also believes that cost containment pressures will continue to create incentives for facility operators to deal increasingly with fewer distributors that, like the Company, can provide inventory management and cost control programs. Addressing Needs of Emerging Market Segments. The Company intends to increase its focus on the home healthcare, hospice and sub-acute, rehabilitative and transitional care segments of the long-term care market. The Company believes that the home healthcare and sub-acute care segments are growing at a faster rate than the nursing home segment of the long-term care industry. Acquisitions. The Company's strategy is to augment its internal growth with the acquisition of medical supply distributors that serve complementary markets or that supplement the Company's presence in existing markets. On December 26, 1996, the Company completed its acquisition of all of the outstanding capital stock and warrants of Gateway Healthcare Corporation, a national supplier of disposable medical surgical supplies to the long-term care and alternate care market places primarily located in New England and the Mid-Atlantic area, with sales of approximately $67 million during the twelve-month period prior to its acquisition. On February 29, 1996, the Company acquired all the outstanding common stock of Bayer Medical Service Systems, Inc., a regional medical supply distributor serving the long-term care markets of the Ohio Valley and Florida. Bayer Medical Service Systems had revenues of approximately $10.0 million during the twelve-month period prior to its acquisition. The Company also acquired certain operating assets and liabilities of Express Care, L.P. on April 1, 1996, Alternative Healthcare Services on July 1, 1996 and TDR Medical, LLC on December 10, 1996, serving principally the Southeast, Southern California and South Texas long-term care markets, respectively. See "Factors Affecting Future Performance." The foregoing discussion contains forward-looking statements which involve risks and uncertainties, and the Company's actual experience may differ materially from that discussed above. Factors that may cause such a difference include, but are not limited to, those discussed in "Factors Affecting Future Performance." 6 -6- CUSTOMERS The Company's customers range from independent nursing home operators to large national chains offering a broad range of healthcare services, as well as providers of home healthcare and sub-acute, rehabilitative and transitional care. Nursing home operators tend to focus on providing custodial or skilled nursing care, principally to elderly patients. In addition, many of these facilities are increasingly setting aside a portion of their beds for sub-acute care patients. Principal customers of the Company providing this form of long-term care include Beverly Enterprises, Multicare, Grancare, National Healthcare and Sun Healthcare Group. Home healthcare providers offer a wide range of services such as pulmonary and infusion therapy to patients who have been discharged from hospitals or sub-acute care facilities. Customers of the Company providing home healthcare include Vitas Healthcare and Apria Healthcare. Sub-acute, rehabilitative and transitional care providers generally serve patients who are recovering from major injury, surgery or illness, but no longer need the full services of a general acute care hospital. Principal customers of the Company providing sub-acute, rehabilitative and transitional care include Sun Healthcare Group. The Company believes that approximately 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. The Company estimates that large nursing home chains (operating more than 50 facilities) and mid-sized nursing home chains (operating between 20 and 50 facilities) accounted for approximately 24.2% of the facilities served by the Company in 1996 and 50.4% of the Company's 1996 net sales. In 1996, the Company's largest five customers accounted for approximately 32.2% of net sales; Beverly Enterprises accounted for 19.6% of net sales for the year ended December 31, 1996. The Company does not have long-term contracts with any of its customers. Although the Company has not to date experienced any failure to collect accounts receivable from its largest customers, an adverse change in the financial condition of any of these customers, including as a result of a change in governmental or private reimbursement programs, which would cause the accounts receivable to become uncollectible or subject to extended payment terms, could have a material adverse effect upon the Company's results of operations or financial condition. CUSTOMER SERVICE/ORDER ENTRY AND FULFILLMENT The Company is committed to providing high levels of customer service and support, the principal basis of which is accurate and complete order fulfillment and reliable, consistent deliveries. As a result of its efficiency in order entry and order fulfillment, the Company estimates that, as of December 31, 1996, it shipped more than 95% of all orders on the same day the order is placed with a fill rate of 98%. Since approximately 80% of customer orders are placed by telephone, the efficient handling of incoming calls is critical to the Company's business. The Company offers to its customers a toll-free telephone number and fax line and is currently using its EDI ordering capability to accept electronically transmitted orders from several of its major customers. All orders are received by 86 customer service representatives primarily at the Company's Jackson distribution facility who utilize on-line computer terminals to enter customer orders and to access information about products, product availability, pricing, promotions and the customer's purchasing history. Following entry of an order, the order is electronically transmitted to the distribution center nearest the customer's facility and a packing slip for the entire order is printed for order fulfillment. The Company imposes no minimum dollar amount on orders. The Company believes that the reliable and consistent delivery of complete and accurate orders is more important to its customers than immediate same-day delivery. Accordingly, each distribution facility stocks the 4,000 most frequently ordered products, with the Jackson facility stocking an additional 6,000 products. Product back orders average less than 2% of products ordered. The Company estimates that approximately 60% of its orders are shipped by United Parcel Service while the remaining orders are shipped by various common carriers. The Company generally does not charge customers for shipping costs for orders of $300 or more. Because the Company seeks to service a customer's entire order from the distribution center nearest the customer's facility, the Company estimates that 90% of the customers receive their orders within one or two business days of the order date and 95% of the customers receive their orders within three business days. Customer service operations of the Company are primarily centralized at its Jackson facility, enabling the Company to provide consistent levels of customer service to all customers, including to each individual facility operated by a large multi-location chain. The Company's 7 -7- customer service representatives are provided with detailed product knowledge and receive ongoing training regarding new products and promotions enabling them to provide prompt and efficient service and accurately answer customer inquiries. From time to time, the Company arranges for manufacturers to make presentations on new products both to the customer service representatives and directly to its customers. An essential part of the Company's commitment to customer service and customer relations is the value-added support services developed by the Company to meet the unique needs of long-term care providers as well as the specialized needs of individual customers. These services are made available both to large chains and to independent operators and are generally provided by the Company without cost to the customer. The principal value-added services currently provided by the Company include the following: Monthly Usage Reports. The Company has been producing monthly usage reports for its customers since the early 1980's and has refined such reports over time in response to customer needs. The Company believes that usage reports are critical to managing inventory consumption and controlling costs. These reports identify each product purchased by a facility during the month, the quantity purchased, the price per product and the total price paid and also provide year-to-date totals. The monthly usage reports enable customers to manage supply requirements, maintain inventory controls, prepare monthly and yearly forecasts and budgets and enable operators of multi-facility chains to track product purchases on either a facility-by-facility or chain-wide basis. Inventory Control/Ancillary Billing Software Programs. Since 1990, the Company has offered software programs which allow a customer to maintain a real time inventory count and order products on a just-in-time basis, as well as to monitor patients' utilization of products for Medicaid and Medicare reimbursement purposes. A product identification number is assigned to each product, and when a product is utilized or distributed within the facility, the customer enters the product identification number into its computer system either manually or by use of a bar code scanner. Next-Day Invoicing. Because the Company seeks to ship each entire order at one time from a single distribution center, the Company is able to generate and mail a single invoice directly to the customer within one business day of the order date. As a result, the customer generally receives the invoice concurrently with or within one day of receiving the order, facilitating efficient verification of charges and reducing handling and administrative costs for the customer. Customized Services. The Company frequently works directly with a customer to provide services tailored to its specialized needs. The Company will generate customized invoices for customers upon request. For those customers that use an inventory control/ancillary billing system, the Company can provide bar code labels to support the customer's software program, making the scanning process simple for those customers. To enable multi-facility chains to better manage costs and control product selection, the Company provides each of its chain customers with a customized ordering guide which contains only those products selected by the chain operator in advance to be offered within each of its facilities. The Company presently publishes approximately 40 customized ordering guides. PRODUCTS The Company offers a comprehensive selection of over 10,000 medical supplies and related products consisting largely of name brand items. The breadth of the Company's product offerings and its special order capabilities enable it to provide its customers with the convenience of one-stop shopping. The following chart sets forth the principal categories of products offered by the Company and the top selling types of products in each category, if appropriate, and percentage of 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 8 -8- 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 RESPIRATORY THERAPY SUPPLIES (5.8%) INCONTINENT SUPPLIES (21.8%) Oxygen Supplies Adult diapers and underpads Ventilator supplies Trach and suction supplies OSTOMY SUPPLIES (1.2%) Wound care supplies, adult diapers and underpads and exam gloves were the Company'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. The Company's Product Task Force regularly evaluates customer response to product offerings and sales results in order to make informed product selections and pricing decisions. Product selection is mainly a function of customer preference, and the Company expects to continue to increase its product line breadth as customer demand warrants. The Company has increased the number of products offered from approximately 4,800 in 1989 to over 10,000 in 1996. SALES AND MARKETING At December 31, 1996, the Company employed a direct sales force of 53 professionals who have primary responsibility for maintaining relationships with existing customers and identifying and soliciting new customers. Once a customer relationship is established, the sales force serves primarily to supplement and support sales through the Company's catalogs. 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 the Company's 18 regional distribution centers, enabling the Company to establish a local sales presence in the markets served by each center. The Company currently anticipates that it will increase the size of its direct sales force to approximately 90 sales professionals by the end of 1997. The Company trains its sales professionals through an ongoing program of identifying and solving customer needs, augmenting selling skills and providing detailed product knowledge. Manufacturers support this program by assisting from time to time in the training of the Company's sales professionals. The Company markets its products to customers primarily through a variety of catalogs. The Company 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, the Company publishes a standard ordering guide which contains pricing information and easy-to-follow ordering procedures for the approximately 750 top selling products carried by the Company. The Company also publishes for certain of its chain customers customized ordering guides which contain only those products requested to be included by the chain. In addition, the Company has introduced specialty ordering guides based on product category, such as home respiratory therapy supplies. The Company guarantees the published pricing information for the life of each of its ordering guides (generally six months). PURCHASING The Company believes that effective purchasing is a key element to providing name brand products at competitive prices. The Company believes that its high volume purchases have increased its purchasing power with its primary suppliers, resulting in volume discounts and rebates, favorable return policies and promotional allowances. 9 -9- The Company regularly evaluates supplier relationships and considers alternate sourcing as appropriate to assure competitive costs and quality standards. No single supplier represented more than 12% of the total cost of the products purchased by the Company in 1996. The Company'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 the Company in 1996. Kendall Healthcare Products Company accounted for over 9.5% of the total cost of products purchased by the Company in 1996. As is customary in the industry, the Company generally does not have any long-term contracts with its suppliers. The Company's management information system is used to monitor and manage its inventory. Generally, the Company has been able to return any unsold or obsolete inventory to the manufacturer, resulting in negligible inventory write-offs. At December 31, 1996, the Company maintained an investment in inventory of approximately $27.2 million, of which approximately $535,000 (less than 2%) was over 180 days old. The Company turned its inventory approximately seven times during 1996. The Company also utilizes its management information system to minimize its inventory out-of-stock position. COMPETITION The Company faces intense competition from many regional and local distributors in its markets as well as from several companies that distribute products to long-term care facilities on a national basis. The Company believes that there are three principal competitors that distribute products to long-term care facilities on a national basis, General Medical Corporation (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. Certain of the Company's current competitors, including many national hospital distributors, have substantially greater capital resources, sales and marketing experience and distribution capabilities than the Company. In response to competitive pressures from any of its current or future competitors, the Company may be required to lower selling prices in order to maintain or increase market share, and such measures could adversely affect the Company's operating results. The Company believes that the principal competitive factors in distributing products to the long-term care market are the quality and level of customer service, product pricing, breadth and quality of products offered and consistency and stability of business relationships with customers. The Company believes that it competes favorably with respect to each of these factors. In particular, the Company believes it differentiates itself from the smaller local and regional distributors with which it competes on account of the breadth of its product offerings, its ability to acquire goods from suppliers at favorable prices and its national coverage which enables it to offer consistent and reliable service to multi-location chains. In addition, the Company believes that it differentiates itself from most other national distributors in the long-term care market as a result of its focus on providing services that can be integrated with customers' internal budgetary and cost containment systems. GOVERNMENT REGULATION The Company's business is subject to regulation under the federal Food, Drug and Cosmetic Act and the Occupational Safety and Health Act, as well as under certain state regulations, because of its labeling, storage and handling of certain drugs and medical devices. The Company believes that sales of products that are subject to such regulation are not material in the aggregate. The Company believes that it is in substantial compliance with such federal and state laws and regulations and possesses all material licenses and permits required for the conduct of its business. 10 -10- EMPLOYEES As of December 31, 1996, the Company employed 642 persons (all on a full-time basis), of whom 125 were engaged in management, administration and accounting, 91 were engaged in direct sales, 145 were engaged in customer service, purchasing and credit collection and 281 were engaged in warehouse and distribution operations. Of these employees, 177 were located at the Company's corporate headquarters and distribution center in Jackson. The Company considers its employee relations to be excellent. No employees are covered by collective bargaining agreements. ITEM 2. PROPERTIES. The Company 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 the Company.
DISTRIBUTION CENTER LOCATION LEASED/OWNED - ---------------------------- ------------ Atlanta, GA . . . . . . . . . . . . . . . . . . . . . . . Leased Columbus, OH . . . . . . . . . . . . . . . . . . . . . . Leased Dallas, TX . . . . . . . . . . . . . . . . . . . . . . . Leased Dallas, TX* . . . . . . . . . . . . . . . . . . . . . . . Leased Harrisburg, PA . . . . . . . . . . . . . . . . . . . . . Leased Indianapolis, IN* . . . . . . . . . . . . . . . . . . . . Leased Jackson, MS . . . . . . . . . . . . . . . . . . . . . . . Owned Los Angeles, CA . . . . . . . . . . . . . . . . . . . . . Leased Madison, WI . . . . . . . . . . . . . . . . . . . . . . . Leased Manchester, NH . . . . . . . . . . . . . . . . . . . . . Leased Memphis, TN . . . . . . . . . . . . . . . . . . . . . . . Leased Orlando, FL . . . . . . . . . . . . . . . . . . . . . . . Leased Orlando, FL* . . . . . . . . . . . . . . . . . . . . . . Leased Phoenix, AZ . . . . . . . . . . . . . . . . . . . . . . . Leased Warren, RI* . . . . . . . . . . . . . . . . . . . . . . . Leased Raleigh, NC . . . . . . . . . . . . . . . . . . . . . . . Leased Richmond, VA . . . . . . . . . . . . . . . . . . . . . . Leased Roanoke, VA . . . . . . . . . . . . . . . . . . . . . . . Leased Sacramento, CA . . . . . . . . . . . . . . . . . . . . . Leased San Antonio, TX . . . . . . . . . . . . . . . . . . . . . Leased Sellinsgrove, PA* . . . . . . . . . . . . . . . . . . . . Leased ADMINISTRATIVE OFFICES - ---------------------- Richmond, VA . . . . . . . . . . . . . . . . . . . . . . Leased Sunbury, PA . . . . . . . . . . . . . . . . . . . . . . . Owned Madison, MS (headquarters) . . . . . . . . . . . . . . . Owned
*Gateway Healthcare operations which have been, or are scheduled to be, discontinued. The Company 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. The Company believes that, if necessary, it could find facilities to replace such leased premises without suffering a material effect on its business. ITEM 3. LEGAL PROCEEDINGS. The Company is a defendant from time to time in lawsuits incidental to its business. The Company currently is not a party to, and none of its property is subject to, any material legal proceedings. 11 -11- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's security holders through the solicitation of proxies or otherwise during the fourth quarter of the Company's fiscal year 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the NASDAQ National Market under the symbol GSMS. The following table sets forth for the periods indicated the high and low closing sale prices for the Common Stock, which reflect a 2-for-1 stock split effected in the form of a stock dividend on May 25, 1995:
STOCK PRICE ----------- 1995 HIGH LOW - ---- ---- --- First Quarter . . . . . . . . . .$20 7/8 $16 1/2 Second Quarter . . . . . . . . . 26 18 1/4 Third Quarter . . . . . . . . . . 32 1/2 23 1/4 Fourth Quarter . . . . . . . . . 30 3/4 19 1996 - ---- First Quarter . . . . . . . . . .$39 $25 3/4 Second Quarter . . . . . . . . . 49 1/2 35 1/4 Third Quarter . . . . . . . . . . 41 1/2 15 Fourth Quarter . . . . . . . . . 32 1/4 21 1/4
On March 11, 1997, the closing price for the Common Stock was $20 7/8 per share. The trading price of the Company's Common Stock may be subject to fluctuations in response to quarter-to-quarter variations in operating results, changes in earnings estimates by investment analysts or changes in business or regulatory conditions affecting the Company, its customers or its competitors. The market price of securities of companies in the healthcare industry have been, and may continue to be, volatile. Such fluctuations and volatility may adversely affect the price of the Company's Common Stock. As of March 11, 1997, there were approximately 45 stockholders of record. The Company believes that shares of the Company's Common Stock held in bank, money management, institution and brokerage house "nominee" names may account for at least an estimated 4,500 additional beneficial holders. The Company has not paid any cash dividends on its capital stock in the past four fiscal years and does not anticipate paying cash dividends in the foreseeable future. The Company intends to retain any earnings or other cash resources to finance future growth of its business. In addition, the Company's revolving line of credit agreement with NationsBank of Tennessee, N. A. prohibits the payment of dividends on the Company's capital stock without the prior written consent of the bank. Any future determinations to pay cash dividends will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition and other factors deemed relevant by the Board of Directors. RECENT SALES UNREGISTERED SECURITIES 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 (the "Shares") of common stock, $.01 12 -12- par value, of the Company to the sole shareholder of Bayer in exchange for the all of the outstanding common stock of Bayer. The Company claims that the offer and sale of the Shares were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended based on the fact that the Shares were sold to a single person and such sale did not involve a public offering. On August 28, 1996, the Company filed a registration statement on Form S-3 (File No. 333-10939) with the Securities and Exchange Commission covering the resale of the Shares, and the registration statement became effective on January 14, 1997. In connection with the acquisition on December 26, 1996 of all of the outstanding capital stock and warrants of Gateway Healthcare Corporation ("Gateway"), The Company issued to the five securityholders of Gateway warrants (the "Warrants",) to purchase up to 450,000 shares of the Company's common stock. The Company claims that the offer and sale of the Warrants were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, based on the fact that the issuance of the Warrants did not involve a public offering. On January 24, 1997, the Company filed a registration statement on Form S-3 covering the resale of the shares of common stock underlying the Warrants. The registration statement became effective on March 7, 1997. 13 -13- ITEM 6. SELECTED FINANCIAL DATA. SELECTED FINANCIAL AND OPERATING DATA
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------- ---------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA) INCOME STATEMENT DATA (1): Net sales . . . . . . . . $ 177,710 $ 130,094 $ 92,151 $ 65,119 $ 44,659 Cost of sales . . . . . . 136,344 97,973 68,122 48,357 33,041 --------- ---------- ----------- ----------- ----------- Gross profit . . . . . . 41,366 32,121 24,029 16,762 11,618 Selling, general and administrative expenses . . . 23,450 18,418 13,913 10,307 7,552 Acquisition and merger expenses 2,378 -- -- -- -- --------- ---------- ----------- ----------- ----------- Operating income (2) . . . 15,538 13,703 10,116 6,455 4,066 Interest expense . . . . (229) (199) (629) (2,206) (1,242) Interest income . . . . . 1,771 163 186 -- -- --------- ---------- ----------- ----------- ----------- Income before income taxes 17,080 13,667 9,673 4,249 2,824 Income taxes (3) . . . . (6,386) (5,507) (3,877) (1,619) (1,030) --------- ---------- ----------- ----------- ----------- Net income (3) . . . . . $ 10,694 $ 8,160 $ 5,796 $ 2,630 $ 1,794 ========= ========== =========== ============ =========== Net income per share (4) . $ .69 $ .58 $ .45 $ .29 $ .19 SELECTED OPERATING DATA: Number of orders shipped 575,113 384,401 283,350 215,425 165,834 Average order size . . . $ 309 $ 313 $ 298 $ 270 $ 238 Number of facilities served 10,730 8,555 6,314 4,390 3,699 BALANCE SHEET DATA (AT PERIOD END) (1): Working capital . . . . . $ 102,074 $ 36,228 $ 28,469 $ 12,842 $ 9,026 Total assets . . . . . . 197,971 55,021 41,042 23,576 16,519 Total debt . . . . . . . 30,321 3,803 1,147 21,015 19,247 Stockholders' equity (deficit) 144,299 39,954 30,502 (5,670) (8,300)
_______________ (1) Restated to reflect the share exchange with Bayer Medical Service Systems Inc. accounted for as a pooling of interests. See Note 2 of Notes to 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 Consolidated Financial Statements. (3) The Company elected to be treated as an S corporation for income tax purposes from January 1, 1989 through June 25, 1992, and accordingly did not pay federal and state (except in certain states) income taxes during such periods. The Company distributed S corporation earnings of $998 to its shareholders 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 the Company had been subject to federal and state income taxes. Because the Company has been a C corporation since June 25,1992, no pro forma adjustment to net income for periods subsequent to such date is necessary and, accordingly, the net income data set forth above for such subsequent periods reflects actual net income. (4) Computed by dividing net income applicable to Common Stock (net income plus interest requirements, less tax effects, of the 10% Convertible Subordinated Debentures (the "Convertible Debentures")) by the weighted average number of shares of Common Stock and equivalents outstanding. The conversion of the Convertible Debentures was effected upon the closing of the Company's initial public offering in March 1994. For the years ended December 31, 1996, 1995, 1994, 1993 and 1992 the weighted average number of shares of Common Stock and equivalents was 15,419,438, 13,993,595, 13,073,040, 10,442,068 and, 10,200,170, respectively. See Note 1 of Notes to Consolidated Financial Statements. Net income per share and weighted average number of shares of Common Stock and equivalents outstanding for each of the years ended December 31, 1994, 1993 and 1992 have been restated to reflect a two-for-one stock split in the form of a stock dividend effected on May 25, 1995. 14 -14- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW Gulf South's net sales have grown at a compound annual rate of 41.0% over the past five years, from $45 million in 1992 to $178 million in 1996. The Company primarily attributes this net sales growth to both the addition of new long-term care customers and the increased penetration of existing customer accounts, including increased sales to providers of home healthcare and sub-acute, rehabilitative and transitional care, and to a lesser extent, the acquisition of six medical supply distributors in 1995 and 1996. The Company's gross profit has increased from $11.6 million in 1992 to $41.4 million in 1996, while the Company's gross profit as a percentage of net sales ("gross margin") has ranged from 23.3% to 26.0% within that period. The Company believes that the decline in gross margin from 26.0% in 1992 to 23.3% in 1996 is primarily attributable to competitive pricing of products sold by the Company in order to maintain or increase market share, particularly with respect to the Company's large chain customers. Management believes that the Company's current gross margins are consistent with the Company's long-term strategy to expand sales with aggressive pricing and to increase operating margins through reductions in selling, general and administrative expenses as a percentage of increased net sales. To date, the decrease in gross margins has been offset in part by participation in volume-based rebate programs offered by vendors. Notwithstanding these actions, there can be no assurance that the Company will be able to increase sales through aggressive pricing or to increase operating margins through controlling selling, general and administrative expenses; or that participation in vendor programs will offset reductions in gross margin to a significant extent. The Company is actively seeking to attract large chain customers and to the extent that the Company is successful in attracting such customers, the Company's operating expenses may increase. In order to effectively serve additional large chain customers, the Company may be required to increase the size of its distribution facilities, to expand its order processing and delivery systems and to hire additional personnel. The Company may also be required to lower prices to attract and maintain such customers. The Company's selling, general and administrative expenses have decreased as a percentage of net sales over the last five years, although such expenses have increased in dollar amount in order to support higher sales volume over this period. Consequently, operating income over this period grew at a compound annual rate of 39.4%, from $4.1 million in 1992 to $15.5 million in 1996. Since September 1995, the Company has completed the acquisition of six medical supply distributors: L&M Medical Inc., Bayer Medical Service Systems, Inc., Express Care, L.P., Alternative Healthcare Services, TDR Medical, LLC, and Gateway Healthcare, Inc. See "Item 1: Business - Growth Strategy". To augment its internal growth, the Company will consider additional acquisitions of medical supply distributors that serve complementary markets or that supplement the Company's presence in existing markets. See "Factors Affecting Future Performance." Economic, regulatory, political and demographic pressures, including cost containment measures from public and private reimbursement sources, are resulting in an increase in the demand for long-term care facilities to provide medical services to patients at lower cost than traditional hospital care. See "Item 1: Business-- Industry Overview." The Company has experienced, and expects to continue to experience, increasing demand for its products and services in this market, including from customers in the home healthcare and subacute care segments, which it believes are growing at a faster rate than the nursing home segment. The Company believes that sales of enteral feeding, respiratory therapy and wound care supplies to home healthcare providers and sub-acute care facilities will represent an increasing proportion of its overall product mix. In order to maintain or increase market share, particularly with respect to the Company's large chain customers, the Company offers competitive pricing for its products, which has in the past resulted in lower gross margins. The Company is actively seeking to attract large chain customers and to the extent that the Company is successful, such trend may continue. 15 -15- Certain of the foregoing statements are forward-looking and involve risks and uncertainties, and the Company's actual experience may differ materially from that discussed above. Factors that may cause such a difference include, but are not limited to, those discussed in "Factors Affecting Future Performance." RESULTS OF OPERATIONS The following table sets forth for the periods indicated information derived from the statements of income of the Company expressed as a percentage of net sales for such year and the percentage change in such items compared to the amount for the prior year.
PERCENTAGE OF NET SALES PERCENTAGE CHANGE -------------------------------- ------------------ 1996 1995 OVER OVER 1996 1995 1994 1995 1994 ------ ------ ------ ------ ------ Net sales . . . . . . . . . 100.0% 100.0% 100.0% 36.6% 41.2% Cost of sales . . . . . . . 76.7 75.3 73.9 39.2 43.8 Gross profit . . . . . . . 23.3 24.7 26.1 28.8 33.7 Selling, general and administration expenses . . 13.2 14.2 15.1 27.3 32.4 Acquisition and merger expenses 1.4 - - - - Operating income . . . . . 8.7 10.5 11.0 13.4 35.5 Interest expense . . . . . (0.1) (0.1) (0.7) 15.1 (68.4) Interest income . . . . . . 1.0 0.1 0.2 - (12.4) Income before income taxes 9.6 10.5 10.5 25.0 41.3 Income taxes . . . . . . . (3.6) (4.2) (4.2) 16.0 42.0 Net income . . . . . . . . 6.0% 6.3% 6.3% 31.1 40.8
1996 COMPARED TO 1995 Net sales increased by $47.6 million, or 36.6%, to $177.7 million in 1996 compared to $130.0 million in 1995. The net sales growth in 1996 was attributable to internal sales growth through the addition of new customers and increased sales penetration in existing customer facilities, expansion through acquisitions of regional medical supply distributors and facility expansion by existing customers. Gross profit increased by $9.2 million, or 28.8%, to $41.4 million in 1996 compared to $32.1 million in 1995, while gross margin decreased to 23.3% from 24.7% over the same period. The decrease in gross margin was primarily due to a greater mix of higher volume, large chain customers that require more competitive pricing, but was offset in part by lower selling and servicing costs as a percentage of net sales. Other factors contributing to the decrease in gross margin were cost increases associated with high volume, commodity items, such as latex exam gloves and paper and resin products, and the Company's aggressive pricing strategy. In addition, the reduction in gross margin was also offset in part by vendor performance incentives earned by the Company through the achievement of certain predetermined sales and purchase levels, and the taking of prompt pay discounts with certain vendors. Selling, general and administrative expenses increased by $5.0 million, or 27.3%, to $23.4 million in 1996 compared to $18.4 million in 1995, and as a percentage of net sales decreased to 13.2% from 14.2% for the same period. Selling, general and administrative expenses increased in order to support the Company's higher sales volume during 1996, while the decrease in selling, general and administrative expenses as a percentage of net sales was due to leveraging of the Company's general and administrative expenses through increased sales volume and the lower selling and servicing costs generally associated with the Company's greater mix of higher volume, large chain customers. Both factors were offset in part by the non-recurring expense related to the write-off of an uncollectible note receivable. During 1996, the Company incurred acquisition and merger expenses of $2.4 million. Included was $819,000 of legal, accounting and other integration costs incurred in connection with the Bayer Medical Service Systems, Inc. 16 -16- share exchange, which was accounted for as a pooling of interests. The Company also incurred integration and exit charges of $771,000 during 1996 pertaining to the acquisition of L&M Medical, Inc. in 1995, and $778,000 pertaining to Express Care L. P. and Alternative Healthcare Services acquired in 1996. 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. The Company believes that it has adequate accruals to cover additional costs in the future relating to these acquisitions. Interest expense increased $30,000, or 15.1%, to $229,000 in 1996 compared to $199,000 in 1995. This increase was attributable to increased borrowings under the Company's revolving line of credit agreement for working capital purposes, offset in part by a portion of the net proceeds of the public offering in June 1996 being used to repay the outstanding balance under the Company's revolving line of credit. Interest income increased $1.6 million to $1.8 million in 1996 compared to $163,000 in 1995. This increase was attributable to the net proceeds of the offering, in excess of the amounts used to pay the outstanding balance of the Company's revolving credit facility, being invested in short-term interest-bearing securities. Income taxes increased by $879,000 to $6.4 million in 1996 compared to $5.5 million in 1995. This increase was attributable to higher income before taxes, which was partially offset by a reduction in the effective tax rate from 40.3% in 1995 to 37.4% in 1996. The decrease in the effective tax rate was primarily due to increased tax-exempt income in 1996 as compared to 1995. 1995 COMPARED TO 1994 Net sales increased by $37.9 million, or 41.2%, to $130.1 million in 1995 compared to $92.2 million in 1994. The net sales growth in 1995 was attributable to the addition of new customers, facility expansion by existing customers and increased sales penetration in existing customer facilities. Gross profit increased by $8.1 million, or 33.7%, to $32.1 million in 1995 compared to $24.0 million in 1994, while gross margin decreased to 24.7% from 26.1% over the same period. The decrease in gross margin was primarily due to a greater mix of higher volume, large chain customers that require more competitive pricing, but was offset in part by lower selling and servicing costs as a percentage of net sales. Other factors contributing to the decrease in gross margin were cost increases associated with high volume, commodity items, such as latex exam gloves and paper and resin products, and the Company's aggressive pricing strategy. In addition, the reduction in gross margin was also offset in part by vendor performance incentives earned by the Company through the achievement of certain predetermined sales and purchase levels, and the taking of prompt pay discounts with certain vendors. Selling, general and administrative expenses increased by $4.5 million, or 32.4%, to $18.4 million in 1995 compared to $13.9 million in 1994, and as a percentage of net sales decreased to 14.2% from 15.1% for the same period. The increase in the amount of selling, general and administrative expenses was primarily attributable to salaries, commissions and other costs associated with increased staffing levels throughout the Company to support the expansion of the Company's business during 1995. The decrease in selling, general and administrative expenses as a percentage of net sales was a result of both the economies associated with the Company's net sales growth, particularly with large chain customers where support costs were generally lower, and increased controls over such expenses. Interest expense decreased by $430,000, or 68.4%, to $199,000 in 1995 compared to $629,000 in 1994. This decrease was a result of a portion of the net proceeds of the Company's initial public offering in March 1994 being used to repay the Company's outstanding long-term debt. Income taxes increased by $1.6 million to $5.5 million in 1995 compared to $3.9 million in 1994. This increase was attributable to higher taxable income and an increase in the Company's provision for state income taxes, resulting in the effective tax rate increasing to 40.3% in 1995 from 40.1% in 1994. 17 -17- LIQUIDITY AND CAPITAL RESOURCES The Company's principal cash requirement to date has been to fund working capital in order to support growth of net sales. Through 1996, the Company funded its working capital requirements principally with cash generated from operations, proceeds from its bank borrowings and the sale of equity securities. The Company completed a third public offering in June 1996 pursuant to which the Company received net proceeds of approximately $91.5 million from the sale by the Company of 2,223,276 shares of its common stock. A portion of the net proceeds from the offering were used to repay the outstanding balance under the Company's revolving credit facility ($9.6 million), with the remaining balance to be used for general corporate purposes, including the possible acquisition of one or more medical supply distributors that serve complementary markets or supplement the Company's presence in existing markets. As part of the Company's growth strategy, the Company continually evaluates potential acquisition candidates. However, the Company presently has no specific agreements or commitments with respect to any acquisition. Pending such uses, the net proceeds of the offering are invested in short-term interest-bearing securities. The Company's working capital was $102.1 million and its current ratio was 2.9 at December 31, 1996 as compared to working capital of $36.4 million and a current ratio of 3.4 at December 31, 1995. Included in working capital are cash and cash equivalents form the Company's public offering. The Company has a revolving credit facility of $15.0 million, of which $10.0 million was available at December 31, 1996. Borrowings bear interest, at the option of the Company, at prime or LIBOR plus an amount ranging from 1% to 2.5% per annum. A facility fee of .125% per annum is charged on the unused portion of the revolving credit facility. Substantially all of the Company's assets would collateralize any borrowings in excess of $7.5 million under the revolving credit facility, which contains numerous restrictive covenants and financial ratio requirements. During 1996, the Company incurred acquisition and merger expenses of $2.4 million. See Note 2 of "Notes to Consolidated Financial Statements" and "Factors Affecting Future Performance". The Company has consolidated, or plans to consolidate, certain distribution facilities into its larger regional distribution centers which has resulted, and may in the future result, in cash expenditures in excess of those required in the ordinary course of business. The Company made capital expenditures totaling $1.1 million in 1996 principally to purchase telephone and computer equipment, an administrative office building and for various warehouse improvements. The Company expects to make capital expenditures of approximately $1.5 million in 1997 principally in connection with improvements to or expansion of existing facilities and to purchase additional telephone, computer and warehouse equipment. The Company expects that available cash, borrowings available under its existing revolving credit facility and funds generated from operations will be sufficient to fund its operations through December 1997. The foregoing statements contain forward-looking statements which involve risks and uncertainties and the Company's actual experience may differ materially from that discussed above. Factors that may cause such a difference include, but are not limited to, those discussed in "Factors Affecting Future Performance" as well as future events that have the effect of reducing the Company's available cash balances, such as unanticipated operating losses or capital expenditures related to possible future acquisitions. Factors Affecting Future Performance The Company's future operating results may be affected by various trends and factors which are beyond the Company's control. These include adverse changes in general economic conditions and changes in federal and state regulation affecting the Company's customers. Accordingly, past trends should not be used to anticipate future results and trends. Further, the Company's prior performance should not be presumed to be an accurate indicator of future performance. 18 -18- The Company faces intense competition from a variety of regional, local and national distributors. Barriers to entry in the long-term care distribution industry are relatively low, and the risk of new competitors entering the market, particularly on a local level, is high. In response to competitive pressures, the Company has in the past lowered, and may in the future lower, selling prices in order to maintain or increase market share, which has resulted, and may in the future result, in lower gross margins. Certain of the Company's current competitors, including many national distributors, have substantially greater capital resources, sales and marketing experience, and distribution capabilities than the Company. Certain of these national distributors may have cost advantages over the Company due to their ability to purchase products in large volumes, the Company may experience significant pricing pressures from these and other competitors which could adversely affect the Company's operating results. A key element of the Company's growth strategy is to augment its internal growth with the acquisition of medical supply distributors, and inventory and facilities of such distributors, that serve complementary markets or that supplement the Company's presence in existing markets. Certain of these businesses may be marginally profitable or unprofitable. In order to achieve anticipated benefits from these acquisitions, the Company must successfully integrate the acquired businesses with its existing operations, and no assurance can be given that the Company will be successful in this regard. In the past the Company has incurred one-time costs and expenses in connection with acquisitions and it is likely that similar one-time costs and expenses may be incurred in connection with future acquisitions, including the write-off of unsold inventory and unused assets. In addition, attractive acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the possible need to obtain regulatory approval. There can be no assurance that the Company will be able to complete future acquisitions. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds either through public or private financings, including bank borrowings. Any financing, if available at all, may be on terms which are not favorable to the Company. The Company may also issue shares of its Common Stock to acquire such businesses, which may result in dilution to the Company's existing stockholders. The Company depends on a limited number of large customers for a significant portion of its net sales, including Beverly Enterprises which accounted for 19.6% of net sales for the year ended December 31, 1996. See "Item 1: Business- Customers". Consolidation among long-term care providers and the growth of the Company's business with large chains could increase such dependence. The loss of, or significant declines in the level of purchases by, one or more of these customers would have a material adverse effect on the Company's operating results. Although the Company has not to date experienced any failure to collect accounts receivable from its largest customers, an adverse change in the financial condition of any of these customers, including as a result of a change in governmental or private reimbursement programs, could have a material adverse effect upon the Company's operating results. In addition, the expansion of the Company's business with large chains has in the past resulted in competitive pricing pressures and lower and lower operating margins and such pressure on margins may continue in the future. A key element of the Company's growth strategy is to increase sales to existing and new customers, including large chains and independent operators, by adding one or more new strategic distribution centers or expanding existing distribution centers and by hiring additional direct sales or other personnel and through national account sales efforts. Such efforts will result in increased operating expenses. There can be no assurance that the establishment of new strategic distribution centers, the expansion of existing distribution centers, the addition of new sales or other personnel or national account sales efforts will result in additional revenues or operating income. As a result of changes occurring in the long-term care market, both the nature of the Company's customer base as well as products and services required by its customers are changing. The failure of the Company's management to effectively respond to and manage changing business conditions, including changes in customer requirements and changes to the Company's overall product mix, could have an adverse effect on the Company's operating results. Because the Company believes that its success to date is dependent in part upon its ability to provide prompt, accurate and complete service to its customers on a price-competitive basis, any disruption in its day-to-day operations or material increases in its cost of procuring and delivering products could have an adverse effect on its operating results. In order to provide prompt and complete service to its customers, the Company maintains a significant investment in product inventory. Although the Company closely monitors its inventory exposure through 19 -19- a variety of inventory control procedures and policies, there can be no assurance that such procedures and policies will continue to be effective or the unforeseen product developments or price changes will not adversely affect the Company's operating results. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. The information required by this item and as listed in Item 14(a)(1) and (2) of this Report is included in this Report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in or disagreements with accountants on accounting or financial disclosure matters. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. DIRECTORS The information concerning directors of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1996, under the heading "Election of Directors" and "Section 16 (a) Beneficial Ownership Reporting Compliance." EXECUTIVE OFFICERS The information concerning executive directors of the Company required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1996, under the heading "Election of Directors" and "Section 16 (a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION. The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1996, under the heading "Compensation and Other Information Concerning Directors and Officers." ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required under this item in incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the close of the Company's fiscal year ended December 31, 1996, under the heading "Management and Principal Stockholders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after the Company's fiscal year ended December 31, 1996, under the headings "Election of Directors." 20 -20- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. The following financial statements of the Company are included in this Report beginning on Page F-1: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 2. Financial Statement Schedules. The following financial statement schedule of the Company is included in this Report beginning on Page S-1: Schedule II -- Valuation and Qualifying Accounts. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. List of Exhibits. The following exhibits are filed with this Report or are incorporated by reference:
Exhibit No. Description - ----------- ----------- 3.1(1) Amended and Restated Certificate of Incorporation of the Company. 3.2(1) Amended and Restated By-laws of the Company. 4.1(1) Specimen certificate representing the Common Stock. 4.2 Form of Common Stock Purchase Warrant 10.1(1)* 1992 Stock Plan, as amended. 10.1a(2)* Forms of the Company's Incentive Stock Option Agreement and Non-Qualified Stock Option Agreement. 10.2(3) Loan and Security Agreement between the Company and NationsBank of Tennessee, N. A. dated September 25, 1995. 10.3 Intentionally omitted.
21 -21- 10.4(1) Registration Rights Agreement among the Company, the Investors, the stockholders listed therein and Healthcare Capital Investments, Inc. dated as of June 25, 1992. 10.5 Intentionally omitted. 10.6(1)* Form of Non-Competition Agreement. 10.7(4) Stock Purchase Agreement dated as of November 19, 1996 among Gulf South Medical Supply, Inc., Gateway Healthcare Corporation ("Gateway") and the stockholders of Gateway listed on the signature pages thereto ("Gateway Stock Purchase Agreement"). 10.8(5) Amendment and Waiver Agreement, dated as of December 26, 1996 among Gateway, the stockholders of Gateway listed on the signature pages thereto and Gulf South Medical Supply, Inc., to the Gateway Stock Purchase Agreement. 10.9* 1997 Stock Plan. 10.10* Form of the Company's Incentive Stock Option Agreement under the 1997 Stock Plan. 10.11* Form of the Company's Non-Qualified Stock Option Agreement under the 1997 Stock Plan. 11.1 Statement re: computation of per share earnings. 23.1 Consent of Ernst & Young LLP. 24.1 Power of Attorney (included on page 28). 27 Financial Data Schedule
- --------------- (1) Incorporated herein by reference to the exhibits (of the same exhibit number) to the Company's Registration Statement on Form S-1 (File No. 33-75170). (2) Filed as Exhibits 4.5 and 4.6, respectively, to the Company's Registration Statement on Form S-8 (File No. 33-83714) and incorporated herein by reference. (3) Incorporated herein by reference to the exhibit (of the same exhibit number) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (4) Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 26, 1996 filed January 9, 1997. (5) Filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated December 26, 1996 filed January 9, 1997. * Indicates a management contract or any compensatory plan, contract or arrangement required to be filed as an exhibit pursuant to Item 14(c). 22 -22- Reports on Form 8-K. Current Report on Form 8-K dated November 19, 1996 reporting, under Item 5, the Company's announcement that it had entered into a certain Stock Purchase Agreement pursuant to which it intended to acquire all of the outstanding capital stock and stock warrants of Gateway Healthcare Corporation. Current Report on Form 8-K dated December 26, 1996 reporting, under Item 2, the Company's completion of the acquisition of all of the outstanding capital stock and warrants of Gateway Healthcare Corporation. Exhibits. The Company hereby files as exhibits to this Report those exhibits listed in Item 14(a)(3), above. Financial Statement Schedules. The Company hereby files as financial statement schedules to this Report the financial statement schedule listed in Item 14(a)(2), above, which is attached hereto. 23 -23- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Jackson, Mississippi on March 21, 1997. GULF SOUTH MEDICAL SUPPLY, INC. By: /s/ Thomas G. Hixon ------------------------------------- Thomas G. Hixon President and Chief Executive Officer We, the undersigned officers and directors of Gulf South Medical Supply, Inc., hereby severally constitute and appoint Thomas G. Hixon and Guy W. Edwards, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities to do all things in our names and on our behalf in such capacities to enable Gulf South Medical Supply, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE --------- -------- ---- /s/ Thomas G. Hixon President, Chief Executive Officer, and - ------------------------------- Chairman of the Board Thomas G. Hixon (principal executive officer) March 21, 1997 /s/ Guy W. Edwards Senior Vice President, Chief Financial Officer, - ------------------------------- Treasurer, Secretary and Director (principal Guy W. Edwards financial and accounting officer) March 21, 1997 /s/ David L. Bogetz Director March 21, 1997 - --------------------------------- David L. Bogetz /s/ Melvin L. Hecktman Director March 21, 1997 - ------------------------------ Melvin L. Hecktman /s/ William W. McInnes Director March 21, 1997 - ----------------------------- William W. McInnes
24 INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets as of December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 . . . . F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . F-8 INDEX TO FINANCIAL STATEMENT SCHEDULES Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . S-1
All other schedules are omitted since the required information is inapplicable or has been presented in the financial statements and related notes. F-1 25 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Gulf South Medical Supply, Inc. We have audited the accompanying consolidated balance sheets of Gulf South Medical Supply, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audit also included the financial statement schedule listed in the index under Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gulf South Medical Supply, Inc. and subsidiaries as of December 31, 1996, and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Jackson, Mississippi February 7, 1997 F-2 26 GULF SOUTH MEDICAL SUPPLY, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, ---------------------- 1996 1995 -------- --------- 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 ======== =========
See accompanying notes. F-3 27 GULF SOUTH MEDICAL SUPPLY, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended December 31, ---------------------------------------------- 1996 1995 1994 ----------- ----------- ------------ 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 ----------- ----------- ------------
See accompanying notes. F-4 28 GULF SOUTH MEDICAL SUPPLY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
TOTAL COMMON STOCK STOCKHOLDERS' -------------------- PAID-IN RETAINED TREASURY EQUITY SHARES AMOUNT CAPITAL EARNINGS STOCK (DEFICIT) ---------- ------ -------- -------- -------- -------- Balance at January 1, 1994 . . . . . 10,200,000 $102 $ 3,396 $ 3,480 $(13,000) $ (6,022) Acquisition - pooling of interest 151,724 1 24 327 -- 352 (Note 2) . . . . . . . . . . . . Net income for 1994 . . . . . . . . -- -- -- 5,796 -- 5,796 Public offering of common stock . . 3,240,000 32 23,350 -- -- 23,382 Retirement of treasury stock . . . (6,120,000) -- (13,000) -- 13,000 -- Conversion of convertible debentures into common stock . . 6,120,000 -- 6,500 -- -- 6,500 Issuance of common stock from exercise of options . . . . . . 137,010 2 37 -- -- 39 Tax benefit of stock options exercised . . . . . . . . . . . . -- -- 455 -- -- 455 ---------- ---- -------- ------- -------- -------- Balance at December 31, 1994 . . . . 13,728,734 137 20,762 9,603 -- 30,502 Net income for 1995 . . . . . . . . -- -- -- 8,160 -- 8,160 Issuance of common stock from exercise of options . . . . . . 189,362 2 110 -- -- 112 Tax benefit of stock options exercised . . . . . . . . . . . . -- -- 1,180 -- -- 1,180 ---------- ---- -------- ------- -------- -------- Balance at December 31, 1995 . . . . 13,918,096 139 22,052 17,763 -- 39,954 Net income for 1996 . . . . . . . -- -- -- 10,694 -- 10,694 Public offering of common stock . . 2,223,276 22 91,441 -- -- 91,463 Issuance of common stock from exercise of options . . . . . . 123,551 2 569 -- -- 571 Tax benefit of stock options exercised . . . . . . . . . . . . -- -- 1,617 -- -- 1,617 ---------- ---- -------- ------- -------- -------- Balance at December 31, 1996 . . . . 16,264,923 $163 $115,679 $28,457 $ -- $144,299 ========== ==== ======== ======= ======== ========
See accompanying notes. F-5 29 GULF SOUTH MEDICAL SUPPLY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 -------- -------- -------- OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . $10,694 $ 8,160 $ 5,796 Adjustments to reconcile net income to net cash provided by 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 ======== ======== ========
continued F-6 30 GULF SOUTH MEDICAL SUPPLY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------------- 1996 1995 1994 ------- ------- ------- 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 ======= ======= =======
See accompanying notes. F-7 31 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. F-8 32 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. 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. F-9 33 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:
Gateway Others ------- ------ 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 ======== =======
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 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:
Period ended December 26, Year ended December 31, ------------ ----------------------- 1996 1995 1994 ---- ---- ---- Net sales . . . . . . . . . . . $248,544 $177,831 $125,367 Gross profit . . . . . . . . . 150,793 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
F-10 34 ACQUISITIONS (CONTINUED) 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:
Year ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- 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 ======== ======== =======
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, 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. F-11 35 4. INCOME TAXES Income tax expense consists of the following:
1996 1995 1994 ------- -------- ------- 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 ====== ====== ======
The components of deferred income tax assets are as follows:
1996 1995 ------ ------ 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 ======= ====
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. 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:
1996 1995 1994 ------- ------- -------- 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 ======= ======== ========
F-12 36 5. RELATED PARTY TRANSACTIONS The Company had the following receivables from a company ("related company") whose stockholders included certain executive officers of the Company.
1996 1995 1994 ---- ---- ---- Account receivable . . . . . . . . . . . . . . . . . . . . . . . $ - $332 $163 Note receivable . . . . . . . . . . . . . . . . . . . . . . . . $ - $413 $413
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 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. F-13 37 6. STOCK OPTION PLAN AND WARRANTS OUTSTANDING (CONTINUED) 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):
1996 1995 ---- ---- Pro forma net income $ 10,314 $ 8,019 Pro forma net income per share $ .67 $ .57
A summary of the Company's stock option activity and related information is as follows:
Weighted-Average Shares Exercise Price ------ -------------- 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 =======
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:
Outstanding Options Exercisable Options ------------------------------------------------------------------ Weighted Average Weighted Weighted Remaining Average Average Exercise Contractual Exercise Exercise Price Range Number Life Price Number Price ---------------------------------------------------------------------------------------- $.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
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. 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. F-14 38 7. OTHER MATTERS (CONTINUED) 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: 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,609 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 908 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 ------ Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . $3,561 ======
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. F-15 39 GULF SOUTH MEDICAL SUPPLY, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (IN THOUSANDS)
BALANCE AT CHARGED TO WRITE-OFF BALANCE AT BEGINNING OF COST AND OF END OF DESCRIPTION PERIOD EXPENSE ACCOUNTS PERIOD ----------- ------ ------- -------- ------ Year ended December 31, 1996: Allowance for doubtful accounts ...... $ 1,717 $ 924 $ 990 $ 1,651 ======= ======= ======= ======= Reserve for inventory obsolescence ... $ 199 $ -- $ -- $ 199 ======= ======= ======= ======= Year ended December 31, 1995: Allowance for doubtful accounts ...... $ 1,203 $ 869 $ 355 $ 1,717 ======= ======= ======= ======= Reserve for inventory obsolescence ... $ 199 $ -- $ -- $ 199 ======= ======= ======= ======= Year ended December 31, 1994: Allowance for doubtful accounts ...... $ 907 $ 525 $ 229 $ 1,203 ======= ======= ======= ======= Reserve for inventory obsolescence ... $ 199 $ -- $ -- $ 199 ======= ======= ======= =======
S-1 40 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 3.1(1) Amended and Restated Certificate of Incorporation of the Company. 3.2(1) Amended and Restated By-laws of the Company. 4.1(1) Specimen certificate representing the Common Stock. 4.2 Form of Common Stock Purchase Warrant 10.1(1)* 1992 Stock Plan, as amended. 10.1a(2)* Forms of the Company's Incentive Stock Option Agreement and Non-Qualified Stock Option Agreement. 10.2(3) Loan and Security Agreement between the Company and NationsBank of Tennessee, N. A. dated September 25, 1995. 10.3 Intentionally omitted. 10.4(1) Registration Rights Agreement among the Company, the Investors, the stockholders listed therein and Healthcare Capital Investments, Inc. dated as of June 25, 1992. 10.5 Intentionally omitted. 10.6(1)* Form of Non-Competition Agreement. 10.7(4) Stock Purchase Agreement dated as of November 19, 1996 among Gulf South Medical Supply, Inc., Gateway Healthcare Corporation ("Gateway") and the stockholders of Gateway listed on the signature pages thereto ("Gateway Stock Purchase Agreement"). 10.8(5) Amendment and Waiver Agreement, dated as of December 26, 1996 among Gateway, the stockholders of Gateway listed on the signature pages thereto and Gulf South Medical Supply, Inc., to the Gateway Stock Purchase Agreement. 10.9* 1997 Stock Plan. 10.10* Form of the Company's Incentive Stock Option Agreement under the 1997 Stock Plan. 10.11* Form of the Company's Non-Qualified Stock Option Agreement under the 1997 Stock Plan. 11.1 Statement re: computation of per share earnings. 23.1 Consent of Ernst & Young LLP. 24.2 Power of Attorney (included on page 28). 27 Financial Data Schedule
- ----------------- 41 (1) Incorporated herein by reference to the exhibits (of the same exhibit number) to the Company's Registration Statement on Form S-1 (File No. 33-75170). (2) Filed as Exhibits 4.5 and 4.6, respectively, to the Company's Registration Statement on Form S-8 (File No. 33-83714) and incorporated herein by reference. (3) Incorporated herein by reference to the exhibit (of the same exhibit number) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (4) Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 26, 1996 filed January 9, 1997. (5) Filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated December 26, 1996 filed January 9, 1997. * Indicates a management contract or any compensatory plan, contract or arrangement required to be filed as an exhibit pursuant to Item 14(c). EX-4.2 2 FORM OF COMMON STOCK 1 EXHIBIT 4.2 THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE. W -- (WarrantNo) ---------------------------------------- GULF SOUTH MEDICAL SUPPLY, INC. COMMON STOCK PURCHASE WARRANT ---------------------------------------- This certifies that, for good and valuable consideration, Gulf South Medical Supply, Inc., a Delaware corporation (the "Company"), grants to (Warrant_Holder) (the "Warrantholder"), the right to subscribe for and purchase from the Company (NoSharesinWords) ((NoSharesinNumbers)) validly issued, fully paid and nonassessable shares (the "Warrant Shares") of the Company's Common Stock, par value $.01 per share (the "Common Stock"), at the purchase price per share of $25.90 (the "Exercise Price"), at any time prior to 5:00 p.m., New York City time, on the Expiration Date, all subject to the terms, conditions and adjustments herein set forth. This Warrant was issued in connection with the Stock Purchase Agreement, dated November 19, 1996 (the "Stock Purchase Agreement"), among the Company, Gateway Healthcare Corporation, and North American Fund II, Allied Investment Corporation, Allied Capital Corporation II, Allied Venture Partnership and Gary Nutter (collectively, the "Sellers"), and is subject to the terms thereof. The Warrantholder is entitled to the rights and subject to the obligations contained in the Stock Purchase Agreement relating to this Warrant and the Warrant Shares. 1. Duration and Exercise of Warrant. 1.1 Duration and Exercise of Warrant. Subject to the terms and conditions set forth herein, this Warrant may be exercised, in whole or in part, by the Warrantholder by: (a) the surrender of this Warrant to the Company, with a duly executed Exercise Form specifying the number of Warrant Shares to be purchased, during normal business hours on any Business Day prior to the Expiration Date; and 2 -2- (b) the delivery of payment to the Company, for the account of the Company, by cash, wire transfer, certified or official bank check or any other means approved by the Company, of the Exercise Price for the number of Warrant Shares specified in the Exercise Form in lawful money of the United States of America. The Company agrees that such Warrant Shares shall be deemed to be issued to the Warrantholder as the record holder of such Warrant Shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for the Warrant Shares as aforesaid. Notwithstanding the foregoing, no such surrender shall be effective to constitute the Person entitled to receive such shares as the record holder thereof while the transfer books of the Company for the Common Stock are closed for any purpose (but not for any period in excess of five days); but any such surrender of this Warrant for exercise during any period while such books are so closed shall become effective for exercise immediately upon the reopening of such books, as if the exercise had been made on the date this Warrant was surrendered and for the number of shares of Common Stock and at the Exercise Price in effect at the date of such surrender. 1.2 Warrant Shares Certificate. A stock certificate or certificates for the Warrant Shares specified in the Exercise Form shall be delivered to the Warrantholder within three Business Days after receipt of the Exercise Form by the Company and payment of the purchase price. No fractional shares shall be issued upon the exercise of this Warrant, provided that the Warrantholder shall receive, in lieu of any fractional shares, cash in an amount equal to the product of the fraction multiplied by the Current Market Price of a share of Common Stock. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of the stock certificate or certificates, deliver to the Warrantholder a new Warrant evidencing the rights to purchase the remaining Warrant Shares, which new Warrant shall in all other respects be identical with this Warrant. 2. Restrictions on Transfer; Restrictive Legends. 2.1 This Warrant, including the registration rights pursuant to Section 7 hereof, may be offered, sold, transferred, pledged or otherwise disposed of, in whole or in part, to any person, subject to compliance with any applicable securities laws. 2.2 Except as otherwise permitted by this Section 2, each stock certificate for Warrant Shares issued upon the exercise of any Warrant and each stock certificate issued upon the direct or indirect transfer of any such Warrant Shares shall be stamped or otherwise imprinted with a legend in substantially the following form: 3 - 3 - THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST HEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE. Notwithstanding the foregoing, the Warrantholder may require the Company to issue a Warrant or a stock certificate for Warrant Shares, in each case without a legend, if either (i) such Warrant or such Warrant Shares, as the case may be, have been registered for resale under the Securities Act, (ii) the Warrantholder has delivered to the Company an opinion of legal counsel (from a firm reasonably satisfactory to the Company) which opinion shall be addressed to the Company and be reasonably satisfactory in form and substance to the Company's counsel, to the effect that such registration is not required with respect to such Warrant or such Warrant Shares, as the case may be, or (iii) such Warrant or Warrant Shares are sold in compliance with Rule 144 or Rule 144(k) (or any successor provision then in effect) under the Securities Act, the Company receives customary representations to such effect and the Company receives an opinion of counsel to the Company in customary form that such legend may be removed. 3. Reservation and Registration of Shares, Etc. The Company covenants and agrees as follows: (a) All Warrant Shares that are issued upon the exercise of this Warrant shall, upon issuance, be validly issued, fully paid and nonassessable, not subject to any preemptive rights, and free from all taxes, liens, security interests, charges, and other encumbrances with respect to the issuance thereof, other than taxes in respect of the issuance of the Warrant Shares hereunder and any transfer occurring contemporaneously with such issue. (b) During the period within which this Warrant may be exercised, the Company shall at all times have authorized and reserved, and keep available free from preemptive rights, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 4. Loss or Destruction of Warrant. Subject to the terms and conditions hereof, upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, of such bond or indemnification as the Company may reasonably require, and, in the case of such mutilation, upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor. 4 - 4 - 5. Ownership of Warrant. The Company may deem and treat the person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer. 6. Certain Adjustments. 6.1 The number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment as follows: (a) Stock Dividends, Splits, Combinations. If at any time after the date of the issuance of this Warrant the Company (i) declares a dividend or other distribution payable in shares of Common Stock or securities convertible into Common Stock or subdivides its outstanding shares of Common stock into a larger number or (ii) combines its outstanding shares of Common Stock into a smaller number, then (x) the number of Warrant Shares to be delivered upon exercise of this Warrant will, upon the occurrence of an event set forth in clause (i) above, be increased and, upon the occurrence of an event set forth in clause (ii) above, be decreased so that such Warrantholder will be entitled to receive the number of shares of Common Stock that such Warrantholder would have owned immediately following such action had this Warrant been exercised immediately prior thereto and (y) the Exercise Price in effect immediately prior to such dividend, other distribution, subdivision or combination, as the case may be, shall be adjusted proportionately by multiplying such Exercise Price by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter. (b) Distributions of Stock, Other Securities, Evidence of Indebtedness, Etc. In case the Company shall distribute to the holders of Common Stock shares of its capital stock (other than Common Stock or shares convertible into Common Stock for which adjustment is made under Section 6.1(a)), stock or other securities of the Company or any other Person, evidences of indebtedness issued by the Company or any other Person, assets (excluding cash dividends) or options, warrants or rights to subscribe for or purchase the foregoing, then, and in each such case, immediately following the record date fixed for the determination of the holders of Common Stock entitled to receive such distribution, the Exercise Price then in effect shall be adjusted by multiplying the Exercise Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be such Current Market Price of the Common Stock less the then Fair Market Value (as determined by the Board of Directors) of the portion of the stock, other securities, evidences of indebtedness so distributed or of such options, warrants or rights applicable to one share of Common Stock (but such numerator shall not be less than one) and (ii) the denominator of which shall be the Current Market Price of the Common Stock on such record date. Such adjustment shall become effective at the opening of business on the Business Day following the record date for the determination of stockholders entitled to such distribution. 5 - 5 - (c) Reorganization, Merger, Sale of Assets. In case of any capital reorganization or reclassification or other change of outstanding shares of Common Stock (other than a change in par value), any consolidation or merger of the Company with or into another Person (other than a consolidation or merger of the Company in which the Company is the resulting or surviving Person and which does not result in any reclassification or change of outstanding Common Stock) or the sale of all or substantially all of the assets of the Company or another Person, upon exercise of this Warrant, the Warrantholder shall have the right to receive the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Company deliverable upon exercise of this Warrant would have been entitled upon such reorganization, reclassification, consolidation, merger or sale had this Warrant been exercised immediately prior to such event; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions of this Section 6 with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth in this Section 6 (including provisions with respect to changes in and other adjustments of the Exercise Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon exercise of this Warrant. (d) Carryover. Notwithstanding any other provision of this Section 6.1, no adjustment shall be made to the number of shares of Common Stock to be delivered to the Warrantholder (or to the Exercise Price) if such adjustment represents less than 1% of the number of shares to be so delivered, but any lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment that together with any adjustments so carried forward shall amount to 1% or more of the number of shares to be so delivered, provided however, that, upon exercise of this warrant pursuant to Section 1 hereof, any adjustment called for by Sections 6.2(a), (b) or (c) which has not been made as a result of this Section 6.1(d) shall be made. 6.2 No Adjustment for Dividends. Except as provided in Section 6.1, no adjustment in respect of any dividends shall be made during the term of this Warrant or upon the exercise of this Warrant. Notwithstanding any other provision hereof, no adjustments shall be made on Warrant Shares issuable on the exercise of this Warrant for any cash dividends paid or payable to holders of record of Common Stock prior to the date as of which the Warrantholder shall be deemed to be the record holder of such Warrant Shares. 6.3 Notice of Adjustment. Whenever the number of Warrant Shares or the Exercise Price of such Warrant Shares shall be adjusted, as provided in Section 6.1, the Company shall forthwith file, at the principal office of the Company (or at such other place as may be designated by the Company), a statement, certified by the chief financial officer of the Company, showing in detail the facts requiring such adjustment, the computation by which such adjustment was made and the Exercise Price that shall be in effect after such adjustment. The Company shall also cause a copy of such statement to be sent by first class mail, postage prepaid, to the Warrantholder, at such Warrantholder's address as shown in the records of the Company. 6 - 6 - 7. Registration Statement. The Company shall file a registration statement with the United States Securities and Exchange Commission within 30 days after the date hereof to effect the registration of the resale of the Warrant Shares under the Securities Act; provided that the Warrantholder shall not sell any Warrant Shares pursuant to such registration statement unless and until it provides to the Company such information as the Company may reasonably request for use in connection with the identification of the Warrantholder as a selling stockholder in such registration statement, or any prospectus included therein, and no such sale shall be made by the Warrantholder pursuant to such registration statement unless and until such information is included by the Company in such registration statement or prospectus. The Company shall in good faith use its reasonable efforts and at its cost to cause such registration statement to be declared effective as promptly as practicable thereafter, to amend such registration statement to include additional or revised information with respect to the selling stockholders and to include in such registration statement the information provided by the Warrantholder as a selling stockholder and shall notify the Warrantholder of the effectiveness thereof and agrees to use its reasonable efforts to maintain the effectiveness of such registration statement until the earliest of (a) such time as all of the Warrant Shares have been sold pursuant to the registration statement, (b) the Warrant expires according to its terms and (c) the date that Rule 144(k) under the Securities Act (or successor provision) is available for the resale of the Warrant Shares, provided that expenses incurred by the Company with respect to any post-effective amendment to include additional or revised information with respect to the selling stockholders shall be paid by such selling stockholders. The Company shall indemnify and hold harmless the Warrantholder, its officers, directors and agents and employees, each person who controls the Warrantholder (within the meaning of Section 15 of the Securities Act or Section 20 of the 1934 Act) and the officers, directors, agents and employees of any such controlling person, from and against all damage, loss, liability and expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding) ("Losses") incurred or suffered and arising out of or based upon any untrue or alleged untrue statement of a material fact contained in any such registration statement, or related prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except to the extent the same are based upon information furnished in writing to the Company by or on behalf of the Warrantholder expressly for use therein; provided, that the Company shall not be liable to the Warrantholder to the extent that any such Losses arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus if either (A)(i) the Warrantholder failed to send or deliver a copy of the final prospectus with or prior to the delivery of written confirmation of the sale by the Warrantholder of a Warrant Share to the person asserting the claim from which such Losses arise and (ii) the prospectus would have completely corrected such untrue statement or alleged untrue statement or such omission or alleged omission; or (B)(i) such untrue statement or alleged untrue statement, omission or alleged omission is completely corrected in an amendment or supplement to the prospectus and (ii) having previously been furnished by or on behalf of the Company with copies of the prospectus as so amended or supplemented, the Warrantholder thereafter fails to deliver such prospectus as so amended or supplemented, prior to or concurrently with the sale of a Warrant Share to the person asserting the claim from which such Losses arise. Promptly after receipt by 7 - 7 - an indemnified party under Section 7.01 of the Stock Purchase Agreement of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the Company under such Section 7.01 notify the Company in writing of the claim or the commencement of that action. No indemnification provided for in such Section 7.01 shall be available to any party who shall fail to give the notice if the party to whom such notice was not given was unaware of the action, suit or proceeding to which the notice would have related and was prejudiced by the failure to give the notice, but the omission so to notify such indemnifying party of any such notification shall not relieve such indemnifying party from any liability which it may have to the indemnified party otherwise than under such Section 7.01. If any such claim or action shall be brought against an indemnified party, and it shall notify the Company thereof, the Company may, or if the indemnified party requests shall, participate therein and assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the Company to the indemnified party of its election to assume the defense of such claim or action, the Company shall not be liable to the indemnified party under such Section 7.01 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, if the defendants in any such action include both an indemnified party and the Company and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and for other indemnified parties that are different from or additional to those available to the Company, the indemnified party or parties under such Section 7.01 shall have the right to employ not more than one counsel to represent them and, in that event, the reasonable fees and expenses of not more than one such separate counsel shall be paid by the Company. The Company shall not be liable for any settlement effected without its written consent of any claim or action. 8. Amendments. Any provision of this Warrant may be amended and the observance thereof waived only with the written consent of the Company and the Warrantholder. 9. Notices of Corporate Action. So long as this Warrant has not been exercised in full, in the event of (a) any taking by the Company of a record of all holders of Common Stock for the purpose of determining the holders thereof who are entitled to receive any dividend (other than cash dividends or distributions paid from the retained earnings of the Company) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; (b) any capital reorganization of the Company, any reclassification (other than a change in par value of the Common Stock) or recapitalization of the capital stock of the Company or any consolidation or merger involving the Company and any other Person or any transfer of all or substantially all the assets of the Company to any other Person; or 8 - 8 - (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company will mail to the Warrantholder a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right and the amount and character of any such dividend, distribution or right or (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for the securities or other property, if any, deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be delivered at least 10 days prior to the date therein specified (unless such date is beyond the control of the Company, in which case, as soon as practicable thereafter, but in no event more than 5 days thereafter), in the case of any date referred to in the foregoing subdivisions (i) and (ii). 10. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: "Affiliate" means any Person who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Business Day" means any day other than a Saturday, Sunday or a day on which national banks are authorized by law to close in the State of Mississippi. "Common Stock" has the meaning specified on the cover of this Warrant. "Company" has the meaning specified on the cover of this Warrant. "Current Market Price" of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (i) If the Common Stock is listed or admitted for trading on a national securities exchange (including The Nasdaq Stock Market, Inc.), then the Current Market Price shall be the average of the last 30 "daily sales prices" of the Common Stock on the principal national securities exchange on which the Common Stock is listed or admitted for trading on the last 30 trading days prior to the Determination Date, or if not listed or traded on any such exchange, then the Current Market Price shall be the average of the last 30 "daily sales prices" of the Common Stock on the over-the-counter market on the last 30 trading days prior to the Determination Date. The "daily sales price" shall be the closing price of the Common Stock at the end of each day; or 9 - 9 - (ii) If the Common Stock is not so listed or admitted to unlisted trading privileges or if no such sale is made on at least 25 of such days, then the Current Market Price shall be as reasonably determined in good faith by the Company's Board of Directors or a duly appointed committee of the Board of Directors (which determination shall be reasonably described in the written notice delivered to the Warrantholder together with the Common Stock certificates). "Exchange Act" means the Securities Exchange Act of 1934, as amended, (or any successor statute thereto) and the rules and regulations of the Commission promulgated thereunder. "Exercise Form" means an Exercise Form in the form annexed hereto as Exhibit A. "Exercise Price" has the meaning specified on the cover of this Warrant. "Expiration Date" means January 2, 2002. "Fair Market Value" means the amount which a willing buyer would pay a willing seller in an arm's length transaction. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, governmental authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Securities Act" has the meaning specified on the cover of this Warrant, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Act, shall include a reference to the comparable section, if any, of any such similar Federal statute. "Stock Purchase Agreement" has the meaning specified on the cover of this Warrant. "Warrantholder" has the meaning specified on the cover of this Warrant. "Warrant Shares" has the meaning specified on the cover of this Warrant. 11. Miscellaneous. 11.1 Entire Agreement. This Warrant, together with the Stock Purchase Agreement, constitute the entire agreement between the Company and the Warrantholder with respect to this Warrant. 11.2 Binding Effect; Benefits. This Warrant shall inure to the benefit of and shall be binding upon the Company and the Warrantholder and their respective successors and assigns. Nothing in this Warrant, expressed or implied, is intended to or shall confer on any 10 - 10 - person other than the Company and the Warrantholder, or their respective successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Warrant. 11.3 Section and Other Headings. The section and other headings contained in this Warrant are for reference purposes only and shall not be deemed to be a part of this Warrant or to affect the meaning or interpretation of this Warrant. 11.4 Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service, overnight mail or personal delivery: (a) if to Warrantholder: (Warrant_Holder) (Address) with a copy to: McDermott, Will & Emery 227 W. Monroe Ave. Chicago, IL 60606 Telecopy: (312) 984-3669 Attention: Helen Friedli, Esq. (b) if to the Company: Gulf South Medical Supply, Inc. 426 Christine Drive Ridgeland, MS 39157 Telecopy: (601) 853-4801 Attention: Stanton Keith Pritchard, Esq. with a copy to: Testa, Hurwitz & Thibeault, LLP High Street Tower 125 High Street Boston, Massachusetts 02110 Telecopy: (617) 248-7100 Attention: William B. Asher, Esq. All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically 11 - 11 - acknowledged, if telecopied. Any party may by notice given in accordance with this Section 11.4 designate another address or Person for receipt of notices hereunder. 11.5 Severability. Any term or provision of this Warrant which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the terms and provisions of this Warrant or affecting the validity or enforceability of any of the terms or provisions of this Warrant in any other jurisdiction. 11.6 GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. 11.7 No Rights or Liabilities as Stockholder. Nothing contained in this Warrant shall be determined as conferring upon the Warrantholder any rights as a stockholder of the Company or as imposing any liabilities on the Warrantholder to purchase any securities whether such liabilities are asserted by the Company or by creditors or stockholders of the Company or otherwise. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 12 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer. GULF SOUTH MEDICAL SUPPLY, INC. By: ------------------------------- Name: Title: Dated: ______ __, 199_ 13 Exhibit A EXERCISE FORM (To be executed upon exercise of this Warrant) The undersigned hereby irrevocably elects to exercise the right represented by this Warrant, to purchase _____ of the Warrant Shares and herewith tenders payment for such Warrant Shares to the order of Gulf South Medical Supply, Inc. in the amount of $_____ in accordance with the terms of this Warrant. The undersigned requests that a certificate for such Warrant Shares be registered in the name of the undersigned and that such certificates be delivered to the undersigned's address below. The undersigned represents that it is acquiring such Warrant Shares for its own account for investment and not with a view to or for sale in connection with any distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times be within its control). Dated:___________ Signature_________________________________ _________________________________________ (Print Name) _________________________________________ (Street Address) _________________________________________ (City) (State) (Zip Code) Signed in the presence of: ________________________ NOTE: The above signature must correspond with the name as written upon the face of this Warrant in ever particular way, without any alteration whatsoever. Any unexercised Warrants evidenced by the Warrant Certificate are to be issued to: Name:_______________________ (please print) Address:_____________________ Taxpayer Identification or Social Security Number:________________ EX-10.9 3 1997 STOCK PLAN 1 EXHIBIT 10.9 GULF SOUTH MEDICAL SUPPLY, INC. 1997 STOCK PLAN 1. PURPOSE. The purpose of the Gulf South Medical Supply, Inc. 1997 Stock Plan (the "Plan") is to encourage key employees of Gulf South Medical Supply, Inc. (the "Company") and of any present or future parent or subsidiary of the Company (collectively, "Related Corporations") and other individuals who render services to the Company or a Related Corporation, by providing opportunities to participate in the ownership of the Company and its future growth through (a) the grant of options which qualify as "incentive stock options" ("ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"); (b) the grant of options which do not qualify as ISOs ("Non-Qualified Options"); (c) awards of stock in the Company ("Awards"); and (d) opportunities to make direct purchases of stock in the Company ("Purchases"). Both ISOs and Non-Qualified Options are referred to hereafter individually as an "Option" and collectively as "Options." Options, Awards and authorizations to make Purchases are referred to hereafter collectively as "Stock Rights." As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation," respectively, as those terms are defined in Section 424 of the Code. 2. ADMINISTRATION OF THE PLAN. A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company (the "Board") or, subject to paragraph 2(D) (relating to compliance with Section 162(m) of the Code), by a committee appointed by the Board (the "Committee"). Hereinafter, all references in this Plan to the "Committee" shall mean the Board if no Committee has been appointed. Subject to ratification of the grant or authorization of each Stock Right by the Board (if so required by applicable state law), and subject to the terms of the Plan, the Committee shall have the authority to (i) determine to whom (from among the class of employees eligible under paragraph 3 to receive ISOs) ISOs shall be granted, and to whom (from among the class of individuals and entities eligible under paragraph 3 to receive Non-Qualified Options and Awards and to make Purchases) Non-Qualified Options, Awards and authorizations to make Purchases may be granted; (ii) determine the time or times at which Options or Awards shall be granted or Purchases made; (iii) determine the purchase price of shares subject to each Option or Purchase, which prices shall not be less than the minimum price specified in paragraph 6; (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7) the time or times when each Option shall become exercisable and the duration of the exercise period; (vi) extend the period during which outstanding Options may be exercised; (vii) determine whether restrictions such as repurchase options are to be imposed on shares subject to Options, Awards and Purchases and the nature of such restrictions, if any, and (viii) interpret the Plan and prescribe and rescind rules and regulations relating to it. If the Committee 2 -2- determines to issue a Non-Qualified Option, it shall take whatever actions it deems necessary, under Section 422 of the Code and the regulations promulgated thereunder, to ensure that such Option is not treated as an ISO. The interpretation and construction by the Committee of any provisions of the Plan or of any Stock Right granted under it shall be final unless otherwise determined by the Board. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem advisable. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Stock Right granted under it. B. COMMITTEE ACTIONS. The Committee may select one of its members as its chairman, and shall hold meetings at such time and places as it may determine. A majority of the Committee shall constitute a quorum and acts of a majority of the members of the Committee at a meeting at which a quorum is present, or acts reduced to or approved in writing by all the members of the Committee (if consistent with applicable state law), shall be the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be granted to members of the Board. All grants of Stock Rights to members of the Board shall in all respects be made in accordance with the provisions of this Plan applicable to other eligible persons. Members of the Board who either (i) are eligible to receive grants of Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights may vote on any matters affecting the administration of the Plan or the grant of any Stock Rights pursuant to the Plan, except that no such member shall act upon the granting to himself or herself of Stock Rights, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting to such member of Stock Rights. D. PERFORMANCE-BASED COMPENSATION. The Board, in its discretion, may take such action as may be necessary to ensure that Stock Rights granted under the Plan qualify as "qualified performance- based compensation" within the meaning of Section 162(m) of the Code and applicable regulations promulgated thereunder ("Performance-Based Compensation"). Such action may include, in the Board's discretion, some or all of the following (i) if the Board determines that Stock Rights granted under the Plan generally shall constitute Performance-Based Compensation, the Plan shall be administered, to the extent required for such Stock Rights to constitute Performance-Based Compensation, by a Committee consisting solely of two or more "outside directors" (as defined in applicable regulations promulgated under Section 162(m) of the Code), (ii) if any 3 - 3 - Non-Qualified Options with an exercise price less than the fair market value per share of Common Stock are granted under the Plan and the Board determines that such Options should constitute Performance- Based Compensation, such options shall be made exercisable only upon the attainment of a pre- established, objective performance goal established by the Committee, and such grant shall be submitted for, and shall be contingent upon stockholder approval and (iii) Stock Rights granted under the Plan may be subject to such other terms and conditions as are necessary for compensation recognized in connection with the exercise or disposition of such Stock Right or the disposition of Common Stock acquired pursuant to such Stock Right, to constitute Performance-Based Compensation. 3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees of the Company or any Related Corporation. Non-Qualified Options, Awards and authorizations to make Purchases may be granted to any employee, officer or director (whether or not also an employee) or consultant of the Company or any Related Corporation. The Committee may take into consideration a recipient's individual circumstances in determining whether to grant a Stock Right. The granting of any Stock Right to any individual or entity shall neither entitle that individual or entity to, nor disqualify such individual or entity from, participation in any other grant of Stock Rights. 4. STOCK. The stock subject to Stock Rights shall be authorized but unissued shares of Common Stock of the Company, par value $.01 per share (the "Common Stock"), or shares of Common Stock reacquired by the Company in any manner. The aggregate number of shares which may be issued pursuant to the Plan is 850,000, subject to adjustment as provided in paragraph 13. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part or shall be repurchased by the Company, the unpurchased shares of Common Stock subject to such Option shall again be available for grants of Stock Rights under the Plan. No employee of the Company or any Related Corporation may be granted Options to acquire, in the aggregate, more than 595,000 shares of Common Stock under the Plan during any fiscal year of the Company. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part or shall be repurchased by the Company, the shares subject to such Option shall be included in the determination of the aggregate number of shares of Common Stock deemed to have been granted to such employee under the Plan. 5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan at any time on or after March 3, 1997 and prior to March 4, 2007. The date of grant of a Stock Right under the Plan will be the date specified by the Committee at the time it grants the Stock Right; provided, however, that such date shall not be prior to the date on which the Committee acts to approve the grant. 4 - 4 - 6. MINIMUM OPTION PRICE; ISO LIMITATIONS. A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS AND PURCHASES. Subject to paragraph 2(D) (relating to compliance with Section 162(m) of the Code), the exercise price per share specified in the agreement relating to each Non-Qualified Option granted, and the purchase price per share of stock granted in any Award or authorized as a Purchase, under the Plan may not be less than the minimum legal consideration required therefor under the laws of any jurisdiction in which the Company or its successors in interest may be organized. B. PRICE FOR ISOS. The exercise price per share specified in the agreement relating to each ISO granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, the price per share specified in the agreement relating to such ISO shall not be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant. For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply. C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee may be granted Options treated as ISOs only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any Related Corporation, ISOs do not become exercisable for the first time by such employee during any calendar year with respect to stock having a fair market value (determined at the time the ISOs were granted) in excess of $100,000. The Company intends to designate any Options granted in excess of such limitation as Non-Qualified Options, and the Company shall issue separate certificates to the optionee with respect to Options that are Non-Qualified Options and Options that are ISOs. D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the date of grant or, if the prices or quotes discussed in this sentence are unavailable for such date, the last business day for which such prices or quotes are available prior to the date of grant and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the Nasdaq National Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq National Market. If the Common 5 - 5 - Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall mean the fair value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 7. OPTION DURATION. Subject to earlier termination as provided in paragraphs 9 and 10 or in the agreement relating to such Option, each Option shall expire on the date specified by the Committee, but not more than (i) ten years from the date of grant in the case of Options generally and (ii) five years from the date of grant in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, as determined under paragraph 6(B). Subject to earlier termination as provided in paragraphs 9 and 10, the term of each ISO shall be the term set forth in the original instrument granting such ISO, except with respect to any part of such ISO that is converted into a Non-Qualified Option pursuant to paragraph 16. 8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through 12, each Option granted under the Plan shall be exercisable as follows: A. VESTING. The Option shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Committee may specify. B. FULL VESTING OF INSTALLMENTS. Once an installment becomes exercisable, it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee. C. PARTIAL EXERCISE. Each Option or installment may be exercised at any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable. D. ACCELERATION OF VESTING. The Committee shall have the right to accelerate the date that any installment of any Option becomes exercisable; provided that the Committee shall not, without the consent of an optionee, accelerate the permitted exercise date of any installment of any Option granted to any employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to paragraph 16) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6(C). 9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the agreement relating to such ISO, if an ISO optionee ceases to be employed by the Company and all Related Corporations other than by reason of death or disability as defined in paragraph 10, no further installments of his or her ISOs shall become exercisable, and his or her ISOs shall terminate on 6 - 6 - the earlier of (a) three months after the date of termination of his or her employment, or (b) their specified expiration dates, except to the extent that such ISOs (or unexercised installments thereof) have been converted into Non-Qualified Options pursuant to paragraph 16. For purposes of this paragraph 9, employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed 90 days or, if longer, any period during which such optionee's right to reemployment is guaranteed by statute or by contract. A bona fide leave of absence with the written approval of the Committee shall not be considered an interruption of employment under this paragraph 9, provided that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the optionee after the approved period of absence. ISOs granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations, so long as the optionee continues to be an employee of the Company or any Related Corporation. Nothing in the Plan shall be deemed to give any grantee of any Stock Right the right to be retained in employment or other service by the Company or any Related Corporation for any period of time. 10. DEATH; DISABILITY. A. DEATH. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his or her death, any ISO owned by such optionee may be exercised, to the extent otherwise exercisable on the date of death, by the estate, personal representative or beneficiary who has acquired the ISO by will or by the laws of descent and distribution, until the earlier of (i) the specified expiration date of the ISO or (ii) 180 days from the date of the optionee's death. B. DISABILITY. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his or her disability, such optionee shall have the right to exercise any ISO held by him or her on the date of termination of employment, for the number of shares for which he or she could have exercised it on that date, until the earlier of (i) the specified expiration date of the ISO or (ii) 180 days from the date of the termination of the optionee's employment. For the purposes of the Plan, the term "disability" shall mean "permanent and total disability" as defined in Section 22(e)(3) of the Code or any successor statute. 11. ASSIGNABILITY. No ISO shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution, and during the lifetime of the optionee shall be exercisable only by such optionee. Stock Rights other than ISOs shall be transferable to the extent set forth in the agreement relating to such Stock Right. 12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 7 - 7 - hereof and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including restrictions applicable to shares of Common Stock issuable upon exercise of Options. The Committee may specify that any Non-Qualified Option shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination and cancellation provisions as the Committee may determine. The Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company to execute and deliver such instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. 13. ADJUSTMENTS. Upon the occurrence of any of the following events, an optionee's rights with respect to Options granted to such optionee hereunder shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the optionee and the Company relating to such Option: A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with or acquired by another entity in a merger or other reorganization in which the holders of the outstanding voting stock of the Company immediately preceding the consummation of such event, shall, immediately following such event, hold, as a group, less than a majority of the voting securities of the surviving or successor entity, or in the event of a sale of all or substantially all of the Company's assets or otherwise (each, an "Acquisition"), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such Options either (a) the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition, (b) shares of stock of the surviving or successor corporation or (c) such other securities as the Successor Board deems appropriate, the fair market value of which shall not materially exceed the fair market value of the shares of Common Stock subject to such Options immediately preceding the Acquisition; or (ii) terminate all Options in exchange for a cash payment to be paid by the entity assuming the obligations of the Company hereunder equal to the excess of the fair market value of the shares subject to such Options (to the extent then exercisable or to be exercisable as a result of the Acquisition) over the exercise price thereof; or (iii) take any other action as may 8 - 8 - be consistent with this Plan, the original instruments granting such Options and tax and accounting rules applicable thereto. C. RECAPITALIZATION OR REORGANIZATION. In the event of a recapitalization or reorganization of the Company (other than a transaction described in subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, an optionee upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise the securities he or she would have received if he or she had exercised such Option prior to such recapitalization or reorganization. D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424 of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs or would cause adverse tax consequences to the holders, it may refrain from making such adjustments. E. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. G. FRACTIONAL SHARES. No fractional shares shall be issued under the Plan and the optionee shall receive from the Company cash in lieu of such fractional shares. H. ADJUSTMENTS. Upon the happening of any of the events described in subparagraphs A, B or C above, the class and aggregate number of shares set forth in paragraph 4 hereof that are subject to Stock Rights which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events described in such subparagraphs. The Committee or the Successor Board shall determine the specific adjustments to be made under 9 - 9 - this paragraph 13 and, subject to paragraph 2, its determination shall be conclusive. 14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address, or to such transfer agent as the Company shall designate. Such notice shall identify the Option being exercised and specify the number of shares as to which such Option is being exercised, accompanied by full payment of the purchase price therefor either (a) in United States dollars in cash or by check, (b) at the discretion of the Committee, through delivery of shares of Common Stock having a fair market value equal as of the date of the exercise to the cash exercise price of the Option, (c) at the discretion of the Committee, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at no less than 100% of the lowest applicable Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion of the Committee and consistent with applicable law, through the delivery of an assignment to the Company of a sufficient amount of the proceeds from the sale of the Common Stock acquired upon exercise of the Option and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be at the participant's direction at the time of exercise, or (e) at the discretion of the Committee, by any combination of (a), (b), (c) and (d) above. If the Committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in clauses (b), (c), (d) or (e) of the preceding sentence, such discretion shall be exercised in writing at the time of the grant of the ISO in question. The holder of an Option shall not have the rights of a shareholder with respect to the shares covered by such Option until the date of issuance of a stock certificate to such holder for such shares. Except as expressly provided above in paragraph 13 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued. 15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on March 3, 1997, subject, with respect to the validation of ISOs granted under the Plan, to approval of the Plan by the stockholders of the Company at the next Meeting of Stockholders or, in lieu thereof, by written consent. If the approval of stockholders is not obtained prior to March 3, 1998, any grants of ISOs under the Plan made prior to that date will be Non-Qualified Options. The Plan shall expire at the end of the day on March 3, 2007 (except as to Options outstanding on that date). Subject to the provisions of paragraph 5 above, Options may be granted under the Plan prior to the date of stockholder approval of the Plan. The Board may terminate or amend the Plan in any respect at any time, except that, without the approval of the stockholders obtained within 12 months before or after the Board adopts a resolution authorizing any of the following actions: (a) the provisions of paragraph 3 regarding eligibility for grants of ISOs may not be modified; (b) the provisions of paragraph 6(B) regarding the exercise price at which shares may be offered pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph 13); and (c) the expiration date of the Plan may not be extended. Except as otherwise provided in this paragraph 15, in no event may action of the Board or stockholders alter or impair 10 - 10 - the rights of a grantee, without such grantee's consent, under any Stock Right previously granted to such grantee. 16. MODIFICATIONS OF ISOS; CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS. Subject to paragraph 13(D), without the prior written consent of the holder of an ISO, the Committee shall not alter the terms of such ISO (including the means of exercising such ISO) if such alteration would constitute a modification (within the meaning of Section 424(h)(3) of the Code). The Committee, at the written request or with the written consent of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or a Related Corporation at the time of such conversion. Such actions may include, but shall not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such ISOs. At the time of such conversion, the Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Committee takes appropriate action. Upon the taking of such action, the Company shall issue separate certificates to the optionee with respect to Options that are Non-Qualified Options and Options that are ISOs. 17. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of shares pursuant to Options granted and Purchases authorized under the Plan shall be used for general corporate purposes. 18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO granted under the Plan, each optionee agrees to notify the Company in writing immediately after such optionee makes a Disqualifying Disposition (as described in Sections 421, 422 and 424 of the Code and regulations thereunder) of any stock acquired pursuant to the exercise of ISOs granted under the Plan. A Disqualifying Disposition is generally any disposition occurring on or before the later of (a) the date two years following the date the ISO was granted or (b) the date one year following the date the ISO was exercised. 19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a Non-Qualified Option, the transfer of a Non-Qualified Stock Option pursuant to an arm's-length transaction, the grant of an Award, the making of a Purchase of Common Stock for less than its fair market value, the making of a Disqualifying Disposition (as defined in paragraph 18), the vesting or transfer of restricted stock or securities acquired on the exercise of an Option hereunder, or the making of a distribution or other payment with respect to such stock or securities, the Company may withhold taxes in respect of amounts that constitute compensation includible in gross income. The Committee in its discretion may condition (i) the exercise of an Option, (ii) the transfer of a Non-Qualified Stock Option, (iii) the grant of an Award, (iv) the making of a Purchase of Common Stock for less than its fair market value, or (v) the vesting or 11 - 11 - transferability of restricted stock or securities acquired by exercising an Option, on the grantee's making satisfactory arrangement for such withholding. Such arrangement may include payment by the grantee in cash or by check of the amount of the withholding taxes or, at the discretion of the Committee, by the grantee's delivery of previously held shares of Common Stock or the withholding from the shares of Common Stock otherwise deliverable upon exercise of a Option shares having an aggregate fair market value equal to the amount of such withholding taxes. 20. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. Government regulations may impose reporting or other obligations on the Company with respect to the Plan. For example, the Company may be required to send tax information statements to employees and former employees that exercise ISOs under the Plan, and the Company may be required to file tax information returns reporting the income received by grantees of Options in connection with the Plan. 21. GOVERNING LAW. The validity and construction of the Plan and the instruments evidencing Stock Rights shall be governed by the laws of Delaware, or the laws of any jurisdiction in which the Company or its successors in interest may be organized. EX-10.10 4 FORM OF THE COMPANY'S INCENTIVE PLAN 1 EXHIBIT 10.10 GULF SOUTH MEDICAL SUPPLY, INC. INCENTIVE STOCK OPTION AGREEMENT Gulf South Medical Supply, Inc., a Delaware corporation (the "Company"), hereby grants as of (Date) to (Employee) (the "Employee"), an option to purchase a maximum of (Number) shares (the "Option Shares") of its Common Stock, $.01 par value ("Common Stock"), at the price of $(ExercisePrice) per share, on the following terms and conditions: 1. GRANT UNDER THE COMPANY'S 1997 STOCK PLAN. This option is granted pursuant to and is governed by the Company's 1997 Stock Plan (the "Plan") and, unless the context otherwise requires, terms used herein shall have the same meaning as in the Plan. Determinations made in connection with this option pursuant to the Plan shall be governed by the Plan as it exists on this date. 2. GRANT AS INCENTIVE STOCK OPTION; OTHER OPTIONS. This option is intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding the above, this option shall be treated as a Non-Qualified Option if the Plan is not approved by the Company's stockholders on or before March 2, 1998. This option is in addition to any other options heretofore or hereafter granted to the Employee by the Company or any Related Corporation (as defined in the Plan), but a duplicate original of this instrument shall not effect the grant of another option. 3. VESTING OF OPTION IF EMPLOYMENT CONTINUES. If the Employee has continued to be employed by the Company or any Related Corporation on the following dates, the Employee may exercise this option for the number of shares of Common Stock set opposite the applicable date: Less than one year from the date - (VestingNumber) shares hereof One year but less than two years from - an additional (VestingNumber) shares the date hereof Two years but less than three years - an additional (VestingNumber) shares from the date hereof Three years but less than four years - an additional (VestingNumber) shares from the date hereof Four years or more from the date - an additional (VestingNumber) shares hereof
2 Notwithstanding the foregoing, in accordance with and subject to the provisions of the Plan, the Committee may, in its discretion, accelerate the date that any installment of this Option becomes exercisable. The foregoing rights are cumulative and (subject to Sections 4 or 5 hereof if the Employee ceases to be employed by the Company and all Related Corporations) may be exercised on or before the date which is ten years from the date this option is granted. 4. TERMINATION OF EMPLOYMENT. (a) TERMINATION OTHER THAN FOR CAUSE. If the Employee ceases to be employed by the Company and all Related Corporations, other than by reason of death or disability as defined in Section 5 or other than for Cause as defined in Section 4(c), no further installments of this option shall become exercisable, and this option shall terminate (and may no longer be exercised) after the passage of three (3) months from the Employee's last day of employment, but in no event later than the scheduled expiration date. In such a case, the Employee's only rights hereunder shall be those which are properly exercised before the termination of this option. (b) TERMINATION FOR CAUSE. If the employment of the Employee is terminated for Cause (as defined in Section 4(c)), this option shall terminate at the time of such termination of employment and shall thereafter not be exercisable to any extent whatsoever. For the purposes of this Section 4(b), termination of employment shall be deemed to occur when the Employee receives notice of such termination. (c) DEFINITION OF CAUSE. "Cause" shall mean conduct involving one or more of the following: (i) the substantial and continuing failure of the Employee, after notice thereof, to render services to the Company or Related Corporation in accordance with the terms or requirements of his or her employment; (ii) disloyalty, gross negligence, willful misconduct, dishonesty or breach of fiduciary duty to the Company or Related Corporation; (iii) the commission of an act of embezzlement or fraud; (iv) deliberate disregard of the rules or policies of the Company or Related Corporation which results in direct or indirect loss, damage or injury to the Company or Related Corporation; (v) the unauthorized disclosure of any trade secret or confidential information of the Company or Related Corporation; or (vi) the commission of an act which constitutes unfair competition with the Company or Related Corporation or which induces any customer or supplier to breach a contract with the Company or Related Corporation. 5. DEATH; DISABILITY. (a) DEATH. If the Employee dies while in the employ of the Company or any Related Corporation, this option may be exercised, to the extent otherwise exercisable on the date of his or her death, by the Employee's estate, personal representative or beneficiary to whom this option has been assigned pursuant to Section 10, at any time within 180 days after the date of death, but not later than the scheduled expiration date. 3 - 3 - (b) DISABILITY. If the Employee ceases to be employed by the Company and all Related Corporations by reason of his or her disability (as defined in the Plan), this option may be exercised, to the extent otherwise exercisable on the date of the termination of his or her employment, at any time within 180 days after such termination, but not later than the scheduled expiration date. (c) EFFECT OF TERMINATION. At the expiration of the 180-day period provided in paragraphs (a) or (b) of this Section 5 or the scheduled expiration date, whichever is the earlier, this option shall terminate (and shall no longer be exercisable) and the only rights hereunder shall be those as to which the option was properly exercised before such termination. 6. PARTIAL EXERCISE. This option may be exercised in part at any time and from time to time within the above limits, except that this option may not be exercised for a fraction of a share unless such exercise is with respect to the final installment of stock subject to this option and cash in lieu of a fractional share must be paid, in accordance with Paragraph 13(G) of the Plan, to permit the Employee to exercise completely such final installment. Any fractional share with respect to which an installment of this option cannot be exercised because of the limitation contained in the preceding sentence shall remain subject to this option and shall be available for later purchase by the Employee in accordance with the terms hereof. 7. PAYMENT OF PRICE. (a) The option price shall be paid in the following manner: (i) in cash or by check; (ii) subject to Section 7(b) below, by delivery of shares of the Company's Common Stock having a fair market value (as determined by the Committee) equal as of the date of exercise to the option price; (iii) by delivery of an assignment satisfactory in form and substance to the Company of a sufficient amount of the proceeds from the sale of the Option Shares and an instruction to the broker or selling agent to pay that amount to the Company; or (iv) by any combination of the foregoing. (b) LIMITATIONS ON PAYMENT BY DELIVERY OF COMMON STOCK. If the Employee delivers Common Stock held by the Employee (the "Old Stock") to the Company in full or partial payment of the option price, and the Old Stock so delivered is subject to restrictions or limitations imposed by agreement between the Employee and the Company, an equivalent number of Option Shares shall be subject to all restrictions and limitations applicable to the Old Stock to the extent that the Employee paid for the Option Shares by delivery of Old Stock, in addition to any restrictions or limitations imposed by this Agreement. Notwithstanding the foregoing, the Employee may not pay any part of the exercise price hereof by transferring Common Stock to the Company 4 - 4 - unless such Common Stock has been owned by the Employee free of any substantial risk of forfeiture for at least six months. 8. RESTRICTIONS ON RESALE. Option Shares may be of an illiquid nature and may be deemed to be "restricted securities" for purposes of the Securities Act of 1933, as amended (the "Securities Act"). Accordingly, such shares may be required to be sold in compliance with the registration requirements of the Securities Act or an exemption therefrom. 9. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of this Agreement, this option may be exercised by written notice to the Company at its principal executive office, or to such transfer agent as the Company shall designate. Such notice shall state the election to exercise this option and the number of Option Shares for which it is being exercised and shall be signed by the person or persons so exercising this option. Such notice shall be accompanied by payment of the full purchase price of such shares, and the Company shall deliver a certificate or certificates representing such shares as soon as practicable after the notice shall be received. Such certificate or certificates shall be registered in the name of the person or persons so exercising this option (or, if this option shall be exercised by the Employee and if the Employee shall so request in the notice exercising this option, shall be registered in the name of the Employee and another person jointly, with right of survivorship). In the event this option shall be exercised, pursuant to Section 5 hereof, by any person or persons other than the Employee, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise this option. 10. OPTION NOT TRANSFERABLE. This option is not transferable or assignable except by will or by the laws of descent and distribution. During the Employee's lifetime only the Employee can exercise this option. 11. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this option imposes no obligation on the Employee to exercise it. 12. NO OBLIGATION TO CONTINUE EMPLOYMENT. Neither the Plan, this Agreement, nor the grant of this option imposes any obligation on the Company or any Related Corporation to continue the Employee in employment. 13. NO RIGHTS AS STOCKHOLDER UNTIL EXERCISE. The Employee shall have no rights as a stockholder with respect to the Option Shares until such time as the Employee has exercised this option by delivering a notice of exercise and has paid in full the purchase price for the shares so exercised in accordance with Section 9. Except as is expressly provided in the Plan with respect to certain changes in the capitalization of the Company, no adjustment shall be made for dividends or similar rights for which the record date is prior to such date of exercise. 14. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. The Plan contains provisions covering the treatment of options in a number of contingencies such as stock splits and mergers. Provisions in the Plan for adjustment with respect to stock subject to options and the related 5 - 5 - provisions with respect to successors to the business of the Company are hereby made applicable hereunder and are incorporated herein by reference. 15. EARLY DISPOSITION. The Employee agrees to notify the Company in writing immediately after the Employee transfers any Option Shares, if such transfer occurs on or before the later of (a) the date two years after the date of this Agreement or (b) the date one year after the date the Employee acquired such Option Shares. The Employee also agrees to provide the Company with any information concerning any such transfer required by the Company for tax purposes. 16. WITHHOLDING TAXES. If the Company or any Related Corporation in its discretion determines that it is obligated to withhold any tax in connection with the exercise of this option, or in connection with the transfer of, or the lapse of restrictions on, any Common Stock or other property acquired pursuant to this option, the Employee hereby agrees that the Company or any Related Corporation may withhold from the Employee's wages or other remuneration the appropriate amount of tax. At the discretion of the Company or Related Corporation, the amount required to be withheld may be withheld in cash from such wages or other remuneration or in kind from the Common Stock or other property otherwise deliverable to the Employee on exercise of this option. The Employee further agrees that, if the Company or any Related Corporation does not withhold an amount from the Employee's wages or other remuneration sufficient to satisfy the withholding obligation of the Company or Related Corporation, the Employee will make reimbursement on demand, in cash, for the amount underwithheld. 17. LOCK-UP AGREEMENT. The Employee agrees that in connection with an underwritten public offering of Common Stock, upon the request of the Company or the principal underwriter managing such public offering, the Option Shares may not be sold, offered for sale or otherwise disposed of without the prior written consent of the Company or such underwriter, as the case may be, for at least ninety (90) days after the effectiveness of the registration statement filed in connection with such offering, or such longer period of time as the Board of Directors may determine if all of the Company's directors and officers agree to be similarly bound. 18. ARBITRATION. Any dispute, controversy, or claim arising out of, in connection with, or relating to the performance of this Agreement or its termination shall be settled by arbitration in the State of Mississippi, pursuant to the rules then obtaining of the American Arbitration Association. Any award shall be final, binding and conclusive upon the parties and a judgment rendered thereon may be entered in any court having jurisdiction thereof. 19. PROVISION OF DOCUMENTATION TO EMPLOYEE. By signing this Agreement the Employee acknowledges receipt of a copy of this Agreement and a copy of the Plan. 20. MISCELLANEOUS. (a) NOTICES. All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail, postage prepaid, return receipt requested, 6 - 6 - to the address set forth below. The addresses for such notices may be changed from time to time by written notice given in the manner provided for herein. (b) ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties. (c) SEVERABILITY. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision. (d) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the limitations set forth in Section 10 hereof. (e) GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, without giving effect to the principles of the conflicts of laws thereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 7 - 7 - IN WITNESS WHEREOF, the Company and the Employee have caused this instrument to be executed as of the date first above written. GULF SOUTH MEDICAL SUPPLY, INC. One Woodgreen Place Madison, MS 39110 - ------------------------------------ EMPLOYEE (Employee) By: - ------------------------------------ ----------------------------- Print Name of Employee - ------------------------------------ -------------------------------- Street Address Title - ------------------------------------ City State Zip Code EX-10.11 5 FORM OF THE COMPANY'S NON-QUALIFIED 1 EXHIBIT 10.11 GULF SOUTH MEDICAL SUPPLY, INC. NON-QUALIFIED STOCK OPTION AGREEMENT Gulf South Medical Supply, Inc., a Delaware corporation (the "Company"), hereby grants as of (Date) to (Optionee) (the "Optionee"), an option to purchase a maximum of (Number) shares (the "Option Shares") of its Common Stock, $.01 par value ("Common Stock"), at the price of $(ExercisePrice) per share, on the following terms and conditions: 1. GRANT UNDER THE COMPANY'S 1997 STOCK PLAN. This option is granted pursuant to and is governed by the Company's 1997 Stock Plan (the "Plan") and, unless the context otherwise requires, terms used herein shall have the same meaning as in the Plan. Determinations made in connection with this option pursuant to the Plan shall be governed by the Plan as it exists on this date. 2. GRANT AS NON-QUALIFIED OPTION; OTHER OPTIONS. This option shall be treated for federal income tax purposes as a Non-Qualified Option (rather than an incentive stock option). This option is in addition to any other options heretofore or hereafter granted to the Optionee by the Company or any Related Corporation (as defined in the Plan), but a duplicate original of this instrument shall not effect the grant of another option. 3. VESTING OF OPTION IF BUSINESS RELATIONSHIP CONTINUES. If the Optionee has continued to serve the Company or any Related Corporation in the capacity of an employee, officer, director or consultant (such service is described herein as maintaining or being involved in a "Business Relationship with the Company") on the following dates, the Optionee may exercise this option for the number of shares of Common Stock set opposite the applicable date: Less than one year from the date hereof - (VestingNumber) shares One year but less than two years from - an additional (VestingNumber) shares the date hereof Two years but less than three years from - an additional (VestingNumber) shares the date hereof Three years but less than four years - an additional (VestingNumber) shares from the date hereof Four years or more from the date hereof - an additional (VestingNumber) shares
Notwithstanding the foregoing, in accordance with and subject to the provisions of the Plan, the Committee may, in its discretion, accelerate the date that any installment of this Option becomes 2 -2- exercisable. The foregoing rights are cumulative and (subject to Sections 4 or 5 hereof) may be exercised up to and including the date which is ten years from the date this option is granted. 4. TERMINATION OF BUSINESS RELATIONSHIP. (a) TERMINATION OTHER THAN FOR CAUSE. If the Optionee's Business Relationship with the Company and all Related Corporations is terminated, other than by reason of death, disability or dissolution as defined in Section 5 or other than for Cause as defined in Section 4(c), no further installments of this option shall become exercisable, and this option shall terminate (and may no longer be exercised) after the passage of three (3) months from the date the Business Relationship ceases, but in no event later than the scheduled expiration date. In such a case, the Optionee's only rights hereunder shall be those which are properly exercised before the termination of this option. (b) TERMINATION FOR CAUSE. If the Optionee's Business Relationship with the Company or any Related Corporation is terminated for Cause (as defined in Section 4(c)), this option shall terminate at the time of such termination of the Optionee's Business Relationship with the Company and shall thereafter not be exercisable to any extent whatsoever. For the purposes of this Section 4(b), termination of an Optionee's Business Relationship with the Company or any Related Corporation shall be deemed to occur when the Optionee receives notice of such termination. (c) DEFINITION OF CAUSE. "Cause" shall mean conduct involving one or more of the following: (i) the substantial and continuing failure of the Optionee, after notice thereof, to render services to the Company or Related Corporation in accordance with the terms or requirements of the Optionee's Business Relationship with the Company; (ii) disloyalty, gross negligence, willful misconduct, dishonesty or breach of fiduciary duty to the Company or Related Corporation; (iii) the commission of an act of embezzlement or fraud; (iv) deliberate disregard of the rules or policies of the Company or Related Corporation which results in direct or indirect loss, damage or injury to the Company or Related Corporation; (v) the unauthorized disclosure of any trade secret or confidential information of the Company or Related Corporation; or (vi) the commission of an act which constitutes unfair competition with the Company or Related Corporation or which induces any customer or supplier to break a contract with the Company or Related Corporation. 5. DEATH; DISABILITY; DISSOLUTION. (a) DEATH. If the Optionee is a natural person who dies while involved in a Business Relationship with the Company or any Related Corporation, this option may be exercised, to the extent otherwise exercisable on the date of his or her death, by the Optionee's estate, personal representative or beneficiary to whom this option has been assigned pursuant to Section 10, at any time within 180 days after the date of death, but not later than the scheduled expiration date. 3 -3- (b) DISABILITY. If the Optionee is a natural person whose Business Relationship with the Company or any Related Corporation is terminated by reason of his or her disability (as defined in the Plan), this option may be exercised, to the extent otherwise exercisable on the date the Business Relationship was terminated, at any time within 180 days after such termination, but not later than the scheduled expiration date. (c) EFFECT OF TERMINATION. At the expiration of such 180-day period provided in paragraphs (a) or (b) of this Section 5 or the scheduled expiration date, whichever is the earlier, this option shall terminate (and shall no longer be exercisable) and the only rights hereunder shall be those as to which the option was properly exercised before such termination. (d) DISSOLUTION. If the Optionee is a corporation, partnership, trust or other entity that is dissolved, is liquidated, becomes insolvent or enters into a merger or acquisition with respect to which the Optionee is not the surviving entity, at a time when the Optionee is involved in a Business Relationship with the Company or any Related Corporation, this option shall immediately terminate as of the date of such event (and shall thereafter not be exercisable to any extent whatsoever), and the only rights hereunder shall be those as to which this option was properly exercised before such dissolution or other event. 6. PARTIAL EXERCISE. This option may be exercised in part at any time and from time to time within the above limits, except that this option may not be exercised for a fraction of a share unless such exercise is with respect to the final installment of stock subject to this option and cash in lieu of a fractional share must be paid, in accordance with Paragraph 13(G) of the Plan, to permit the Optionee to exercise completely such final installment. Any fractional share with respect to which an installment of this option cannot be exercised because of the limitation contained in the preceding sentence shall remain subject to this option and shall be available for later purchase by the Optionee in accordance with the terms hereof. 7. PAYMENT OF PRICE. (a) FORM OF PAYMENT. The option price shall be paid in the following manner: (i) in cash or by check; (ii) subject to Section 7(b) below, by delivery of shares of the Company's Common Stock having a fair market value (as determined by the Committee) equal as of the date of exercise to the option price; (iii) by delivery of an assignment satisfactory in form and substance to the Company of a sufficient amount of the proceeds from the sale of the Option Shares and an instruction to the broker or selling agent to pay that amount to the Company; or (iv) by any combination of the foregoing. 4 -4- (b) LIMITATIONS ON PAYMENT BY DELIVERY OF COMMON STOCK. If the Optionee delivers Common Stock held by the Optionee (the "Old Stock") to the Company in full or partial payment of the option price, and the Old Stock so delivered is subject to restrictions or limitations imposed by agreement between the Optionee and the Company, an equivalent number of Option Shares shall be subject to all restrictions and limitations applicable to the Old Stock to the extent that the Optionee paid for the Option Shares by delivery of Old Stock, in addition to any restrictions or limitations imposed by this Agreement. Notwithstanding the foregoing, the Optionee may not pay any part of the exercise price hereof by transferring Common Stock to the Company unless such Common Stock has been owned by the Optionee free of any substantial risk of forfeiture for at least six months. 8. RESTRICTIONS ON RESALE. Option Shares may be of an illiquid nature and may be deemed to be "restricted securities" for purposes of the Securities Act of 1933, as amended (the "Securities Act"). Accordingly, such shares may be required to be sold in compliance with the registration requirements of the Securities Act or an exemption therefrom. 9. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of this Agreement, this option may be exercised by written notice to the Company, at the principal executive office of the Company, or to such transfer agent as the Company shall designate. Such notice shall state the election to exercise this option and the number of Option Shares for which it is being exercised and shall be signed by the person or persons so exercising this option. Such notice shall be accompanied by payment of the full purchase price of such shares, and the Company shall deliver a certificate or certificates representing such shares as soon as practicable after the notice shall be received. Such certificate or certificates shall be registered in the name of the person or persons so exercising this option (or, if this option shall be exercised by the Optionee and if the Optionee shall so request in the notice exercising this option, shall be registered in the name of the Optionee and another person jointly, with right of survivorship). In the event this option shall be exercised, pursuant to Section 5 hereof, by any person or persons other than the Optionee, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise this option. 10. OPTION NOT TRANSFERABLE. This option is not transferable or assignable except by will or by the laws of descent and distribution or pursuant to a valid domestic relations order. Except as set forth in the preceding sentence, during the Optionee's lifetime, only the Optionee can exercise this option. 11. NO OBLIGATION TO EXERCISE OPTION. The grant and acceptance of this option imposes no obligation on the Optionee to exercise it. 12. NO OBLIGATION TO CONTINUE BUSINESS RELATIONSHIP. Neither the Plan, this Agreement, nor the grant of this option imposes any obligation on the Company or any Related Corporation to continue to maintain a Business Relationship with the Optionee. 5 -5- 13. NO RIGHTS AS STOCKHOLDER UNTIL EXERCISE. The Optionee shall have no rights as a stockholder with respect to the Option Shares until such time as the Optionee has exercised this option by delivering a notice of exercise and has paid in full the purchase price for the number of shares for which this option is to be so exercised in accordance with Section 9. Except as is expressly provided in the Plan with respect to certain changes in the capitalization of the Company, no adjustment shall be made for dividends or similar rights for which the record date is prior to such date of exercise. 14. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. The Plan contains provisions covering the treatment of options in a number of contingencies such as stock splits and mergers. Provisions in the Plan for adjustment with respect to stock subject to options and the related provisions with respect to successors to the business of the Company are hereby made applicable hereunder and are incorporated herein by reference. 15. WITHHOLDING TAXES. If the Company or any Related Corporation in its discretion determines that it is obligated to withhold any tax in connection with the exercise of this option, or in connection with the transfer of, or the lapse of restrictions on, any Common Stock or other property acquired pursuant to this option, the Optionee hereby agrees that the Company or any Related Corporation may withhold from the Optionee's wages or other remuneration the appropriate amount of tax. At the discretion of the Company or Related Corporation, the amount required to be withheld may be withheld in cash from such wages or other remuneration or in kind from the Common Stock or other property otherwise deliverable to the Optionee on exercise of this option. The Optionee further agrees that, if the Company or Related Corporation does not withhold an amount from the Optionee's wages or other remuneration sufficient to satisfy the withholding obligation of the Company or Related Corporation, the Optionee will make reimbursement on demand, in cash, for the amount underwithheld. 16. LOCK-UP AGREEMENT. The Employee agrees that in connection with an underwritten public offering of Common Stock, upon the request of the Company or the principal underwriter managing such public offering, the Option Shares may not be sold, offered for sale or otherwise disposed of without the prior written consent of the Company or such underwriter, as the case may be, for at least 90 days after the effectiveness of the registration statement filed in connection with such offering, or such longer period of time as the Board of Directors may determine if all of the Company's directors and officers agree to be similarly bound. 17. ARBITRATION. Any dispute, controversy, or claim arising out of, in connection with, or relating to the performance of this Agreement or its termination shall be settled by arbitration in the State of Mississippi, pursuant to the rules then obtaining of the American Arbitration Association. Any award shall be final, binding and conclusive upon the parties and a judgment rendered thereon may be entered in any court having jurisdiction thereof. 18. PROVISION OF DOCUMENTATION TO EMPLOYEE. By signing this Agreement the Optionee acknowledges receipt of an original of this Agreement and a copy of the Plan. 6 -6- 19. MISCELLANEOUS. (a) NOTICES. All notices hereunder shall be in writing and shall be deemed given when sent by certified or registered mail, postage prepaid, return receipt requested, to the address set forth below. The addresses for such notices may be changed from time to time by written notice given in the manner provided for herein. (b) ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the entire agreement between the parties relative to the subject matter hereof, and supersedes all proposals, written or oral, and all other communications between the parties relating to the subject matter of this Agreement. This Agreement may be modified, amended or rescinded only by a written agreement executed by both parties. (c) SEVERABILITY. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision. (d) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, subject to the limitations set forth in Section 10 hereof. (e) GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, without giving effect to the principles of the conflicts of laws thereof. The preceding choice of law provision shall apply to all claims, under any theory whatsoever, arising out of the relationship of the parties contemplated herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 7 -7- IN WITNESS WHEREOF, the Company and the Optionee have caused this instrument to be executed as of the date first above written. GULF SOUTH MEDICAL SUPPLY, INC. - -------------------------------------- One Woodgreen Place OPTIONEE Madison, MS 39110 (Optionee) By: - -------------------------------------- ----------------------------- Print Name of Optionee - -------------------------------------- -------------------------------- Street Address Title - -------------------------------------- City State Zip Code EX-11.1 6 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 GULF SOUTH MEDICAL SUPPLY, INC. COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, ------------------------------ 1996 1995 1994 -------- -------- -------- Average shares outstanding .............. 15,287 13,841 12,877 Net effect of common stock options -- based on the treasury method using average market value ............. 132 153 196 -------- -------- -------- Weighted average number of common shares ............ 15,419 13,994 13,073 ======== ======== ======== Net income ................ $ 10,694 $ 8,160 $ 5,796 Interest on convertible subordinated debt, net of income tax credit ................... -- -- 98 -------- -------- -------- $ 10,694 $ 8,160 $ 5,894 ======== ======== ======== Net income per share .................... $ .69 $ .58 $ .45 ======== ======== ========
EX-23.1 7 CONSENT OF ERNST & YOUNG 1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8, No. 33-83714; Form S-3, No. 333-10939; and Form S-3, No. 333-20395) and related prospectuses of Gulf South Medical Supply, Inc. of our report dated February 7, 1997, with respect to the consolidated financial statements and schedule of Gulf South Medical Supply, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ ERNST & YOUNG LLP Jackson, Mississippi March 20, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH AUDITED FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 76,054 0 50,055 1,651 27,189 155,746 4,964 1,092 197,971 53,672 0 163 0 0 144,136 197,971 177,710 177,710 136,344 136,344 25,828 924 229 17,080 6,386 10,694 0 0 0 10,694 .69 .69
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