<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 8-K/A
AMENDMENT NO. 1
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 26, 1996
Gulf South Medical Supply, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 0-21512 06-1251310
- ---------------------------- ----------- -------------------
(State or other jurisdiction (Commission (IRS Employer
of Incorporation) File number) Identification No.)
426 Christine Drive, Ridgeland, MS 39157
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (601) 856-5900
<PAGE> 2
The undersigned registrant hereby amends and restates Item 7 of its
Current Report on Form 8-K dated December 26, 1996, so that as so amended and
restated said Item 7 shall read in its entirety as set forth on the following
pages.
-2-
<PAGE> 3
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired.
The following audited consolidated financial statements of Gateway
Healthcare Corporation, together with the report thereon manually signed by
KPMG Peat Marwick LLP, are included as Exhibit 99.1 to this report and
incorporated herein by this reference:
Consolidated Balance sheets as of December 31, 1995 and 1994
and September 30, 1996 (unaudited) and 1995
(unaudited)
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994 and for the nine months
(unaudited) ended September 30, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995 and 1994 and the nine months
ended September 30, 1996 (unaudited)
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1994 and for the nine months
(unaudited) ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information.
The following unaudited pro forma combined financial statements are
included as Exhibit 99.2 to this report and are incorporated herein by this
reference:
Unaudited Pro Forma Combined Balance Sheets as of September
30, 1996
Unaudited Pro Forma Combined Statements of Operations for the
years ended December 31, 1995 and 1994 and the nine months
ended September 30, 1996
Notes to Unaudited Pro Forma Combined Financial Information
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1* 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").
2.2* Amendment and Waiver Agreement, dated as of December 26, 1996 among Gateway, the stockholders of
Gateway listed on the signature pages thereto
</TABLE>
-3-
<PAGE> 4
<TABLE>
<S> <C>
and Gulf South Medical Supply, Inc., to the Gateway Stock Purchase Agreement.
23.1 Consent of KPMG Peat Marwick LLP
99.1 The following audited consolidated financial statements of
Gateway Healthcare Corporation, together with the report
thereon manually signed by KPMG Peat Marwick LLP
Consolidated Balance sheets as of December 31, 1995 and 1994
and September 30, 1996 (unaudited) and 1995
(unaudited)
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994 and for the nine months
(unaudited) ended September 30, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995 and 1994 and the nine months
ended September 30, 1996 (unaudited)
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1994 and for the nine months
(unaudited) ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements
99.2 The following unaudited pro forma combined financial statements:
Unaudited Pro Forma Combined Balance Sheets as of September 30, 1996
Unaudited Pro Forma Combined Statements of Operations for the years ended December 31, 1995 and 1994
and the nine months ended September 30, 1996
Notes to Unaudited Pro Forma Combined Financial Information
</TABLE>
- -----------------
*Previously filed with the Company's Current Report on Form 8-K dated December
26, 1996 filed on January 9, 1997.
-4-
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this amendment to be signed on its behalf by
the undersigned hereunto authorized.
GULF SOUTH MEDICAL SUPPLY, INC.
Date: March 11, 1997
By: /s/ Thomas G. Hixon
-----------------------------
Thomas G. Hixon
-5-
<PAGE> 6
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------
<S> <C>
2.1* 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").
2.2* 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.
23.1 Consent of KPMG Peat Marwick LLP
99.1 The following audited consolidated financial statements of
Gateway Healthcare Corporation, together with the report
thereon manually signed by KPMG Peat Marwick LLP
Consolidated Balance sheets as of December 31, 1995 and 1994
and September 30, 1996 (unaudited) and 1995
(unaudited)
Consolidated Statements of Operations for the years
ended December 31, 1995 and 1994 and for the nine
months (unaudited) ended September 30, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995 and 1994 and the nine months
ended September 30, 1996 (unaudited)
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1994 and for the nine months
(unaudited) ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements
99.2 The following unaudited pro forma combined financial statements:
Unaudited Pro Forma Combined Balance Sheets as of September 30, 1996
Unaudited Pro Forma Combined Statements of Operations for the years ended December 31, 1995 and
1994 and the nine months ended September 30, 1996
Notes to Unaudited Pro Forma Combined Financial Information
</TABLE>
- --------------
*Previously filed with the Company's Current Report on Form 8-K dated December
26, 1996 filed on January 9, 1997.
-6-
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Gulf South Medical Supply:
We consent to the incorporation by reference in the registration statements
(No. 33-83714, No. 333-10939 and No. 333-20395) on Forms S-8, S-3 and S-3,
respectively, of Gulf South Medical Supply of our report dated April 10, 1996,
with respect to the consolidated balance sheets of Gateway Healthcare
Corporation and subsidiary, a then majority-owned subsidiary of North American
Fund II, as of December 31, 1995 and 1994, and the related consolidated
statements of operations, changes in stockholder's equity, and cash flows for
the years then ended, which report appears in the Form 8-K/A of Gulf South
Medical Supply dated March 11, 1997.
(signed) KPMG Peat Marwick LLP
Richmond, Virginia
March 10, 1997
<PAGE> 1
EXHIBIT 99.1
Consolidated Financial Statements
Gateway Healthcare Corporation
and Subsidiary
(a majority-owned subsidiary of
North American Fund II)
Years ended December 31, 1995 and 1994, and the nine
months (unaudited) ended
September 30, 1996 and 1995
with Report of Independent Auditors
<PAGE> 2
Gateway Healthcare Corporation and Subsidiary
Consolidated Financial Statements
Years ended December 31, 1995 and 1994 and the
nine months (unaudited) ended September 30, 1996 and 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . .. . . . . . . . . . 1
Consolidated Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . .. . . . . . . . . . 2
Consolidated Statements of Operations . . . . . . . . .. . . . . . . . . . 4
Consolidated Statements of Stockholder's Equity . . . .. . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . .. . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . .. . . . . . . . . . 7
</TABLE>
<PAGE> 3
Report of Independent Auditors
The Board of Directors
Gateway Healthcare Corporation
We have audited the accompanying consolidated balance sheets of Gateway
Healthcare Corporation and subsidiary, a majority-owned subsidiary of North
American Fund II, as of December 31, 1995 and 1994, and the related
consolidated statements of operations, changes in stockholder's equity, and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gateway Healthcare
Corporation and subsidiary as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
April 10, 1996
1
<PAGE> 4
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Consolidated Balance Sheets
(in thousands, except share information)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1995 1994 1996 1995
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
(unaudited)
ASSETS (NOTE 4)
Current assets:
Cash and cash equivalents $ 210 $ 160 $ 32 $ 9
Accounts receivable, less allowances for
doubtful accounts of $250 and $184
at December 31, 1995 and 1994 and $202
(unaudited) and $285 (unaudited) at
September 30, 1996 and 1995 (Note 10) 9,392 4,455 11,443 7,742
Inventories 5,351 3,170 5,809 4,788
Prepaid expenses 89 47 99 121
------------------------ -------------------------
Total current assets 15,042 7,832 17,383 12,660
Property and equipment, net (Note 3) 1,380 866 1,237 1,159
Intangible and other assets, at cost:
Noncompete agreements 839 829 839 839
Deferred charges 470 380 493 444
Goodwill 3,381 1,468 3,381 3,382
Other intangible assets 309 266 273 299
------------------------ -------------------------
4,999 2,943 4,986 4,964
Accumulated amortization (1,659) (1,379) (1,903) (1,573)
------------------------ -------------------------
3,340 1,564 3,083 3,391
------------------------ -------------------------
Total assets $ 19,762 $ 10,262 $ 21,703 $ 17,210
======================== =========================
</TABLE>
continued
2
<PAGE> 5
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Consolidated Balance Sheets, continued
(in thousands, except share information)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1995 1994 1996 1995
------------------------ ------------------------
<S> <C> <C> <C> <C>
(unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank overdraft $ 1,404 $ - $ 1,008 $ 587
Accounts payable 4,153 2,194 4,777 3,952
Note payable to bank (Note 5) 4,473 - 7,523 3,000
Note payable to parent (Note 5) 1,000 450 1,000 1,000
Notes payable (Note 5) 408 - 25 864
Other accrued expenses 900 461 631 328
---------------------- ----------------------
Total current liabilities 12,338 3,105 14,964 9,731
Long-term debt(Note 5) 3,192 3,210 3,176 3,202
Total liabilities 15,530 6,315 18,140 12,933
Stockholder's equity (Note 1):
Common stock, $0.01 par value. Authorized 10,000,000
shares, issued and outstanding 545,000 and 525,000
shares at December 31, 1995 and 1994 and 545,000
(unaudited) and 525,000 (unaudited) shares at September
30, 1996 and 1995 5 5 5 5
Convertible preferred stock, $117.69 par value, $10
liquidation value. Authorized, issued and outstanding
13,000 shares (Note 5) 200 200 200 200
Additional paid-in capital 5,565 5,365 5,565 5,365
Accumulated deficit (1,538) (1,623) (2,207) (1,293)
---------------------- ----------------------
Total stockholder's equity 4,232 3,947 3,563 4,277
Commitments and contingencies (Note 9
and 11)
---------------------- ----------------------
Total liabilities and stockholder's equity $19,762 $ 10,262 $21,703 $ 17,210
====================== ======================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31 September 30
1995 1994 1996 1995
------------------------- -----------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales (Note 10) $47,737 $33,216 $52,979 $33,061
Cost of goods sold 37,724 26,436 42,390 26,238
----------------------- ----------------------
Gross profit 10,013 6,780 10,589 6,823
Selling, general and administrative
expenses 9,475 6,653 10,542 6,227
----------------------- ----------------------
Operating income 538 127 47 596
Interest expense (527) (488) (742) (333)
Other income 74 107 26 67
----------------------- ----------------------
Income (loss) before income taxes and
extraordinary item 85 (254) (669) 330
Income taxes (Note 8) - - - -
Income (loss) before extraordinary item 85 (254) (669) 330
----------------------- ----------------------
Extraordinary item-early
extinguishment of long-term debt
(Note 5) - 544 - -
----------------------- ----------------------
Net income (loss) $ 85 $ 290 $ (669) $ 330
======================= ======================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Consolidated Statements of Stockholder's Equity
(in thousands)
<TABLE>
<CAPTION>
Convertible Additional
Common Preferred Paid-in Accumulated
Stock Stock Capital Deficit Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 370 $ - $3,450 $(1,913) $1,907
Issuance of common stock to parent 1,550 - - - 1,550
Equity reclassification due to reorganization
transaction (Note 1) (1,915) - 1,915 - -
Issuance of preferred stock (Note 5) - 200 - - 200
Net income for the year ended December 31, 1994 - - - 290 290
--------------------------------------------------------------------
Balance at December 31, 1994 5 200 5,365 (1,623) 3,947
Issuance of common stock - - 200 - 200
Net income for the year ended December 31, 1995 - - - 85 85
--------------------------------------------------------------------
Balance at December 31, 1995 5 200 5,565 (1,538) 4,232
Net loss for the nine months ended
September 30, 1996 (unaudited) - - - (669) (669)
--------------------------------------------------------------------
Balance at September 30, 1996 (unaudited) $ 5 $ 200 $5,565 $(2,207) $3,563
====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 8
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Consolidated Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
1995 1994 1996 1995
---------------------- -------------------------
(unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 85 $ 290 $ (669) $ 330
Adjustments to reconcile net income to net cash used in
operating activities,net of effects of acquisition:
Extraordinary item - early extinguishment of long-
term debt - (544) - -
Depreciation 268 221 300 187
Amortization of intangible assets 281 247 244 194
Loss (gain) on sale of assets 2 (1) - -
Accretion of discount on long-term debt - 242 - -
Increase in accounts receivable (2,182) (479) (2,051) (1,229)
Increase in inventories (804) (536) (458) (692)
Decrease (increase) in prepaid expenses and other
intangible assets 16 (2) 26 (7)
Increase (decrease) in bank overdraft 1,404 - (396) 587
Increase in accounts payable 374 110 624 722
Increase (decrease) in other accrued expenses 187 76 (269) (351)
---------------------- -------------------------
Net cash used in operating activities (369) (376) (2,649) (259)
INVESTING ACTIVITIES
Purchase of property and equipment (364) (219) (157) (125)
Organization costs and other fees paid (90) (8) (23) (64)
Cash paid for acquisitions (Note 4) (3,125) (1,813) - (2,502)
Proceeds from sale of equipment 17 11 - -
---------------------- -------------------------
Net cash used in investing activities (3,562) (2,029) (180) (2,691)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 200 1,550 - -
Proceeds from issuance of notes payable to bank 4,473 - 3,050 3,000
Proceeds from issuance of demand notes to parent 1,000 450 - 1,000
Proceeds from notes payable - 5 - 481
Payments on demand notes to parent (450) - - (450)
Payments on notes payable to bank (1,223) - (383) (1,224)
Principal payments on long-term debt (19) (164) (16) (8)
---------------------- -------------------------
Net cash provided by financing activities 3,981 1,841 2,651 2,799
Net increase (decrease) in cash and cash equivalents 50 (564) (178) (151)
Cash and cash equivalents at beginning of year 160 724 210 160
---------------------- -------------------------
Cash and cash equivalents at end of period $ 210 $ 160 $ 32 $ 9
====================== ========================
SUPPLEMENTAL CASH FLOW INFORMATION - INTEREST PAID $ 528 $ 250 $ 333 $ 759
====================== ========================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 9
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Notes to Consolidated Financial Statements
(in thousands, except share amounts)
December 31, 1995 and 1994
1. DESCRIPTION OF BUSINESS
Gateway Healthcare Corporation (Gateway) is a medical and surgical supply
distributor with operations in Virginia, North Carolina, Indiana, New Hampshire
and Pennsylvania. Gateway is a wholly-owned subsidiary of North American Fund
II, a venture capital fund.
Effective December 28, 1994, Gateway Holdings, Inc., the former parent of
Gateway underwent certain reorganization transactions as follow: (1) Gateway
Healthcare Corporation amended and restated its articles of incorporation to
authorize 10,000,000 shares of common stock and reduce the par value of common
stock to $.01 per share; (2) Gateway Healthcare Corporation amended and
restated its articles of incorporation to authorize 200,000 shares of preferred
stock; and (3) Gateway Holdings, Inc. merged into Gateway Healthcare
Corporation, its wholly-owned subsidiary and thereby transferred all of its
assets and liabilities.
Subsequent to the reorganization transactions, the consolidated assets,
liabilities and operations of Gateway Healthcare Corporation are essentially
those of Gateway Holdings, Inc. Accordingly, the accompanying consolidated
financial statements present the historical financial position and results of
operations of Gateway Healthcare Corporation, formerly known as Gateway
Holdings, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Gateway Healthcare Corporation, its wholly- owned subsidiary, TotalMed Leasing
& Sales Corporation and its divisions, Medical Surgical Center, Commonwealth
Medical Supply, Carolina Surgical Supply and Dominion Medical Supply. All
significant intercompany transactions have been eliminated in consolidation.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
7
<PAGE> 10
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Notes to Consolidated Financial Statements (continued)
(in thousands, except share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories of medical and surgical supplies held for resale are stated at the
lower of cost or market. Cost is determined using the first-in, first-out
method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated on the straight-line method over the estimated useful
lives of the assets, which range from 3 to 31.5 years.
INTANGIBLE AND OTHER ASSETS
Non-Compete agreements are amortized over the related non-compete periods which
range from 2 to 5 years.
Deferred charges consist principally of loan fees, professional fees and other
direct costs of acquiring the net assets of the acquired companies. Loan fees
and related costs are amortized on a straight-line basis over the life of the
related loans. Other fees are amortized on the straight-line method over a
five-year period.
Goodwill represents the excess of the cost of the purchased business over the
fair value of the net assets at the date of acquisition and is being amortized
on the straight-line method over periods ranging from 15 to 40 years.
Other intangible assets represent the value of operating leases acquired at
less than market value. The differential is being amortized over the term of
the leases.
DISCOUNT ON LONG-TERM DEBT
The discount on long-term debt was being amortized on the interest method over
the life of the debt.
8
<PAGE> 11
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Notes to Consolidated Financial Statements (continued)
(in thousands, except share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Under the asset
and liability method of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
USE OF ESTIMATES
Management has made estimates and assumptions relating to the reporting of
assets and liabilities and the disclosure of contingent assets and liabilities
to prepare these consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
3. PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1995 1994 1996 1995
----------------------- -------------------------
(unaudited)
<S> <C> <C> <C> <C>
Land $ 14 $ 14 $ 14 $ 14
Buildings and improvements 248 147 248 248
Equipment and fixtures 1,741 955 1,880 1,361
Trucks and autos 230 215 248 242
Rental equipment 26 26 26 26
----------------------- ------------------------
2,259 1,357 2,416 1,891
Less accumulated depreciation 879 491 1,179 732
----------------------- ------------------------
$ 1,380 $ 866 $ 1,237 $ 1,159
======================= ========================
</TABLE>
9
<PAGE> 12
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Notes to Consolidated Financial Statements (continued)
(in thousands, except share amounts)
4. ACQUISITIONS
On June 30, 1995, Gateway acquired, TotalMed Leasing & Sales Corp. (TotalMed),
a New Hampshire based medical equipment and supply company. The acquisition
was accounted for by the purchase method of accounting and accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their fair values at the date of the acquisition. The excess of the
purchase price over fair value of net assets acquired was recorded as goodwill.
Gateway obtained a bank note payable to fund the purchase of TotalMed. The
results of operations from June 30, 1995 to December 31, 1995 of TotalMed have
been included in the financial statements of Gateway.
On November 6, 1995, Gateway acquired Pointsource, Inc. (Pointsource) a
Massachusetts based medical supply company. The acquisition was accounted for
by the purchase method of accounting and accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their fair
values at the date of the acquisition. No goodwill was acquired. The results
of operations from November 1, 1995 to December 31, 1995 of Pointsource have
been included in the financial statements of Gateway.
On April 8, 1994, Gateway acquired Dominion Medical Supply, a Richmond,
Virginia based medical supply company. The acquisition was accounted for by
the purchase method of accounting and accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their fair
values at the date of the acquisition. The excess of the purchase price over
fair value of net assets acquired was recorded as goodwill. Gateway issued
additional common stock to North American Fund II in a cash for stock
transaction to fund the purchase of Dominion Medical Supply and provide working
capital to Gateway. The results of operations from April 1, 1994 to December
31, 1994 of Dominion Medical have been included in the financial statements of
Gateway.
10
<PAGE> 13
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Notes to Consolidated Financial Statements (continued)
(in thousands, except share amounts)
4. ACQUISITIONS (CONTINUED)
A summary of the fair value of assets acquired and liabilities assumed follows:
<TABLE>
<CAPTION>
1995 1994
TOTALMED POINTSOURCE TOTAL DOMINION
-------------------------------------------------------
<S> <C> <C> <C> <C>
Accounts receivable $ 2,058 $ 697 $ 2,755 $ 678
Inventories 926 452 1,378 395
Prepaids 56 1 57 3
Property and equipment 355 82 437 119
Other assets 44 - 44 -
Noncompete agreements 10 - 10 10
Goodwill 1,914 - 1,914 993
Accounts payable (1,036) (549) (1,585) -
Accrued expenses (218) (35) (253) (385)
Notes payable to bank (1,224) - (1,224) -
-------------------------------------------------------
Fair value of assets acquired 2,885 648 3,533 1,813
Less holdbacks and additional
amounts payable to seller 383 25 408 -
-------------------------------------------------------
Cash paid $ 2,502 $ 623 $ 3,125 $ 1,813
=======================================================
</TABLE>
5. DEBT
NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1995 1994 1996 1995
-----------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Note payable to bank $4,473 $ - $7,523 $3,000
Notes payable to parent 1,000 450 1,000 1,000
Notes payable 408 - 25 864
----------------------------------------------------
Total notes payable $5,881 $ 450 $8,548 $4,864
====================================================
</TABLE>
11
<PAGE> 14
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Notes to Consolidated Financial Statements (continued)
(in thousands, except share amounts)
5. DEBT (CONTINUED)
The note payable to bank represents the amount drawn on a $9,000 line of
credit, due in full on June 30, 1996. The rate of interest on the note is
prime plus .62. Subsequent to December 31, 1995, the line of credit was
increased to $10,000 (unaudited) with interest at prime plus .58 due June 30,
1997.
The note payable to Gateway's parent, North American Fund II, is subordinated
to notes payable to bank, due on demand and bears interest at the prime rate
plus one percent.
The notes payable relate to amounts held back by Gateway in accordance with
acquisition agreements as discussed in Note 4. The TotalMed note bears
interest at 5% and both notes are expected to be repaid in full in 1996.
LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1995 1994 1996 1995
----------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Subordinated secured debentures $3,142 $3,142 $3,142 $3,142
Notes payable 50 68 34 60
----------------------------------------------------
Long-term debt $3,192 $3,210 $3,176 $3,202
====================================================
</TABLE>
In December 1994, the senior secured notes, subordinated debentures and senior
subordinated debentures were exchanged for subordinated secured debentures in
the amount of $3,142 bearing interest at 8.25% and with all principal due and
payable in a single payment on September 1, 2001 and 13,000 shares of
convertible preferred stock of Gateway with a par value of $1,530 valued at
$200 at the time of exchange. The preferred stock does not pay dividends and
has a liquidation value of $10 per share to acquire 10,000 shares of Gateway
common stock and is convertible into 13,000 shares of Gateway common stock.
The transaction was accounted for as a debt extinguishment with the resulting
gain recorded as an extraordinary item in the amount of $544, due to the
write-off of the discount on the previous debt that was exchanged. Detachable
stock warrants to acquire 10,000 shares of Gateway common stock were also
issued to replace the warrants held by the former holder of the senior
debentures. These warrants are
12
<PAGE> 15
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Notes to Consolidated Financial Statements (continued)
(in thousands, except share amounts)
5. DEBT (CONTINUED)
convertible into 10,000 shares of Gateway common stock in exchange for cash or
shares of preferred stock as set forth in a conversion schedule in the warrant
agreement. The holder of the subordinated secured debenture also holds
warrants to acquire 10,000 shares of Gateway common stock in exchange for $10
per share. The warrants were deemed to have no additional value as of December
31, 1995 and 1994 over what was attributed to them in 1991.
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
In 1995, Gateway adopted the provisions of FASB Statement No. 107, Disclosure
about Fair Value of Financial Instruments, which defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged
in a current transaction between parties.
Cash and cash equivalents, accounts receivables and all current liabilities
have carrying amounts which approximate fair value because of the short
maturity of those instruments.
The fair value of Gateway's long-term debt is estimated to be $2,800 at
December 31, 1995 based on current market rates for similar issues.
7. BENEFIT PLANS
Gateway has a defined contribution employee profit sharing plan in which
substantially all employees are eligible to participate. Employees may make
voluntary contributions up to the maximum allowed by ERISA. The Company
matches approximately 60% of employee contributions on an amount not to exceed
6% of a contributing employees' total compensation. Gateway may also make a
discretionary profit sharing plan contribution. Total profit sharing expense
was approximately $115 and $76, respectively, for the years ended December 31,
1995 and 1994 and $109 (unaudited) and $81 (unaudited), respectively, for the
nine months ended September 30, 1996 and 1995.
Gateway has a management stock option plan under which grants of stock options
to acquire Gateway common stock are granted to certain key employees at the
discretion of the Board of Directors. Gateway had outstanding under this plan
stock options to acquire 61,688 and 53,813 shares of Gateway common stock at
December 31, 1995 and 1994 and 60,375 (unaudited) and 56,438
13
<PAGE> 16
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Notes to Consolidated Financial Statements (continued)
(in thousands, except share amounts)
7. BENEFIT PLANS (CONTINUED)
(unaudited) shares of Gateway common stock at September 30, 1996 and 1995
at an exercise share price of $10 per share. The options, in general, vest
over a five-year term period from date of employment.
8. INCOME TAXES
At December 31, 1995 and 1994, Gateway had deferred tax assets of approximately
$700 arising principally from net operating losses and additional inventory
costs capitalized for tax purposes, and deferred tax liabilities of
approximately $200 arising principally from amortization of other assets which
differs from book amortization. The net deferred tax assets have been reduced
to zero by valuation allowances.
Net operating losses of $326 were utilized at December 31, 1995 to reduce
income tax expense to $0.
At December 31, 1995, Gateway has a net operating loss carryforward of
approximately $1,200 available to offset any future income taxes. These
carryforwards expire beginning December 31, 2005 through December 31, 2009.
9. LEASES
The Company has several noncancellable operating leases, primarily for office
facilities, that expire over the next five years. Rental expense for operating
leases was approximately $540 and $280, respectively, for the years ended
December 31, 1995 and 1994 and $734 (unaudited) and $359 (unaudited) for the
nine months ended September 30, 1996 and 1995.
Future minimum lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 1995
are as follows: 1996, $645; 1997, $567; 1998, $543; 1999, $268 and 2000, $79.
14
<PAGE> 17
Gateway Healthcare Corporation and Subsidiary
(a majority-owned subsidiary of North American Fund II)
Notes to Consolidated Financial Statements (continued)
(in thousands, except share amounts)
10. SIGNIFICANT CUSTOMERS AND CREDIT CONCENTRATIONS
Sales to two major customers accounted for approximately 16% of net sales for
the years ended December 31, 1995 and 1994 and 16% (unaudited) for the nine
months ended September 30 ,1996 and 1995. Accounts receivables related to
these customers were approximately 4% and 12%, respectively, of total accounts
receivable at December 31, 1995 and 1994 and 12% (unaudited) at September 30,
1996 and 1995.
Gateway's customers consist primarily of nursing homes, physician clinics and
other health care providers in the Midatlantic, New England, and the Midwest.
Gateway grants credit to these customers on an unsecured basis during the
normal course of business.
11. COMMITMENTS AND CONTINGENCIES
During the normal course of business, Gateway negotiates various inventory
purchase arrangements with suppliers. In the opinion of management, these
purchase arrangements are not expected to result in operating losses to
Gateway.
15
<PAGE> 1
EXHIBIT 99.2
GULF SOUTH MEDICAL SUPPLY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma combined balance sheet as of September
30, 1996 and pro forma combined statements of operations for the years ended
December 31, 1995 and 1994 and the nine months ended September 30, 1996 of Gulf
South Medical Supply, Inc. ("Gulf South") give effect to the December 26, 1996
purchase of all of the outstanding stock of Gateway Healthcare Corporation
("Gateway"). The pro forma combined financial statements have been
prepared by management of Gulf South based upon the historical financial
statements of Gulf South and the adjustments and assumptions in the
accompanying notes to the pro forma combined financial statements.
The pro forma combined statements of operations for the years ended December
31, 1995 and 1994 and the nine months ended September 30, 1996 set forth the
effects of Gulf South's purchase of Gateway as if it had been consumated on
January 1, 1994.
These pro forma combined financial statements may not be indicative of the
results that actually would have occurred if the purchase had been in effect on
the dates indicated or which may be obtained in the future. The pro forma
combined financial statements should be read in conjunction with the
financial statements and notes of Gulf South included in its annual report on
Form 10-K for the year ended December 31, 1995.
<PAGE> 2
GULF SOUTH MEDICAL SUPPLY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEETS
September 30, 1996
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Gulf South Pro Forma (2) Gulf South
Historical Adjustments Pro Forma
----------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 78,578 $(37,518)(3) $ 41,060
Trade accounts receivable 37,080 10,906 47,986
Inventories 22,983 4,928 27,911
Prepaid expenses and other 1,404 61 1,465
Deferred income taxes 664 875 1,539
-------- -------- --------
Total current assets 140,709 (20,748) 119,961
Property and equipment, net 2,628 1,139 (4) 3,767
Other assets:
Goodwill 4,395 27,624 (6) 32,019
Deferred income taxes -- 2,900 2,900
Other assets 3,951 53 4,004
-------- -------- --------
Total assets $151,683 $ 10,968 $l62,651
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 8,617 $ 5,331 $ 13,948
Accrued expenses and other current liabilities 795 5,152 (7) 5,947
Accrued integration expenses -- 3,677 3,677
-------- -------- --------
Total current liabilities 9,412 14,160 23,572
Stockholders' equity:
Preferred stock, $.0l par value:
Authorized shares -- 1,000,000
Issued and outstanding shares -- none -- -- --
Common stock, $.0l par value:
Authorized shares -- 30,000,000
Issued and outstanding shares -- 16,264,923 162 -- 162
Paid-in capital 115,679 -- 115,679
Retained earnings 26,430 (3,192) 23,238
-------- -------- --------
Total stockholders' equity 142,271 (3,192) 139,079
-------- -------- --------
Total liabilities and stockholders' equity $151,683 $ 10,968 $162,651
======== ======== ========
</TABLE>
<PAGE> 3
GULF SOUTH MEDICAL SUPPLY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,1995
(in thousands)
<TABLE>
<CAPTION>
Gulf South Pro Forma (5) Gulf South
Historical Adjustments Pro Forma
----------------------------- -----------
<S> <C> <C> <C>
Net sales $ 130,094 $ 47,737 $ 177,831
Cost of sales 97,973 37,724 135,697
--------------------------- -----------
Gross profit 32,121 10,013 42,134
Selling, general and administrative expenses 18,418 10,016 (4),(6) 28,434
--------------------------- -----------
Operating income 13,703 (3) 13,700
Interest expense (199) (2,698)(7) (2,897)
Interest income 163 (163)(7) --
Other income -- 74 74
--------------------------- -----------
Income before income taxes 13,667 (2,790) 10,877
Income tax (expense) benefit (5,507) 840 (8) (4,667)
--------------------------- -----------
Net income $ 8,160 $ (1,950) $ 6,210
=========================== ===========
Net income per share $ 0.58 $ 0.44
=========================== ===========
</TABLE>
<PAGE> 4
GULF SOUTH MEDICAL SUPPLY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,1994
(in thousands)
<TABLE>
<CAPTION>
Gulf South Pro Forma (5) Gulf South
Historical Adjustments Pro Forma
----------------------- ----------
<S> <C> <C> <C>
Net sales $ 92,151 $ 33,216 $ 125,367
Cost of sales 68,122 26,436 94,558
--------------------- ---------
Gross profit 24,029 6,780 30,809
Selling, general and administrative expenses 13,913 7,476 (4),(6) 21,389
--------------------- ---------
Operating income 10,116 (696) 9,420
Interest expense (629) (2,620)(7) (3,249)
Interest income 186 (186)(7) --
Other income -- 107 107
--------------------- ---------
Income before income taxes and
extraordinary item 9,673 (3,395) 6,278
Income tax (expense) benefit (3,877) 1,019 (8) (2,858)
--------------------- ---------
Income before extraordinary item 5,796 (2,376) 3,420
Extraordinary item -- 544 544
--------------------- ---------
Net income $ 5,796 $ (1,832) $ 3,964
===================== =========
Net income per share $ 0.45 $ 0.30
===================== =========
</TABLE>
<PAGE> 5
GULF SOUTH MEDICAL SUPPLY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,1996
(in thousands)
<TABLE>
<CAPTION>
Gulf South Pro Forma (5) Gulf South
Historical Adjustments Pro Forma
----------------------- ---------
<S> <C> <C> <C>
Net sales $ 130,980 $ 52,979 $ 183,959
Cost of sales 100,217 42,390 142,607
---------------------- ---------
Gross profit 30,763 10,589 41,352
Selling, general and administrative expenses 17,532 10,914 (4),(6) 28,446
---------------------- ---------
Operating income 13,231 (325) 12,906
Interest expense (219) (1,720)(7) (1,939)
Interest income 962 (499)(7) 463
Other income -- 26 26
---------------------- ---------
Income before income taxes 13,974 (2,518) 11,456
Income tax (expense) benefit (5,309) 768 (8) (4,541)
---------------------- ---------
Net income $ 8,665 $ (1,750) $ 6,915
====================== =========
Net income per share $ 0.57 $ 0.46
====================== =========
</TABLE>
<PAGE> 6
GULF SOUTH MEDICAL SUPPLY, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands)
1. Effective December 26, 1996, Gulf South Medical Supply, Inc. purchased all
of the outstanding stock of Gateway Healthcare Corporation ("Gateway") for
$26,077, including transaction cost of $756, in a transaction accounted for
as a purchase. The purchase price was funded with notes to the selling
shareholders of which $20,321 were paid January 2, 1997. The remaining
$5,000 in notes are being held in escrow and are to be paid in accordance
with the Gateway Stock Purchase Agreement.
2. The pro forma adjustments to the Consolidated Balance Sheet as of September
30, 1996 include the following purchase accounting adjustment to reflect
Gateway's assets and liabilities at their estimated fair values as December
26, 1996:
<TABLE>
<S> <C>
Cash $ 24
Accounts receivable 10,906
Inventories 4,928
Prepaid 61
Deferred income taxes 875
Property and equipment 690
Goodwill 29,561
Deferred income taxes 2,900
Other assets 53
Notes payable (11,465)
Accounts payable (5,331)
Accrued exit integration expense (3,677)
Accrued expenses (3,448)
--------
$ 26,077
========
</TABLE>
The pro forma adjustments reflected in the pro forma Consolidated
Statements of Operations for the years ended December 31, 1995 and 1994 and
the nine months ended September 30, 1996 as described in notes 3, 4, 6 and
7 reflect the effects of the transaction as if it had been recorded in the
earliest year presented.
3. The pro forma adjustments to cash and cash equivalents as of September 30,
1996 assumes that Gateway's purchase price and related transaction costs
totaling $26,077 and Gateway's existing notes payable and long-term debt
totaling $11,465 were funded from Gulf South's and Gateway's existing cash
and cash equivalents.
<PAGE> 7
4. The pro forma adjustment to property and equipment includes a write-down of
$454 to its estimated fair value resulting in pro forma adjustments to
decrease depreciation expense of $163 for the years ended December 31,1995
and 1994, respectively, and $123 for the nine months ended September 30,
1996.
5. The effects on income and expenses of the pro forma adjustments of
Gateway's income and expense for the periods presented are as follows:
<TABLE>
<CAPTION>
Nine Months
ended
Year ended December 31 September 30
1995 1994 1996
------------------------ ------------
<S> <C> <C> <C>
Net sales $47,737 $33,216 $52,979
Cost of sales 37,724 26,436 42,390
------------------------ -------
Gross profit 10,013 6,780 10,589
Selling, general and
administrative expenses 9,475 6,653 10,542
Operating income 538 127 47
Interest expense (527) (488) (742)
Other income 74 107 26
------------------------ -------
Income (loss) before taxes and
extraordinary item 85 (254) (669)
Income taxes - - -
------------------------ -------
Income before extraordinary
item 85 (254) (669)
Extraordinary item - 544 -
------------------------ -------
Net income (loss) $ 85 $ 290 $ (669)
======================== =======
</TABLE>
6. The pro forma adjustments to selling, general and administrative expense
include amortization expense of $985 for the years ended December 31,
1995 and 1994, respectively, and $739 for the nine months ended
September 30, 1996 resulting from the goodwill on the Gateway purchase
being amortized on a straight-line basis over 30 years and the reduction of
Gateway's amortization expense of $281 and $247 for the years ended
December 31, 1995 and 1994, respectively, and $244 for the nine months
ended September 30, 1996 for the elimination of Gateway's existing goodwill
through the purchase accounting adjustment.
<PAGE> 8
7. The pro forma adjustments to interest income includes the reduction of Gulf
South's cash and cash equivalents for the period from June 12 through
September 30, 1996. For the period from January 1, 1994 through June 11,
1996, the pro forma effect of the Gateway purchase was to eliminate cash
and cash equivalents and to increase borrowings under the revolving credit
agreement at Gulf South's borrowing rate thus reducing interest income and
increasing interest expense for that period. The pro forma adjustments
reflect decreased interest income of $163 and $186 for the years ended
December 31,1995 and 1994, respectively, and $499 for the nine months ended
September 30, 1996. The pro forma adjustments also reflect increased
interest expense of $2,171 and $2,132 for the years ended December 31,1995
and 1994, respectively, and $978 for the nine months ended September 30,
1996.
8. The pro forma effective income tax rate increased to 43.9% and 42.9% for
the years ended December 31, 1995 and 1994, respectively, and 39.6% for the
nine months ended September 30, 1996 because of the non-deductibility for
income tax purposes of a portion of the goodwill amortization applicable to
the Gateway purchase.
