<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1996
REGISTRATION NO. 333-6621
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SUBURBAN OSTOMY SUPPLY CO., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 5047 04-2675674
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
75 OCTOBER HILL ROAD
HOLLISTON, MA 01746
(508) 429-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
HERBERT P. GRAY
CHIEF EXECUTIVE OFFICER
SUBURBAN OSTOMY SUPPLY CO., INC.
75 OCTOBER HILL ROAD
HOLLISTON, MA 01746
(508) 429-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JAMES WESTRA, ESQUIRE JOHN J. HUBER, ESQUIRE
HUTCHINS, WHEELER & DITTMAR LATHAM & WATKINS
A PROFESSIONAL CORPORATION SUITE 1300
101 FEDERAL STREET 1001 PENNSYLVANIA AVENUE, N.W. WASHINGTON,
BOSTON, MASSACHUSETTS 02110 DC 20004
(617) 951-6600 (202) 637-2200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are to be offered
pursuant to a dividend or interest reinvestment plan, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE PRICE(1) REGISTRATION FEE(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par
value per share....... 4,485,000 $14.00 $62,790,000 $21,652
</TABLE>
- -------------------------------------------------------------------------------
(1) The Registrant has previously registered 4,312,500 shares with a proposed
maximum offering price of $62,531,250 for which a filing fee of $21,563
has already been paid. An additional filing fee of $100 is paid herewith.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501 OF REGULATION S-K SHOWING THE LOCATION IN
THE PROSPECTUS OF THE RESPONSES TO THE ITEMS IN PART I OF THE FORM S-1)
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
ON FORM S-1 LOCATION IN PROSPECTUS
----------------------- ----------------------
<S> <C>
1. Forepart of the
Registration Statement
and Outside Front Cover
Page of Prospectus..... Outside Front Cover Page of Prospectus
2. Inside Front Cover and
Outside Back Cover Inside Front Cover and Outside Back Cover Pages of
Pages of Prospectus.... Prospectus
3. Summary Information,
Risk Factors and Ratio
of Earning to Fixed
Charges................ Prospectus Summary; Risk Factors
4. Use of Proceeds....... Prospectus Summary; Use of Proceeds
5. Determination of
Offering Price......... Outside Front Cover Page of Prospectus; Underwriting
6. Dilution.............. Risk Factors; Dilution
7. Selling Security
Holders................ Not Applicable
8. Plan of Distribution.. Outside Front Cover Page; Underwriting
9. Description of
Securities to be
Registered............. Capitalization; Description of Capital Stock
10. Interests of Named
Experts and Counsel.... Not Applicable
11. Information with
Respect to the Outside Front Cover Page of Prospectus; Prospectus
Registrant............. Summary; Risk Factors; The Company; Recent
Developments; Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected Consolidated
Financial Data; Unaudited Combined Pro Forma
Financial Data; Management's Discussion and Analysis
of Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal Stockholders; Description of Capital
Stock; Shares Eligible for Future Sale; Consolidated
Financial Statements
12. Disclosure of
Commission Position on
Indemnification for
Securities Act
Liabilities............ Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
Dated September 18, 1996
3,900,000 SHARES
[LOGO]
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby (the "Shares") are being
offered by Suburban Ostomy Supply Co., Inc. ("Suburban" or the "Company").
Prior to this offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price
will be between $12.00 and $14.00 per share. See "Underwriting." The
Company has applied to have the Shares approved for quotation on the
Nasdaq National Market under the symbol "SOSC."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------
<S> <C> <C> <C>
PER SHARE $ $ $
TOTAL(3) $ $ $
- ----------------------------------------------
- ----------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $800,000.
(3) The Company and a certain stockholder have granted the several Underwriters
a 30-day option to purchase up to an additional 585,000 shares of Common
Stock to cover over-allotments, if any. The Company may, at its election,
make available all shares of Common Stock to cover any over-allotments, but
in no event will make available fewer than one half of such shares. If all
such shares are purchased from the Company, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
-----------
The Shares are offered by the several Underwriters named herein when, as and
if received and accepted by them, subject to their right to reject any order in
whole or in part and subject to certain other conditions. It is expected that
delivery of the Shares will be made in New York, New York, on or about ,
1996.
-----------
DEAN WITTER REYNOLDS INC.
BEAR, STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY
WHEAT FIRST BUTCHER SINGER
, 1996
<PAGE>
COVER FROM THE WINTER 1995 WHOLESALE CATALOG FEATURING HERBERT
P. GRAY, CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF SUBURBAN, AND
CERTAIN REPRESENTATIVE MEDICAL SUPPLIES FROM THE CATALOG.
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its
independent public accountants and with quarterly reports for each of
the first three quarters of each fiscal year containing unaudited
consolidated financial information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF
THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 4
Risk Factors....................... 7
The Company........................ 11
Recent Developments................ 11
Use of Proceeds.................... 12
Dividend Policy.................... 13
Dilution........................... 14
Capitalization..................... 15
Selected Consolidated Financial Da-
ta................................ 16
Unaudited Pro Forma Combined
Financial Data.................... 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business......................... 29
Management....................... 39
Certain Transactions............. 43
Principal Stockholders........... 45
Description of Capital Stock..... 46
Shares Eligible for Future Sale.. 48
Underwriting..................... 50
Legal Matters.................... 51
Experts.......................... 51
Additional Information........... 51
Index to Financial Statements.... F-1
</TABLE>
----------------
UNTIL , 1996 (25 DAYS FROM THE DATE OF THE PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the Consolidated Financial Statements and related notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus: (i) reflects a 3.1 for 1 stock split
effected as of June 21, 1996 by means of a stock dividend; and (ii) assumes no
exercise of the Underwriters' over-allotment option. See "Capitalization."
References to a particular fiscal year of the Company are to the fiscal year of
the Company which ends on the Saturday nearest to August 31 of such year.
Unless the context requires otherwise, references to "Suburban" or the
"Company" are to Suburban Ostomy Supply Co., Inc., and with respect to periods
following their respective acquisitions, its subsidiaries, St. Louis Ostomy
Distributors, Inc. ("St. Louis Ostomy") and Patient-Care Medical Sales
("Patient-Care").
THE COMPANY
Suburban is a leading national direct marketing wholesaler of medical
supplies and related products to the home health care industry. The Company
sells products to over 20,000 customers, including: (i) independent suppliers
of home health care products (principally home medical equipment dealers and
local and chain pharmacies); (ii) national home health care chains and
wholesalers; and (iii) managed care organizations. Through its direct sales and
marketing programs, the Company markets a comprehensive selection of more than
5,000 stock keeping units ("SKUs"), comprised primarily of ostomy,
incontinence, diabetic and wound care products. The Company's primary product
lines fulfill its customers' needs to provide a complete line of products for
their home health care patients. The Company believes that its success is
attributable to the expertise gained from more than 17 years of focus on its
product lines and its commitment to providing superior service and technical
support to its customers.
The Company has positioned itself as a high volume, cost-effective direct
marketer of home health care products. The Company's direct marketing
materials, particularly its industry-recognized catalog, offer a broad
selection of products in an easy to use format, enabling the Company to offer
its customers a single source for the Company's product lines. During fiscal
1995, the Company distributed over 500,000 pieces of direct mail, consisting of
catalogs, flyers, trade press advertisements and package inserts. This
marketing program is supplemented by telemarketing and frequent "fax specials"
which provide customers competitive pricing and promotional information. The
Company's 40 experienced, highly-trained service representatives located at its
headquarters in Holliston, Massachusetts use the Company's proprietary software
to fill customer orders, explore additional product needs and respond to
customer inquiries. During fiscal 1995, the Company filled over 300,000
customer orders with an average order size of approximately $176. The Company
imposes no annual purchase commitments or minimum order requirements. The
Company's 20 largest customers accounted in the aggregate for less than 13.1%
and 16.2% of the net sales for fiscal 1995 and the thirty-nine weeks ended June
1, 1996, respectively. Suburban provides quick, cost-effective delivery on a
national basis, enabling the Company to meet the needs of national home health
care and managed care organizations as well as local independent suppliers. Its
national distribution network enables the Company to ship over 95% of orders on
the day of receipt, with a product fill rate of over 92%, and to deliver
product to 94% of the U.S. population within 48 hours. The Company also
provides customers with value-added services, such as the Company's stockless
inventory program (the "Stockless Inventory Program") in which the Company
ships products directly to its customers' patients and provides detailed
utilization reporting to customers. The Stockless Inventory Program is designed
to assist customers in reducing their inventory levels, controlling costs and
managing utilization.
The Company is committed to meeting the changing needs of manufacturers and
customers in the home health care market. Manufacturers are becoming
increasingly dependent upon wholesalers to help reduce manufacturers' costs by
assuming their small order distribution. The Company achieves volume discounts,
rebates and promotional allowances from manufacturers by providing significant
value added services to its suppliers through marketing support and information
management. Suburban's high degree of service, technical support and outbound
telemarketing complements the manufacturers' continuing product support. In
addition, Suburban's direct marketing expertise enhances the manufacturers'
ability to introduce new products and sustain on-going marketing campaigns.
With respect to customers, cost containment efforts are
4
<PAGE>
prompting many of the Company's customers to become "one stop shop" suppliers
of home health care products. Suburban offers customers a comprehensive
selection of products that customers typically are unable to stock cost
effectively because of the relatively low volume of sales of such products by
these customers. The Company's national distribution network and management
information systems ("MIS") enable it to fill a large quantity of the small and
broken case orders typically placed by home health care providers and which
many other wholesalers have difficulty filling efficiently.
The Company believes that there are economic and demographic factors that
will support the continued growth of home health care and the need for the
Company's products. Ongoing efforts to reform the health care system have
resulted in greater cost sensitivity on behalf of medical providers and payors.
Home delivered health and medical services are increasingly recognized as
viable, low-cost alternatives to inpatient care. Industry research indicates
that the majority of patients prefer home health care to institutional care,
and that patients recover more quickly in the home environment with the close
support of family and friends. Technological advancements have also enabled
patients who previously would have required hospitalization to be treated at
home. In addition, the elderly represent the largest and fastest-growing single
consumer segment of health care in the United States. The Company believes that
greater utilization of medical services by the elderly will drive growth in the
use of medical supplies, including products used in the home setting.
The Company's growth strategy is to increase sales and profitability by: (i)
making strategic acquisitions of health care wholesalers; (ii) increasing sales
to national home health care chains; (iii) adding contracts with managed care
organizations; and (iv) increasing sales to independent suppliers. Consistent
with the Company's acquisition strategy, the Company has recently completed two
acquisitions of home health care wholesalers that have enhanced the Company's
position as a leading national direct marketing wholesaler by increasing the
number of its customers, expanding its geographic markets and product
categories and leveraging its existing infrastructure. In January 1996, the
Company acquired St. Louis Ostomy, which had approximately $17.0 million in
sales in its fiscal 1995, expanding the Company's presence in the Midwest. In
June 1996, the Company acquired Patient-Care, based in Santa Fe Springs,
California, which had approximately $18.0 million in sales in its fiscal 1996.
The Company believes that the acquisition of Patient-Care will expand the
Company's market penetration in California as well as enhance its position in
the incontinence market.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered............ 3,900,000 shares
Common Stock Outstanding After 10,123,250 shares(1)
the Offering...................
Use of Proceeds................. To repay an aggregate of $35.1 million of
senior and subordinated indebtedness, to
redeem $7.5 million in value of Suburban's
outstanding Series A Redeemable Preferred
Stock ("Redeemable Preferred Stock"), and for
general corporate or working capital
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market "SOSC"
Symbol.........................
</TABLE>
- --------
(1) Excludes: (i) 665,570 shares of Common Stock reserved for issuance under
the Company's 1995 Stock Option Plan (the "Stock Option Plan") (of which
options to purchase 649,450 shares of Common Stock have been granted and
options to purchase 126,377 shares of Common Stock were exercisable at
September 1, 1996); and (ii) 86,180 shares of Common Stock reserved for
issuance under a warrant (the "Bank Warrant") exercisable on or before
January 22, 2006, issued to The First National Bank of Boston (the "Bank")
in connection with the Credit Agreement dated as of July 3, 1995, as
amended as of January 22, 1996 and further amended as of June 14, 1996 (the
"Credit Facility"). See "Use of Proceeds," "Management--Stock Option Plan"
and "Certain Transactions."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 2, 1995
FISCAL YEAR ENDED (1) (52 WEEKS) (1) (2) THIRTY-NINE WEEKS ENDED (1)
--------------------------------------------- ------------------------ ------------------------------------
JUNE 3, 1995 JUNE 1, 1996
AUGUST 31, AUGUST 29, AUGUST 28, SEPTEMBER 3, ------------ -----------------------
1991 1992 1993 1994 PRO FORMA PRO FORMA
(52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) ACTUAL AS ADJUSTED (3) ACTUAL ACTUAL AS ADJUSTED(3)
---------- ---------- ---------- ------------ ------- --------------- ------------ ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
INCOME STATEMENT
DATA:
Net sales....... $32,571 $37,921 $42,738 $47,311 $52,667 $87,937 $39,324 $49,302 $70,462
Cost of goods
sold........... 24,411 28,599 32,305 35,599 39,872 67,918 29,660 37,476 54,276
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.... 8,160 9,322 10,433 11,712 12,795 20,019 9,664 11,826 16,186
Operating
expenses....... 5,333 7,512 6,991 7,627 7,752 12,184 5,684 6,241 9,481
Depreciation and
amortization... 267 268 265 270 266 932 195 387 716
Non-recurring
executive
compensation (4).. -- -- 2,111 2,237 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating
income......... 2,560 1,542 1,066 1,578 4,777 6,903 3,785 5,198 5,989
Interest
expense........ -- -- -- -- 370 30 7 1,841 22
Other expense
(income), net.. (238) (224) (158) (132) (145) (261) (125) (15) (78)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before
income taxes... 2,798 1,766 1,224 1,710 4,552 7,134 3,903 3,372 6,045
Provision for
income taxes... 142 101 69 88 358 1,520 236 1,446 2,616
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income...... $ 2,656 $ 1,665 $ 1,155 $ 1,622 $ 4,194 $ 5,614 $ 3,667 $ 1,926 $ 3,429
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income
applicable to
common
stockholders
(5)............ $ 2,656 $ 1,665 $ 1,155 $ 1,622 $ 4,083 $ 5,614 $ 3,667 $ 1,419 $ 3,429
======= ======= ======= ======= ======= ======= ======= ======= =======
Supplemental pro
forma data (6):
Net income...... $ 1,679 $ 1,060 $ 735 $ 1,026 $ 2,955 $ 4,150 $ 2,342 $ 3,047 $ 3,429
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per
share.......... $ .32 $ .39 $ .28 $ .32
======= ======= ======= =======
Weighted average
common shares
outstanding.... 9,150 10,788 10,789 10,789
======= ======= ======= =======
OPERATING DATA:
Number of
orders......... 203,573 223,418 247,469 276,056 307,525 228,028 295,949
Inventory
turnover (7)... 8.7x 8.7x 8.4x 9.8x 11.8x 10.6x 10.9x
</TABLE>
<TABLE>
<CAPTION>
JUNE 1, 1996
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA (8) AS ADJUSTED (9)
-------- --------- ---------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................ $ 8,562 $ 9,783 $12,982
Total assets............................... 26,808 33,522 36,249
Long-term debt............................. 31,419 35,884 --
Redeemable preferred stock (2)............. 7,268 7,268 --
Total stockholders' (deficit) equity ...... (18,389) (18,389) 27,962
</TABLE>
- -------
(1) The Company's fiscal year ends on the Saturday nearest to August 31, and is
divided into four thirteen-week periods.
(2) In connection with a recapitalization completed in July 1995 (the
"Recapitalization"), the Company: (i) issued to certain investors $6.75
million in aggregate principal amount of 12% Junior Subordinated Notes due
June 30, 2000 (the "Summit Notes") and $6.65 million stated value of
Redeemable Preferred Stock which accretes a dividend of 10% per year; (ii)
issued to certain executive officers $2.5 million in aggregate principal
amount of 12% Junior Subordinated Promissory Notes (the "Management
Notes"); and (iii) borrowed $13.5 million under the Credit Facility.
(3) Pro forma data for the fiscal year ended September 2, 1995 and the thirty-
nine weeks ended June 1, 1996 have been adjusted to reflect the
acquisitions of St. Louis Ostomy and Patient-Care (the "Recent
Acquisitions") and the sale of the 3,900,000 shares of Common Stock offered
hereby, at an assumed price of $13.00 per share and the application of the
net proceeds therefrom, as if such transactions had been effected September
4, 1994. In connection with the acquisition of St. Louis Ostomy in January
1996, the Company issued to the former sole stockholder of St. Louis Ostomy
a $1.235 million 10% Junior Subordinated Promissory Note due January 22,
2001 (the "St. Louis Note"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Unaudited Pro Forma
Combined Financial Data" and "Certain Transactions."
(4) Represents bonuses paid to certain executive officers to facilitate their
purchase of stock prior to the Recapitalization. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Management."
(5) Represents net income less the accretion of the Redeemable Preferred Stock
during the period.
(6) Prior to the Recapitalization, the Company elected to be taxed as a
Subchapter S corporation for federal income tax purposes. Supplemental pro
forma information has been computed as if the Company had been subject to
federal income taxes and all applicable state corporate income taxes for
each period presented. With respect to the "Actual " columns above,
supplemental pro forma net income and weighted average shares are presented
as if, at the beginning of the respective periods, the Company had sold, at
an assumed offering price of $13.00 per share, shares of Common Stock
sufficient to fund the Recapitalization in 1995 and repay indebtedness
incurred in 1996 to finance the acquisition of St. Louis Ostomy.
(7) "Inventory turnover" means the cost of goods sold for the period divided by
the average inventory balance for the period (annualized data for the
thirty-nine week periods).
(8) Pro forma to reflect the acquisition of Patient-Care as if it had occurred
on June 1, 1996.
(9) Pro forma further adjusted to reflect the sale of the 3,900,000 shares of
Common Stock offered hereby at an assumed price of $13.00 per share and the
application of the net proceeds therefrom, as if it had occurred on June 1,
1996.
6
<PAGE>
RISK FACTORS
Acquisition Strategy. The Company intends to expand its geographic and
market penetration through acquisitions of health care wholesalers. The Recent
Acquisitions are the Company's first actions in implementing this strategy as
well as its first purchases of other businesses. Factors which the Company
considers in evaluating a proposed acquisition include the profitability,
customer list, product mix, management and location of the acquisition
candidate, as well as the feasability of integrating selected operations of
the acquisition candidate with those of the Company. In attempting to make
acquisitions, the Company will compete with other potential acquirers, some of
which have greater financial or operational resources than the Company.
Competition for acquisitions may intensify due to the ongoing consolidation in
the industry, which may increase the costs of capitalizing on such
opportunities. There can be no assurance that the Company will be able to
locate, negotiate, finance and integrate the acquisitions it desires. While
the Company routinely evaluates potential acquisitions, and has initiated
conversations with several acquisition candidates, at present the Company is
not involved in preliminary negotiations with any such candidate, nor has it
reached any agreement or understanding with respect to any future acquisition.
Such negotiations may, however, commence at any time should the Company
identify a potential acquisition. Acquisitions involve numerous short and long
term risks, including diversion of management's attention, failure to retain
key personnel and customers of the acquired businesses, inability to integrate
management information systems of acquired businesses without material
disruptions, amortization of acquired intangible assets and the effects of
contingent earn-out payments. While the Company has not experienced these
risks to date with respect to the Recent Acquisitions, no assurance can be
given that the Company will not experience such risks with respect to the
Recent Acquisitions or other acquisitions in the future. In addition, health
care wholesalers which the Company may acquire may have product lines or
operating assets not normally carried or proposed to be used by the Company.
These product lines or assets may be difficult to sell, resulting in the
Company incurring operating expenses, or writing off any such unsold inventory
or unused assets in future periods. The Company may also incur one-time
acquisition expenses. Consummation of acquisitions could result in the
incurrence or assumption by the Company of additional indebtedness and the
issuance of additional equity. There can be no assurance that the Company will
be able to finance an acquisition, or if financing is available, that the
terms will be favorable to the Company. The issuance of shares of Common Stock
to acquire a wholesaler may also result in dilution to the Company's
stockholders. See "Business--Growth Strategy."
Changes in Health Care Industry and Changing Market Conditions. In recent
years, the health care industry has undergone significant changes due in part
to cost reduction efforts, trends towards managed care, reduction in Medicare
reimbursement rates and other government-sponsored programs, collective
purchasing arrangements by health care practitioners and potential health care
reform. Government imposed limits on reimbursement of providers and cost
constraints imposed by private third party reimbursement plans have
significantly impacted spending budgets in certain markets. In response to
cost containment pressures, third party payors are increasingly developing
programs to reduce or control the prices paid for health care products and
services. As a consequence of such cost containment efforts and other trends
in the health care industry, the nature of the Company's customer base is
changing. Independent home medical equipment dealers and pharmacies, which
historically have accounted for the substantial majority of the Company's net
sales, are consolidating. Sales of certain of the Company's products are
dependent on the availability and amount of reimbursement to the Company's
customers from third party payors. There can be no assurance that changes in
the health care industry, including those affecting reimbursement for purchase
and use of the Company's products, will not have a material adverse effect on
the results of operations or financial condition of the Company. Reductions in
reimbursement rates and the increased buying power of larger suppliers have
resulted in competitive pricing pressures and lower gross margins on the part
of the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Industry Overview" and "--
Government Regulation."
Intense Competition. Suburban faces intense competition from a variety of
local, regional and national wholesalers, a number of which have greater
financial and other resources than the Company. Most of the Company's products
are available from several sources, and the Company's customers often have
relationships with several wholesalers. In addition, manufacturers could
increase their efforts to sell directly to suppliers, thereby by-passing
wholesalers, such as the Company. Since barriers to entry in the home health
care
7
<PAGE>
distribution industry are relatively low, there is substantial risk that
current competitors will seek to expand their market presence and new
competitors will enter the market. There is ongoing consolidation of home
health care product wholesalers which could result in existing competitors
increasing their market positions through acquisitions, joint ventures or
exclusive supply relationships. In response to pressures from current or
future competitors, the Company may be required to lower selling prices to
maintain or increase market share. Such measures could have a material adverse
effect on the results of operations or financial condition of the Company. See
"Business--Customers" and "--Competition."
Risks of Business Growth. While the Company plans to increase sales and
profitability by targeting existing and new customers, no assurance can be
given that the Company's efforts will result in additional revenues or
operating income. The Company's growth plans also could place significant
demands upon the Company's management and financial resources. The failure by
the Company to manage its growth could have a material adverse effect on the
results of operations or financial condition of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Industry Overview" and "--Customers."
Dependence on Manufacturers. The Company distributes more than 5,000 SKUs
produced by approximately 200 manufacturers and is dependent on these
manufacturers to supply product. Three manufacturers accounted for
approximately 43.9% and 41.6% of the Company's total purchases for fiscal 1995
and for the thirty-nine weeks ended June 1, 1996, respectively, and the
Company's top ten manufacturers accounted for approximately 67.2% and 65.1%,
respectively, of the Company's total purchases during such periods.
Substantially all of the ostomy products marketed by the Company, which
accounted for 32.5% and 32.4% of the Company's net sales in fiscal 1995 and
for the thirty-nine weeks ended June 1, 1996, respectively, are purchased from
Hollister Incorporated and Convatec, a division of Bristol-Meyers Squibb
Company. The Company regularly searches for and evaluates new sources of
supply, but the Company expects that its reliance on a small group of
principal manufacturers will continue. While the Company has contracts with
one of its top three and seven of its top ten manufacturers, it does not have
contracts with the majority of its manufacturers. As a result, the Company may
be subject to unanticipated changes in the terms of its arrangements with
manufacturers, including pricing, minimum volume and dollar requirements,
return policies and promotional allowances. Where the Company has a contract
with a manufacturer, it is typically of short duration with a limited number
of terms. If any of the Company's principal manufacturers were to experience
financial difficulties, quality control problems or delays in the manufacture
or delivery of products, or were to raise the price of products substantially,
such events could have a material adverse effect on the results of operation
or financial condition of the Company. There can be no assurance that the
Company's principal manufacturers will not experience such events or that the
Company will maintain good relationships with such manufacturers. See
"Business--Purchasing."
Reliance on Efficiency of Distribution Systems. The Company believes that
its financial performance is dependent upon its ability to provide products to
its customers in a timely, reliable and efficient manner. An interruption in
one or more of the Company's computer, telephone, management information,
warehouse or delivery systems could adversely affect its ability to receive,
process and fill orders and therefore could have a material adverse effect on
its results of operations or financial condition. Delivery of orders and
marketing material, which is part of the Company's distribution system, is
handled by third parties, such as United Parcel Service ("UPS"), the U.S.
Postal Service and other common carriers. In fiscal 1995 and during the
thirty-nine weeks ended June 1, 1996, substantially all of the Company's sales
were delivered by UPS. Labor disruption or strikes by such carriers,
particularly UPS, or significant cost increases in delivery expense could have
a material adverse effect on the results of operations or financial condition
of the Company. See "Business--Order Entry and Fulfillment; Customer Service
and Technical Support."
Government Regulation. The Company, its customers and manufacturers are
subject to varying degrees of federal and state regulation. Legislative or
regulatory changes which affect its customers or manufacturers may indirectly
affect the Company. The Company cannot predict whether state or federal
legislative or regulatory changes, such as health care reform, will occur and,
if so, the effect that such changes would have on its acquisition strategy or
its results of operations or financial condition. See "Business--Government
Regulation."
Dependence on Key Personnel. The success of the Company is dependent upon
the efforts and abilities of its executive officers. In July 1995, the Company
entered into an employment agreement with each of its
8
<PAGE>
executive officers for a term of five years. The loss of service of one or
more of these persons could have a material adverse effect on the results of
operations or financial condition of the Company. See "Management--Employment
Agreements."
Control by Current Stockholders. After the consummation of this offering,
Summit Ventures III, L.P. ("Summit Ventures"), Summit Investors II, L.P.
("Summit Investors") and Summit Subordinated Debt Fund, L.P. ("Summit Debt
Fund", and together with Summit Ventures and Summit Investors, "Summit") and
the Company's executive officers will own 41.8% and 10.0%, respectively, of
the outstanding Common Stock. In addition, two of the four members of the
Board of Directors are representatives of Summit. As a result, Summit and the
executive officers of the Company will be able to elect all of the Company's
directors, to determine the outcome of all corporate actions requiring
approval by the Board of Directors or stockholders and to control the business
affairs of the Company. See "Management" and "Principal Stockholders."
Benefits of Offering to Certain Stockholders. Approximately $16.8 million
from the sale of the Shares offered hereby will be used to retire the
Management Notes and Summit Notes and to redeem the Redeemable Preferred Stock
issued in connection with the Recapitalization. See "Use of Proceeds" and
"Certain Transactions."
Immediate and Substantial Dilution. The purchasers of the Shares will
experience immediate and substantial dilution in net tangible book value of
$11.35 per share of Common Stock as a result of the sale of 3,900,000 shares
of Common Stock offered hereby. See "Dilution."
Potential Adverse Impact of Shares Eligible for Future Sale. 6,223,250
shares representing 61.5% of the number of shares of Common Stock outstanding
after the consummation of this offering are or will be eligible for future
sale in the public market at prescribed times pursuant to Rule 144 or Rule 701
under the Securities Act of 1933, as amended (the "Securities Act"), or
pursuant to the exercise of registration rights. Sales of such shares in the
public market, or the perception that such sales may occur, could adversely
affect the market price of the Common Stock or impair the Company's ability to
raise additional capital in the future through the sale of equity securities.
See "Dilution," "Description of Capital Stock," "Shares Eligible for Future
Sale" and "Underwriting."
No Prior Market; Potential Volatility. Prior to this offering, there has
been no public market for the Common Stock, and there can be no assurance that
an active trading market will develop or be sustained after this offering. The
initial public offering price will be determined by negotiations among the
Company and the representatives of the Underwriters and may not be indicative
of prices which may prevail in the trading market. See "Underwriting." There
has been significant volatility in the stocks of health care and related
companies that has often been unrelated to the operating performance of such
companies. In addition, the Company believes that certain factors, including
legislative and regulatory developments, the response by the investment
community and by competitors to such developments, quarterly fluctuations in
the actual or anticipated results of operations of the Company, lower revenues
or earnings than those anticipated by securities analysts, the overall economy
and the financial markets could cause the price of the Common Stock to
fluctuate substantially.
Anti-Takeover Provisions; Possible Issuance of Preferred Stock. The
Company's Restated Articles of Organization, as amended ("Articles of
Organization") and Amended and Restated Bylaws ("Bylaws") contain provisions
that might diminish the likelihood that a potential acquiror would make an
offer for the Common Stock, impede a transaction favorable to the interest of
the stockholders or increase the difficulty of removing members of the Board
of Directors or management. After the consummation of this offering, the Board
of Directors will have the authority, without further stockholder approval, to
issue up to 1,000,000 shares of preferred stock in one or more series and to
determine the price, rights, preferences and privileges of those shares. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be
issued in the future. The issuance of shares of preferred stock, while
potentially providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. The Company has no present plans to issue shares
of preferred stock. Furthermore, certain provisions of the Articles of
Organization, including provisions that provide for the Board of Directors to
be divided into three classes to serve for staggered three-year terms,
9
<PAGE>
may have the effect of delaying or preventing a change of control of the
Company, which could adversely affect the market price of the Common Stock. In
addition, the Company is subject to Chapters 110D and 110F of the
Massachusetts General Laws, which prohibit the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of such provisions also could have the
effect of delaying or preventing a change of control of the Company. Certain
licenses and permits held by the Company also prohibit a change of control of
the Company without applicable governmental or regulatory approval. See
"Business--Government Regulation" and "Description of Capital Stock--Certain
Articles of Organization, Bylaws and Statutory Provisions Affecting
Stockholders."
10
<PAGE>
THE COMPANY
Suburban is a leading national direct marketing wholesaler of medical
supplies and related products to the home health care industry. The Company
sells products to over 20,000 customers, including: (i) independent suppliers
of home health care products (principally home medical equipment dealers and
local and chain pharmacies); (ii) national home health care chains and
wholesalers; and (iii) managed care organizations. Through its direct sales
and marketing programs, the Company markets a comprehensive selection of more
than 5,000 SKUs, comprised primarily of ostomy, incontinence, diabetic and
wound care products. The Company's primary product lines fulfill its
customers' needs to provide a complete line of products for their home health
care patients. The Company believes that its success is attributable to the
expertise gained from more than 17 years of focus on its product lines and its
commitment to providing superior service and technical support to its
customers.
The Company's first catalog was mailed in 1977, and Suburban was
incorporated as a Massachusetts corporation in 1979 by Herbert P. Gray. On
July 3, 1995, the Company effected the Recapitalization. In addition, the
Company acquired St. Louis Ostomy in January 1996 and Patient-Care in June
1996 as part of its strategy to expand its business through the acquisition of
wholesalers of health care products. See "Recent Developments" and "Certain
Transactions."
The Company's executive offices are located at 75 October Hill Road,
Holliston, Massachusetts 01746, and its telephone number is (508-429-1000).
RECENT DEVELOPMENTS
As part of its growth strategy, Suburban recently completed two
acquisitions designed to enhance its position as a leading national direct
marketing wholesaler. In January 1996, the Company acquired St. Louis Ostomy
for $12.4 million of which $11.2 million was paid in cash and $1.2 million was
paid by the issuance of the St. Louis Note. The acquisition has been accounted
for using the purchase method of accounting, with $10.9 million of goodwill
being amortized on a straight line basis over 25 years. This acquisition has
enabled the Company to expand its market penetration in the Midwest. The
Company consolidated the operations of St. Louis Ostomy with those of the
Company effective July 1, 1996, which consolidation resulted in the closing of
the St. Louis distribution center and a reduction in duplicative corporate
overhead. As part of the consolidation process, the Company aligned the
pricing of Suburban and St. Louis Ostomy and continues to conduct outbound
telemarketing to contact customers of St. Louis Ostomy.
In June 1996, the Company acquired Patient-Care for $4.2 million, of which
$3.8 million was paid at closing and $375,000 is payable on the first
anniversary of the closing subject to offset with respect to any claims for
indemnity which may be asserted by the Company. The acquisition will be
accounted for using the purchase method of accounting resulting in
approximately $2.9 million of goodwill on a preliminary basis which is
expected to be amortized on a straight line basis over 25 years. Suburban
expects that the acquisition of Patient-Care will enable the Company to expand
its market penetration in California and its position in the incontinence
market. The Company is in the process of evaluating Patient-Care to determine
whether any of its operations should be integrated with those of Suburban.
For the thirteen weeks ended August 31, 1996, the Company had net sales of
$23.2 million, compared with $13.3 million for the thirteen weeks ended
September 2, 1995. Net sales for the thirteen weeks ended August 31, 1996
include results of thirteen weeks of operations of the Company and St. Louis
Ostomy and eleven weeks of operations of Patient-Care. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Results."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
3,900,000 shares of Common Stock offered hereby, based upon an assumed initial
offering price of $13.00 per share, are estimated to be $46.4 million ($53.4
million if the Underwriters exercise the over-allotment option in full and the
Company elects to sell all shares purchased upon exercise of such option).
The Company intends to apply the net proceeds of this offering: (A) to repay
all indebtedness and other obligations incurred in connection with the
Recapitalization and the Recent Acquisitions as follows: (i) approximately
$24.5 million will be used to repay all outstanding indebtedness incurred
under the Credit Facility; (ii) approximately $9.3 million will be used to
retire in full the Summit Notes and Management Notes; (iii) approximately $7.5
million will be used to redeem all outstanding shares of the Redeemable
Preferred Stock; and (iv) approximately $1.3 million will be used to retire in
full the St. Louis Note; and (B) to fund general corporate purposes and
working capital. After giving effect to the application of the net proceeds of
this offering, the Company will have no outstanding long term indebtedness.
See "Certain Transactions."
The Credit Facility provides that the Company may reborrow funds which it
has previously borrowed and subsequently re-paid, up to the maximum amount of
availability under the Credit Facility, which was $30.0 million as of
September 1, 1996, and which amount of available borrowings declines as the
Credit Facility approaches its scheduled maturity date of June 30, 2000. To
secure the Company's obligations under the Credit Facility, the Company
granted the Bank a first priority security interest in all of the Company's
assets, including a lien on the stock of St. Louis Ostomy and Patient-Care.
That portion of outstanding indebtedness under the Credit Facility which is
less than the sum of (A) 80% of the Company's accounts receivable, plus (B)
50% of the Company's inventory (the "Threshold Amount"), accrues interest at
an annual rate equal to, at the Company's option, either: (i) the London
Interbank Offered Rate ("LIBOR") plus 200 basis points; or (ii) the higher of
the annual rate of interest announced by the Bank as its base rate (the "Base
Rate") or the overnight Federal Funds Effective Rate as published by the Board
of Governors of the Federal Reserve System plus 1/2% (the "Federal Funds
Effective Rate"). That portion of outstanding indebtedness under the Credit
Facility which exceeds the Threshold Amount, accrues interest at an annual
rate equal to, at the Company's option, either: (i) LIBOR plus 250 basis
points; or (ii) the higher of the Bank's Base Rate plus 1/2% or the Federal
Funds Effective Rate plus 1/2%. In connection with the Credit Facility, the
Company issued the Bank Warrant.
Prior to the consummation of this offering, the Company intends to enter
into an amendment to the Credit Facility (the "Amended Credit Facility") with
the Bank pursuant to which the Company will have maximum available borrowings
thereunder of $30.0 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Pending such uses, the net proceeds of this offering will be invested in
short-term interest-bearing securities.
12
<PAGE>
DIVIDEND POLICY
Other than the stock dividends declared in connection with the Company's 100
for 1 stock split pursuant to the Recapitalization, the 50 for 1 stock split
effected April 10, 1996 and the 3.1 for 1 stock split effected June 21, 1996,
the Company has not declared or paid dividends since the Recapitalization, nor
does it intend to declare or pay any dividends on its Common Stock in the
foreseeable future. The Company intends to retain all earnings for the
operation and expansion of its business. The declaration and payment of future
dividends will be at the sole discretion of the Board of Directors subject to
such factors as the Board of Directors may deem relevant, including future
earnings, results of operations, capital requirements, the general financial
condition of the Company, general business conditions and contractual
restrictions on the declaration and payment of dividends. The payment of cash
dividends on Common Stock is restricted by the Credit Facility and will be
restricted by the Amended Credit Facility.
Prior to the Recapitalization, the Company elected to be treated as a
Subchapter S corporation under Section 1361(a) of the Internal Revenue Code of
1986, as amended. In connection with the Company's status as a Subchapter S
corporation, on September 3, 1994 and July 1, 1995, the Company distributed to
each of its stockholders a proportionate share of the Company's income taxable
to such stockholders for fiscal 1994 and fiscal 1995, respectively. The
aggregate amount of the distributions were $428,000 in fiscal 1994 and $2.2
million in fiscal 1995. See "Certain Transactions."
13
<PAGE>
DILUTION
As of June 1, 1996, the Company had a net tangible book value of $(29.6)
million, or $(4.76) per share of Common Stock. Net tangible book value per
share is determined by dividing the number of outstanding shares of Common
Stock into the net tangible book value of the Company. After giving effect to
the sale of the 3,900,000 shares offered hereby and the receipt and
application of net proceeds therefrom, the pro forma net tangible book value
of the Company at June 1, 1996 would have been approximately $16.7 million, or
$1.65 per share. This represents an immediate increase in pro forma net
tangible book value of $6.41 per share to existing stockholders and an
immediate dilution of $11.35 per share to new investors. The following table
illustrates the per share dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $13.00
Net tangible book value per share at June 1, 1996.......... $(4.76)
Increase in net tangible book value per share attributable
to new investors........................................... 6.41
------
Pro forma net tangible book value per share after the offer-
ing........................................................ 1.65
------
Dilution per share to new investors......................... $11.35
======
</TABLE>
The following table sets forth, on a pro forma basis, at June 1, 1996, the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing
stockholders of Common Stock and by new investors purchasing shares of Common
Stock offered hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 6,223,250 61.5% $ 161,607 -- % $ .03
New investors.................. 3,900,000 38.5 50,700,000 100.0 13.00
---------- ----- ----------- -----
Total...................... 10,123,250 100.0% $50,861,607 100.0%
========== ===== =========== =====
</TABLE>
- --------
The foregoing tables assume: (i) no exercise of outstanding options under
the Stock Option Plan; and (ii) no exercise of the Bank Warrant. At June 1,
1996, there were outstanding options to purchase 626,200 shares of Common
Stock at a weighted average exercise price of $0.84 per share. To the extent
the Bank Warrant or outstanding or subsequently granted options are exercised,
there could be further dilution to new investors. If the Bank Warrant and
options outstanding at June 1, 1996 were exercised, new investors purchasing
shares of Common Stock in this offering would incur additional dilution in net
tangible book value per share of $0.05 per share. See "Management--Stock
Option Plan" and Note 8 to the Consolidated Financial Statements.
14
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 1, 1996: (i) on an actual basis; (ii) on a pro forma basis
assuming the acquisition of Patient-Care had occurred on June 1, 1996; and
(iii) on a pro forma basis as adjusted to reflect the sale of the Shares
offered hereby and the application of the estimated net proceeds therefrom as
described under "Use of Proceeds" and assuming the acquisition of Patient-Care
had occurred on June 1, 1996. This table should be read in conjunction with
the "Unaudited Pro Forma Combined Financial Data" and the Consolidated
Financial Statements and related notes thereto. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation."
<TABLE>
<CAPTION>
JUNE 1, 1996
------------------------------
(DOLLARS IN THOUSANDS)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
Long-term debt:
Credit Facility............................... $21,058 $25,523 $ --
Summit Notes and Management Notes(1).......... 9,250 9,250 --
St. Louis Note(2)............................. 1,235 1,235 --
Redeemable Preferred Stock, redeemable; $.01 par
value, 66,500 shares authorized(3); 66,500
shares outstanding(4).......................... 7,268 7,268 --
Stockholders' equity:
Common Stock; no par value; 10,000,000 shares
authorized(3); 6,223,250 actual shares issued
and outstanding (10,123,250 Pro Forma as Ad-
justed shares issued and outstanding)(5)..... 162 162 46,513
Additional paid-in capital......................
Retained earnings............................... (18,551) (18,551) (18,551)
------- ------- -------
Total stockholders' equity (deficit).......... (18,389) (18,389) 27,962
------- ------- -------
Total capitalization.......................... $20,422 $24,887 $27,962
======= ======= =======
</TABLE>
- --------
(1) In connection with the Recapitalization, the Company issued the Summit
Notes and the Management Notes.
(2) In connection with the St. Louis Ostomy acquisition, the Company issued
the St. Louis Note.
(3) Immediately prior to the consummation of this offering, the Company will
amend its Articles of Organization to increase the number of authorized
shares of Common Stock to 40,000,000 and to provide for authorized shares
of preferred stock of 1,000,000. See "Description of Capital Stock."
(4) Represents an accretion in value of the Redeemable Preferred Stock of
$618,000 since the Recapitalization.
(5) Excludes: (i) 665,570 shares of Common Stock reserved for issuance under
the Stock Option Plan (of which options to purchase 626,200 shares of
Common Stock have been granted and options to purchase 94,085 shares of
Common Stock were exercisable at June 1, 1996); and (ii) 86,180 shares of
Common Stock reserved for issuance upon exercise of the Bank Warrant. See
"Management--Stock Option Plan."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data as of and for each fiscal
year in the five year period ended September 2, 1995 and for the thirty-nine
weeks ended June 1, 1996 have been derived from the Consolidated Financial
Statements. These financial statements have been audited by Arthur Andersen
LLP, independent public accountants. The Selected Consolidated Financial Data
of the Company as of and for the thirty-nine weeks ended June 3, 1995 are
derived from unaudited consolidated financial statements of the Company and
include, in the opinion of the Company, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the data set forth
herein. The results of operations for the thirty-nine weeks ended June 1, 1996
are not necessarily indicative of results that may be expected for any other
interim period or for the full year. The data should be read in conjunction
with "Recent Developments," "Unaudited Pro Forma Combined Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes
thereto included elsewhere in this Prospectus.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
THIRTY-NINE
FISCAL YEAR ENDED (1) WEEKS ENDED (1)
------------------------------------------------------------ ----------------
AUGUST 31, AUGUST 29, AUGUST 28, SEPTEMBER 3, SEPTEMBER 2,
1991 1992 1993 1994 1995 JUNE 3, JUNE 1,
(52 WEEKS) (52 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS) (2) 1995 1996(2)
---------- ---------- ---------- ------------ -------------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Net sales.............. $32,571 $37,921 $42,738 $47,311 $52,667 $39,324 $49,302
Cost of goods sold..... 24,411 28,599 32,305 35,599 39,872 29,660 37,476
------- ------- ------- ------- ------- ------- -------
Gross profit........... 8,160 9,322 10,433 11,712 12,795 9,664 11,826
Operating expenses..... 5,333 7,512 6,991 7,627 7,752 5,684 6,241
Depreciation and
amortization.......... 267 268 265 270 266 195 387
Non-recurring executive
compensation (3)...... -- -- 2,111 2,237 -- -- --
------- ------- ------- ------- ------- ------- -------
Operating income....... 2,560 1,542 1,066 1,578 4,777 3,785 5,198
Interest expense....... -- -- -- -- 370 7 1,841
Other expense (income),
net................... (238) (224) (158) (132) (145) (125) (15)
------- ------- ------- ------- ------- ------- -------
Income before income
taxes................. 2,798 1,766 1,224 1,710 4,552 3,903 3,372
Provision for income
taxes................. 142 101 69 88 358 236 1,446
------- ------- ------- ------- ------- ------- -------
Net income............. $ 2,656 $ 1,665 $ 1,155 $ 1,622 $ 4,194 $ 3,667 $ 1,926
======= ======= ======= ======= ======= ======= =======
Net income applicable
to common
stockholders (4) ..... $ 2,656 $ 1,665 $ 1,155 $ 1,622 $ 4,083 $ 3,667 $ 1,419
======= ======= ======= ======= ======= ======= =======
Supplemental pro forma
data (5):
Net income............. $ 1,679 $ 1,060 $ 735 $ 1,026 $ 2,955 $ 2,342 $ 3,047
======= ======= ======= ======= ======= ======= =======
Net income per common
share................. $ .32 $ .28
======= =======
Weighted average common
shares outstanding.... 9,150 10,789
======= =======
OPERATING DATA:
Number of orders....... 203,573 223,418 247,469 276,056 307,525 228,028 295,949
Inventory turnover
(6)................... 8.7x 8.7x 8.4x 9.8x 11.8x 10.6x 10.9x
CONSOLIDATED BALANCE
SHEET DATA:
Working capital........ $ 6,337 $ 4,849 $ 6,491 $ 7,838 $ 7,467 $ 9,294 $ 8,562
Total assets........... 10,471 10,359 12,248 12,849 13,832 14,730 26,808
Long-term debt......... -- -- -- -- 21,830 -- 31,419
Redeemable preferred
stock (2)............. -- -- -- -- 6,761 -- 7,268
Total stockholders'
(deficit) equity...... 7,392 6,179 7,868 9,061 (19,926) 10,692 (18,389)
</TABLE>
- --------
(1) The Company's fiscal year ends on the Saturday nearest to August 31, and
is divided into four thirteen-week periods.
(2) In July 1995, the Company effected the Recapitalization, in connection
with which the Company: (i) issued $6.75 million in aggregate value of
Summit Notes; (ii) issued $2.5 million in aggregate principal amount of
Management Notes; (iii) issued $6.65 million in stated value of Redeemable
Preferred Stock; and (iv) borrowed $13.5 million under the Credit
Facility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Certain Transactions."
(3) Represents bonuses paid to certain executive officers to facilitate their
purchase of stock prior to the Recapitalization. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Management."
(4) Represents net income less the accretion in value of the Redeemable
Preferred Stock during the period.
(5) Prior to the Recapitalization, the Company elected to be taxed as a
Subchapter S corporation for federal income tax purposes. Supplemental pro
forma information has been computed as if the Company had been subject to
federal income taxes and all applicable state corporate income taxes for
each period presented. Supplemental pro forma net income and weighted
average shares are presented as if, at the beginning of the respective
periods, the Company had sold, at an assumed offering price of $13.00 per
share, shares of Common Stock sufficient to fund the Recapitalization in
1995 and repay indebtedness incurred in 1996 to finance the acquisition at
St. Louis Ostomy.
(6) "Inventory turnover" means the cost of goods sold for the period divided
by the average inventory balance for the period (annualized data for the
thirty-nine week periods).
17
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following Unaudited Pro Forma Combined Balance Sheet as of June 1, 1996
and Unaudited Pro Forma Combined Statements of Income for the year ended
September 2, 1995 and for the thirty-nine weeks ended June 1, 1996, are based
on the Consolidated Financial Statements and the notes related thereto. The
Pro Forma Combined Balance Sheet is adjusted to give effect to (i) the
acquisition of Patient-Care and (ii) the consummation of this offering and
application of the estimated net proceeds therefrom as if these transactions
had occurred on June 1, 1996. The Unaudited Pro Forma Combined Statements of
Operations are adjusted to give effect to: (i) the Recent Acquisitions; and
(ii) the consummation of this offering and the application of the estimated
net proceeds therefrom as if these transactions had occurred as of September
4, 1994. The Unaudited Pro Forma Combined Statements of Income combine the
Unaudited Pro Forma Consolidated Financial Statements with the historical
operations of the Recent Acquisitions prior to the dates the Company made such
acquisitions, using the purchase method of accounting. The pro forma operating
results are not necessarily indicative of the operating results that would
have been achieved had the acquisitions actually occurred at September 4,
1994, nor do they purport to indicate the results of future operations.
The Unaudited Pro Forma Combined Financial Data is based on the assumptions
set forth in the notes to such statements and should be read in conjunction
with the related Consolidated Financial Statements and notes thereto included
elsewhere in this Prospectus. The pro forma adjustments are based on available
information and certain adjustments that the Company believes are reasonable.
In the opinion of the Company, all adjustments have been made that are
necessary to fairly present the pro forma data.
18
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
AS OF JUNE 1, 1996
<TABLE>
<CAPTION>
HISTORICAL
------------------------- ACQUISITION OFFERING PRO FORMA
SUBURBAN PATIENT-CARE PRO FORMA PRO PRO FORMA AS
JUNE 1,1996 MARCH 31,1996 ADJUSTMENTS (A) FORMA ADJUSTMENTS(B)(C) ADJUSTED
----------- ------------- --------------- -------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents........... $ 1,715 $ 84 $ (275) $ 1,524 $ 2,727 $ 4,251
Accounts receivable,
net................... 7,192 1,894 -- 9,086 -- 9,086
Inventories............ 5,466 1,412 -- 6,878 -- 6,878
Prepaid expenses and
other................. 243 252 -- 495 -- 495
Deferred income taxes.. 380 90 -- 470 -- 470
-------- ------ ------- -------- ------- -------
Total current assets.. 14,996 3,732 (275) 18,453 2,727 21,180
Fixed assets, at cost,
net:................... 884 324 -- 1,208 -- 1,208
Other assets............ 194 27 -- 221 -- 221
Goodwill................ 10,734 -- 2,906 13,640 -- 13,640
-------- ------ ------- -------- ------- -------
$ 26,808 $4,083 $ 2,631 $ 33,522 $ 2,727 $36,249
======== ====== ======= ======== ======= =======
LIABILITIES AND
STOCKHOLDERS'
(DEFICIT) EQUITY
Current Liabilities:
Current maturities of
long term debt........ $ 124 $ 455 $ (275) $ 304 $ (124) $ 180
Bank line of credit.... -- 890 (890) -- -- --
Patient-Care deferred
payment............... -- -- 375 375 -- 375
Accounts payable and
accrued expenses...... 6,310 1,481 200 7,991 (348) 7,643
-------- ------ ------- -------- ------- -------
Total current
liabilities.......... 6,434 2,826 (590) 8,670 (472) 8,198
Long-term Liabilities:
Long-term debt, less
current maturities.... 21,058 -- 4,465 25,523 (25,523) --
St. Louis Note......... 1,111 -- -- 1,111 (1,111) --
Management Notes....... 2,500 -- -- 2,500 (2,500) --
Summit Notes........... 6,750 -- -- 6,750 (6,750) --
Deferred income taxes.. 76 13 -- 89 -- 89
-------- ------ ------- -------- ------- -------
Total long-term
liabilities.......... 31,495 13 4,465 35,973 (35,884) 89
Redeemable Preferred
Stock, $.01 par value,
$100 redemption value
plus 10% cumulative
return--
Authorized, issued and
outstanding--66,500
shares................ 7,268 -- -- 7,268 (7,268) --
Stockholders' (deficit)
equity:
Common stock, no par
value--
Authorized--40,000,000
shares
issued and
outstanding--
6,223,250 actual
shares at June 1, 1996
(10,123,250 shares
outstanding for Pro
Forma
as Adjusted purposes)
...................... 162 -- -- 162 46,351 46,513
(Accumulated deficit)
retained earnings..... (18,551) 1,244 (1,244) (18,551) -- (18,551)
-------- ------ ------- -------- ------- -------
Total stockholders'
(deficit) equity..... (18,389) 1,244 (1,244) (18,389) 46,351 27,962
-------- ------ ------- -------- ------- -------
Total liabilities and
stockholders'
(deficit) equity..... $ 26,808 $4,083 $ 2,631 $ 33,522 $ 2,727 $36,249
======== ====== ======= ======== ======= =======
</TABLE>
See Accompanying Notes
19
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED SEPTEMBER 2, 1995
<TABLE>
<CAPTION>
ST. LOUIS OSTOMY PATIENT-CARE
--------------------------------- -------------------------
YEAR ENDED JULY 29, 1995 YEAR ENDED JUNE 30, 1995
--------------------------------- -------------------------
HISTORICAL PRO FORMA PRO PRO FORMA PRO
SUBURBAN HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS(A) FORMA
---------- --------------- -------------- ------- ---------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........ $52,667 $ 17,235 $ -- $69,902 $18,035 $ -- $87,937
Cost of goods
sold............ 39,872 13,756 -- 53,628 14,290 -- 67,918
------- --------------- ------------- ------- ------- ----- -------
Gross profit..... 12,795 3,479 -- 16,274 3,745 -- 20,019
Operating
expenses........ 7,752 1,972 (758)(d) 8,966 3,218 -- 12,184
Depreciation and
amortization.... 266 57 435 (d) 758 58 116 (d) 932
------- --------------- ------------- ------- ------- ----- -------
Operating
income.......... 4,777 1,450 323 6,550 469 (116) 6,903
Interest
expense......... 370 91 1,125 (e) 1,586 114 352(e) 2,052
Other expense
(income), net... (145) (13) -- (158) (103) -- (261)
------- --------------- ------------- ------- ------- ----- -------
Income before
income taxes.... 4,552 1,372 (802) 5,122 458 (468) 5,112
Pro Forma data
(g):
Provision for
income taxes... 1,821 515 (147) 2,189 127 (141) 2,175
------- --------------- ------------- ------- ------- ----- -------
Net income...... $ 2,731 $ 857 $ (655) $ 2,933 $ 331 $(327) $ 2,937
======= =============== ============= ======= ======= ===== =======
Net income
applicable to
common
stockholders
(h)............
Net income per
common share...
Weighted average
common shares
outstanding....
<CAPTION>
OFFERING PRO FORMA
PRO FORMA AS
ADJUSTMENTS (B)(C) ADJUSTED
------------------ -----------
<S> <C> <C>
Net sales........ $ -- $87,937
Cost of goods
sold............ -- 67,918
------------------ -----------
Gross profit..... -- 20,019
Operating
expenses........ -- 12,184
Depreciation and
amortization.... -- 932
------------------ -----------
Operating
income.......... -- 6,903
Interest
expense......... (2,022)(f) 30
Other expense
(income), net... -- (261)
------------------ -----------
Income before
income taxes.... 2,022 7,134
Pro Forma data
(g):
Provision for
income taxes... 809 2,984
------------------ -----------
Net income...... $1,213 $ 4,150
================== ===========
Net income
applicable to
common
stockholders
(h)............ $ 4,150
===========
Net income per
common share... $ .39
===========
Weighted average
common shares
outstanding.... 10,788(i)
===========
THIRTY-NINE WEEKS ENDED JUNE 1, 1996
<CAPTION>
ST. LOUIS OSTOMY PATIENT-CARE
--------------------------------- -------------------------
FOR THE PERIOD
SEPTEMBER 1, 1995 THIRTY-NINE WEEKS
THROUGH JANUARY 22, 1996 (J) ENDED MARCH 31, 1996(J)
---------------------------- -------------------------
HISTORICAL PRO FORMA PRO PRO FORMA PRO
SUBURBAN HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS(A) FORMA
---------- --------------- -------------- ------- ---------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........ $49,302 $ 7,511 $ -- $56,813 $13,649 $ -- $70,462
Cost of goods
sold............ 37,476 5,969 -- 43,445 10,831 -- 54,276
------- --------------- ------------- ------- ------- ----- -------
Gross profit..... 11,826 1,542 -- 13,368 2,818 -- 16,186
Operating
expenses........ 6,241 1,043 (437)(d) 6,847 2,634 -- 9,481
Depreciation and
amortization.... 387 22 167 (d) 576 53 87 (d) 716
------- --------------- ------------- ------- ------- ----- -------
Operating
income.......... 5,198 477 270 5,945 131 (87) 5,989
Interest
expense......... 1,841 13 433(e) 2,287 112 264(e) 2,663
Other expense
(income) net.... (15) (4) -- (19) (59) -- (78)
------- --------------- ------------- ------- ------- ----- -------
Income before
income taxes.... 3,372 468 (163) 3,677 78 (351) 3,404
Provision for
income taxes.... 1,446 187 2 1,635 31 (106) 1,560
------- --------------- ------------- ------- ------- ----- -------
Net income....... $ 1,926 $ 281 $ (165) $ 2,042 $ 47 $(245) $ 1,844
======= =============== ============= ======= ======= ===== =======
Net income
applicable to
common
stockholders(h)..
Net income per
common share....
Weighted average
common shares
outstanding.....
<CAPTION>
OFFERING PRO FORMA
PRO FORMA AS
ADJUSTMENTS(B)(C) ADJUSTED
------------------ -----------
<S> <C> <C>
Net sales........ $ -- $70,462
Cost of goods
sold............ -- 54,276
------------------ -----------
Gross profit..... -- 16,186
Operating
expenses........ -- 9,481
Depreciation and
amortization.... -- 716
------------------ -----------
Operating
income.......... -- 5,989
Interest
expense......... (2,641)(f) 22
Other expense
(income) net.... -- (78)
------------------ -----------
Income before
income taxes.... 2,641 6,045
Provision for
income taxes.... 1,056 2,616
------------------ -----------
Net income....... $1,585 $ 3,429
================== ===========
Net income
applicable to
common
stockholders(h).. $ 3,429
===========
Net income per
common share.... $ .32
===========
Weighted average
common shares
outstanding..... 10,789(i)
===========
</TABLE>
See Accompanying Notes
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(a) Represents adjustments for the acquisition of Patient-Care based on a
purchase price of $4.2 million including expenses of $200,000. The
acquisition has been accounted for using the purchase method. The purchase
price has been allocated on a preliminary basis, subject to revision to
the net assets acquired based on the fair values of such assets which are
estimated to equal their book value. The $2.9 million balance of the
purchase price was allocated to goodwill which will be amortized on a
straight-line basis over 25 years. The Company expects to perform a
complete allocation of purchase price in the near future and does not
anticipate material changes to the preliminary allocation.
(b) Reflects the issuance of 3,900,000 shares of Common Stock offered hereby
and the receipt and application of the net proceeds therefrom as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Gross proceeds from this offering............................ $ 50,700
Underwriting discounts and commissions....................... (3,549)
Estimated expenses of this offering.......................... (800)
--------
Net proceeds................................................. 46,351
Repayment of long-term debt, including current portion, and
Redeemable Preferred Stock and related accrued interest and
dividend accretion.......................................... (43,624)
--------
Net increase in cash and cash equivalents.................... $ 2,727
========
</TABLE>
(c) The non-recurring charge to write off deferred financing charges and a
debt discount, net of related income tax effects, have been excluded from
the Offering Pro Forma Adjustments. Deferred financing charges amounted to
approximately $192,000 and $162,000 at September 2, 1995 and June 1, 1996,
respectively. The debt discount amounted to approximately $69,000 at June
1, 1996. Related income tax savings would have been approximately $77,000
and $92,000 for the year ended September 2, 1995 and the thirty-nine weeks
ended June 1, 1996, respectively.
(d) The adjustment to operating expenses represents a reduction for
compensation paid to a former employee of St. Louis Ostomy which ended
effective May 31, 1996 as well as a one time bonus paid to another St.
Louis Ostomy employee during the period from September 1, 1995 through
January 22, 1996 net of the amortization over a 25-year period of $13.8
million of costs in excess of net assets acquired by Suburban, as if the
Recent Acquisitions occurred at September 4, 1994.
(e) Represents interest expense on amounts borrowed to finance the Recent
Acquisitions as if such borrowings had occurred at the beginning of the
periods presented. Assumes the entire purchase prices and related
transaction fees for St. Louis Ostomy ($12.4 million) and Patient-Care
($4.2 million) were financed with the St. Louis Note ($1.2 million) at an
interest rate of 10%, the $375,000 Patient-Care deferred payment at an
interest rate of 8.0% and the balance under the Credit Facility at an
interest rate of 9.0%.
(f) The adjustment to interest expense reflects the retirement of certain
outstanding debt of the Company by applying a portion of the estimated net
proceeds of this offering as described under "Use of Proceeds", as if such
transaction had ocurred at September 4, 1994.
(g) Prior to July 3, 1995, the Company elected to be taxed as a Subchapter S
corporation for federal income tax purposes. Pro forma information has
been subject to federal income taxes and all applicable state corporate
income taxes for the period presented.
(h) See Note 2 to the Consolidated Financial Statements.
(i) Shares used in the computation of pro forma net income per share, as
adjusted, give effect to the issuance and sale of the 3,900,000 shares of
Common Stock offered hereby and the application of the net proceeds
therefrom. Stock options and warrants granted within a 12-month period
preceding the date of this Prospectus are included as if they were
outstanding for all periods presented. The dilutive effect (688,169 shares
and 681,325 shares at September 2, 1995 and June 1, 1996, respectively),
of all options and warrants outstanding was calculated using the treasury
stock method and the anticipated public offering price. See "Dilution" and
"Capitalization."
(j) The Company's results include the operations of St. Louis Ostomy from
January 22, 1996, the date of acquisition.
(k) Represents the thirty-nine week period ended March 31, 1996.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's consolidated
financial condition and consolidated results of operations should be read in
conjunction with the Unaudited Pro Forma Combined Financial Data and the
Consolidated Financial Statements and related notes thereto included elsewhere
in this Prospectus.
OVERVIEW
The Company is a leading national direct marketing wholesaler of medical
supplies and related products to the home health care industry. While the
Company's growth has historically been internally generated, the consolidation
of the health care industry has created an opportunity for the Company also to
grow through strategic acquisitions. A key component of the Company's growth
strategy is to expand its geographic penetration and product lines through
acquisitions of health care product wholesalers, and pursuant to this
strategy, the Company has consummated the Recent Acquisitions. In January
1996, the Company acquired St. Louis Ostomy for $12.4 million, of which $11.2
million was paid in cash and $1.2 million was paid by the issuance of the St.
Louis Note. In June 1996, the Company acquired Patient-Care for $4.2 million,
of which $3.8 million was paid at closing, and $375,000 is payable on the
first anniversary of the closing, subject to offset with respect to any claims
for indemnity which may be asserted by the Company. The Company borrowed $11.5
million and $5.0 million under the Credit Facility to fund the cash payments
made in connection with the acquisitions of St. Louis Ostomy and Patient-Care,
respectively, and to fund the payment of related transactional expenses. The
Company intends to repay the entire outstanding balance of the Credit Facility
and the St. Louis Note with a portion of the net proceeds of this offering.
The Company operates in an environment impacted by cost containment efforts
and consolidation of health care companies. This environment has led to the
Company's strategic decision to price its products competitively and offer
volume based pricing programs to its customers. As a result, while the
Company's gross profit increased from $8.2 million in fiscal 1991 to $12.8
million in fiscal 1995 and to $11.8 million for the thirty-nine weeks ended
June 1, 1996, the Company's gross profit as a percentage of net sales ("gross
margin") decreased from 25.1% in fiscal 1991 to 24.3% in fiscal 1995 and to
24.0% for the thirty-nine weeks ended June 1, 1996. The Company has sought to
mitigate the decline in gross margins through: (i) the negotiation of volume
discounts, rebates, promotional allowances and other favorable terms with
suppliers; (ii) the application of the Company's MIS capabilities to enhance
its inventory management; and (iii) regular evaluation of alternate suppliers
to ensure it receives competitive pricing and quality products. The Company
expects that as it continues to increase its net sales, its ability to
negotiate volume based incentives with suppliers will be enhanced. While the
Company believes that cost containment efforts and consolidation of health
care companies will continue to exert downward pressure on the Company's gross
margins, it also believes that the utilization of the foregoing programs will
mitigate the effects of these pressures such that the Company will not
experience any further significant decreases in its gross margins from their
current levels. Notwithstanding this belief, there can be no assurance that
the Company will be able to maintain or increase its gross margins.
The Company has successfully implemented a business strategy which has
enabled it to increase operating income as a percentage of net sales from 7.9%
in fiscal 1991 to 9.1% in fiscal 1995 and to 10.5% for the thirty-nine weeks
ended June 1, 1996 through decreasing operating expenses as a percentage of
net sales. Suburban's operating expenses decreased as a percentage of net
sales from 16.4% in fiscal 1991 to 14.7% in fiscal 1995 and to 12.7% for the
thirty-nine weeks ended June 1, 1996, although such expenses have increased in
total dollar amount due to the support required for higher sales volume over
this period. The principal components of the Company's strategy to improve its
operating income margin include leveraging its existing operating
infrastructure over a larger base of sales and the establishment of the
Company's budget and expense programs designed to control expense levels. The
Company has historically offered management incentives for the achievement of
cost reduction goals and intends to continue to offer such incentives, as well
as invest additional funds in its MIS infrastructure. In addition, operating
expenses decreased due to the reduction in compensation levels related to the
Recapitalization. Based on the fact that approximately 20% of the aggregate
space in the Company's regional distribution centers is not currently
utilized, the Company believes that it can increase sales significantly
without the need to make material investments in additional distribution
facilities.
As part of its acquisition strategy, after the Company completes an
acquisition, it typically operates the acquired company for a period of time
as a subsidiary. During this period, the Company decides whether,
22
<PAGE>
and under what conditions, any of the acquired company's operations, including
MIS functions, should be integrated with those of the Company. The Company may
incur costs, such as additional rental costs, while operating an acquired
company prior to possible consolidation with the Company. Consistent with this
strategy, the Company has operated St. Louis Ostomy as a subsidiary since its
acquisition although it consolidated the operations of St. Louis Ostomy with
those of the Company effective July 1, 1996. During the first five months of
calendar 1996, the Company incurred the expense of additional rent for the St.
Louis Ostomy facility and additional personnel and overhead expenses in
connection with the St. Louis Ostomy acquisition. The Company has incurred
costs associated with the closing of the St. Louis Ostomy distribution center
and will continue to incur costs associated with the integration of St. Louis
Ostomy with the Company, such as severance payments and the elimination of
redundant corporate overhead. The Company charged $109,000 to expense in the
second and third quarters of fiscal 1996 for inventory and receivable write-
offs. In addition, $225,000 of costs associated with the closure of the St.
Louis distribution center were reserved as of the date of the St. Louis Ostomy
acquisition. The Company estimates that further consolidation costs of
approximately $75,000 will be expensed in the fourth quarter of fiscal 1996.
The gross margins of St. Louis Ostomy and Patient-Care were 20.2% and 20.4%,
respectively, for their fiscal 1995. The Company believes that St. Louis
Ostomy and Patient-Care had lower gross margins than the Company in 1995
because they were unable to purchase product on terms as favorable as those
negotiated by the Company and were unable to offer the level of service,
technical assistance and timely delivery the Company offers, and, therefore,
were required to compete principally on the basis of price. As a result, the
Company's pro forma gross margin for fiscal 1995 was 22.8%, which is lower
than the Company's actual gross margin of 24.3% for the same period. As part
of the process of integrating the Recent Acquisitions into the Company, the
Company is negotiating new supply arrangements and adjusting prices. While the
Company believes that the implementation of these measures will improve the
gross margins of the Recent Acquisitions, there can be no assurance that these
measures will result in increased gross margins of the Company on a
consolidated basis.
The acquisition of St. Louis Ostomy has been accounted for using the
purchase method of accounting, and accordingly, the results of operations of
St. Louis Ostomy are included within those of the Company subsequent to the
dates of its acquisition. In connection with the acquisition of St. Louis
Ostomy, the Company recorded $10.9 million of goodwill which is being
amortized on a straight line basis over 25 years and which has resulted in a
significant increase in the Company's amortization expense beginning in the
second quarter of fiscal 1996. In connection with the acquisition of Patient-
Care, the Company expects to record approximately $2.9 million of goodwill
which will be amortized on a straight line basis over 25 years. See Note 2 to
the Consolidated Financial Statements.
Prior to the Recapitalization, the Company elected to be treated as a
Subchapter S corporation for income tax purposes and accordingly did not pay
federal and certain state income taxes during such period. In addition, the
amount of certain compensation and other expenses incurred prior to the
Recapitalization are not expected to be made in similar amounts following the
Recapitalization.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information derived
from the consolidated statements of income of the Company expressed as a
percentage of net sales. The Company's past operating results are not
necessarily indicative of future operating results.
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
THIRTY-NINE
YEAR ENDED WEEKS ENDED
------------------------------------ ---------------
AUGUST 28, SEPTEMBER 3, SEPTEMBER 2, JUNE 3, JUNE 1,
1993 1994 1995 1995 1996
---------- ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Net sales................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold....... 75.6 75.2 75.7 75.4 76.0
----- ----- ----- ----- -----
Gross profit............. 24.4 24.8 24.3 24.6 24.0
Operating expenses....... 16.4 16.1 14.7 14.5 12.7
Depreciation and amorti-
zation.................. 0.6 0.6 0.5 0.5 0.8
Non-recurring compensa-
tion expense............ 4.9 4.7 -- -- --
----- ----- ----- ----- -----
Operating income......... 2.5 3.4 9.1 9.6 10.5
Interest expense......... -- -- 0.7 -- 3.7
Other (income) expense,
net..................... (0.4) (0.2) (0.2) (0.3) --
----- ----- ----- ----- -----
Pre-tax (pro forma)...... 2.9 3.6 8.6 9.9 6.8
Net income (pro forma)... 1.7 2.2 5.2 6.0 3.9
</TABLE>
23
<PAGE>
THIRTY-NINE WEEKS ENDED JUNE 1, 1996 AND JUNE 3, 1995
Net sales increased by $10.0 million, or 25.4%, to $49.3 million for the
thirty-nine weeks ended June 1, 1996 from $39.3 million for the thirty-nine
weeks ended June 3, 1995. The number of customer orders filled increased 29.8%
to approximately 296,000 orders for the thirty-nine weeks ended June 1, 1996
from approximately 228,000 orders for the thirty-nine weeks ended June 3,
1995. Of the $10.0 million increase in net sales, $7.0 million, or 70.0%, was
attributable to the acquisition of St. Louis Ostomy, and $3.0 million, or
30.0%, was attributable to a 7.6% growth rate in net sales to existing
customers for the thirty-nine weeks ended June 1, 1996. Same store growth in
net sales was primarily attributable to increases in sales to national home
health care chains and managed care organizations. The average order size
decreased to $171 for the thirty-nine weeks ended June 1, 1996 from $176 for
the same period ended June 3, 1995, primarily as a result of the lower order
size of sales made to customers of St. Louis Ostomy.
Gross profit increased by $2.2 million, or 22.4%, to $11.8 million for the
thirty-nine weeks ended June 1, 1996 from $9.7 million for the thirty-nine
weeks ended June 3, 1995, while gross margin decreased to 24.0% from 24.6%
over the same period. The decrease in gross margin was primarily attributable
to competitive pricing of products sold by the Company to maintain or increase
market share, particularly with respect to volume based pricing programs
offered by the Company.
Operating expenses increased by $557,000, or 9.8%, to $6.2 million for the
thirty-nine weeks ended June 1, 1996 from $5.7 million for the thirty-nine
weeks ended June 3, 1995, and, as a percentage of net sales, decreased to
12.7% from 14.5% during the same period. The increase in operating expenses
was due to the support required for higher sales volume and the costs
associated with the operations of St. Louis Ostomy. The decrease in operating
expenses as a percentage of net sales was primarily attributable to the
leveraging of the Company's operating infrastructure over a larger base of
sales and the effect of Company's established budget and expense programs.
Depreciation and amortization expense increased by $192,000 to $387,000 for
the thirty-nine weeks ended June 1, 1996 from $195,000 for the thirty-nine
weeks ended June 3, 1995 due to the amortization of expenses associated with
the acquisition of St. Louis Ostomy.
Operating income increased by $1.4 million, or 37.4%, to $5.2 million for
the thirty-nine weeks ended June 1, 1996 from $3.8 million for the thirty-nine
weeks ended June 3, 1995. Operating income increased as a percentage of net
sales to 10.5% for the thirty-nine weeks ended June 3, 1996 from 9.6% for the
thirty-nine weeks ended June 1, 1995. The increase in operating income as a
percentage of net sales was primarily attributable to increased sales and
decreased operating expenses as a percentage of net sales, offset by declining
gross margins.
Interest expense for the thirty-nine weeks ended June 1, 1996 was $1.8
million, due to borrowings to fund in part the Recapitalization and the
acquisition of St. Louis Ostomy. The Company did not have any interest expense
for the thirty-nine weeks ended June 3, 1995.
Income taxes increased by $1.2 million to $1.5 million, or 42.9% of pre-tax
income, for the thirty-nine weeks ended June 1, 1996 from $236,000, or 6.0% of
pre-tax income, for the thirty-nine weeks ended June 3, 1995. This increase is
primarily attributable to the fact that prior to July 3, 1995, the Company
operated as a Subchapter S corporation.
YEARS ENDED SEPTEMBER 2, 1995 (52 WEEKS) AND SEPTEMBER 3, 1994 (53 WEEKS)
Net sales increased by $5.4 million, or 11.3%, to $52.7 million in fiscal
1995 from $47.3 million in fiscal 1994. The number of customer orders filled
increased 11.6% to approximately 308,000 orders in fiscal 1995 from
approximately 276,000 orders in fiscal 1994. The net sales growth in fiscal
1995 was primarily attributable to increased sales to independent home health
care suppliers pursuant to volume based pricing programs and increased
penetration of national home health care chains. The average order size
remained constant in fiscal
24
<PAGE>
1994 and fiscal 1995 at approximately $176, due to a larger volume of small
dollar amount orders under the Stockless Inventory Program in fiscal 1995
which offset the effect of price increases and inflation.
Gross profit increased by $1.1 million, or 9.2%, to $12.8 million in fiscal
1995 from $11.7 million in fiscal 1994, while gross margin decreased to 24.3%
from 24.8% over the same period. The decrease in gross margin was primarily
attributable to competitive pricing of products sold by the Company to
maintain or increase market share, particularly with respect to volume based
pricing programs offered by the Company.
Operating expenses increased by $125,000, or 1.6%, to $7.8 million in 1995
from $7.6 million in fiscal 1994, and, as a percentage of net sales, decreased
to 14.7% from 16.1% for the same period. The decrease in operating expenses as
a percentage of net sales was primarily attributable to the reduction in
compensation levels related to the Recapitalization.
There was no non-recurring compensation expense in fiscal 1995, as compared
to non-recurring compensation expense of $2.2 million in fiscal 1994
representing 4.7% of net sales in fiscal 1994.
Operating income increased by $3.2 million, or 202.7%, to $4.8 million for
fiscal 1995 from $1.6 million for fiscal 1994. The increase in operating
income was primarily attributable to the absence of bonus payments of $2.2
million in fiscal 1995 and is also attributable to increased sales and
decreased operating expenses as a percentage of net sales, offset by declining
gross margins. Excluding the effect of the non-recurring compensation,
operating income would have increased to $4.8 million in fiscal 1995 from $3.8
million in fiscal 1994, representing 9.1% of net sales in fiscal 1995 and 8.1%
of net sales in fiscal 1994.
Interest expense for fiscal 1995 was $370,000 due to the incurrence of debt
under the Management Notes, the Summit Notes and the Credit Facility in
connection with the Recapitalization, including $188,000 of interest under the
Management Notes and Summit Notes and $176,000 of interest under the Credit
Facility.
Income taxes increased by $270,000 to $358,000 in fiscal 1995 from $88,000
in fiscal 1994, representing 7.9% of pre-tax income in fiscal 1995. Prior to
July 3, 1995, the Company operated as a Subchapter S corporation and
accordingly was not responsible for federal and certain state income taxes. If
the Company had not elected Subchapter S corporation status for this period,
the Company's pro forma income tax expense for would have been $684,000 and
$1.8 million for fiscal 1994 and fiscal 1995, respectively.
YEARS ENDED SEPTEMBER 3, 1994 (53 WEEKS) AND AUGUST 28, 1993 (52 WEEKS)
Net sales increased by $4.6 million, or 10.7%, to $47.3 million in fiscal
1994 from $42.7 million in fiscal 1993. The number of customer orders filled
increased by approximately 29,000, or 11.7%, to approximately 276,000 orders
in fiscal 1994 from approximately 247,000 orders in fiscal 1993. The net sales
growth in fiscal 1994 was primarily attributable to increased penetration of
national home health care chains and to increased sales to home medical
equipment dealers pursuant to volume based pricing programs.
Gross profit increased by $1.3 million, or 12.3%, to $11.7 million in fiscal
1994 from $10.4 million in fiscal 1993, while gross profit increased to 24.8%
from 24.4% over the same period. The increase in gross profit was primarily
attributable to selective forward buying of product by the Company, effective
price management, especially with respect to products sold by the Company in
broken case orders, and more favorable pricing that became available from
suppliers pursuant to volume based incentives.
Operating expenses increased $636,000, or 9.1%, to $7.6 million in fiscal
1994 from $7.0 million in fiscal 1993, and as a percentage of net sales
decreased to 16.1% from 16.4% for the same period. The increase in expenses
was primarily attributable to additional personnel hired to support the
increased level of sales.
The Company incurred a non-recurring compensation expense of $2.2 million in
fiscal 1994 and $2.1 million in fiscal 1993.
25
<PAGE>
Operating income increased by $512,000, or 48.0%, to $1.6 million for fiscal
1994 from $1.1 million for fiscal 1993. Operating income as a percentage of
net sales increased to 3.3% for fiscal 1994 from 2.5% for fiscal 1993. The
increase in operating income was primarily attributable to the increased sales
and gross margins offset by increased operating expenses as a percentage of
net sales.
Income taxes increased to $88,000 in fiscal 1994 from $69,000 in fiscal
1993. During both periods the Company operated as a Subchapter S corporation
and accordingly was not responsible for federal and certain state income
taxes. If the Company had not elected Subchapter S corporation status for
these periods, the Company's pro forma income tax expense for fiscal 1994 and
fiscal 1993 would have been $684,000 and $490,000, respectively.
QUARTERLY RESULTS
The following table sets forth summary unaudited quarterly financial
information for each quarter in fiscal 1994 and 1995 and the fiscal quarters
ended December 2, March 2 and June 1, 1996. In the opinion of the Company,
such information has been prepared on the same basis as the audited
Consolidated Financial Statements appearing elsewhere in this Prospectus and
reflects all necessary adjustments (consisting of only normal, recurring
adjustments) for fair presentation of such unaudited quarterly results when
read in conjunction with the audited financial statements and related notes.
The operating results for any quarter are not necessarily indicative of
results for any future period, and there can be no assurance that any trends
reflected in such results will continue in the future. The Company does not
believe that its business is seasonal.
<TABLE>
<CAPTION>
FISCAL 1996
FISCAL 1994 PERIOD ENDED FISCAL 1995 PERIOD ENDED PERIOD ENDED
---------------------------------- ---------------------------- ---------------------
11/27/93 2/26/94 5/28/94 9/3/94(1) 12/3/94 2/9/95 5/3/95 9/2/95 12/2/95 3/2/96 6/1/96
-------- ------- ------- --------- ------- ------ ------ ------ ------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $11.1 $11.5 $11.7 $13.0 $12.9 $13.4 $13.0 $13.3 $13.5 $16.5 $19.3
Cost of goods sold...... 8.4 8.6 8.8 9.8 9.7 10.1 9.8 10.2 10.2 12.6 14.6
Gross profit............ 2.7 2.9 2.9 3.2 3.2 3.3 3.2 3.1 3.3 3.8 4.7
Operating expenses...... 1.7 1.8 1.8 2.3 1.9 1.9 1.9 2.1 1.6 2.0 2.6
Depreciation and
amortization........... 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2
Operating income........ 0.9 (0.1) 1.0 (0.3) 1.2 1.3 1.3 1.0 1.6 1.7 1.8
Interest expense........ -- -- -- -- -- -- -- 0.4 0.5 0.6 0.7
Pre-tax (pro forma)..... 0.9 * 1.0 (0.3) 1.2 1.4 1.3 0.6 1.1 1.1 1.1
Net income (pro forma).. 0.6 * 0.6 (0.2) 0.7 0.8 0.8 0.4 0.7 0.7 0.6
</TABLE>
- -------
(1) Fourth quarter of fiscal 1994 consists of 14 weeks.
* Under $49,000.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Recapitalization, the Company's principal cash requirements
were to fund working capital in order to support growth of net sales and to
fund dividends required as a result of the Company's Subchapter S corporation
status. The Company funded such working capital and dividend requirements
principally with cash generated from operations. Cash flows generated from
operations were $900,000, $1.5 million, and $4.1 million for fiscal 1993, 1994
and 1995, respectively. For the thirty-nine weeks ended June 1, 1996, the
Company used cash of $31,000.
On July 3, 1995, the Company effected the Recapitalization pursuant to which
the Company redeemed an aggregate of 70.0% of the shares of Common Stock then
outstanding for total consideration of $29.5 million, of which $27.0 million
was paid in cash and $2.5 million was paid in the form of the Management
Notes. To finance the Recapitalization, the Company issued an aggregate of
$6.7 million Redeemable Preferred Stock and issued the Summit Notes in the
aggregate principal amount of $6.75 million. The Company also entered into the
Credit Facility with the Bank and borrowed $13.5 million thereunder. See
"Certain Transactions." These transactions resulted in a significant increase
in the Company's interest expense beginning in the fourth quarter of fiscal
1995.
26
<PAGE>
Following the Recapitalization, the Company's principal cash requirements
have been to fund acquisitions and debt service and provide working capital to
support growth of net sales. The Company has funded these requirements with
cash generated from operations and with borrowings under the Credit Facility.
Borrowing capacity under the Credit Facility is $30.0 million, and
borrowings bear interest at either the Bank's Base Rate or LIBOR plus an
applicable margin, depending on the Company's earnings. The outstanding
borrowings under the Credit Facility are secured by substantially all of the
assets of the Company, including a pledge of all of the capital stock of its
subsidiaries. The Credit Facility contains covenants which require the Company
to maintain certain financial ratios and impose certain limitations and
prohibitions on the Company with respect to: (i) incurring additional
indebtedness; (ii) the creation of security interests on the assets of the
Company; and (iii) the payment of cash dividends on the Common Stock. At
August 31, 1996, the Company was in compliance with such covenants. The terms
of the Credit Facility provide for reductions in the amount available for
borrowing thereunder at six month intervals until such time as availability
reaches $17.75 million at June 30, 2000, the maturity date of the Credit
Facility. Borrowings outstanding under the Credit Facility were $12.6 million
at September 2, 1995 as compared to $21.0 million at June 1, 1996 and $24.4
million at August 31, 1996.
Prior to the consummation of this offering, the Company intends to enter
into the Amended Credit Facility which will provide the Company with a maximum
borrowing availability of $30.0 million. The entire $30.0 million of revolving
credit will be available for borrowing by the Company upon consummation of
this offering to fund working capital needs and acquisitions. Interest on
amounts borrowed under the Amended Credit Facility will bear interest, at the
Company's option, at either the Bank's Base Rate or at LIBOR plus an
applicable margin, depending upon the Company's earnings. All obligations
under the Amended Credit Facility will be required to be repaid by June 30,
2000. The Amended Credit Facility will contain customary covenants, including,
restrictions on the incurrence of indebtedness and liens, capital
expenditures, certain mergers and acquisitions, certain distributions on the
Company's capital stock and transactions with affiliates. The Amended Credit
Facility will also require that the Company satisfy certain financial
covenants. The ability of the Company to meet its debt service requirements
and to comply with such financial covenants will be dependent upon the
Company's future performance, which is subject to financial, economic,
competitive and other factors affecting the Company, some of which are beyond
its control. The Company's obligations under the Amended Credit Facility will
be secured by a first priority security interest in substantially all of the
assets and properties of the Company, including a pledge of all of the stock
of St. Louis Ostomy and Patient-Care. The Company expects that upon maturity
of the Amended Credit Facility, indebtedness thereunder will be repaid with
borrowings under a replacement credit facility or with proceeds of future
equity or debt financings.
The net proceeds of this offering will be used to repay in full the
Management Notes, the Summit Notes, the St. Louis Note, the Redeemable
Preferred Stock and borrowings under the Credit Facility. See "Use of
Proceeds." As a result, after giving effect to this offering and the
application of the net proceeds therefrom, the Company will have no long-term
indebtedness other than amounts which the Company may reborrow under the
Amended Credit Facility in order to fund working capital and future
acquisitions. In connection with the repayment of this debt, the Company will
write-off approximately $162,000 of deferred financing costs associated with
the incurrence of the obligations which are being repaid, which write-off will
be reflected in the fourth quarter of fiscal 1996.
The Company made capital expenditures totaling $213,000, $136,000, $293,000
and $229,000 in fiscal 1993, 1994, 1995 and for the thirty-nine weeks ended
June 1, 1996, respectively. The Company expects to make total capital
expenditures of $350,000 in fiscal 1996 and $450,000 in fiscal 1997, primarily
to expand its MIS capabilities. Such amounts may be increased due to
acquisitions and other expenditures required to expand the Company's
operations.
27
<PAGE>
Other expenses of the Company include the cost of carrying inventory. During
the Company's last five fiscal years, the Company had negligible inventory
write-offs. Companies which Suburban may acquire may have product lines or
operating assets which are not readily saleable, which may lead to increased
inventory write-offs in the future. At June 1, 1996, the Company maintained an
investment in inventory of approximately $5.5 million, of which approximately
$526,000 (9.6%) was over 120 days. The Company's inventory turnover was
approximately 11.8 times during fiscal 1995, as compared to 9.8 times in
fiscal 1994, and was 10.9 times for the thirty-nine weeks ended June 1, 1996,
as compared to 10.6 times for the comparable period in fiscal 1995.
Following consummation of this offering, the Company's long-term liquidity
needs will consist of working capital and capital required to fund future
acquisitions. The Company believes that the net proceeds from this offering,
together with funds generated from its operations and borrowings available
under the Amended Credit Facility, will be sufficient to fund its operations
and possible acquisitions through fiscal 1997. In the event the Company
requires additional funds for such purposes, it intends to raise such funds
through future equity or debt financings.
The Company does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
28
<PAGE>
BUSINESS
GENERAL
Suburban is a leading national direct marketing wholesaler of medical
supplies and related products to the home health care industry. The Company
sells products to over 20,000 customers, including: (i) independent suppliers
of home health care products (principally home medical equipment dealers and
local and chain pharmacies); (ii) national home health care chains and
wholesalers; and (iii) managed care organizations. Through its direct sales
and marketing programs, the Company markets a comprehensive selection of more
than 5,000 SKUs, comprised primarily of ostomy, incontinence, diabetic and
wound care products. The Company's primary product lines fulfill its
customers' needs to provide a complete line of products for their home health
care patients. The Company believes that its success is attributable to the
expertise gained from more than 17 years of focus on its product lines and its
commitment to providing superior service and technical support to its
customers. Through its product knowledge and ability to efficiently process a
high volume of orders without a minimum order amount, the Company fills an
important need in the fragmented and diverse home health care industry.
INDUSTRY OVERVIEW
Home Health Care Market. Home health care encompasses a broad spectrum of
both health and social services and products which can be delivered to the
recovering, disabled or chronically ill person in the home. The Company
believes that the following economic and demographic factors will support the
continued growth of home health care and the need for the Company's products:
. Cost-Containment Efforts. Ongoing efforts to reform the health care
system in light of increasing medical costs have resulted in greater cost
sensitivity on behalf of medical providers and payors. Home health care
services are increasingly recognized as viable, cost-effective alternatives
to inpatient health care.
. Patient Preference/Increased Acceptance. Industry research indicates
that the majority of patients prefer home health care to institutional
care, and that patients recover more quickly in the home environment with
the close support of family and friends. In addition, the Company believes
that people today are more health conscious than prior generations, and
that they more readily acknowledge their medical conditions, home health
care needs and their use of the products which the Company markets.
. Technological Advances. Technological advancements enable patients who
previously would have required hospitalization to be treated at home. For
example, advances in wound care products enable many persons with chronic
wounds to be treated at home, rather than in a hospital. The use of
minimally invasive surgical procedures has also reduced the length of
hospital stays and increased the incidence and length of recovery in the
home setting.
. Changing Demographics. The elderly represent the largest and fastest-
growing single consumer segment of health care in the United States. The
Company believes that greater utilization of medical services by the
elderly will drive the growth in the use of medical supplies, including
products used in the home setting.
Home Health Care Products Distribution Channels. The home health care
distribution industry is highly fragmented, with a large number of local and a
limited number of national wholesalers carrying a broad range of products and
serving similar customers. Increasingly, local and regional wholesalers are
consolidating in response to pressure from both customers and manufacturers.
To minimize costs while maintaining high service levels, health care payors
have demonstrated a preference for home health care chains which serve as a
cost-effective "one stop shop" source of a comprehensive range of home health
products and services. Due to the complexity of supporting the wide variety of
home health care products and the geographically dispersed nature of home
health care patients, the Company believes that such national home health care
29
<PAGE>
chains are seeking wholesalers which can quickly and efficiently provide
supplies for all of their patients on a nationwide basis. In addition to such
pressures from their own customers, home health care wholesalers face
increasing pressure from manufacturers which, to reduce their distribution
costs, prefer to sell higher volumes of product to a reduced number of larger
wholesalers. This evolving marketplace provides an opportunity for wholesalers
with national distribution capabilities and sophisticated management
information systems to offer value added services to meet the needs of
manufacturers and customers.
BUSINESS STRENGTHS
The Company believes its position as a leading national direct marketer to
the home health care industry is principally attributable to the following
factors:
National Distribution Network. The Company's distribution network provides
quick, cost-effective delivery on a national basis. This network enables the
Company to meet the needs of national home health care chains and managed care
organizations, as well as local independent suppliers. The Company's MIS is
designed to coordinate inventory with order fulfillment so that the Company is
able to fill orders from any of its five regional distribution centers located
in Holliston, Massachusetts; Atlanta, Georgia; Dallas, Texas; South Bend,
Indiana; and Rancho Cucamonga, California. Its national distribution network
enables the Company to ship over 95% of orders on the day of receipt, with a
product fill rate of over 92%, and to deliver product to 94% of the U.S.
population within 48 hours. Given existing capacity, the Company believes that
it can increase sales significantly without the need to make material
investments in additional facilities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and
Capital Resources."
Superior Customer Service and Technical Support. The Company provides
superior customer service and technical support through extensive training and
systems support. All of the Company's new service representatives receive at
least four continuous weeks of specialized training, two of which precede any
customer contact. In addition, the Company regularly conducts sales and
product training to ensure that all service representatives and marketing and
purchasing staff have current knowledge of products and their applications.
Service representatives are available to offer technical advice and support to
customers to assist them in product selection. Additionally, the Company
performs daily outbound telemarketing to welcome new customers, including
those added through acquisitions, to extend special pricing to customers and
to implement new programs with chain customers. To augment its service
representatives, the Company also employs two registered nurses, including an
enterostomal therapist, who are available to respond to more complex inquiries
about the Company's products. The Company provides a toll-free number and uses
its call center and automated call routing technology to process an average of
2,500 calls per day during the hours of 8:00 a.m. and 7:00 p.m. eastern time,
with service representatives answering 95% of calls within thirty seconds.
Utilizing the Company's proprietary software, service representatives have
access to the customer's profile which includes information on product
availability, prices, order history, shipping address and billing information.
The software assists service representatives in fulfilling customer orders, as
well as in exploring additional, complementary product needs and handling
customer inquiries.
Comprehensive Catalog and Direct Marketing. The Company's direct marketing
program is designed to provide customers with frequent access to the Company's
products. The Company believes that direct marketing is the most cost-
effective and convenient distribution method to reach the Company's customers.
In fiscal 1995, the Company's marketing staff produced in-house and
distributed to the Company's customers over 500,000 pieces of direct mail,
consisting of catalogs, flyers, trade press advertisements and package
inserts. This marketing program is supplemented by direct telemarketing and
frequent "fax specials" which provide its customers timely pricing and
promotional information. Suburban's comprehensive wholesale product catalog
has been continually published since 1977 and is published two or three times
a year. This catalog strengthens the Company's position as a leader in its
markets by serving as a valuable reference source for its products,
facilitating the ordering process and providing a complete description of
products and a listing of manufacturers and prices for all ordering
quantities. In addition, Suburban publishes and sells a retail catalog to its
customers which can be customized with their name and logo for use in
marketing the Company's products. The Company has also developed and maintains
a proprietary customer and product
30
<PAGE>
database which it uses to target its direct mailings. The Company believes
that this database, which contains the names of more than 20,000 customers and
13,000 prospects, provides a significant competitive advantage to Suburban.
This database contains detailed information about each customer, including
purchase history by product, pricing history, shipping address and billing
information.
Focused Product Offering. The Company's broad product offering within its
ostomy, incontinence, diabetic and wound care product categories enables
Suburban to provide "one stop shopping" within these lines. In addition, the
Company sells a large assortment of other products for use in home health care
and which are frequently used by purchasers of its principal products. The
Company continually evaluates new product lines within the home health care
market to meet the evolving needs of its customers and to take advantage of
changes in medical technologies.
Stockless Inventory Program. The Company markets its Stockless Inventory
Program to its customers to enhance their service capability and to promote
their ability to be a "one stop shop" provider to managed care organizations.
This is accomplished by shipping products on the customer's behalf directly to
the customer's patients. The transaction is transparent to the patient as only
the names of the Company's customer and the recipient of the product appear in
the shipping materials received. Because its customers, particularly the
national home health care chains, do not have to carry product inventory, this
program eliminates the customer's inventory costs for the product and reduces
its handling costs, improving the customer's cash flow and space utilization.
The program also provides to the customer the benefits of detailed utilization
reporting and accelerated billing cycles.
GROWTH STRATEGY
The Company's strategy is to expand sales to existing and new customers by
continuing to focus on its business strengths and by implementing the
following growth strategy:
Acquisitions. The Company believes that the consolidation in the home health
care industry provides an opportunity for the Company to expand its business
through acquisitions. The Company intends to enhance its position as a leading
national direct marketing wholesaler by increasing its number of customers,
expanding its geographic markets and product categories and leveraging its
existing infrastructure. As part of this strategy, the Company has completed
the Recent Acquisitions. The Company's acquisition of St. Louis Ostomy enabled
the Company to expand its presence in the Midwest, and the Patient-Care
acquisition enabled the Company to expand its presence in California, as well
as increase its sales of incontinence products. After making an acquisition,
the Company operates the acquired company as a subsidiary for a period of
time, which allows the Company to decide whether to consolidate any of the
operations of the acquired company with those of Suburban. Where appropriate,
the Company will consolidate the operations of an acquired company with its
own and may close facilities of acquired businesses and transfer operations to
the Company's facilities. Consistent with this strategy, the Company closed
the St. Louis Ostomy facility effective July 1, 1996 and fully integrated its
operations with those of Suburban. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation."
Increase Sales to National Home Health Care Chains. With the continued
growth of national home health care chains, the Company has increasingly
focused on marketing to these larger, national companies. The Company has
supply arrangements with 22 national chains, including exclusive supply
arrangements with two of these chains. Sales to national home health care
chains were $6.8 million for fiscal 1995 and $7.6 million for the thirty-nine
weeks ended June 1, 1996, representing approximately 15% of net sales for each
period. Suburban believes its Stockless Inventory Program is particularly
attractive to national home health care chains. Suburban intends to establish
additional relationships with national home health care chains to become their
preferred or exclusive provider of specialty product lines.
Add Contracts with Managed Care Organizations. The Company believes that
there are significant growth opportunities in marketing its products to
managed care organizations. Sales of products to managed
31
<PAGE>
care organizations accounted for less than 1% of the Company's net sales in
fiscal 1995 and increased to 1.9% of the Company's net sales for the thirty-
nine weeks ended June 1, 1996. To meet the cost containment and informational
needs of managed care organizations, the Company has developed a detailed
reporting and utilization system which allows for reduced product acquisition
costs and better management and control of utilization.
Expand Penetration of Independent Supplier Base. The Company believes that
there exists an opportunity to leverage its existing customer relationships
and to expand the number of independent suppliers to which it sells products.
In fiscal 1995, the Company sold products to over 20,000 independent home
medical equipment dealers and local and chain pharmacies. The Company believes
there are approximately 50,000 additional such suppliers to which it does not
currently sell its products. The Company intends to expand its penetration of
the independent provider base by: (i) implementing its acquisition strategy;
(ii) expanding the Company's outbound telemarketing effort, direct mail
coverage and frequent "fax specials" program; and (iii) expanding the
Company's product line offering. See "Business--Customers."
PRODUCTS
The Company supplies more than 5,000 SKUs, primarily in the ostomy,
incontinence, diabetic and wound care categories. These four product
categories accounted for approximately 81.5% of Suburban's net sales for the
thirty-nine weeks ended June 1, 1996.
<TABLE>
<CAPTION>
NET SALES FOR PERCENTAGE
THIRTY-NINE OF NET
WEEKS SALES FOR
ENDED THIRTY-NINE
JUNE 1, 1996 WEEKS NO. OF SKUS
(DOLLARS IN ENDED AT
PRODUCT CATEGORIES THOUSANDS) JUNE 1, 1996 JUNE 1, 1996
- ------------------ ------------- ------------ ------------
<S> <C> <C> <C>
Ostomy.................................. $16,539 33.5% 1,562
Incontinence............................ 9,344 19.0 1,021
Diabetic Care........................... 6,824 13.8 109
Wound Care.............................. 7,503 15.2 671
Other................................... 9,092 18.5 1,665
------- ----- -----
Total................................... $49,302 100.0% 5,028
======= ===== =====
</TABLE>
Ostomy Products. Suburban has developed an expertise in the ostomy market
and markets a broad spectrum of related products, primarily one and two piece
ostomy appliances, accessories, adhesives, pastes, skin barriers and odor
control products. A common reason for ostomy surgery is cancer. An ostomy is
usually conducted when a patient's condition requires that a surgeon
disconnect or remove part or all of the patient's colon. The surgeon
constructs a new elimination route to replace the function of the colon. The
surgeon brings a portion of the patient's intestine through the abdominal
wall, folds it over, and sutures it to the skin, forming a stoma. The stoma
provides an exit for waste material that is drained into a disposable pouch,
commonly referred to as an ostomy appliance. Ostomy appliances come in
numerous shapes and sizes, including one-piece and two-piece models, and
reusable or disposable systems. Depending on the manufacturer and the system,
patients may replace their ostomy dressing as frequently as daily, or as
infrequently as once per week.
According to a leading industry source, in 1995 there were an estimated
750,000 to 1,000,000 ostomates (persons with an ostomy) living in the U.S. and
Canada. Based upon industry data, the Company estimates that in 1996 the
wholesale market for ostomy and related products in the U.S. was approximately
$228.0 million. Industry sources estimate that there are approximately 95,000
ostomy surgeries each year, 60% resulting in temporary stomas, which typically
range from one to six months, and 40% resulting in permanent stomas. In
response to its customers' individual needs and preferences, the Company
offers a large number of SKUs within the ostomy category which the Company
believes acts as a barrier to entry to those competitors unable to stock a
complete assortment of these products on a cost-effective basis.
32
<PAGE>
The market for ostomy products is closely related to that for
incontinence/urological and wound/skin care products. Due to the nature of
their condition, ostomates commonly purchase incontinence products in
conjunction with ostomy supplies. In addition, ostomates also purchase wound
care products. Since the fecal discharge has not been subject to enzyme
neutralization, which would normally occur in the colon, the area surrounding
the stoma can become irritated and damaged if left unprotected, and therefore
must be cared for as a wound.
Incontinence Products. The Company markets a broad selection of incontinence
and urological products, including disposable and reusable adult diapers and
undergarments, irrigation trays, intermittent and external catheters, and
drainage and leg bags. According to industry statistics, urinary incontinence
("UI") affects 15%-30% of non-institutionalized persons over the age of 60. UI
can be caused by pathologic, anatomic, or physiologic factors affecting the
urinary tract as well as by external factors. The UI market is generally
segmented into three distinct usage categories--light, moderate and severe.
The severely incontinent tend to use 50% more product than either other
segment and are usually older than those in the other two categories. The
severely incontinent generally prefer to purchase in an easy and discreet
manner, and generally purchase in case quantity rather than by the package.
Diabetic Care Products. The American Diabetes Association estimates that
there were 11.0 million diabetics in the U.S., 1.1 million of whom must test
themselves four to seven times daily to control the potentially degenerative
effects of diabetes. The Company markets a broad selection of products for the
treatment of diabetes, including test strips, blood-glucose meters, lancets
and accessories. Based on the American Diabetes Association's estimates and
the average price of monitoring devices prevailing in the market, the Company
estimates that the annual wholesale market for blood glucose monitoring
products will be approximately $1.4 billion in calendar 1996.
Wound Care Products. According to industry sources, approximately five
million Americans suffered from chronic wounds in 1995 that required wound
care. Based on industry statistics, the Company believes that the total U.S.
market for wound care and related products of the type marketed by the Company
was approximately $400 million in 1995. Wound care products marketed by the
Company include traditional tapes, gauze, bandages and sponges and advanced
dressings such as hydrocolloid, calcium alginates, hydrogel and transplant
dressings. The most common types of treatable chronic wounds are venous stacis
ulcers, pressure sores, vessel disease wounds, surgery wound breakdown, spinal
injury wounds, burns as a result of radiation treatment and chemical wounds,
usually resulting from chemotherapy. Since wound treatment programs have
improved technologically and become more individualized, the number of SKUs
which the Company carries relating to wound care has increased to 671 SKUs as
of June 1, 1996.
Other Products. The Company sells a large assortment of products for home
health care other than those in its principal four product categories. These
products are frequently ordered by its customers and include respiratory,
convalescent care, skin care, home diagnostic and enteral feeding products.
The Company continually evaluates new product categories within the home
health care market to meet the evolving needs of its customers and to take
advantage of changes in medical technologies.
CUSTOMERS
The Company's three market segments consist of over 20,000 customers,
including: (i) independent suppliers of home health care products, principally
home medical equipment dealers and local and chain pharmacies; (ii) national
home health care chains and wholesalers; and (iii) managed care organizations.
Sales to independent suppliers, national home health care chains and
wholesalers and managed care organizations accounted for approximately 86.4%,
12.9% and 0.7%, respectively, of net sales in fiscal 1995, and 83.0%, 15.2%
and 1.8%, respectively, of net sales for the thirty-nine weeks ended June 1,
1996. While the number of independent home medical equipment dealers and
pharmacies continues to decline due to consolidation, the Company continues to
add new customers in this market. Of Suburban's broad customer base, only two
customers accounted for more than 1% of the Company's net sales for each of
fiscal 1995 and the thirty-nine
33
<PAGE>
weeks ended June 1, 1996, and the twenty largest customers accounted, in the
aggregate, for less than 13.1% and 16.2% of net sales for fiscal 1995 and for
the thirty-nine weeks ended June 1, 1996, respectively. See "Business--Sales
and Marketing."
SALES AND MARKETING
The Company's direct marketing program is designed to provide its customers
with frequent exposure to the Company's comprehensive product categories on a
cost-effective basis. The Company's direct marketing program consists of the
following components: (i) a wholesale catalog for customer orders; (ii) a
retail catalog sold to customers for their use as a marketing tool; (iii)
monthly flyers; (iv) frequent "fax specials" to targeted customer segments;
(v) package inserts; (vi) general advertising; (vii) trade press literature;
and (viii) trade show materials. The components of this program enable the
Company to determine the market acceptance of new products prior to the
Company making a significant inventory investment or including such products
in its catalog. The Company continually evaluates these direct marketing
components to arrive at the optimal mix of marketing techniques.
The Company's comprehensive wholesale catalog has been continually published
since 1977 and is published two or three times a year. This catalog
strengthens the Company's position as a leader in its markets by serving as a
valuable reference tool for the its products, facilitating the ordering
process and providing a complete description of products and listing of
manufacturers and prices for all ordering quantities. In fiscal 1995, the
Company circulated approximately 120,000 wholesale catalogs. Unlike most
wholesalers, the Company produces each component of the direct marketing
program using its in-house marketing staff, which provides the Company with
greater flexibility in timing its production and updates and enables it to
control quality and reduce production costs. The Company has invested in desk-
top publishing hardware and software to produce direct marketing materials and
maintains a library of product photos that can be varied in size and color.
The costs of the Company's direct marketing programs are partially offset by
cooperative advertising support from manufacturers which have their products
included in the catalog.
The Company also publishes and sells a retail catalog to its customers which
can be customized with their name and logo for use in marketing the Company's
products. The Company publishes retail catalogs approximately every eighteen
months and has sold 250,000 of its most recent catalog since its date of
publication. The Company has also developed and maintains a proprietary
customer and prospect database. The Company believes this database, which
contains the names of more than 20,000 customers and 13,000 prospects,
provides a significant competitive advantage to Suburban. The customer
database contains detailed information about each customer, including purchase
history by product, pricing history, shipping address and billing information.
Using this proprietary database, the Company cost-effectively targets its
directed mailings of monthly flyers, frequent "fax specials" and package
inserts.
ORDER ENTRY AND FULFILLMENT; CUSTOMER SERVICE AND TECHNICAL SUPPORT
Order Entry and Fulfillment. Suburban makes purchasing its products as
convenient as possible. All of the Company's service operations are
centralized at its Holliston facility. Because the substantial majority of
orders are placed by telephone, the efficient and timely handling of calls is
key to the Company's business. The Company provides a toll-free number and
uses its call center and automated call routing technology to process an
average of 2,500 calls per day between 8:00 a.m. and 7:00 p.m. eastern time,
with service representatives answering approximately 95% of all calls within
thirty seconds. The Company's 40 service representatives use the Company's
proprietary software to fill customer orders, explore additional product needs
and respond to customer inquiries. Each service representative has access to
the customer's profile, which contains information on product availability,
prices, order history, shipping address and billing information. Service
representatives are also trained and incentivized to cross-sell selected
products, to suggest the purchase of complementary products and to highlight
special product promotions sponsored by manufacturers. Senior service
representatives assume the additional responsibility of managing certain large
34
<PAGE>
volume customers and are incentivized to exceed specified sales and margin
goals. In addition, the Company has a four person team which focuses primarily
on large, national accounts, particularly home health care chains and managed
care organizations. Members of this team visit customer locations, exhibit
products at trade shows and develop and negotiate contracts with leading home
health care companies. Outbound programs involve all 40 representatives and
consist primarily of follow-up with new customers, including those obtained
through acquisitions, national chain customer contact and new program
introductions.
Once an order is entered into the system, a credit check is performed, and
if the credit is approved, the order is electronically sent to the appropriate
distribution center where a packing slip and invoice are printed for order
fulfillment. Approximately 85% of the Company's customers purchase on an open-
account basis, while the remainder are cash on delivery and credit card
purchases. For each of the Company's past five fiscal years, the Company's bad
debt experience has not exceeded 1/2 of 1% of net sales. Each of the Company's
distribution centers is a full-service facility capable of receiving,
preparing and shipping orders for customers. Given existing capacity, the
Company believes that it can increase sales significantly without the need to
make material investments in additional facilities. The Company's order
placement policy includes no minimum requirements and free freight for orders
over a specified dollar amount. The Company's MIS and national distribution
network enable the Company to ship over 95% of orders on the day of receipt,
with a product fill rate of over 92%, and to deliver product to 94% of the
U.S. population within 48 hours. In the event that an item is not in stock at
one distribution center, the Company's MIS immediately discloses to the
service representative the product's availability at an alternate distribution
center. Once the order is filled and packaged, substantially all orders are
shipped by UPS. For orders shipped through the Stockless Inventory Program,
customers are invoiced for merchandise promptly after shipment.
Customer Service and Technical Support
The Company provides its customers with a high level of customer service and
technical support, the principal bases of which are accurate and complete
order fulfillment and prompt product delivery. All new service representatives
receive at least four weeks of consecutive, specialized training, two of which
precede any customer contact. Thereafter, service representatives regularly
receive at least three hours per week of sales and product training. In
addition to in-house training, sales representatives regularly receive from
manufacturers technical training regarding various products. To augment its
service representatives, the Company employs two registered nurses, including
an enterostomal therapist, who are accessible to respond to more complex
customer inquiries regarding the Company's products.
The Company markets its Stockless Inventory Program to all its customers to
enhance their service capability and to promote their ability to be a "one
stop shop" provider. This is accomplished by shipping products on the
customer's behalf directly to the customer's patients. The transaction is
transparent to the patient as only the names of the Company's customer and the
recipient of the product appear in the shipping materials received. Because
the customer does not have to carry product inventory, this program eliminates
the customer's inventory costs for these products and reduces its handling
costs, improving the customer's cash flow and space utilization. The Stockless
Inventory Program also enables both the Company and the customer to record a
sale at the time the order is shipped by the Company. The Company shipped 7.6%
and 8.4% of its net sales through its Stockless Inventory Program for fiscal
1995 and the thirty-nine weeks ended June 1, 1996, respectively. National home
health care chains have been the most frequent users of the Stockless
Inventory Program.
With the Stockless Inventory Program, the Company also provides additional
value-added services for its larger customers, such as detailed reporting with
respect to the patient's payor and clinician as well as the products shipped
to the patient's home. This type of in-depth reporting is particularly helpful
in managed care settings where there is frequently limited data available on
utilization and patient populations of ostomy, diabetic and incontinent
members. Within this reporting system is a Medicare compatibility database
that assists the customer with its billing efforts. While the Company does no
third party billing, it does have an extensive support database that ties all
5,000 SKUs for which reimbursement is available to the correct Health
35
<PAGE>
Care Financing Administration code and reimbursement information. This is
particularly helpful to suppliers under on-going pressure to manage costs.
MANAGEMENT INFORMATION SYSTEMS
The Company operates a sophisticated proprietary management information
system that allows centralized management of key functions, including: (i)
accounts receivable and inventory management; (ii) communication links between
distribution centers; (iii) customized customer reporting; (iv) purchasing;
(v) pricing; (vi) order entry and fulfillment; (vii) mail list management; and
(viii) the preparation of daily management reports which provide timely
information regarding key aspects of the business. The system enables the
Company to ship customer orders on a same-day basis and respond to order
changes and supports a high level of customer service. See "Management
Discussion and Analysis of Financial Results and Operations--Liquidity and
Capital Resources."
PURCHASING
The Company purchases products from over 200 manufacturers and regularly
evaluates its relationships and considers alternative suppliers to ensure
competitive costs and product quality. The Company's top ten manufacturers
accounted for approximately 67.2% and 65.1%, of the Company's total purchases
in fiscal 1995 and the thirty-nine weeks ended June 1, 1996, respectively.
Three of these manufacturers, Hollister Incorporated, Convatec, a division of
Bristol Meyers Squibb, and Lifescan, Inc., a subsidiary of Johnson & Johnson,
accounted for 18.5%, 15.7% and 9.7%, respectively, of the Company's total
purchases in fiscal 1995. These three manufacturers accounted for 18.6%, 15.6%
and 7.3%, respectively of the Company's total purchases for the thirty-nine
weeks ended June 1, 1996, as compared to 18.5%, 15.9% and 9.6%, respectively,
for the thirty-nine weeks ended June 3, 1995. The Company is able to achieve
volume discounts, rebates and promotional allowances from manufacturers by
providing significant value added services through marketing support and
information management.
While the Company has contracts with seven of its top ten manufacturers, it
does not have contracts with the majority of its manufacturers, and instead
relies on terms contained in purchase orders. As a result, the Company may be
subject to unanticipated changes in its arrangements with manufacturers,
including pricing, minimum volume and dollar requirements, return policies and
promotional allowances. Where the Company has a contract with a manufacturer,
it is typically of short duration with a limited number of terms. See "Risk
Factors--Dependence on Manufacturers."
The Company's purchasing function is centralized at its corporate
headquarters in Holliston, Massachusetts and includes a manager and four
buyers, each of whom is responsible for approximately 50 vendor relationships,
plus expediting special orders. Each buyer's performance is measured
periodically against goals set for inventory turns, service level and gross
margins. Purchases from the Company's primary vendors occur on a weekly basis,
while purchases from smaller vendors occur bi-weekly or on an as needed basis.
Forward purchasing decisions are made on a selected, limited basis, such as
when the price discount exceeds the cost of carrying incremental inventory.
Forward purchasing typically is a function of expectations of price increases,
taking advantage of promotions and return on the Company's invested capital.
Purchasing is closely tied to the inventory management controls of the
Company. Due to the Company's effective inventory management, the Company's
inventory write-offs during the last five fiscal years have been negligible.
COMPETITION
Suburban faces intense competition from a variety of local, regional and
national wholesalers. In addition to home health care wholesalers, Suburban's
competition includes drug wholesalers and distributors to hospitals and long
term care providers. Most of the Company's products are available from several
sources, and the Company's customers often have relationships with several
wholesalers. Since barriers to entry in the
36
<PAGE>
home health care distribution industry are relatively low, there is
substantial risk that current competition will expand their market presence
and new competitors will enter the market. Certain of the Company's current
competitors have substantially greater capital resources, sales and marketing
experience and distribution capabilities than the Company. The ongoing
consolidation of home health care wholesalers could result in existing
competitors improving their market positions through acquisitions or joint
ventures. In addition, the Company faces competition from manufacturers that
may increase their efforts to sell directly to suppliers, thus bypassing
wholesalers such as Suburban. In response to competitive pressures from
current or future competitors, the Company may be required to lower selling
prices to maintain or increase market share. Such measures could have a
material adverse effect on the results of operations or the financial
condition of the Company. See "Management Discussion and Analysis of Financial
Condition and Results of Operation."
The Company competes on the basis of its: (i) order and delivery
capabilities; (ii) product knowledge; (iii) product breadth; (iv) technical
support; (v) customer relationships with service representatives; and (vi)
price. The Company believes that its customers base their purchasing decisions
upon such factors and that the Company competes favorably with respect to each
of these factors. In particular, the Company believes that it differentiates
itself from other wholesalers with which it competes on the basis of a high
fill rate of its product line, knowledgeable service representatives, the
Stockless Inventory Program and its MIS capabilities.
GOVERNMENTAL REGULATION
Suburban is subject to regulation under the Federal Food, Drug and Cosmetic
Act, as well as under certain state regulations, because of its storage and
handling of certain medical devices and products. The amount of sales of
products that are subject to such regulation is not material to the Company's
results of operations. The Company believes that it is in compliance with all
applicable federal and state requirements and that it possesses all licenses
and permits required for the conduct of its business. In addition, certain
licenses and permits of the Company prohibit a change of control without
relevant regulatory approval.
PRODUCT LIABILITY INSURANCE
The Company maintains product liability insurance of $10.0 million, and is
named as an additional insured under policies maintained by approximately 95%
of its manufacturers whose products represent approximately 98% of the
Company's net sales. While the Company believes that such coverage will be
adequate, no assurance can be given that such coverage will be adequate to
cover all future claims or will be available in adequate amounts or at a
reasonable cost or that such indemnification agreements will provide adequate
protection to the Company.
STATE SALES TAX
The Company collects sales tax or other similar tax only with respect to
those states in which the Company maintains facilities. Although various other
state agencies have attempted to impose on direct marketers the burden of
collecting state sales taxes on the sale of products shipped to residents of
these states, no state has initiated any action to collect state sales taxes
from the Company. The Company does not believe that state sales tax collection
is material to the Company, in part because substantially all products
marketed by the Company are purchased for resale and in part because a large
portion of its products are exempt from state sales tax.
PROPRIETARY RIGHTS
The Company holds a service mark for the name "Home Health Direct" which it
uses in certain of its direct marketing programs.
EMPLOYEES
As of August 31, 1996, the Company had 159 full time employees and 18 part
time employees. There are 62 employees within the sales, marketing and
customer service area, 45 employees within the financial, administrative and
purchasing area, and 70 employees within the distribution, operations and MIS
area.
37
<PAGE>
The Company considers its employee relations to be good. None of the
Company's employees are covered by a collective bargaining agreement.
PROPERTIES
The Company currently conducts its operations from six leased distribution
centers. See Note 7 to Consolidated Financial Statements. The Holliston,
Massachusetts location also serves as the Company's corporate headquarters.
The Company's leases include:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE EXPIRATION DATE
-------- -------------- ------------------
<S> <C> <C>
Holliston, MA(1)......................... 58,000 December 31, 2006
Atlanta, GA (1).......................... 48,000 August 4, 2006
Dallas, TX............................... 24,000 July 1, 2001
South Bend, IN(1)........................ 30,000 July 31, 2003
Rancho Cucamonga, CA..................... 23,000 September 30, 2000
Santa Fe Springs, CA..................... 33,500 May 31, 1998
</TABLE>
- --------
(1) See "Management--Certain Transactions."
LEGAL MATTERS
The Company is party to certain claims and litigation in the ordinary course
of business. The Company is not involved in any legal proceeding that it
believes will result, individually or in the aggregate, in a material adverse
effect on its financial condition or results of operations.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Herbert P. Gray......... 62 Chairman of the Board of Directors; Chief Executive Officer
Donald H. Benovitz...... 55 President; Chief Operating Officer and Director
Stephen N. Aschettino... 46 Vice President; Chief Financial Officer and Treasurer
Patrick Bohan........... 40 Vice President--Sales and Marketing
John G. Manos........... 40 Vice President--MIS and Operations
Martin J. Mannion....... 37 Director
Joseph F. Trustey....... 34 Director
</TABLE>
Herbert P. Gray has served as the Chairman of the Board of Directors and
Chief Executive Officer of Suburban since 1979. Mr. Gray, who was a practicing
pharmacist before forming Suburban's predecessor in 1962, has delivered
numerous seminars and lectures in the home health care industry.
Donald H. Benovitz has served as Suburban's President and Chief Operating
Officer since 1987. Prior to that time, Mr. Benovitz, a pharmacist with over
25 years experience in the distribution of health care products, worked for
Medi-Mart Drug Stores, a regional drug store chain, serving in various
capacities, including Vice President of Corporate Pharmacy Operations and
President.
Stephen N. Aschettino has served as Chief Financial Officer of Suburban
since 1991 and as Vice President and Treasurer since 1992. Prior to that time,
he served as Vice President and General Manager for Woodcraft Supply Company,
a national direct marketer and distributer of specialty woodworking tools and
equipment.
Patrick Bohan has served as Vice President--Sales and Marketing since 1990.
Prior to that time, Mr. Bohan was the Vice President-Sales and Marketing for
H.L. Moore, a national direct marketing wholesaler of pharmaceuticals, over-
the-counter and home health care products.
John G. Manos has served as Vice President--MIS and Operations since 1992.
Prior to that time, he served as Director of Management Information Systems at
National Medical Care, a division of W.R. Grace.
Martin J. Mannion has served as a director of the Company since July 1995.
Since 1985, Mr. Mannion has been employed by Summit Partners, where he has
been a general partner since 1987. Mr. Mannion currently serves and has served
as a director of numerous private companies.
Joseph F. Trustey has served as a director of the Company since July 1995.
Mr. Trustey has been employed by Summit Partners since June 1992, where he has
been a Vice President from December 1994 to January 1996 and as general
partner since January 1996. Prior to that time, Mr. Trustey was a strategy
consultant with Bain & Co., Inc., a management consultant firm. Mr. Trustey
also serves as a director of Home Health Corporation of America, Inc.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the total
compensation paid or accrued by the Company, for services rendered during the
fiscal year ended September 2, 1995, to the Company's Chief Executive Officer
and certain other officers whose total 1995 salary and bonus exceeded $100,000
during such year.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- ------------
OTHER SECURITIES
FISCAL ANNUAL UNDERLYING ALL OTHER
NAME YEAR SALARY ($) BONUS ($) COMPENSATION OPTIONS (#) COMPENSATION ($)(1)
- ---- ------ ---------- --------- ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Herbert P. Gray......... 1995 324,722(2) -- -- 186,000 --
Donald H. Benovitz...... 1995 192,907(2) -- -- 124,000 --
Stephen N. Aschettino... 1995 115,000 -- -- 155,000 --
Patrick Bohan........... 1995 130,000 -- -- -- --
John Manos.............. 1995 100,000 300,000(3) -- 155,000 --
</TABLE>
- --------
(1) Does not include other benefits that did not exceed in the aggregate
$50,000 or 10% of total annual salary and bonus reported for the named
executive officer.
(2) Does not include compensation paid to the spouses of Messrs. Gray and
Benovitz, each of whom is an employee of the Company.
(3) Includes a $300,000 bonus paid by the Company to Mr. Manos at the time of
the Recapitalization with proceeds from capital contributions from certain
stockholders.
The following table sets forth certain information regarding the option
grants made during the fiscal year ended September 2, 1995, to each of the
Company's officers named in the Summary Compensation Table above:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)(3)
------------------------------------------------------------- ---------------------
NUMBER OF
SECURITIES
UNDERLYING PERCENT OF TOTAL
OPTIONS OPTIONS GRANTED TO EXERCISE OR BASE
GRANTED EMPLOYEES IN FISCAL PRICE ($) PER EXPIRATION
NAME (1) (#) YEAR (%) SHARE (1), (2) DATE 5% ($) 10% ($)
- ---- ---------- ------------------- ---------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Herbert P. Gray......... 186,000 30% .81 June 30, 2005 3,480,060 5,978,000
Donald H. Benovitz...... 124,000 20% .81 June 30, 2005 2,320,040 3,985,360
Stephen N. Aschettino... 155,000 25% .81 June 30, 2005 2,900,050 4,981,700
John Manos.............. 155,000 25% .81 June 30, 2005 2,900,050 4,981,700
</TABLE>
- --------
(1) After giving effect to the Company's 50 for 1 split of its Common Stock
on April 10, 1996 and its 3.1 for 1 split of Common Stock on June 21,
1996.
(2) All options were granted at exercise prices equal to the fair market
value of a Common Stock on the date of grant.
(3) Potential realizable value is based on the difference between the option
exercise price and the initial public offering price of the Common Stock
(based upon an assumed initial offering price to the public of $13.00)
multiplied by the number of shares of Common Stock underlying the option.
These assumed annual rates of appreciation were used in compliance with
the rules of the Securities and Exchange Commission and are not intended
to forecast future price appreciation of the Common Stock or to take into
account the immediate increase in potential realizable value that will
occur. The actual value realized from the options could be higher or lower
than the values reported above, depending on the future appreciation or
depreciation of the Common Stock during the option period and the timing
of exercise of the options.
40
<PAGE>
Year End Option Table. The following table sets forth information regarding
exercise of options and the number and value of options held at September 2,
1995, by each of the officers named in the Summary Compensation Table above.
No options were exercised during fiscal 1995 by such executives.
AGGREGATE UNEXERCISED OPTIONS AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED
SHARES AT IN-THE-MONEY OPTIONS
ACQUIRED YEAR END (#) AT YEAR-END ($)(1)
ON VALUE -------------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Herbert P. Gray......... -- -- 6,211 179,789 75,712 2,191,627
Donald H. Benovitz...... -- -- 4,141 119,859 50,478 1,461,081
Stephen N. Aschettino... -- -- 5,176 149,824 63,095 1,826,354
Patrick Bohan........... -- -- -- -- -- --
John Manos.............. -- -- 5,176 149,824 63,095 1,826,354
</TABLE>
- --------
(1) Value is based on the difference between the option exercise price and
the initial public offering price of the Common Stock (based upon an
assumed initial offering price to the public of $13.00) multiplied by the
number of shares of Common Stock underlying the option. No market existed
for the Common Stock prior to this offering.
EMPLOYMENT AGREEMENTS
Effective July 3, 1995, the Company entered into five year employment
agreements with each of Messrs. Gray, Benovitz, Aschettino, Bohan and Manos.
Mr. Gray's agreement provides for his employment as Chairman of the Board of
Directors and Chief Executive Officer at a base annual salary of $150,000. Mr.
Benovitz' agreement provides for his employment as President and Chief
Operating Officer of Suburban at a base annual salary of $195,000. Mr.
Aschettino's agreement provides for his employment as Vice President, Chief
Financial Officer, Treasurer and Clerk of Suburban at a base annual salary of
$115,000. Mr. Bohan's agreement provides for his employment as Vice
President--Sales and Marketing of Suburban at a base annual salary of
$130,000. Mr. Manos' agreement provides for his employment as Vice President--
MIS and Operations of Suburban at an annual base salary of $100,000. Each of
the foregoing agreements provides for annual salary increases (i) to reflect
increases in the applicable consumer price index and (ii) in such other
amounts, if any, as determined by the Compensation Committee. In addition,
Messrs. Gray, Benovitz, Aschettino, Bohan and Manos are eligible to receive
bonuses upon the achievement by the Company of certain financial targets
determined by the Compensation Committee. Each of the employment agreements
extends until July 1, 2000, with annual renewals thereafter unless terminated
prior thereto in accordance with their respective terms.
STOCK OPTION PLAN
Under the Stock Option Plan, which was adopted in July 1995, 665,570 shares
are reserved for issuance upon exercise of stock options. The Stock Option
Plan is designed to attract, retain and motivate key employees and investors.
The Board of Directors is responsible for the administration and
interpretation of the Stock Option Plan and is authorized to grant options
thereunder to all eligible employees and directors of the Company, except that
no director who is not also an employee of the Company is eligible to receive
incentive stock options (as defined in Section 422 of the Internal Revenue
Code).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee was established July 3, 1995 and currently
consists of Messrs. Gray, Mannion and Trustey. Mr. Gray participated in
deliberations of the Compensation Committee regarding compensation of other
executive officers, but did not participate in deliberations relating to his
own compensation. See "Certain Transactions."
41
<PAGE>
LIMITATION OF LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has entered into separate indemnification agreements with its
directors and officers. These agreements require the Company, among other
things, to indemnify the directors and officers of the Company against certain
liabilities that may arise by reason of their status or service as directors
or officers (other than liabilities arising from actions not taken in good
faith or in a manner the indemnitee believed to be opposed to the best
interests of the Company or arising from certain other actions taken by the
indemnitee), to advance their expenses incurred as a result of any proceedings
against them as to which they could be indemnified and to obtain directors'
insurance if available on reasonable terms. The Company believes that the
indemnification agreements are necessary to attract and retain qualified
persons as directors and officers. The Articles of Organization limit the
personal liability of directors to the Company, and the Bylaws provide that
the Company shall indemnify the Company's directors and officers, in each
case, to the full extent permitted by the Massachusetts General Laws. See
"Description of Capital--Certain Articles of Organization, Bylaws and
Statutory Provisions Affecting Stockholders."
42
<PAGE>
CERTAIN TRANSACTIONS
RECAPITALIZATION
The Company completed the Recapitalization on July 3, 1995 to provide
liquidity to Messrs. Aronson, Gray, Benovitz, Aschettino and Bohan
(collectively, the "Recapitalization Participants"). By aligning the
organizational and capital structure of the Company with that of other private
companies with professional investors, the Recapitalization was intended to
allow the Company to (i) attract experienced and qualified outside directors
such as Mr. Trustey and Mr. Mannion, who could assist management with
operational as well as strategic advice, and (ii) facilitate raising
additional capital, if necessary, by making the Company more attractive to
other professional investors who would not ordinarily invest in a closely-held
company. Pursuant to the Recapitalization, the Company redeemed an aggregate
of 70.0% of the then outstanding shares of Common Stock from the
Recapitalization Participants for total consideration of $29,500,000, which
was allocated to the Recapitalization Participants in the following amounts:
Mr. Gray ($11,800,000), Mr. Aronson ($11,800,000), Mr. Benovitz ($4,425,000),
Mr. Aschettino ($737,500) and Mr. Bohan ($737,500). Of such amount,
$27,000,000 was paid in cash and $2,500,000 was paid in Management Notes. Each
of the Recapitalization Participants received a pro rata share of the cash and
note consideration. To finance these redemptions and related expenses, the
Company: (i) issued an aggregate of $6,650,000 of Redeemable Preferred Stock
to Summit Ventures ($6,323,544), Summit Investors ($129,052) and The Bear
Stearns Companies, Inc. ("BSC") ($197,404), an affiliate of which served as
the Company's financial advisor in connection with the Recapitalization; (ii)
issued an aggregate of $100,000 of Common Stock at a price of $.02 per share
to Summit Ventures ($83,113), Summit Investors ($1,948), Summit Debt Fund
($12,343) and BSC ($2,596); (iii) issued an aggregate of $6,750,000 in
principal amount of Summit Notes to Summit Debt Fund ($6,615,000) and Summit
Investors ($135,000); and (iv) borrowed $13,500,000 under the Credit Facility.
See "Use of Proceeds." Messrs. Mannion and Trustey, who are general partners
of Summit, became members of the Board of Directors at the time of the
Recapitalization.
In connection with the Recapitalization, the Company entered into a
Shareholders' Agreement dated July 3, 1995 (the "Shareholders' Agreement")
which will be terminated upon consummation of this offering, and a
Registration Rights Agreement dated July 3, 1995 (the "Registration Rights
Agreement") with Summit and the Recapitalization Participants. The
Shareholders' Agreement provides for, among other things, restrictions on
transfer of shares, rights of first refusal, rights of participation in sales,
take along rights and election of directors. Pursuant to the Registration
Rights Agreement, holders of at least 25% of the shares of Common Stock
subject to the Registration Rights Agreement may require the Company to effect
the registration of shares of Common Stock held by such parties for sale to
the public on any two occasions, subject to certain conditions and
limitations. In addition, under the terms of the Registration Rights
Agreement, if the Company proposes to register any of its securities under the
Securities Act whether for its own account or otherwise, the parties to the
Registration Rights Agreement are entitled to receive notice of such
registration and to include their shares therein, subject to certain
conditions and limitations. The Company has agreed to pay the fees, costs and
expenses of any registration effected on behalf of the parties to the
Registration Rights Agreement (other than underwriting discounts and
commissions.) All rights to register Common Stock in connection with this
offering have been waived by the parties to the Registration Rights Agreement.
See "Shares Eligible for Future Sale--Registration Rights."
In connection with the Recapitalization, the Recapitalization Participants
made certain representations and warranties to Summit with respect to the
business, operations and financial condition of the Company, and agreed to
indemnify Summit for losses incurred as a result of a breach of such
representations and warranties; provided that the aggregate liability of the
Recapitalization Participants shall not exceed $2.5 million. Such
indemnification obligations will expire upon the earlier of receipt of
financial statements for the Company's fiscal year ended August 31, 1996 and
December 31, 1996; provided that such obligations will continue with respect
to certain matters, including certain tax matters, until expiration of the
applicable statute of limitations. Summit has agreed to assign to the Company
its rights to indemnification upon the effectiveness of this offering.
43
<PAGE>
Also in connection with the Recapitalization, Messrs. Gray and Aronson each
made a $150,000 capital contribution to the Company which was used to pay a
one-time bonus to Mr. Manos.
AFFILIATED LEASES
The Company leases a distribution center in Atlanta, Georgia from the
Suburban Grayson Atlanta Partnership, a Georgia general partnership in which
Messrs. Gray and Aronson each has a 50.0% interest. In May 1995, the Company
exercised an option to renew the lease covering this property through August
4, 2006. The monthly rent payable under the lease is $13,333. See "Business--
Properties."
The Company leases its distribution center in Holliston, Massachusetts from
the GBA Realty Trust a Massachusetts realty trust in which Messrs. Gray,
Aronson and Benovitz have a 40%, 40% and 20% interest, respectively. This
lease, which expires in December 31, 2006, provides for monthly rental
payments equal to 110% of the amounts due and payable each month under a
promissory note between GBA Realty Trust and United of Omaha Life Insurance,
provided that the minimum annual rent is $329,037. The rent paid to GBA Realty
Trust was $330,000 during fiscal 1995 and $247,500 for the thirty-nine weeks
ended June 1, 1996. Such promissory note is the obligation solely of GBA
Realty Trust and is not guaranteed by, or otherwise an obligation of, the
Company. See "Business--Properties."
In addition, the Company leases its South Bend, Indiana distribution center
from GBA Realty Corp., an Indiana corporation in which Messrs. Gray, Aronson,
Benovitz, Aschettino and Bohan and Mr. Doug Gray own 20%, 30%, 20%, 10%, 10%,
and 10%, respectively, of the outstanding capital stock. The lease, which
expires on July 31, 2003, provides for an annual rent of $108,000, subject to
periodic adjustments, at the option of GBA Realty Corp. The rent paid to GBA
Realty Corp was $108,000 in fiscal 1995 and $81,000 for the thirty-nine weeks
ended June 1, 1996.
The Company believes that the terms of the leases with each of the
affiliated real estate entities are comparable to those which would be
available from an unaffiliated entity on the basis of an arms-length
negotiation.
OTHER RELATED PARTY ARRANGEMENTS
The Company provides general business insurance to GBA Realty Corp., GBA
Realty Trust and Suburban Grayson Atlanta Partnership under its umbrella
policy.
LIFE INSURANCE POLICIES
On June 30, 1995, life insurance policies in the amount of $2.5 million for
each of Messrs. Gray and Aronson, which had previously been carried by the
Company were transferred to each of them. In the event of either individual's
death, the proceeds of this insurance were to be used to repurchase the
individual's stock in the Company at book value. In return for the transfer of
the insurance, the executives exchanged certain notes payable to them from the
Company and issued notes payable to the Company of $129,520, an amount equal
to the difference between the old notes payable and the cash surrender value
of the insurance, plus prepaid insurance premiums at the date of transfer.
These notes were paid in full by Messrs. Gray and Aronson on September 2,
1995. See Note 11 to the Consolidated Financial Statements.
The Company maintains life insurance policies in the amount of $1.0 million
on each of Messrs. Gray and Benovitz. Under the terms of the Credit Facility,
in the event of either individual's death, the proceeds from the applicable
policy must be used to pay down outstanding principal under Credit Facility.
AUTOMOBILE PURCHASE
In December, 1995, Mr. Gray bought an automobile from the Company for a
purchase price of $20,000.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding Common Stock as of September 1, 1996 and
as adjusted to reflect the sale of the Common Stock offered hereby by: (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock; (ii) each director or executive officer of
the Company who beneficially owns any shares, of Common Stock; and (iii) all
directors and executive officers of the Company as a group. Except as otherwise
indicated, the persons listed below have sole voting and investment power with
respect to all shares of Common Stock owned by them.
<TABLE>
<CAPTION>
PERCENT AFTER
NAME OF BENEFICIAL OWNER(1)(2) NUMBER OF SHARES(1) PERCENT BEFORE OFFERING OFFERING
- ------------------------------ ------------------- ----------------------- -------------
<S> <C> <C> <C>
Herbert P. Gray......... 669,624 10.7% 6.6%
Melvin Aronson(3)....... 372,000 6.0% 3.7%
Donald H. Benovitz(4)... 312,083 5.0% 3.1%
Stephen N. Aschettino... 87,854 1.4% *
Patrick Bohan(5)........ 129,166 2.1% 1.3%
John Manos.............. 41,354 * *
Summit(6)(7)............ 4,227,332 67.9% 41.8%
Martin J.
Mannion(6)(7).......... 4,227,332 67.9% 41.8%
Joseph F.
Trustey(6)(7).......... 4,227,332 67.9% 41.8%
All directors and execu-
tive officers as a
group (7 persons)...... 5,426,080 84.7% 52.6%
</TABLE>
- --------
* Less than one percent
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission (the "Commission") and includes general
voting power or investment power with respect to securities. Shares of
Common Stock subject to options and warrants currently exercisable or
exercisable within sixty (60) days of June 14, 1996 are deemed outstanding
for computing the percentage of the person holding such options, but are
not deemed outstanding for computing the percentage of any other person.
Except as otherwise specified below, the persons named in the table above
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(2) Unless otherwise indicated, the address of each of the beneficial owners
identified is 75 October Hill Road, Holliston, MA 01746. See "Management--
Executive Officers and Directors," "Management--Employment Agreements and
Certain Transactions" for a discussion of any material relationship which
any person named in the table has had with the Company for the last three
years.
(3) The address for this stockholder is 25 Dartmouth Drive, Framingham, MA
01701.
(4) Includes 33,634 shares of Common Stock held in separate trusts for two
children of Mr. Benovitz, as to which Mr. Benovitz retains general voting
power and investment power.
(5) Includes options currently exercisable to purchase 82,666 shares of Common
Stock.
(6) Reflects the following shares held by Summit: Summit Ventures (3,607,099.5
shares), Summit Investors (84,546.3 shares) and Summit Debt Fund (535,686.2
shares). Messrs. Mannion and Trustey, as general partners of these funds
may be deemed to be beneficial owners of such shares, but disclaim
beneficial ownership of these shares. Does not reflect the sale of up to
292,500 shares representing one half of the shares subject to the
Underwriters' over-allotment option, which shares may be sold upon the
exercise of such option by the Underwriters and the election of the
Company. In such event, Summit would beneficially own 3,934,832 shares or
38.9% of the outstanding shares of Common Stock.
(7) The address of this stockholder is 600 Atlantic Avenue, Suite 2800, Boston,
MA 02210.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, no par value, and 66,500 shares of Redeemable Preferred Stock,
par value $.01 per share. As of June 1, 1996, an aggregate of 6,223,250 shares
of Common Stock were held of record by fifteen stockholders, and 66,500 shares
of Redeemable Preferred Stock were outstanding and held of record by three
stockholders. The Company will redeem all shares of Redeemable Preferred Stock
upon the consummation of this offering. See "Use of Proceeds." Copies of the
proposed Articles of Organization and Bylaws have been filed as exhibits to
the Registration Statement and are incorporated by reference herein. Prior to
the effectiveness of this offering, the Company will amend its Articles of
Organization to authorize 1,000,000 shares of preferred stock and increase the
number of authorized shares of Common Stock to 40,000,000.
COMMON STOCK
All outstanding shares of Common Stock are, and the shares of Common Stock
offered hereby will be, fully paid and nonassessable. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
voted upon by stockholders and may not cumulate votes. Subject to the rights
of holders of any future series of undesignated preferred stock where defined
which may be designated, each share of the outstanding Common Stock is
entitled to participate equally in any distribution of net assets made to the
stockholders in the liquidation, dissolution or winding up of the Company and
is entitled to participate equally in dividends as and when declared by the
Board of Directors. There are no redemption, sinking fund, conversion or
preemptive rights with respect to the shares of Common Stock. All shares of
Common Stock have equal rights and preferences.
PREFERRED STOCK
The net proceeds of this offering will be used, in part, to redeem all of
the Redeemable Preferred Stock as soon as is practicable after the
consummation of the offering. See "Use of Proceeds." After the consummation of
this offering, the Board of Directors will have the authority, without further
stockholder approval, to issue 1,000,000 shares of preferred stock in one or
more series and to fix the relative rights, preferences, privileges,
qualifications, limitations and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series. The issuance of
preferred stock, while potentially providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of, and
the voting and other rights of the holders of the Common Stock. No shares of
preferred stock will be outstanding immediately following the consummation of
this offering. The Company has no present plans to issue any shares of
preferred stock. See "Risk Factors--Anti-takeover Provisions; Possible
Issuance of Preferred Stock."
CERTAIN ARTICLES OF ORGANIZATION, BYLAWS AND STATUTORY PROVISIONS AFFECTING
STOCKHOLDERS
Classified Board and Other Matters. The Board of Directors will be divided
into three classes, each of which, after a transitional period, will serve for
three years, with one class being elected each year. Under the Massachusetts
General Laws, in the case of a corporation having a classified board of
directors, stockholders may remove a director only for cause. In order for a
stockholder to bring business properly before a meeting of stockholders, such
stockholder must provide the Clerk of the Company sixty days' prior written
notice with respect to a general or special meeting in lieu of annual meeting
of stockholders or ten days' prior written notice with respect to a special
meeting in lieu of annual meeting of stockholders. The Articles of
Organization provide that special meetings of stockholders of the Company may
be called only by the Board of Directors, the Chairman of the Board of
Directors or the President. The Articles of Organization as well as applicable
provisions of the Massachusetts General Law provide that no action required or
permitted to be taken at any annual or special meeting of the stockholders of
the Company may be taken without a meeting, unless the unanimous consent of
stockholders entitled to vote thereon is obtained. The affirmative vote of the
holders of at least 80% of the combined voting power of then outstanding
voting stock of the Company will be required to alter, amend or repeal the
foregoing provisions that might diminish the likelihood that a potential
acquiror
46
<PAGE>
would make an offer for the Common Stock, impede a transaction favorable to
the interest of the stockholders or increase the difficulty of removing Board
of Directors or management. See "Risk Factors--Anti-Takeover Provisions;
Possible Issuance of Preferred Stock."
Chapters 110D and 110F of Massachusetts General Laws. The Company is subject
to the provisions of Chapter 110F of the Massachusetts General Laws, an anti-
takeover law. In general, this statute prohibits a publicly held Massachusetts
corporation with sufficient ties to Massachusetts from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person becomes an interested
stockholder, unless either: (i) the interested stockholder obtains the
approval of the board of directors prior to becoming an interested
stockholder; (ii) the interested stockholder acquires 90% of the outstanding
voting stock of the corporation (excluding shares held by certain affiliates
of the corporation) at the time he becomes an interested stockholder; or (iii)
the business combination is approved by both the board of directors and two-
thirds of the outstanding voting stock of the corporation (excluding shares
held by the interested stockholder). An "interested stockholder" is a person
who, together with affiliates and associates, owns (or at any time within the
prior three years did own) 5% or more of the corporation's voting stock. A
"business combination" includes mergers, stock and asset sales and other
transactions resulting in a financial benefit to the stockholder. Holders of a
majority of the Company's voting stock may at any time amend the Articles of
Organization or Bylaws to elect not to be governed by Chapter 110F, but such
an amendment would not be effective for twelve months after the date of the
amendment and would not apply to a business combination with any person who
became an interested stockholder prior to the date of the amendment.
The Company is also subject to the provisions of Chapter 110D of the
Massachusetts General Laws, entitled "Regulation of Control Share
Acquisitions." This statute provides, in general, that any stockholder who
acquires 20% or more of the outstanding voting stock of a corporation subject
to this statute may not vote that stock unless the stockholders of the
corporation so authorize. In addition, Chapter 110D permits a corporation to
provide in its articles of organization or bylaws that the corporation may
redeem (for fair value) all the shares thereafter acquired in a control share
acquisition if voting rights for those shares were not authorized by the
stockholders or if no control share acquisition statement was delivered. The
Bylaws include a provision which permits the Company to effect such
redemptions. See "Risk Factors--Anti-Takeover Provisions; Possible Issuance of
Preferred Stock."
Directors Liability. The Articles of Organization provide that no director
shall be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for: (i) any breach
of the directors's duty of loyalty to the Company or its stockholders; (ii)
acts or omissions not in good faith or which involve intentional misconduct;
(iii) pursuant to Chapter 156B, Section 61 or Section 62 of The Massachusetts
General Laws; or (iv) any transaction from which such director derives
improper personal benefit. The effect of this provision is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. The limitations
summarized above, however, do not affect the ability of the Company or its
stockholders to seek non-monetary based remedies, such as an injunction or
rescission, against a director for breach of his fiduciary duty nor would such
limitations limit liability under the federal securities laws. The Articles of
Organization provide that the Company shall, to the full extent permitted by
the Massachusetts General Laws as currently in effect, indemnify and advance
expenses to each of its currently acting and former directors, officers,
employees and agents arising in connection with their acting in such
capacities. See "Management--Limitation of Liability; Indemnification of
Directors and Officers."
TRANSFER AGENT
The transfer agent and registrar of the Common Stock is Boston EquiServe
Limited Partnership.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market
sales of shares or the availability of such shares for sale will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts
of Common Stock in the public market may have an adverse impact on such market
price.
Upon consummation of this offering, the Company will have 10,123,250 shares
of Common Stock outstanding, based upon the number of shares outstanding as of
June 1, 1996. Of these shares, the 3,900,000 shares sold in this offering
(4,485,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by "affiliates" of
the Company, as that term is defined under the Securities Act ("Affiliates").
SALES OF RESTRICTED SHARES
There are 6,223,250 shares of Common Stock (the "Restricted Shares"), which
are deemed "restricted securities" under Rule 144 under the Securities Act and
may not be sold unless they are registered under the Securities Act or unless
an exemption, such as the exemption provided by Rule 144, is available. All
Restricted Shares are subject to the agreements with the Underwriters,
pursuant to which certain principal stockholders and executive officers agree
not to sell or otherwise transfer any shares of Common Stock or options to
purchase Common Stock for a period of 180 days following the consummation of
the offering (the "No-Sale Period") described below (the "Agreements with
Underwriters Regarding Restrictions on Sales"). All of these shares may be
eligible for sale in the public market in accordance with Rule 144 under the
Securities Act, subject to the terms of the agreements with Underwriters.
Certain stockholders have the right to have their Restricted Shares registered
by the Company under the Securities Act as described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned Restricted Shares for at least two years, is entitled to sell, within
any three-month period, a number of such shares that does not exceed the
greater of (i) one percent of the then outstanding shares of Common Stock
(approximately 101,233 shares after this offering) or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
the date on which notice of such sale is filed with the Commission. In
addition, under Rule 144(k), a person who is not an Affiliate and has not been
an Affiliate for at least three months prior to the sale and who has
beneficially owned the Restricted Shares for at least three years may resell
such shares without compliance with the foregoing requirements. In meeting the
two and three year holding periods described above, a holder of Restricted
Shares can include the holding periods of a prior owner who was not an
Affiliate. The Commission has proposed to amend the holding periods under Rule
144 by reducing the two year period referred to above to one year, the three
year period referred to above to two years. The proposed amendments have not
yet been adopted by the Commission.
OPTIONS
As of September 1, 1996, options to purchase a total of 626,200 shares of
Common Stock were outstanding. Of these shares, 596,750 shares are subject to
agreements pursuant to which certain of the Company's stockholders agree not
to sell or otherwise transfer their shares of Common Stock for a period of 180
days following the consummation of this offering. Options to purchase the
remaining 29,450 shares were granted to various employees of the Company. An
additional 39,370 shares are available for future grants under the Stock
Option Plan. Pursuant to Rule 701 under the Securities Act, persons who
purchase shares upon exercise of options granted prior to the Company becoming
subject to the provisions of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and which were otherwise granted pursuant to Rule 701 are
entitled to sell such shares in reliance upon Rule 144 commencing 90 days
after the date of this offering without regard to the holding period, volume
limitations or other restrictions of Rule 144, if such persons are not
Affiliates, and without regard to the holding period requirements of Rule 144,
if such persons
48
<PAGE>
are Affiliates. Additionally, the Company intends to file one or more
registration statements on Form S-8 under the Securities Act to register all
shares of Common Stock subject to then outstanding stock options and Common
Stock issuable pursuant to the Stock Option Plan. The Company expects to file
these registration statements promptly following the consummation of this
offering, and such registration statements are expected to become effective
upon filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, subject to the Agreements with
Underwriters Regarding Restrictions on Sale, to the extent applicable. See
"Management."
BANK WARRANT
In connection with the Credit Facility, the Company issued to the Bank the
Bank Warrant. The exercise price of the Bank Warrant is $0.81 per share. The
Bank Warrant grants the Bank the right to cause the Company to redeem the Bank
Warrant upon the repayment in full of all borrowings under the Credit Facility
and expires on January 22, 2006. The difference between the $1.61 fair value
per share at the grant date and the exercise price has been treated as a debt
discount, which is being amortized during the term of the Credit Facility. The
Bank, at any time, may convert the Bank Warrant, in whole or in part, into the
number of shares of Common Stock determined by multiplying the number of
shares subject to the Bank Warrant (for which the conversion right is being
exercised) by a fraction, the numerator of which is the difference between the
market price of one share of Common Stock and the per share exercise price of
the Bank Warrant and the denominator of which is the market price of one share
of Common Stock. For purpose of the Bank Warrant, the market price of one
share of Common Stock at the Company shall be determined either according to
the trading price of the Common Stock during the ten days preceding the
exercise of the warrant, or, if the Common Stock does not trade on a national
securities exchange and is not quoted on the Nasdaq National Market, by
agreement between the Company and the Bank. See Note 4 to the Consolidated
Financial Statements.
AGREEMENTS WITH UNDERWRITERS REGARDING RESTRICTIONS ON SALE
The Company and holders of all 6,223,250 outstanding shares of Common Stock
of the Company as of June 1, 1996, and options to purchase 596,750 shares of
Common Stock, have agreed, not to directly or indirectly, without the prior
written consent of Dean Witter Reynolds Inc., offer, sell or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock, or any securities exercisable for or convertible into Common Stock for
a period of 180 days following the date of consummation of this offering.
REGISTRATION RIGHTS
The holders of an aggregate of 6,200,000 shares of Common Stock will be
entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of a Registration Rights Agreement,
if the Company proposes to register any of its securities under the Securities
Act, either for its own account or for the account of other securityholders
exercising registration rights, such holders are entitled to notice of such
registration and are entitled to include such shares of Common Stock in the
registration. The rights are subject to certain conditions and limitations. In
connection with this offering, the rights of the holders to have shares of
Common Stock registered under the Securities Act as part of this offering were
waived pursuant to the terms of the Registration Rights Agreement.
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sales, will have on the
prevailing market price for the Common Stock. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for the Common Stock and could impair the
Company's future ability to obtain capital through an offering of equity
securities. See "Risk Factors--Potential Adverse Impact of Shares Eligible for
Future Sale."
49
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Dean Witter Reynolds Inc., Bear,
Stearns & Co. Inc., William Blair & Company, L.L.C. and Wheat, First
Securities, Inc. are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (a copy of which has been filed as an exhibit to the Registration
Statement), to purchase from the Company the number of shares of Common Stock
set forth opposite their respective names in the table below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Dean Witter Reynolds Inc...........................................
Bear, Stearns & Co. Inc............................................
William Blair & Company, L.L.C.....................................
Wheat, First Securities, Inc.......................................
---
Total..........................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligation is such that they must purchase all of the shares (other than those
subject to the over-allotment option) if any are purchased.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be
determined through negotiations between the Company and the Representatives.
Among the factors to be considered in making such determination are prevailing
market conditions, the market capitalization of publicly traded companies
which the Company and the Representatives believe to be comparable to the
Company, the revenues and earnings of the Company in recent periods, the
experience of the Company's management, the economic characteristics of the
business in which the Company competes, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock directly to the public at the initial offering price
set forth on the cover page of this Prospectus and to certain dealers (who may
include the Underwriters) at such public offering price less a concession not
to exceed $ per share. Such dealers may reallow a concession not to exceed
$ per share to other dealers. After the initial public offering, the public
offering price may be reduced and concessions and reallowances to dealers may
be changed by the underwriters. The Representatives have informed the Company
that the Underwriters do not intend to confirm sales to any account over which
they exercise discretionary authority. The Representatives intend to make a
market in the Common Stock after consummation of this offering.
The Company and Summit have granted to the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to an additional 585,000 shares of Common Stock at the initial
public offering price, less underwriting discounts and commissions, to cover
over-allotments, if any. The Company may, at its election, sell up to all of
the shares of Common Stock sold upon exercise of the over-allotment option,
but will in no event sell less than half of such shares. Summit will sell
shares of Common Stock necessary to satisfy the exercise of the over-allotment
option to the extent such shares are not sold by the Company. After the
commencement of this offering, the Underwriters may confirm sales subject to
the over-allotment option.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
Bear, Stearns & Co. Inc., an affiliate of BSC, served as the Company's
financial advisor in connection with the Recapitalization. In consideration of
its financial advisory services, BSC received a fee of $450,000 from the
Company of which $250,000 was paid in cash and the balance was paid in the
form of 112,668 (post-April 10, 1996 and June 21, 1996 stock splits) shares of
Common Stock and 1,974.04 shares of Redeemable Preferred Stock. The Company
also reimbursed the financial advisor for its out-of-pocket expenses. See
"Certain Transactions."
50
<PAGE>
The Company, certain principal Stockholders and the executive officers and
directors of the Company have agreed that they will not offer, sell, or
otherwise dispose of any shares of Common Stock for a period of 180 days from
the date of this Prospectus without the prior written consent of Dean Witter
Reynolds Inc. except, in the case of the Company, under certain limited
circumstances.
At the Company's request, the Representatives have reserved up to 191,100
shares of Common Stock for sale at the initial public offering price to the
Company's employees and other persons having certain business relationships
with the Company. The number of shares of Common Stock available for sale to
the general public will be reduced to the extent these persons purchase such
reserved shares. Any reserved shares not purchased will be offered by the
Underwriters to the general public on the same terms as the other shares
offered hereby. Reserved shares purchased by individuals will, except as
restricted by applicable securities laws, be available for resale following
this offering.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hutchins, Wheeler & Dittmar, A Professional
Corporation. Certain legal matters relating to the offering will be passed
upon for the Underwriters by Latham & Watkins.
EXPERTS
The consolidated financial statements included in this Prospectus and the
selected supplemental schedule of the Company incorporated by reference in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports thereto, are included herein
in reliance upon the authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement. For further information with respect
to the Company and the Shares offered hereby, reference is hereby made to such
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and,
in each instance, reference is made to the copy of such contract or document
field as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. Copies of the Registration
Statement may be obtained from the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: Seven World Trade Center, New York, New York 1004, and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained from the public reference section of the Commission
at its Washington address upon payment of the fees prescribed by the
Commission, or may be examined without charge at the offices of the
Commission.
51
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SUBURBAN OSTOMY SUPPLY CO., INC.
Report of Independent Public Accountants................................ F- 2
Consolidated Balance Sheets at September 3, 1994, September 2, 1995 and
June 1, 1996........................................................... F- 3
Consolidated Statements of Income for the Years Ended August 28, 1993,
September 3, 1994, September 2, 1995 and the Thirty-Nine Weeks Ended
June 1, 1996........................................................... F- 4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the Years Ended August 28, 1993, September 3, 1994 and September 2,
1995 and the Thirty-Nine Weeks Ended June 1, 1996...................... F- 5
Consolidated Statements of Cash Flows For the Years Ended August 28,
1993, September 3, 1994, September 2, 1995 and the Thirty-Nine Weeks
Ended June 1, 1996..................................................... F- 6
Notes to Consolidated Financial Statements.............................. F- 7
ST. LOUIS OSTOMY DISTRIBUTORS, INC.
Report of Independent Public Accountants................................ F-19
Balance Sheets at July 30, 1994 and July 29, 1995....................... F-20
Statements of Income For the Years Ended July 31, 1993, July 30, 1994
and July 29, 1995 and the Period from July 30, 1995 through January 22,
1996................................................................... F-21
Statements of Changes in Stockholders' (Deficit) Equity for the Years
Ended July 31, 1993, July 30, 1994 and July 29, 1995 and the Period
from July 30, 1995 through January 22, 1996............................ F-22
Statements of Cash Flows for the Years Ended July 31, 1993, July 30,
1994 and July 29, 1995 and the Period from July 30, 1995 through
January 22, 1996....................................................... F-23
Notes to Financial Statements........................................... F-24
PATIENT-CARE MEDICAL SALES
Report of Independent Public Accountants................................ F-28
Balance Sheets at March 31, 1995 and 1996 and May 31, 1996 (Unaudited).. F-29
Statements of Income for the Years Ended March 31, 1994, 1995 and 1996
and the two months ended May 31, 1995 and 1996 (Unaudited)............. F-30
Statements of Changes in Stockholders' Equity for the Years Ended March
31, 1994, 1995 and 1996 and the two months ended May 31, 1995 and 1996
(Unaudited)............................................................ F-31
Statements of Cash Flows for the Years Ended March 31, 1994, 1995 and
1996 and the two months ended May 31, 1995 and 1996 (Unaudited)........ F-32
Notes to Financial Statements........................................... F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Suburban Ostomy Supply Co., Inc.:
We have audited the accompanying consolidated balance sheets of Suburban
Ostomy Supply Co., Inc. (a Massachusetts corporation) as of September 3, 1994,
September 2, 1995 and June 1, 1996, and the related consolidated statements of
income, changes in stockholders' equity (deficit) and cash flows for the years
ended August 28, 1993, September 3, 1994, September 2, 1995 and for the
thirty-nine weeks ended June 1, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Suburban Ostomy Supply
Co., Inc. as of September 3, 1994, September 2, 1995 and June 1, 1996, and the
results of its operations and its cash flows for the years ended August 28,
1993, September 3, 1994, September 2, 1995, and for the thirty-nine week
period ended June 1, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 21, 1996
F-2
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 3, SEPTEMBER 2, JUNE 1,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............ $ 4,133,807 $ 3,970,113 $ 1,714,889
Accounts receivable, net of allowance
for doubtful accounts of $25,000 in
1994 and 1995 and $175,000 in 1996.. 4,243,810 4,766,991 7,191,679
Merchandise inventory................ 3,082,047 3,659,499 5,465,948
Prepaid expenses and other........... 165,162 153,145 242,946
Deferred income taxes................ -- 50,750 380,137
----------- ------------ ------------
Total current assets................ 11,624,826 12,600,498 14,995,599
----------- ------------ ------------
Fixed assets, at cost:
Equipment and fixtures............... 1,234,792 1,270,335 1,501,528
Leasehold improvements............... 72,994 206,918 245,531
----------- ------------ ------------
1,307,786 1,477,253 1,747,059
Less--Accumulated depreciation...... 600,205 739,630 863,230
----------- ------------ ------------
Total fixed assets, net.............. 707,581 737,623 883,829
----------- ------------ ------------
Other Assets:
Goodwill............................. -- -- 10,734,163
Other assets......................... 516,157 494,189 194,583
----------- ------------ ------------
Total other assets.................. 516,157 494,189 10,928,746
----------- ------------ ------------
Total assets........................ $12,848,564 $ 13,832,310 $ 26,808,174
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Current portion of St. Louis Note
payable............................. -- -- $ 123,500
Accounts payable and accrued ex-
penses.............................. $ 2,876,501 $ 3,302,710 5,244,725
Notes payable to officers............ 221,926 -- --
Accrued compensation and related
items............................... 676,769 370,791 328,369
Accrued common stock dividends pay-
able................................ -- 900,000 --
Accrued interest..................... -- 329,235 348,267
Income taxes payable................. 12,011 230,448 388,786
----------- ------------ ------------
Total current liabilities........... 3,787,207 5,133,184 6,433,647
----------- ------------ ------------
Long-term Liabilities:
Long-term debt....................... -- 12,580,000 21,058,450
Subordinated debt to related par-
ties................................ -- 6,750,000 6,750,000
Notes payable to officers............ -- 2,500,000 2,500,000
St. Louis Note payable, less current
portion............................. -- -- 1,111,500
Deferred income taxes................ -- 34,719 76,475
----------- ------------ ------------
Total long-term liabilities......... -- 21,864,719 31,496,425
----------- ------------ ------------
Redeemable Preferred Stock:
$.01 par value, $100 redemption value
plus 10% cumulative return--
Authorized, issued and outstanding--
66,500 shares....................... -- 6,760,833 7,267,893
Stockholders' Equity (Deficit):
Authorized--10,000,000 shares
Issued and outstanding--22,000 shares
in 1994, 6,200,000 shares in 1995
and 6,223,250 shares in 1996........ 2,402,700 142,857 161,607
Additional paid-in capital........... 21,772 -- --
Retained earnings (accumulated defi-
cit)................................ 6,636,885 (20,069,283) (18,551,398)
----------- ------------ ------------
Total stockholders' equity (defi-
cit)............................... 9,061,357 (19,926,426) (18,389,791)
----------- ------------ ------------
Total liabilities and stockholders'
equity (deficit)................... $12,848,564 $ 13,832,310 $ 26,808,174
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THIRTY-NINE
YEAR ENDED YEAR ENDED YEAR ENDED WEEKS
AUGUST 28, SEPTEMBER 3, SEPTEMBER 2, ENDED JUNE 1,
1993 1994 1995 1996
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net Sales.................. $42,737,715 $47,310,992 $52,667,379 $49,301,866
Cost of Goods Sold......... 32,304,359 35,598,531 39,872,671 37,475,443
----------- ----------- ----------- -----------
Gross profit........... 10,433,356 11,712,461 12,794,708 11,826,423
Operating Expenses......... 6,990,928 7,627,408 7,752,234 6,241,450
Depreciation and
Amortization.............. 266,212 269,990 265,771 386,561
Non-recurring Executive
Compensation.............. 2,110,530 2,236,857 -- --
----------- ----------- ----------- -----------
Operating income....... 1,065,686 1,578,206 4,776,703 5,198,412
Interest Expense........... -- -- 369,575 1,840,885
Other Expense (Income),
net....................... (158,912) (131,662) (144,582) (14,648)
----------- ----------- ----------- -----------
Income before income
taxes................. 1,224,598 1,709,868 4,551,710 3,372,175
Provision for Income
Taxes..................... 69,252 88,128 357,422 1,446,010
----------- ----------- ----------- -----------
Net income............. 1,155,346 1,621,740 4,194,288 1,926,165
Accretion of Preferred
Stock..................... -- -- 110,833 507,060
----------- ----------- ----------- -----------
Net income applicable
to common
stockholders.......... $ 1,155,346 $ 1,621,740 $ 4,083,455 $ 1,419,105
=========== =========== =========== ===========
Supplemental Pro Forma
(unaudited):
Net income............... $ 2,954,576 $ 3,046,943
=========== ===========
Net income per share..... $ .32 $ .28
=========== ===========
Weighted average common
shares outstanding...... 9,149,706 10,788,621
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SHARES OF RETAINED TOTAL
COMMON COMMON ADDITIONAL EARNINGS STOCKHOLDERS'
STOCK NO STOCK, NO PAR PAID-IN (ACCUMULATED TREASURY EQUITY
PAR VALUE VALUE CAPITAL DEFICIT) STOCK (DEFICIT)
--------- ------------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 29,
1992................... 21,900 $ 98,000 $ 21,772 $ 6,591,020 $(532,000) $ 6,178,792
Net income............ -- -- -- 1,155,346 -- 1,155,346
Treasury stock
retired.............. (1,900) (95,000) -- (437,000) 532,000 --
Shares issued under
Stock Option Plan.... 2,000 1,200,000 -- -- -- 1,200,000
Dividends paid ($32
per share of common
stock)............... -- -- -- (666,392) -- (666,392)
--------- ----------- -------- ------------ --------- ------------
Balance, August 28,
1993................... 22,000 1,203,000 21,772 6,642,974 -- 7,867,746
Shares retired........ (2,000) (300) -- (1,199,700) -- (1,200,000)
Shares issued under
Stock Option Plan.... 2,000 1,200,000 -- -- -- 1,200,000
Dividends on common
stock ($21 per
share)............... -- -- -- (428,129) -- (428,129)
Net income............ -- -- -- 1,621,740 -- 1,621,740
--------- ----------- -------- ------------ --------- ------------
Balance, September 3,
1994................... 22,000 2,402,700 21,772 6,636,885 -- 9,061,357
Shares retired........ (2,000) (300) -- (1,199,700) -- (1,200,000)
Dividends on common
stock ($110 per
share)............... -- -- -- (2,199,929) -- (2,199,929)
Capital contribution.. -- -- -- 300,000 -- 300,000
Redemption of 19,880
shares of common
stock................ (19,880) (2,359,543) (21,772) (27,689,994) -- (30,071,309)
Effect of stock
splits............... 1,859,880 -- -- -- -- --
Issuance of 4,340,000
shares of common
stock................ 4,340,000 100,000 -- -- -- 100,000
Accretion of preferred
stock................ -- -- -- (110,833) -- (110,833)
Net income............ -- -- -- 4,194,288 -- 4,194,288
--------- ----------- -------- ------------ --------- ------------
Balance, September 2,
1995................... 6,200,000 142,857 -- (20,069,283) -- (19,926,426)
Shares issued under
stock option plan.... 23,250 18,750 -- -- -- 18,750
Capital contribution.. -- -- -- 98,780 -- 98,780
Accretion of preferred
stock................ -- -- -- (507,060) -- (507,060)
Net income............ -- -- -- 1,926,165 -- 1,926,165
--------- ----------- -------- ------------ --------- ------------
Balance, June 1, 1996... 6,223,250 $161,607 $ -- $(18,551,398) $ -- $(18,389,791)
========= =========== ======== ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THIRTY-NINE
YEAR ENDED YEAR ENDED YEAR ENDED WEEKS
AUGUST 28, SEPTEMBER 3, SEPTEMBER 2, ENDED JUNE 1,
1993 1994 1995 1996
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income............. $1,155,346 $1,621,740 $ 4,194,288 $ 1,926,165
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities--
Depreciation and
amortization........ 266,212 269,990 265,771 386,561
Provision for bad
debt losses......... -- 25,000 -- 45,058
Net loss on sale of
fixed assets........ -- 50,959 34,056 21,102
Deferred income tax
benefit, net........ -- -- (16,031) (92,116)
Change in assets and
liabilities net of
effects from
purchase of St.
Louis Ostomy--
Accounts
receivable........ (187,021) (901,139) (523,181) (684,184)
Merchandise
inventory......... (593,462) 1,082,488 (577,452) (963,574)
Prepaid expenses
and other......... 82,150 (86,226) 12,017 (89,801)
Accounts payable
and accrued
expenses.......... 200,369 (593,334) 667,903 (580,202)
---------- ---------- ------------ ------------
Net cash provided
by (used in)
operating
activities...... 923,594 1,469,478 4,057,371 (30,991)
---------- ---------- ------------ ------------
Cash Flows from Investing
Activities:
Purchase of fixed
assets................ (213,447) (135,828) (293,421) (228,701)
Proceeds from sale of
fixed assets.......... -- 3,484 9,563 109,968
Payment for purchase of
St. Louis Ostomy, net
of cash acquired...... -- -- -- (10,709,366)
(Increase) decrease in
other assets.......... (99,617) (35,671) (53,760) 317,433
---------- ---------- ------------ ------------
Net cash used in
investing
activities...... (313,064) (168,015) (337,618) (10,510,666)
---------- ---------- ------------ ------------
Cash Flows from Financing
Activities:
Net decrease in notes
receivable from
officers.............. 3,995 21,706 -- 129,520
Capital contribution
from shareholders..... -- -- 300,000 98,780
Issuance of common
stock................. 1,200,000 1,200,000 100,000 18,750
Issuance of preferred
stock................. -- -- 6,650,000 --
Dividends paid to
stockholders.......... (666,392) (428,129) (1,299,929) --
Repurchase and
retirement of common
stock................. -- (1,200,000) (28,200,000) --
Capitalization of
financing costs....... -- -- (192,209) --
Expenses of
recapitalization...... -- -- (571,309) --
Proceeds from issuance
of long-term bank
debt.................. -- -- 13,580,000 12,517,517
Principal repayment of
long-term bank debt... -- -- (1,000,000) (4,478,134)
Proceeds from issuance
of subordinated debt.. -- -- 6,750,000 --
---------- ---------- ------------ ------------
Net cash provided
by (used in)
financing
activities...... 537,603 (406,423) (3,883,447) 8,286,433
---------- ---------- ------------ ------------
Net Increase (Decrease)
in Cash and Cash
Equivalents............. 1,148,133 895,040 (163,694) (2,255,224)
Cash and Cash
Equivalents, beginning
of period............... 2,090,634 3,238,767 4,133,807 3,970,113
---------- ---------- ------------ ------------
Cash and Cash
Equivalents, end of
period.................. $3,238,767 $4,133,807 $ 3,970,113 $ 1,714,889
========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 1, 1996
(1) ORGANIZATION AND RECAPITALIZATION
Suburban Ostomy Supply Co., Inc. (the "Company") is a leading national
direct marketing wholesaler of home health care products. The Company's
principal location is in Holliston, Massachusetts, with additional
distribution centers in Atlanta, Georgia; Los Angeles, California; Dallas,
Texas; and South Bend, Indiana. The Company has a subsidiary operation in St.
Louis, Missouri (see Note 3).
On July 3, 1995, the Company completed a series of transactions to effect a
recapitalization of the Company (the "Recapitalization"). The terms and
provisions of the Recapitalization are set forth in the Stock Purchase and
Redemption Agreement dated July 3, 1995 (the "Stock Purchase and Redemption
Agreement").
The Company sold for $100,000 cash 4,340,000 shares of its common stock to
Summit Ventures III, L.P., Summit Investors II, L.P., Summit Subordinated Debt
Fund, L.P. (collectively, "Summit") and The Bear Stearns Companies, Inc.
("BSC"), and borrowed $6.75 million in exchange for subordinated debt (the
"Summit Notes"). The terms of this debt are discussed in Note 4 to the
consolidated financial statements.
The Company also issued to Summit and BSC 66,500 shares of Series A
Redeemable Preferred Stock, $.01 par value, for $6.65 million (the "Redeemable
Preferred Stock"). The Company may redeem, at any time, all or a portion of
the Redeemable Preferred Stock for an amount equal to $100 per share plus a
10% cumulative annual return since the July 3, 1995 issuance date through the
redemption date (the "Redemption Price"). Notwithstanding the Company's
redemption option, one third of the shares outstanding on July 1, 2000 will be
mandatorily redeemed on July 1 of each of the years 2000, 2001 and 2002. The
occurrence of a liquidity event (as defined in the Stock Purchase and
Redemption Agreement) would require 100% redemption of the outstanding stock
at the redemption price. Annually, the Company accretes the value of the
Redeemable Preferred Stock by charging retained earnings/accumulated deficit
until the Redeemable Preferred Stock reaches its redemption value.
The Company entered into a $16.0 million credit agreement (the "Credit
Facility") with The First National Bank of Boston (the "Bank"), of which $13.5
million was drawn down to facilitate the stock repurchase discussed below. The
terms of the Credit Facility are further discussed in Note 4 to the
consolidated financial statements.
The proceeds of the above transactions were used by the Company to
repurchase 19,880 shares or 70% of the then outstanding shares of Common Stock
from certain stockholders for a total purchase price of $29.5 million. An
amount of $27.0 million was paid in cash and $2.5 million in notes were issued
to the stockholders (the "Management Notes"). The Management Notes carry a 12%
annual rate of interest which is payable quarterly in arrears. Principal
repayment is due on June 30, 2000, and mandatory prepayment of the Management
Notes is required upon the occurrence of a liquidity event.
The Company incurred approximately $571,000 in professional fees related to
the above stock repurchase transactions, which have been reflected as a
reduction of retained earnings. Of these professional fees, $450,000 was paid
to BSC, $250,000 of which was paid in cash and $200,000 of which was paid in
the form of 112,668 shares of Common Stock and 1,974.04 shares of Redeemable
Preferred Stock. Costs incurred in connection with obtaining debt financing of
approximately $192,000 have been capitalized as deferred financing costs. They
are included in other assets in the accompanying consolidated balance sheets
and are being amortized over the lives of the underlying respective debt
agreements. Accumulated amortization at September 2, 1995 and June 1, 1996 is
approximately $3,000 and $30,000, respectively.
Subsequent to the above transactions, the Company effected a 100-for-1
Common Stock split. In April 1996, the Company further effected a 50-for-1
Common Stock split. On June 21, 1996, the Company further effected a 3.1-to-1
Common Stock split. For periods subsequent to the Recapitalization all
references to common shares in the consolidated financial statements,
including these accompanying notes, retroactively reflects these splits.
F-7
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 1, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to August 31. The
year ending September 3, 1994 contains 53 weeks and the years ending August
28, 1993, and September 2, 1995 contain 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable, notes payable and debt.
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to the short-term
nature of these instruments. Certain of the Company's debt bears interest at a
variable market rate, and thus has a carrying amount that approximates fair
value. The remainder of the debt carries a fixed rate of interest which also
approximates fair value based on rates available to the Company for debt with
similar terms and maturities.
Accounting for Stock-Based Compensation
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 requires that an entity account for employee stock
compensation under a fair value-based method. However, SFAS 123 also allows an
entity to continue to measure compensation cost for employee stock-based
compensation plans using the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Effective for fiscal years beginning after December 15, 1995,
entities electing to remain with accounting under APB 25 are required to make
pro forma disclosures of net income and net income per share as if the fair
value-based method of accounting under SFAS 123 had been applied. The Company
will continue to account for employee stock-based compensation under APB 25
and will make the pro forma disclosures required under SFAS 123.
Merchandise Inventory
Inventory is stated at the lower of cost or market and is accounted for
using the weighted moving-average cost method, which approximates the first-
in, first-out (FIFO) method.
Fixed Assets
The cost of property and equipment is depreciated and amortized over the
estimated useful lives of the related assets, as follows:
<TABLE>
<S> <C> <C>
Equipment, computers and fixtures................. 5-7 years Straight-line
Leasehold improvements............................ 4-5 years Straight-line
</TABLE>
Repairs and maintenance are expensed as incurred.
F-8
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 1, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets
During 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards, No. 121, "Accounting for the Impairment of Long-Lived
Assets" ("SFAS 121"). SFAS 121 requires, among other things, that an entity
review its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an
asset may not be fully recoverable. As a result of its review, the Company
does not believe that any impairment currently exists related to its long-
lived assets.
Goodwill
The Company has classified as goodwill the cost in excess of fair value of
the net assets acquired in the purchase of St. Louis Ostomy (see Note 3).
Goodwill is being amortized on a straight-line basis over an estimated useful
life not exceeding 25 years. The carrying value of goodwill is evaluated
whenever events or changes in circumstances indicate that the current useful
life has diminished. If undiscounted cash flows over the remaining
amortization period indicate that goodwill may not be recoverable, the
carrying value of goodwill will be reduced.
Cash and Cash Equivalents
For the accompanying consolidated statements of cash flows, the Company
considers all highly liquid instruments with original maturities of three
months or less to be cash equivalents.
Other Assets
Other assets include an intangible asset for an agreement not to compete,
which is being amortized on a straight-line basis over the 82-month agreement
life, which expired in January 1996. Accumulated amortization as of September
2, 1995 and June 1, 1996 amounted to approximately $238,000 and $256,000,
respectively.
Income Taxes
Effective July 3, 1995, the Company's tax status changed from a Subchapter S
corporation to a C corporation, and accordingly, it is subject to federal and
state income taxes. The Company accounts for taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes, which is an asset and liability method. Under the asset and
liability method, deferred taxes are established for the temporary differences
between the financial reporting and tax bases of the Company's assets and
liabilities at currently enacted tax laws and rates.
Common Stock Equivalents
The Common Stock equivalents used to calculate supplemental pro forma net
income per share represent, in periods in which they have a dilutive effect,
the effect of common shares contingently issuable from stock options and
warrants using the treasury-stock method. Additionally, stock, options and
warrants issued within one year prior to the anticipated filing of the
Registration Statement (see Note 12) are considered issued and outstanding for
the periods presented using the treasury stock method.
F-9
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 1, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Supplemental Pro Forma Net Income Per Share
Prior to the Recapitalization on July 3, 1995, the Company elected to be
taxed as a Subchapter S corporation, and accordingly, was not subject to
federal income taxes and certain state income tax jurisdictions. Further, the
Company plans to repay borrowings under the Credit Facility, the Summit Notes,
the Management Notes, the St. Louis Note and related accrued interest thereon
with a portion of the net proceeds from the public offering of Common Stock.
Supplemental pro forma net income per share for the year ended September 2,
1995 and the thirty-nine weeks ended June 1, 1996 has been calculated (1) as
if the Company had been subject to federal and state income taxes for 1995 and
(2) as if, at the beginning of the respective periods, the Company had sold,
at an assumed offering price of $13.00 per share, shares of Common Stock
sufficient to fund the July 3, 1995 Recapitalization and repay indebtedness
incurred in 1996 to finance the acquisition of St. Louis Ostomy.
The weighted average number of shares is the actual weighted average number
of shares of Common Stock or equivalents thereof outstanding effected for the
Recapitalization as if it had occurred September 4, 1994, plus (1) for the
year ended September 2, 1995, the additional shares of Common Stock sufficient
to fund the Recapitalization (2,261,537) and (2) for the thirty-nine weeks
ended June 1, 1996 the 3,900,000 shares of Common Stock that are expected to
be sold (see Note 12).
Supplemental pro forma net income per share has been calculated as follows
(in thousands):
<TABLE>
<CAPTION>
THIRTY-NINE
YEAR ENDED WEEKS ENDED
SEPTEMBER 2, JUNE 1,
1995 1996
------------ -----------
<S> <C> <C>
Historical income before taxes.................... $ 4,552 $ 3,372
Provision for income taxes........................ (1,821) (1,446)
Reversal of interest charges and amortization of
deferred financing costs relating to debt treated
as being repaid, net of tax...................... 224 1,121
------- -------
Net income........................................ $ 2,955 $ 3,047
======= =======
Net income per share.............................. $ .32 $ .28
======= =======
Weighted average shares outstanding............... 9,150 10,789
======= =======
</TABLE>
Supplemental pro forma net income per share for the fiscal 1993 and 1994 has
not been presented as it is not meaningful due to the Company's Subchapter S
Corporation status and the Recapitalization on July 3, 1995.
F-10
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 1, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Splits
The Company effected a 100-for-1 Common Stock split in July 1995. In April
1996, the Company further effected a 50-for-1 Common Stock split. On June 21,
the Company further effected a 3.1-for-1 Common Stock split. All references to
shares of Common Stock in the consolidated financial statements, including
these accompanying notes retroactively reflect these splits for periods
subsequent to the Recapitalization.
Reclassifications
Certain reclassifications have been made to the 1993, 1994 and 1995
consolidated financial statements to conform to the 1996 presentation.
(3) ACQUISITION
On January 22, 1996, the Company acquired all of the outstanding common
stock of St. Louis Ostomy Distributors, Inc., a Missouri corporation ("St.
Louis Ostomy"), for an aggregate purchase price, including expenses, of
approximately $12,364,000, of which $1,235,000 was paid through the issuance
of a subordinated promissory note (the "St. Louis Note") (see Note 4). The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of St. Louis Ostomy are included in the consolidated financial
statements from January 22, 1996. The purchase price was allocated to the net
assets acquired and identified based on their respective estimated fair
values, which resulted in approximately $10,888,000 of goodwill (See Note 2).
The acquisition was financed using bank debt (see Note 4). On an unaudited pro
forma basis, assuming St. Louis Ostomy had been acquired at September 3, 1995,
the Company's net sales and net income would have been approximately
$56,813,000, and $1,526,000, respectively. Had the acquisition occurred on
September 4, 1994, the Company's unaudited pro forma net sales and net income
would have been approximately $69,900,000 and $2,798,000, respectively.
F-11
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 1, 1996
(4) DEBT
Debt consisted of the following at September 2, 1995 and June 1, 1996:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Secured loans, payable to The First National Bank of
Boston, interest rates at June 1, 1996 ranging from
7.5% to 8.75%......................................... $12,580,000 $21,058,450
Summit Notes due June 30, 2000, interest payable quar-
terly at 12% ......................................... 6,750,000 6,750,000
Management Notes due June 30, 2000, interest payable
quarterly at 12%...................................... 2,500,000 2,500,000
St. Louis Note......................................... -- 1,235,000
----------- -----------
$21,830,000 $31,543,450
=========== ===========
</TABLE>
The Company had no debt at September 3, 1994.
On July 3, 1995, the Company entered into the Credit Facility with the Bank
for $16,000,000. Of the $13,580,000 initial drawdown by the Company,
$13,500,000 was used to repurchase certain outstanding common stock in
connection with the Recapitalization (discussed in Note 1), and $80,000
represents the Bank's facility fee. In January 1996, the Credit Facility was
increased by $9,000,000 to facilitate the Company's acquisition of St. Louis
Ostomy (see Note 3). In connection with the Credit Facility amendment, the
Company provided the Bank with warrants to purchase 86,180 shares of the
Company's Common Stock at $.81 per share (the "Bank Warrant"). The Bank
Warrant may also be converted into that number of shares of Common Stock
determined by multiplying the number of shares subject to the Bank Warrant
(for which the conversion right is being exercised) by a fraction, the
numerator of which is the difference between the market price of one share
Common Stock and the per share exercise price of the Bank Warrant and the
denominator of which is the market price of one share of Common Stock. For
purpose of the Bank Warrant, the market price of one share of Common Stock of
the Company shall be determined either according to the trading price of the
Common Stock during the ten days preceding the exercise of the warrant, or, if
the Common Stock does not trade on a national securities exchange and is not
quoted on the Nasdaq National Market, by agreement between the Company and the
Bank. Should the Company prepay the outstanding borrowings and terminate the
related Credit Facility, the Bank may request that the Company redeem the
warrants from the Bank for $90,000. The warrants expire in January 2006. The
difference between the $1.61 fair value per share at the grant date and the
exercise price has been treated as a debt discount. This amount of
approximately $69,000 is being amortized using the effective interest method
during the term of the Credit Facility. The outstanding borrowings are secured
by substantially all of the assets of the Company. Advances made under the
Credit Facility bear interest at either the Bank's base rate (8.25% at June 1,
1996) plus 1/2%, or the LIBOR rate (5 21/32% at June 1, 1995) plus an
applicable margin. The applicable margin for the LIBOR advances ranges from
2.0% to 2.5% based on the amount of the borrowings relative to the Company's
eligible accounts receivable and inventory (as defined in the Credit
Facility). Interest is payable monthly in arrears. The average daily unused
line bears a commitment fee of .375% per annum payable quarterly. The total
commitment may be irrevocably reduced by the Company at any time in an amount
equal to $250,000 or an integral multiple of $100,000 in excess thereof. If
not accelerated by option of the Company, the commitment reduces in
approximate six-month intervals to $17,750,000 until the June 30, 2000
maturity date.
Subsequent to June 1, 1996, the Credit Facility was further amended to
provide for an additional $5,000,000 of borrowings to facilitate the Company's
acquisition of Patient-Care (see Note 12).
On July 3, 1995, the Company issued at face value, the Summit Notes. The
proceeds were used to fund the Recapitalization, as discussed in Note 1. The
Summit Notes are subordinate to the Bank debt and are secured by substantially
all of the assets of the Company. Principal repayment is due on June 30, 2000,
and
F-12
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 1, 1996
(4) DEBT (CONTINUED)
early payments may be made from time to time at the option of the Company
without penalty. Interest of 12% per annum is payable quarterly in arrears
beginning September 30, 1995.
Also in connection with the Recapitalization, the Company issued the
Management Notes for the repurchase of a portion of their outstanding stock.
The Management Notes carry a 12% annual rate of interest which is payable
quarterly in arrears. Principal repayment is due on June 30, 2000, optional
prepayments may be made without penalty, and mandatory prepayment of the notes
is required upon the occurrence of a liquidity event (as defined in the Stock
Purchase and Redemption Agreement).
In connection with the acquisition of St. Louis Ostomy (see Note 3), the
Company issued the St. Louis Note. The St. Louis Note bears interest at 10%
per annum and requires annual principal payments of approximately $123,500 in
each of January 1997 and 1998 and approximately $329,400 in each of January
1999, 2000 and 2001.
The Company is required to comply with a number of affirmative and negative
covenants under the Credit Facility and the terms of the Summit Notes. Among
other things, the Company is required to satisfy certain financial tests and
ratios (including debt service coverage, minimum net income and leverage
ratio). As of June 1, 1996, the Company is in full compliance with all debt
covenants.
Should the Company not make any optional principal prepayments on its
indebtedness, aggregate minimum maturities would be as follows at June 1,
1996:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
June 1 through August 31, 1996... $ --
1997............................. 123,500
1998............................. 181,950
1999............................. 2,329,333
2000............................. 28,579,333
2001............................. 329,334
-----------
$31,543,450
===========
</TABLE>
(5) INCOME TAXES
Effective July 3, 1995, the Company's tax status changed from a Subchapter S
corporation to a C corporation, and accordingly, it is subject to federal and
state income taxes. Deferred tax assets and liabilities were not material at
the conversion date. The Company accounts for taxes in accordance with SFAS
No. 109, Accounting for Income Taxes, which is an asset and liability method.
The provision (benefit) for income taxes for the years ended August 28,
1993, September 3, 1994, September 2, 1995 and the thirty-nine weeks ended
June 1, 1996 consisted of the following:
<TABLE>
<CAPTION>
THIRTY-NINE
WEEKS ENDED
1993 1994 1995 JUNE 1 , 1996
------- ------- -------- -------------
<S> <C> <C> <C> <C>
U.S. Federal--
Current............................... $ -- $ -- $ 88,242 $1,145,358
Deferred.............................. -- -- (12,083) 430,494
State--
Current............................... 69,252 88,128 285,211 (93,203)
Deferred.............................. -- -- (3,948) (36,640)
------- ------- -------- ----------
$69,252 $88,128 $357,422 $1,446,010
======= ======= ======== ==========
</TABLE>
F-13
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 1, 1996
(5) INCOME TAXES (CONTINUED)
Under SFAS No. 109, net current deferred tax assets or liabilities and net
long-term deferred tax assets or liabilities are reported separately in the
Company's balance sheets. The Company had a Subchapter S corporation status in
fiscal 1993 and fiscal 1994 and, accordingly, did not have any deferred taxes
recorded as of September 3, 1994.
The effect of temporary differences which give rise to a significant portion
of deferred taxes are as follows at September 2, 1995 and June 1, 1996:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals not yet deductible for tax
purposes................................................ $ 10,150 $335,038
Inventory basis differences.............................. 40,600 45,099
-------- --------
Total deferred tax assets.................................. 50,750 380,137
Deferred tax liabilities:
Property basis differences............................... (32,188) (74,804)
Other.................................................... (2,531) (1,671)
-------- --------
Total deferred tax liabilities............................. (34,719) (76,475)
-------- --------
Net deferred tax assets.................................... $ 16,031 $303,662
======== ========
</TABLE>
During fiscal 1993 and fiscal 1994, the Company was operating as a
Subchapter S corporation and was not subject to federal income taxes. The
provision for income taxes in the accompanying statements of operations
represents certain state tangible and net worth taxes. A reconciliation of tax
on income at the federal statutory rate to the recorded income tax provision
for fiscal 1995 and for the thirty-nine weeks ended June 1, 1996 is presented
below.
<TABLE>
<CAPTION>
THIRTY-NINE
WEEKS ENDED
1995 JUNE 1, 1996
----------- ------------
<S> <C> <C>
Tax provision at statutory rate..................... $ 1,547,581 $1,146,539
State tax provision, net of federal taxes........... 304,054 259,944
Subchapter S corporation earnings not subject to
federal and state income taxes..................... (1,599,209) --
Subchapter S corporation related taxes.............. 168,334 --
Book expenses not deductible for tax purposes....... -- 59,203
Other............................................... (63,338) (19,676)
----------- ----------
Recorded income tax provision....................... $ 357,422 $1,446,010
=========== ==========
</TABLE>
(6) RETIREMENT PLAN
The Company has adopted a qualified, noncontributory defined contribution
retirement plan which covers all employees who have completed one year of
service and who have reached age 21. Employees qualify for benefits upon
reaching the age of 62; however, an employee cannot receive benefits from the
defined contribution retirement plan until actual retirement. Vesting begins
at 20% after two years of employment and is increased by 20% each subsequent
year until full vesting occurs. Retirement plan contributions are made at the
discretion of the Company and for fiscal 1993, 1994 and 1995 and for the
thirty-nine weeks ended June 1, 1996 were approximately $215,000, $217,000,
$176,000 and $149,000, respectively.
F-14
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 1, 1996
(7) COMMITMENTS AND CONTINGENCIES
Leases
The Company occupies five warehouse facilities and a corporate office
building (which includes a warehouse) under operating leases expiring at
various dates through 2006. Two of the warehouses and the Company's corporate
office and warehouse facility in Holliston, Massachusetts, are leased from
related parties (see Note 10).
Certain of the Company's leased premises are subject to renewal options at
their fair rental values at the time of renewal. Rent expense for fiscal 1993,
1994 and 1995 and for the thirty-nine weeks ended June 1, 1996, under all
operating leases, including certain motor vehicle and equipment leases,
amounted to approximately $595,000, $636,000, $702,000 and $583,000 (net of
sublease income of approximately $72,000, $47,000, $42,000 and $11,000),
respectively.
At June 1, 1996, approximate future minimum lease payments, net of sublease
income, for the next five years and thereafter under noncancelable operating
leases including $149,500 in the period June 1, 1996 through August 31, 1996,
$598,000 in each year from 1997 through 2001 and $2,684,780 thereafter, to
related parties, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ----------
<S> <C>
June 1 through August 31, 1996.... $ 213,025
1997.............................. 814,597
1998.............................. 768,192
1999.............................. 763,542
2000.............................. 763,542
2001.............................. 682,077
Thereafter........................ 2,684,780
----------
$6,689,755
==========
</TABLE>
Employment Contracts
In connection with the Recapitalization (discussed in Note 1) on July 3,
1995, the Company entered into employment and noncompetition agreements (the
"Employment Agreements") with five executive officers. The Employment
Agreements provide for an employment term through July 1, 2000, after which
the term will be automatically renewed on an annual basis unless written
notice to the contrary is given at least 90 days in advance by either party.
The Employment Agreements provide for an aggregate initial annual base salary
of $690,000, subject to such annual increases to reflect increases in the
applicable consumers price index as may be determined by the Board of
Directors, as well as certain benefits and reimbursement of expenses. Should
employment be terminated by the Company for any reason other than cause (as
defined in the Employment agreements) prior to July 3, 1996, the officer shall
be entitled to receive all salary and bonus earned through the termination
date, the remaining salary through July 3, 1996 and an additional 12 months of
salary. In the event of termination by the Company for any reason other than
cause in subsequent years, the officer shall be entitled to receive all salary
and bonus earned through the termination date plus an additional 12 months of
salary.
F-15
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 1, 1996
(8) STOCK TRANSACTIONS
On July 3, 1995, the Recapitalization of the Company was completed. These
transactions are described in Note 1. In connection with the Recapitalization,
the Company effected a 100-for-1 Common Stock split. In April 1996, the
Company further effected a 50-for-1 Common Stock split. On June 21, 1996, the
Company further effected a 3.1-for-1 Common Stock split. All references to the
number of common shares and per share amounts in the consolidated financial
statements, including these accompanying notes have been retroactively
restated to reflect these splits for periods subsequent to the
Recapitalization.
In August 1993, the Company adopted an employee stock option plan for three
key employees and granted options to purchase 4,000 shares of Common Stock at
the estimated fair market value on the date of grant. These options were to
expire 15 years from the date of grant and were exercisable immediately. In
1993, 2,000 options were exercised, and the remaining 2,000 options were
exercised in 1994. To facilitate the exercise of these options, the Company
made bonus payments to the executives in the amounts of approximately
$2,111,000 and $2,237,000 in 1993 and 1994, respectively. In connection with
the Recapitalization, this stock option plan was terminated.
The Company redeemed 2,000 shares of Common Stock held by certain officers
of the Company on both September 6, 1993 and September 26, 1994 at their
estimated fair market value.
On July 3, 1995, in connection with the Recapitalization, the Company
adopted an incentive stock option plan (the "Stock Option Plan") under which
688,820 shares of Common Stock have been authorized. In July 1995, the Company
granted options to certain officers to purchase a total of 620,000 shares of
Common Stock. In October 1995, the Company granted to certain employees
options to purchase 29,450 shares of Common Stock. The exercise price of the
options granted in July, 1995 is $0.81 per share, and the exercise price of
the options granted in October, 1995 is $1.61 per share which, in both
instances, is not less than estimated fair market value on the grant date. The
options vest over seven years at rates set forth in the Stock Option Plan
agreement and are exercisable for a 10-year period. A summary of option
activity is presented below:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Options granted......................................... 620,000 $0.81
Outstanding, September 2, 1995.......................... 620,000 0.81
Granted............................................... 29,450 1.61
Exercised............................................. (23,250) 0.81
-------
Outstanding, June 1, 1996............................... 626,200 $0.84
------- -----
Options exercisable, June 1, 1996....................... 94,085 $0.84
------- -----
Shares available for future grants...................... 39,370
=======
</TABLE>
On July 3, 1995, certain stockholders of the Company made a $300,000 capital
contribution pursuant to the Recapitalization, which was used to pay a onetime
bonus to an executive officer of the Company. Payment of the bonus was made
prior to year-end and is included in the operating expenses in the
accompanying consolidated statements of income.
In 1995, the Company declared dividends in the amount of approximately
$2,200,000. In 1996, certain stockholders contributed approximately $99,000 of
this dividend back to the Company. These transactions are reflected in the
accompanying consolidated statements of changes in stockholders' equity
(deficit).
F-16
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 1, 1996
(9) SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash payments for interest and income taxes and certain noncash transactions
were as follows for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED THIRTY-NINE WEEKS
AUGUST 28, SEPTEMBER 3, SEPTEMBER 2, ENDED JUNE 1,
1993 1994 1995 1996
---------- ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Interest................ $ -- $ -- $ 51,494 $1,821,854
Income taxes............ 18,560 73,328 149,792 1,420,690
Issuance of subordinated
note to acquire net
assets of St. Louis
Ostomy................. -- -- -- 1,235,000
1995 unpaid dividends
contributed by
stockholders back to
the Company in 1996.... -- -- -- 98,780
Issuance of 12% note
payable on June 30,
2000 for the repurchase
of common stock........ -- -- 2,500,000 --
Issuance of 200 shares
of preferred stock for
certain
Recapitalization fees.. -- -- 200,000 --
Accretion of preferred
stock.................. -- -- 110,833 507,060
Transfer of cash
surrender value of life
insurance to officers.. -- -- 309,966 --
Exchange of notes
payable by officers for
cash surrender value of
life insurance......... -- -- 234,739 --
</TABLE>
(10) OTHER RELATED PARTY TRANSACTIONS
The stockholders of the Company and, in certain cases, two of its officers,
participate in three partnerships with which the Company has entered into
certain transactions. The Company leases warehouse facilities in Holliston,
Massachusetts; Atlanta, Georgia; and South Bend, Indiana, from related parties
under 15- and 10-year leases expiring in fiscal 2006, 2006 and 2003,
respectively. Rent expense under these leases amounted to approximately
$563,000, $571,000, $591,000 and $449,000 for 1993, 1994, 1995 and the thirty-
nine weeks ended June 1, 1996, respectively. In the opinion of the Company,
the rent paid to related parties is not materially different than the amounts
which would be paid to third parties for comparable space. In July 1995, the
Company was released from the guarantee of repayment of a mortgage loan on the
Atlanta facility.
In December 1995, the Company sold an automobile with a net book value of
$2,000 to one of the executives for $20,000.
(11) LIFE INSURANCE ON KEY EXECUTIVES
On June 30, 1995, $5,000,000 of life insurance for two key executives which
had previously been carried by the Company was transferred back to the
executives. In the event of either individual's death, the proceeds of this
insurance were to be used to repurchase the individual's stock in the Company
at book value. In return for the transfer of the insurance, the executives
exchanged certain notes payable to them from the Company and issued notes
payable of $129,520 in the amount of the difference between the old notes
payable and the cash surrender value of the insurance plus prepaid insurance
premiums at the date of transfer. At September 2, 1995, the entire $129,520 is
due from the executives and is included in accounts receivable in the
accompanying balance sheet. The notes were paid in full during the thirty-nine
weeks ended June 1, 1996.
F-17
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 1, 1996
(11) LIFE INSURANCE ON KEY EXECUTIVES
In order to comply with certain debt covenants, the Company acquired term
life insurance policies in the amount of $1,000,000 each on the two key
executives. In the event of either individual's death, the proceeds of this
insurance must be used to pay down outstanding principal under the terms of
the Credit Facility Agreement.
(12) SUBSEQUENT EVENTS
On June 14, 1996, the Company acquired all of the outstanding common stock
of Patient-Care Medical Sales, a California corporation, for an aggregate
purchase price, including expenses, of approximately $4,150,000, of which
$375,000 is payable on the first annual anniversary of the closing, subject to
set off ("Patient-Care Deferred Payment"). The acquisition is expected to be
accounted for as a purchase, and the purchase price will be allocated to the
net assets acquired based on their respective estimated fair values. The
acquisition was financed using bank debt (see Note 4).
In June 1996, the Company plans to file a registration statement with the
Securities and Exchange Commission to sell 3,900,000 shares, or 38.5% of its
common stock, through a public offering.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To St. Louis Ostomy Distributors, Inc.:
We have audited the accompanying balance sheets of St. Louis Ostomy
Distributors, Inc. (a Missouri corporation) as of July 30, 1994 and July 29,
1995, and the related statements of income, changes in stockholders' (deficit)
equity and cash flows for each of the three years ended July 29, 1995 and for
the period from July 30, 1995 through January 22, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of St. Louis Ostomy
Distributors, Inc. as of July 30, 1994 and July 29, 1995, and the results of
its operations and its cash flows for each of the three years ended July 29,
1995 and for the period from July 30, 1995 through January 22, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
June 14, 1996
F-19
<PAGE>
ST. LOUIS OSTOMY DISTRIBUTORS, INC.
BALANCE SHEETS--JULY 30, 1994 AND JULY 29, 1995
<TABLE>
<CAPTION>
1994 1995
----------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 86,042 $ 448,782
Accounts receivable, net of allowance for doubtful
accounts of $90,015 and $91,651 in 1994 and 1995,
respectively........................................ 1,710,283 1,741,359
Merchandise inventory................................ 764,829 681,323
Prepaid expenses and other........................... 68,748 39,949
Deferred income taxes................................ 36,502 36,767
----------- ----------
Total current assets............................... 2,666,404 2,948,180
----------- ----------
Fixed Assets, at cost:
Equipment and fixtures............................... 396,097 466,681
Leasehold improvements............................... 48,037 48,037
----------- ----------
444,134 514,718
Less--Accumulated depreciation....................... 187,107 243,865
----------- ----------
Total fixed assets, net............................ 257,027 270,853
----------- ----------
Other Assets:
Cash surrender value of life insurance............... 34,071 40,688
Deposits............................................. 20,350 20,350
----------- ----------
Total other assets................................. 54,421 61,038
----------- ----------
Total assets....................................... $ 2,977,852 $3,280,071
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt.................... $ -- $ 303,384
Note payable......................................... 1,545,262 --
Accounts payable..................................... 998,950 1,049,773
Accrued expenses, including payroll and related
taxes............................................... 158,460 205,442
Income taxes payable................................. 14,596 14,057
----------- ----------
Total current liabilities.......................... 2,717,268 1,572,656
----------- ----------
Long-term Debt......................................... -- 585,724
Deferred Income Taxes.................................. 5,819 9,913
Stockholders' Equity:
Common stock, $1 par value--
Authorized--30,000 shares
Issued--500 shares in 1994 and 250 shares in 1995.. 500 250
Additional paid-in capital........................... 51,957 51,957
Retained earnings.................................... 2,166,118 1,059,571
Treasury stock at cost, 250 shares in 1994........... (1,963,810) --
----------- ----------
Total stockholders' equity......................... 254,765 1,111,778
----------- ----------
Total liabilities and stockholders' equity......... $ 2,977,852 $3,280,071
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
ST. LOUIS OSTOMY DISTRIBUTORS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED JULY 31, 1993, JULY 30, 1994 AND JULY 29, 1995
AND THE PERIOD FROM JULY 30, 1995 THROUGH JANUARY 22, 1996
<TABLE>
<CAPTION>
PERIOD FROM
JULY 30, 1995
THROUGH
JANUARY 22,
1993 1994 1995 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net Sales.................. $14,025,192 $15,905,672 $17,235,282 $9,272,034
Cost of Goods Sold......... 11,102,211 12,490,194 13,756,393 7,375,178
----------- ----------- ----------- ----------
Gross profit............. 2,922,981 3,415,478 3,478,889 1,896,856
Operating Expenses......... 1,838,181 1,812,520 1,972,352 1,120,079
Depreciation and amortiza-
tion...................... 54,685 53,658 56,758 55,113
----------- ----------- ----------- ----------
Operating income......... 1,030,115 1,549,300 1,449,779 721,664
Interest Expense, net...... 173,635 135,974 90,263 17,857
Other (Income) Expense..... (16,920) 5,285 (12,841) (4,882)
----------- ----------- ----------- ----------
Income before provision
for income taxes........ 873,400 1,408,041 1,372,357 708,689
Provision for Income Tax-
es........................ 324,777 506,408 515,344 277,278
----------- ----------- ----------- ----------
Net income............... $ 548,623 $ 901,633 $ 857,013 $ 431,411
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
ST. LOUIS OSTOMY DISTRIBUTORS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED JULY 31, 1993, JULY 30, 1994 AND JULY 29, 1995
AND THE PERIOD FROM JULY 30, 1995 THROUGH JANUARY 22, 1996
<TABLE>
<CAPTION>
TOTAL
COMMON ADDITIONAL STOCKHOLDERS'
STOCK, PAID-IN RETAINED TREASURY (DEFICIT)
$1 PAR VALUE CAPITAL EARNINGS STOCK EQUITY
------------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, July 25, 1992.. $ 500 $ -- $ 715,862 $(1,963,810) $(1,247,448)
Capital contribution.. -- 51,957 -- -- 51,957
Net income............ -- -- 548,623 -- 548,623
----- ------- ----------- ----------- -----------
Balance, July 31, 1993.. 500 51,957 1,264,485 (1,963,810) (646,868)
Net income............ -- -- 901,633 -- 901,633
----- ------- ----------- ----------- -----------
Balance, July 30, 1994.. 500 51,957 2,166,118 (1,963,810) 254,765
Retirement of treasury
stock................ (250) -- (1,963,560) 1,963,810 --
Net income............ -- -- 857,013 -- 857,013
----- ------- ----------- ----------- -----------
Balance, July 29, 1995.. 250 51,957 1,059,571 -- 1,111,778
Net income............ -- -- 431,411 -- 431,411
----- ------- ----------- ----------- -----------
Balance, January 22,
1996................... $ 250 $51,957 $ 1,490,982 $ -- $ 1,543,189
===== ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
ST. LOUIS OSTOMY DISTRIBUTORS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1993, JULY 30, 1994 AND JULY 29, 1995
AND THE PERIOD FROM JULY 30, 1995 THROUGH JANUARY 22, 1996
<TABLE>
<CAPTION>
PERIOD FROM
JULY 30, 1995
THROUGH
1993 1994 1995 JANUARY 22, 1996
--------- --------- ---------- ----------------
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income................ $ 548,623 $ 901,633 $ 857,013 $ 431,411
Adjustments to reconcile
net income to net cash
provided by operating
activities--
Depreciation and amorti-
zation................. 54,685 53,658 56,758 55,113
Provision for bad debt
losses................. 10,432 13,445 1,636 13,291
Net loss on sale of
fixed assets........... -- 20,000 -- --
Deferred income tax
(benefit) provision.... (3,361) (19,861) 3,829 (14,010)
Change in assets and li-
abilities--
Accounts receivable... (208,637) (268,907) (32,712) (187,014)
Merchandise invento-
ry................... (181,288) (107,198) 83,506 (161,552)
Prepaid expenses and
other................ (38,316) (18,998) 28,799 39,949
Deposits.............. 6,150 (12,634) -- --
Accounts payable...... 292,160 (160,124) 50,823 192,900
Accrued expenses...... (10,721) (21,096) 46,982 85,703
Income taxes payable.. (280,067) 5,561 (539) 7,241
--------- --------- ---------- ---------
Net cash provided by
operating
activities......... 189,660 385,479 1,096,095 463,032
--------- --------- ---------- ---------
Cash Flows from Investing
Activities:
Repayments from affiliated
company.................. 16,707 -- -- --
Purchase of fixed assets.. (73,137) (82,679) (70,584) (36,653)
Increase in cash surrender
value of life insurance.. (13,749) (13,332) (6,617) (4,384)
Proceeds from surrender of
life insurance policy.... -- 41,268 -- --
--------- --------- ---------- ---------
Net cash used in
investing
activities......... (70,179) (54,743) (77,201) (41,037)
--------- --------- ---------- ---------
Cash Flows from Financing
Activities:
Capital contribution from
stockholder.............. 51,957 -- -- --
Proceeds from notes pay-
able to bank............. 300,000 -- -- --
Principal repayment of
notes payable to bank.... (223,059) (231,679) (28,332) --
Principal repayment of
long-term bank debt...... (108,830) (227,184) (627,822) (451,693)
--------- --------- ---------- ---------
Net cash provided by
(used in) financing
activities......... 20,068 (458,863) (656,154) (451,693)
--------- --------- ---------- ---------
Net Increase (Decrease) in
Cash and Cash Equivalents.. 139,549 (128,127) 362,740 (29,698)
Cash and Cash Equivalents,
beginning of period........ 74,620 214,169 86,042 448,782
--------- --------- ---------- ---------
Cash and Cash Equivalents,
end of period.............. $ 214,169 $ 86,042 $ 448,782 $ 419,084
========= ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
ST. LOUIS OSTOMY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 29, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
St. Louis Ostomy Distributors, Inc. (the "Company") is a wholesaler of home
health care products. The Company is located in St. Louis, Missouri.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable, notes payable and debt.
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to the short-term
nature of these instruments. Certain of the Company's debt bears interest at a
variable market rate, and thus has a carrying amount that approximates fair
value. The debt carries a fixed rate of interest which approximates fair value
based on rates available to the Company for debt with similar terms and
maturities.
Merchandise Inventory
Inventory is stated at the lower of cost or market and is accounted for
using the weighted moving-average cost method, which approximates the first-
in, first-out (FIFO) method.
Fixed Assets
The cost of property and equipment is depreciated and amortized over the
estimated useful lives of the related assets, as follows:
<TABLE>
<S> <C> <C>
Equipment, computers and fixtures................. 3-7 years Straight-line
Leasehold improvements............................ 31 years Straight-line
</TABLE>
Maintenance and repairs are expensed as incurred.
Cash and Cash Equivalents
For the accompanying statements of cash flows, the Company considers all
highly liquid instruments with original maturities of three months or less to
be cash equivalents.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which is an asset and liability method. Under the asset and liability method,
deferred taxes are established for the temporary differences between the
financial reporting and tax bases of the Company's assets and liabilities at
currently enacted tax laws and rates.
(2) DEBT
Debt consists of the following at July 30, 1994 and July 29, 1995:
<TABLE>
<CAPTION>
1994 1995
---------- --------
<S> <C> <C>
Note payable to Jefferson Bank...................... $ -- $889,108
Note payable to Colonial Bank. The note was
refinanced in September 1994....................... 1,545,262 --
---------- --------
$1,545,262 $889,108
========== ========
</TABLE>
F-24
<PAGE>
ST. LOUIS OSTOMY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 29, 1995
(2) DEBT (CONTINUED)
In connection with the acquisition of certain shares held by a former
stockholder in 1993 (discussed in Note 7), the Company entered into a note
agreement in the amount of $1,963,810. The note was collateralized by all of
the Company's assets and shares of common stock and was guaranteed by the
remaining sole stockholder of the Company. The note was refinanced with
$1,700,000 of bank debt in February 1994.
The $1,700,000 debt payable to Colonial Bank was secured by the Company's
accounts receivable, inventory and equipment, and was guaranteed by the
stockholder of the Company. Interest on the note was at prime (7.25% at July
30, 1994) plus .5%. Monthly payments were required in the amount of $28,333
plus interest. In September 1994, this debt was refinanced with new bank debt
in the amount of $1,516,929.
The $1,516,929 original debt with Jefferson Bank is collateralized by
accounts receivable and inventory of the Company, as well as the assignment of
a Company-owned life insurance policy on the life of the stockholder. The debt
is guaranteed by the stockholder. Interest accrues annually at the prime rate
(8.75% at July 29, 1995). The terms of the debt agreement provide for monthly
payments of $25,282 plus interest, with the final payment due in September
1999. In addition to the required minimum monthly payments, the Company has
made optional prepayments in accordance with the terms of the agreement in the
amount of approximately $442,000 through July 29, 1995.
In February 1992, the Company entered into a $80,000 loan agreement with
Colonial Bank secured by an automobile. The loan bore interest at prime (6.0%
at July 31, 1993) plus 1% and was fully repaid in April 1994.
In October 1992, the Company entered into a loan agreement with Colonial
Bank secured by accounts receivable, inventory and equipment of the Company.
The loan was guaranteed by the stockholder. Interest accrued at a rate of
prime plus .5%, and monthly payments were due in the amount of $25,901 plus
interest. The note was fully repaid in October 1993.
At July 29, 1995, aggregate minimum maturities are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- --------
<S> <C>
1996................................ $303,384
1997................................ 303,384
1998................................ 282,340
--------
$889,108
========
</TABLE>
(3) INCOME TAXES
The provision (benefit) for income taxes for the years ended July 31, 1993,
July 30, 1994 and July 29, 1995 and for the period from July 30, 1995 through
January 22, 1996 consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 30, 1995
THROUGH
JANUARY 22,
1993 1994 1995 1996
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
U.S. Federal--
Current............................ $295,328 $480,470 $452,895 $261,488
Deferred........................... (3,025) (18,133) 3,390 (13,232)
State--
Current............................ 32,810 45,799 58,620 29,800
Deferred........................... (336) (1,728) 439 (778)
-------- -------- -------- --------
$324,777 $506,408 $515,344 $277,278
======== ======== ======== ========
</TABLE>
F-25
<PAGE>
ST. LOUIS OSTOMY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 29, 1995
(3) INCOME TAXES (CONTINUED)
Under SFAS No. 109, net current deferred tax assets or liabilities and net
long-term deferred tax assets or liabilities are reported separately in the
Company's accompanying balance sheets. The components of the deferred taxes as
of July 30, 1994 and July 29, 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals not yet deductible for tax purposes... $33,306 $33,192
Other....................................................... 3,196 2,855
------- -------
Total deferred tax assets..................................... 36,502 36,767
Deferred tax liabilities:
Property basis differences.................................. (5,819) (9,913)
------- -------
Net deferred taxes............................................ $30,683 $22,854
======= =======
</TABLE>
The provision for income taxes is different from the amount computed by
applying the U.S. federal statutory income tax rate of 34% to income before
provision for income taxes, primarily due to state taxes net of federal income
tax benefit.
(4) RETIREMENT PLAN
The Company has a qualified, noncontributory, profit-sharing plan covering
eligible full-time employees. The plan provides for contributions by the
Company in such amounts as the Board of Directors may annually determine.
Contributions to the plan amounted to approximately $52,000, $60,000, $75,000
and $0 in 1993, 1994, 1995 and the period from July 30, 1995 through January
22, 1996, respectively.
(5) COMMITMENTS AND CONTINGENCIES
Leases
In December 1991, the Company entered into a lease for rental of a warehouse
facility commencing in April 1992 and expiring in March 1997. Rent expense
charged against operations under the lease amounted to approximately $117,000,
$83,000, $86,000 and $35,000 in 1993, 1994, 1995 and the period from July 30,
1995 through January 22, 1996, respectively.
In March 1994, the Company entered into a lease for rental of a luxury box
at a sports facility for a five-year period expiring in August 1999. Rent
expense for fiscal 1995 and for the period from July 30, 1995 through January
22, 1996 was approximately $13,000 and $14,000, respectively.
At July 29, 1995, approximate future minimum lease payments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1996................................ $114,666
1997................................ 89,959
1998................................ 32,056
1999................................ 34,300
--------
$270,981
========
</TABLE>
F-26
<PAGE>
ST. LOUIS OSTOMY DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 29, 1995
(6) SUPPLEMENTAL CASH FLOWS DISCLOSURE
Cash payments for interest and income taxes and certain noncash transactions
were as follows for the periods indicated:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 30,
1995
THROUGH
JANUARY 22,
1993 1994 1995 1996
-------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Interest........................... $170,520 $ 137,239 $ 108,117 $ 33,472
Income taxes....................... 644,157 543,816 478,835 284,586
Refinance of note payable through
the issuance of long-term debt.... -- -- 1,516,929 --
Retirement of long-term debt
through the issuance of note
payable........................... -- 1,512,990 -- --
</TABLE>
(7) STOCK REDEMPTION AGREEMENT
On April 24, 1992, the Company entered into an agreement to acquire the
outstanding shares of one of the Company's stockholders. The purchase of 250
shares of the Company's stock was funded through the issuance of a promissory
note in the amount of $1,963,810. In February 1994, this obligation was
refinanced with bank debt (see Note 2).
The agreement contained a covenant not to compete in the amount of $250,000
to be paid in monthly installments ranging from $3,125 to $5,208 through March
1998. Additionally, a one-year employment agreement for $50,000 and a five-
year consulting agreement for $100,000 per year were entered into between the
Company and the former stockholder. Amounts paid under these agreements
amounted to approximately $145,000 in 1993.
On May 19, 1993, in connection with the sale of the remaining stockholder's
interest in an affiliated company, the terms of the above agreement were
modified to release the Company from further obligation under the
noncompetition and consulting agreements.
(8) RELATED PARTY TRANSACTIONS
The Company engaged in transactions with a company formerly related through
common ownership. Sales in the amount of $335,565 were made to the affiliate
during 1993. On May 19, 1993, the stockholder of the Company sold his interest
in the affiliated company. Under the agreement, the Company agreed to maintain
the same profit margin on future sales to the former affiliate. During 1994,
this provision was eliminated. The companies also entered into a mutual
covenant not to compete for a period of three years.
(9) STOCK TRANSACTIONS
In April 1992, the Company acquired 250 shares of stock held by a former
stockholder. This transaction is discussed in Note 7.
In March 1995, the Company's stockholder transferred 175 shares of stock to
a limited partnership in which the stockholder is the general partner.
(10) SUBSEQUENT EVENT
On September 22, 1995, the stockholders of the Company signed a confidential
letter of intent to sell the outstanding stock to Suburban Ostomy Supply Co.,
Inc. The transaction was completed on January 22, 1996.
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Patient-Care Medical Sales:
We have audited the accompanying balance sheets of Patient-Care Medical
Sales (a California corporation) as of March 31, 1995 and 1996, and the
related statements of income, changes in stockholders' equity and cash flows
for the three years ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Patient-Care Medical Sales
as of March 31, 1995 and 1996, and the results of its operations and its cash
flows for the three years ended March 31, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
May 3, 1996
F-28
<PAGE>
PATIENT-CARE MEDICAL SALES
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, MAY 31,
--------------------- -----------
1995 1996 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 117,030 $ 84,116 $ 150
Accounts receivable, net of allowance for
doubtful accounts of $132,399, $123,791
and $84,914 at March 31, 1995 and 1996 and
May 31, 1996, respectively................ 2,239,783 1,893,234 1,857,516
Merchandise inventory...................... 1,233,667 1,412,178 1,238,011
Prepaid expenses and other................. 21,697 90,887 72,637
Prepaid income taxes....................... -- 161,813 157,208
Deferred income taxes...................... 113,350 89,826 89,826
---------- ---------- ----------
Total current assets..................... 3,725,527 3,732,054 3,415,348
---------- ---------- ----------
Fixed Assets, at cost:
Equipment and fixtures..................... 674,693 813,439 813,439
Leasehold improvements..................... 40,864 45,422 45,422
---------- ---------- ----------
715,557 858,861 858,861
---------- ---------- ----------
Less--Accumulated depreciation............. 464,581 534,682 549,858
---------- ---------- ----------
Total fixed assets, net.................. 250,976 324,179 309,003
---------- ---------- ----------
Other Assets:
Deposits................................... 14,738 27,282 24,465
Deferred income taxes...................... 9,816 -- --
---------- ---------- ----------
Total assets............................. $4,001,057 $4,083,515 $3,748,816
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt.......... $ 195,113 $ 455,620 $ 440,376
Bank line of credit........................ 880,000 890,000 810,000
Accounts payable........................... 1,050,488 951,584 1,028,987
Accrued expenses, including payroll and
related taxes............................. 280,345 529,269 205,504
Income taxes payable....................... 206,986 -- --
---------- ---------- ----------
Total current liabilities................ 2,612,932 2,826,473 2,484,867
---------- ---------- ----------
Long-Term Debt............................... 271,500 -- --
Deferred Income Taxes........................ -- 12,615 12,615
Commitments and Contingencies
Stockholders' Equity:
Common stock, no par value--
Authorized--100,000 shares
Issued--295 shares at March 31, 1995,
1996 and
May 31, 1996............................ 5,000 5,000 5,000
Retained earnings.......................... 1,111,625 1,239,427 1,246,334
---------- ---------- ----------
Total stockholders' equity............... 1,116,625 1,244,427 1,251,334
---------- ---------- ----------
Total liabilities and stockholders'
equity.................................. $4,001,057 $4,083,515 $3,748,816
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
PATIENT-CARE MEDICAL SALES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED MARCH 31, ENDED MAY 31,
------------------------------------- ----------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales............... $17,580,778 $18,100,947 $18,321,220 $3,048,523 $2,989,523
Cost of Goods Sold...... 14,405,775 14,403,101 14,545,214 2,470,245 2,396,432
----------- ----------- ----------- ---------- ----------
Gross profit.......... 3,175,003 3,697,846 3,776,006 578,278 593,091
Operating Expenses...... 2,919,138 3,120,145 3,435,205 550,855 558,863
Depreciation and Amorti-
zation................. 70,626 57,897 70,101 12,032 15,176
----------- ----------- ----------- ---------- ----------
Operating income...... 185,239 519,804 270,700 15,391 19,052
Interest Expense, Net... 109,783 105,979 146,182 22,285 21,229
Other Income, Net....... (33,258) (78,442) (88,976) (17,395) (13,689)
----------- ----------- ----------- ---------- ----------
Income before provi-
sion for
income taxes......... 108,714 492,267 213,494 10,501 11,512
Provision for Income
Taxes.................. 36,669 210,773 85,692 4,496 4,605
----------- ----------- ----------- ---------- ----------
Net income............ $ 72,045 $ 281,494 $ 127,802 $ 6,005 $ 6,907
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
PATIENT-CARE MEDICAL SALES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON TOTAL
STOCK, RETAINED STOCKHOLDERS'
NO PAR VALUE EARNINGS EQUITY
------------ ---------- -------------
<S> <C> <C> <C>
Balance, March 31, 1993.................. $5,000 $ 758,086 $ 763,086
Net income............................. -- 72,045 72,045
------ ---------- ----------
Balance, March 31, 1994.................. 5,000 830,131 835,131
Net income............................. -- 281,494 281,494
------ ---------- ----------
Balance, March 31, 1995.................. 5,000 1,111,625 1,116,625
Net income............................. -- 127,802 127,802
------ ---------- ----------
Balance, March 31, 1996.................. 5,000 1,239,427 1,244,427
Net income (unaudited)................. -- 6,907 6,907
------ ---------- ----------
Balance, May 31, 1996 (unaudited)........ $5,000 $1,246,334 $1,251,334
====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
PATIENT-CARE MEDICAL SALES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED MARCH 31, ENDED MAY 31,
------------------------------- ------------------
1994 1995 1995 1995 1996
--------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operat-
ing Activities:
Net income............ $ 72,045 $ 281,494 $ 127,802 $ 6,005 $ 6,907
Adjustments to
reconcile net income
to net cash provided
by operating
activities--
Depreciation and am-
ortization......... 70,626 57,897 70,101 12,032 15,176
Provision for bad
debt losses........ 50,000 82,399 (8,608) (1,478) (38,877)
Loss on sale of
fixed assets....... 1,713 17,225 -- -- --
Change in assets and
liabilities--
Deferred income
tax (benefit)
provision, net... (25,070) (57,957) 45,955 -- --
Accounts receiv-
able............. (321,538) (357,215) 355,157 225,303 74,595
Merchandise inven-
tory............. (83,041) (108,311) (178,511) (189,299) 174,167
Prepaid expenses
and other........ 15,597 (17,051) (69,190) (30,030) 18,250
Prepaid income
taxes............ -- -- (161,813) -- 4,605
Deposits.......... -- 320 (12,544) (1,899) 2,817
Accounts payable.. 121,769 95,579 (98,904) (19,125) 77,403
Accrued expenses.. 94,465 4,494 248,924 2,829 (323,765)
Income taxes pay-
able............. 25,518 180,606 (206,986) 4,496 --
--------- --------- --------- -------- --------
Net cash
provided by
operating
activities..... 22,084 179,480 111,383 8,834 11,278
--------- --------- --------- -------- --------
Cash Flows from Invest-
ing Activities:
Purchase of fixed as-
sets................. (29,247) (47,000) (143,304) -- --
--------- --------- --------- -------- --------
Net cash used in
investing
activities..... (29,247) (47,000) (143,304) -- --
--------- --------- --------- -------- --------
Cash Flows from Financ-
ing Activities:
Payments on capital
lease obligations.... (31,227) (34,015) (10,993) -- (15,244)
Net (payments on) pro-
ceeds from bank line
of credit............ (163,000) 280,000 10,000 180,000 (80,000)
Principal repayment of
notes payable........ -- (65,000) -- -- --
--------- --------- --------- -------- --------
Net cash (used
in) provided by
financing
activities..... (194,227) 180,985 (993) 180,000 (95,244)
--------- --------- --------- -------- --------
Net (Decrease) Increase
in Cash and Cash Equiv-
alents................. (201,390) 313,465 (32,914) 188,834 (83,966)
Cash and Cash Equiva-
lents, Beginning of Pe-
riod................... 4,955 (196,435) 117,030 117,030 84,116
--------- --------- --------- -------- --------
Cash and Cash Equiva-
lents, End of Period... $(196,435) $ 117,030 $ 84,116 $305,864 $ 150
========= ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
PATIENT-CARE MEDICAL SALES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT MAY 31, 1995 AND 1996 AND FOR THE TWO MONTHS THEN ENDED IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Patient-Care Medical Sales (the "Company") is a wholesaler of home health
care products, primarily incontinence, ostomy and wound care supplies. The
Company is located in Santa Fe Springs, California.
Merchandise Inventory
Inventory is stated at the lower of cost or market and is accounted for using
the weighted moving-average cost method, which approximates the first-in,
first-out (FIFO) method.
Fixed Assets
The cost of property and equipment is depreciated and amortized over the
estimated useful lives of the related assets, as follows:
<TABLE>
<S> <C> <C>
Equipment, computers and fixtures 5-7 years Straight-line
Leasehold improvements 5 years Straight-line
</TABLE>
Cash and Cash Equivalents
For the accompanying statements of cash flows, the Company considers all
highly liquid instruments with original maturities of three months or less to
be cash equivalents.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which is an asset and liability method. Under the asset and liability method,
deferred taxes are established for the temporary differences between the
financial reporting and tax bases of the Company's assets and liabilities at
currently enacted tax laws and rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable, bank line-of-credit payable
and note payable to shareholder. The carrying amounts of the Company's cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value due to the short-term nature of these instruments. The Company's
outstanding bank line of credit bears interest at a variable market rate and
has a carrying amount that approximates fair value. The note payable to
shareholder carries a fixed rate of interest that also approximates fair value,
based on rates available to the Company for debt with similar terms and
remaining maturities.
Interim Financial Information
The financial statements at May 31, 1996 and for the two months then ended
are unaudited. In the opinion of the Company's management, the unaudited
financial statements at May 31, 1996 and for the two months then ended include
all adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation. The results of operations for the two months ended May 31,
1996 are not necessarily indicative of the results to be expected for the full
year.
F-33
<PAGE>
PATIENT-CARE MEDICAL SALES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MAY 31, 1995 AND 1996 AND FOR THE TWO MONTHS THEN ENDED IS
UNAUDITED)
(2) DEBT
Debt consists of the following at March 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Sanwa Bank line of credit............................. $ 880,000 $ 890,000
Note payable to a shareholder......................... 271,500 271,500
Equipment capital leases.............................. 195,113 184,120
---------- ----------
$1,346,613 $1,345,620
========== ==========
</TABLE>
The Company has an agreement with Sanwa Bank which provides for a $1,400,000
line of credit secured by substantially all the assets of the Company.
Outstanding borrowings bear interest monthly at the annual rate of prime plus
1% (or 9.25% at March 31, 1996). The line of credit agreement expires on July
31, 1996, at which time all outstanding borrowings and unpaid interest are due
in full. The agreement requires the Company to comply with certain covenants
and to satisfy certain financial tests and ratios.
In February 1993, the shareholder of the Company advanced funds to the
Company in the amount of $271,500 in return for a promissory note. The note is
due in February 1997 and bears interest monthly at an interest rate of 11% per
annum. The note is secured by substantially all the Company's assets and is
subordinate to the bank line of credit.
The Company also has equipment capital leases ranging in maturities from
June 1997 to February 2000 and bearing interest rates ranging from 7% to 13%.
(3) INCOME TAXES
The provision (benefit) for income taxes for the years ended March 31, 1994,
1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
U.S. Federal--
Current........................................... $ 45,603 $210,896 $30,529
Deferred.......................................... (19,262) (44,528) 35,308
State--
Current........................................... 16,136 57,834 9,208
Deferred.......................................... (5,808) (13,429) 10,647
-------- -------- -------
$ 36,669 $210,773 $85,692
======== ======== =======
</TABLE>
F-34
<PAGE>
PATIENT-CARE MEDICAL SALES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MAY 31, 1995 AND 1996 AND FOR THE TWO MONTHS THEN ENDED IS
UNAUDITED)
(3) INCOME TAXES (CONTINUED)
Under SFAS No. 109, net current deferred tax assets or liabilities and net
long-term deferred tax assets or liabilities are reported separately in the
Company's accompanying balance sheets. Deferred taxes result primarily from
nondeductible accruals and reserves and tax bases differing from financial
reporting bases of inventories and fixed assets. The components of the
deferred taxes as of March 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995
-----------------
LONG-
CURRENT TERM
-------- --------
<S> <C> <C>
Deferred tax assets......................................... $113,350 $ 9,816
Deferred tax liabilities.................................... -- --
-------- --------
$113,350 $ 9,816
======== ========
<CAPTION>
1996
-----------------
LONG-
CURRENT TERM
-------- --------
<S> <C> <C>
Deferred tax assets......................................... $ 89,826 $ --
Deferred tax liabilities.................................... -- (12,615)
-------- --------
$ 89,826 $(12,615)
======== ========
</TABLE>
The provision for income taxes is different from the amount computed by
applying the U.S. federal statutory income tax rate of 34% to income before
provision for income taxes, primarily due to state taxes net of federal income
tax benefit.
(4) RETIREMENT PLAN
In 1996, the Company adopted a qualified, defined contribution 401(k) plan
covering eligible full-time employees during the 1996 fiscal year. The Company
matches 25% of employee contributions up to 6% of their annual salary and may
also make discretionary contributions. Contributions to the plan by the
Company amounted to $7,014 in 1996.
(5) COMMITMENTS AND CONTINGENCIES
Lease
The Company currently has a lease for its Santa Fe Springs warehouse
facility which expires in May 1998. Rent expense, including common area
maintenance charges, charged against operations under the lease amounted to
$212,433, $169,739 and $176,077 in 1994, 1995 and 1996, respectively.
At March 31, 1996, approximate future minimum lease payments under this
noncancelable operating lease are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1997................................ $160,920
1998................................ 160,920
1999................................ 26,820
--------
$348,660
========
</TABLE>
F-35
<PAGE>
PATIENT-CARE MEDICAL SALES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFOMATION AT MAY 31, 1995 AND 1996 AND FOR THE TWO MONTHS THEN ENDED IS
UNAUDITED)
(6) SUPPLEMENTAL CASH FLOWS DISCLOSURE
Cash payments for interest and income taxes and certain noncash transactions
were as follows:
<TABLE>
<CAPTION>
TWO MONTHS
ENDED
YEAR ENDED MARCH 31, MAY 31,
------------------------- ---------------
1994 1995 1995 1995 1996
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest............................ $61,740 $268,730 $146,182 $22,285 $21,229
Income taxes........................ 36,222 88,124 408,535 -- --
Equipment acquired under capital
lease obligations.................. -- 179,172 -- -- --
======= ======== ======== ======= =======
</TABLE>
(7) SUBSEQUENT EVENT
On April 18, 1996, the stockholder of the Company signed a confidential
letter of intent to sell the outstanding stock to Suburban Ostomy Supply Co.,
Inc. The proposed transaction is subject to a number of conditions, including
the negotiation of a definitive agreement and satisfactory completion of due
diligence by the buyer.
F-36
<PAGE>
Graphic depiction of the Company's Direct Marketing material and training and
telemarketing Staffs.
<PAGE>
[LOGO]
3,900,000 SHARES
COMMON STOCK
PROSPECTUS
DEAN WITTER REYNOLDS INC.
BEAR, STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY
WHEAT FIRST BUTCHER SINGER
, 1996
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses (other than underwriting discounts and commissions) payable in
connection with the sale of the Common Stock offered hereby (including the
Common Stock which may be issued pursuant to an over-allotment option) are as
follows:
<TABLE>
<CAPTION>
AMOUNTS
-----------
<S> <C>
SEC Registration fee........................................... $ 21,652.00
NASD filing fee................................................ $ 6,753.00
Nasdaq National Market fee..................................... $ 46,700.00
Printing Expenses.............................................. $150,000.00
Legal fees and expenses........................................ $300,000.00
Accounting Fees and expenses................................... $125,000.00
Blue sky fees and expenses (including legal fees and ex-
penses)....................................................... $ 25,000.00
Transfer agent and registrar fees and expenses................. $ 20,000.00
Miscellaneous.................................................. $104,895.00
-----------
Total...................................................... $800,000.00
-----------
</TABLE>
The Company will bear all expenses shown above.
- --------
* All amounts are estimated, except SEC Registration, NASD and Nasdaq National
Market Fees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 67 of Chapter 156B of the Massachusetts Business Corporation Law,
which is applicable to the Company, provides as follows:
Indemnification of directors, officers, employees and other agents of a
corporation, and persons who serve at its request as directors, officers,
employees or other agents of another organization, or who serve at its request
in any capacity with respect to any employee benefit plan, may be provided by
it to whatever extent shall be specified in or authorized by: (i) the articles
of organization or (ii) a by-law adopted by the stockholders or (iii) a vote
adopted by the holders of a majority of the shares of stock entitled to vote
on the election of directors. Except as the articles of organization or by-
laws otherwise require, indemnification of any persons referred to in the
preceding sentence who are not directors of the corporation may be provided by
it to the extent authorized by the directors. Such indemnification may include
payment by the corporation of expenses incurred in defending a civil or
criminal action or proceeding in advance of the final disposition of such
action or proceeding, upon receipt of an undertaking by the person indemnified
to repay such payment if he shall be adjudicated to be not entitled to
indemnification under this Section which undertaking may be accepted without
reference to the financial ability of such person to make repayment. Any such
indemnification may be provided although the person to be indemnified is no
longer an officer, director, employee or agent of the corporation or of such
other organization or no longer serves with respect to any such employee
benefit plan.
No indemnification shall be provided for any person with respect to any
matter as to which he shall have been adjudicated in any proceeding not to
have acted in good faith in the reasonable belief that his action was in the
best interest of the corporation or to the extent that such matter relates to
service with respect to an employee benefit plan, in the best interests of the
participants or beneficiaries of such employee benefit plan.
The absence of any express provision for indemnification shall not limit any
right of indemnification existing independently of this section.
A corporation shall have power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or other agent of
the corporation, or is or was serving at the request of the
II-1
<PAGE>
corporation as a director, officer, employee or other agent of another
organization or with respect to any employee benefit plan, against any
liability incurred by him in any such capacity, or arising out of his status
as such, whether or not the corporation would have the power to indemnify him
against such liability.
In addition, pursuant to its Articles of Organization and Bylaws, the
Company shall indemnify its directors and officers against expenses (including
judgments or amounts paid in settlement) incurred in any action, civil or
criminal, to which any such person is a party by reason of any alleged act or
failure to act in his capacity as such, except as to a matter as to which such
director or officer shall have been finally adjudged not to have acted in good
faith in the reasonable belief that his action was in the best interest of the
corporation.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Act"). Reference is made to
the form of Underwriting Agreement filed as Exhibit 1 hereto.
The Company maintains directors and officers liability insurance for the
benefit of its directors and certain of its officers and has entered into
indemnification agreements with its directors and certain of its officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, Suburban has issued the following securities,
none of which have been registered under the Securities Act of 1933, as
amended (the "Act"):
(a) On July 3, 1995, in connection with the recapitalization of the
Company, the Company sold: (i) an aggregate of 4,340,000 shares (after
giving effect to the 100 for 1 Common Stock split effected July 3, 1995,
the 50 for 1 Common Stock split effected April 10, 1996 and the 3.1 for 1
Common Stock split effected June 21, 1996) to Summit Ventures, Summit
Investors, Summit Debt Fund and BSC for an aggregate purchase price of
$100,000; and (ii) an aggregate of 66,500 shares of its Redeemable
Preferred Stock to Summit Partners for an aggregate consideration of
$6,650,000. In connection with the July 3, 1995 recapitalization, the
Company also issued $9,250,000 in principal amount of Summit Notes and the
Management Notes. Finally, in connection with the July 3, 1995
recapitalization, the Company granted to certain officers of the Company
options to purchase 620,000 (post-splits) shares of its Common Stock.
(b) In connection with the acquisition of St. Louis Ostomy the Company
issued the St. Louis Note.
(c) On October 12, 1995 and April 31, 1996, the Company issued an
aggregate of 23,250 shares (post-splits) of Common Stock upon the exercise
by Mr. Manos of option to purchase such shares, at exercise price of $0.81
per share (post-splits).
(d) On October 31, 1995, the Company granted to various employees options
to purchase an aggregate of 29,450 shares (post-splits) pursuant to the
Company's 1995 Stock Option Plan.
(e) On January 22, 1996, the Company issued the Bank Warrant.
ITEM 16. EXHIBITS
Exhibits:
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement
3.1 Restated Articles of Organization, as amended
3.2 Bylaws
5.1 Form of Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, as to the legality of the securities being registered
10.1 Stock Purchase and Redemption Agreement, among the Company, Summit,
BSC, the Management Stockholders and Melvin Aronson, dated July 3, 1995
10.2 Subordinated Debenture Purchase Agreement among the Company, Summit
Debt and Summit Investors, dated July 3, 1995
10.3 Shareholders' Agreement among the Company, Summit, BSC, the Management
Stockholders and Melvin Aronson, dated July 3, 1995
10.4 Registration Rights Agreement among the Company, Summit, BSC, the
Management Stockholders and Melvin Aronson, dated July 3, 1995
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.5 $6,615,000 12% Subordinated Debenture of the Company issued to Summit
Debt, dated July 3, 1995
10.6 $135,000 12% Subordinated Debenture of the Company issued to Summit
Investors, dated July 3, 1995
10.7 Suburban Ostomy Supply Co., Inc. Stock Option Plan
10.8 Stock Option Agreement with Herbert Grey, dated July 3, 1995
10.9 Stock Option Agreement with Donald Benovitz, dated July 3, 1995
10.10 Stock Option Agreement with Stephen N. Aschettino, dated July 3, 1995
10.11 Stock Option Agreement with John Manos, dated July 3, 1995
10.12 Employment Agreement with Herbert Gray, dated July 3, 1995
10.13 Employment Agreement with Donald Benovitz, dated July 3, 1995
10.14 Employment Agreement with Stephen N. Aschettino, dated July 3, 1995
10.15 Employment Agreement with Patrick Bohan, dated July 3, 1995
10.16 Employment Agreement with John Manos, dated July 3, 1995
10.17 $1,000,000 12% Non-Negotiable Subordinated Promissory Note of the
Company issued to Melvin Aronson, dated July 3, 1995
10.18 $1,000,000 12% Non-Negotiable Subordinated Promissory Note of the
Company issued to Herbert P. Gray, dated July 3, 1995
10.19 $375,000 12% Non-Negotiable Subordinated Promissory Note of the
Company issued to Donald Benovitz, dated July 3, 1995
10.20 $62,500 12% Non-Negotiable Subordinated Promissory Note of the Company
issued to Stephen N. Aschettino, dated July 3, 1995
10.21 $62,500 12% Non-Negotiable Subordinated Promissory Note of the Company
issued to Patrick Bohan, dated July 3, 1995
10.22 Credit Agreement between the Company and The First National Bank of
Boston, dated July 3, 1995
10.23 First Amendment to Credit Agreement among the Company, the Bank and
St. Louis Ostomy, dated January 22, 1996
10.24 Second Amendment to Credit Agreement among the Company, the Bank and
St. Louis Ostomy, dated June 14, 1996
10.25 Proposed terms and conditions of Amended Credit Facility from the Bank
10.26 Warrant to purchase shares of Common Stock issued to the Bank, dated
January 22, 1996
10.27 Stock Purchase Agreement relating to the Purchase of St. Louis Ostomy
by the Company, dated January 22, 1996
10.28 Non-Competition Agreement between the Company and Michael J. Quinn,
dated January 22, 1996
10.29 $1,235,000 10% Subordinated Promissory Note of the Company issued to
Michael J. Quinn, dated January 22, 1996
10.30 Employment Letter Agreement between the Company and Michael J. Quinn,
dated January 22, 1996
10.31 Stock Purchase Agreement relating to the Purchase of Patient-Care by
the Company, dated June 14, 1996
10.32 Escrow Agreement among the Company and the Stockholders of Patient-
Care, dated June 14, 1996
10.33 Non-Competition Agreement by Nate Spunt for the benefit of the Company
and Patient-Care, dated June 14, 1996
10.34 Employment Agreement between Patient-Care and John Somers, dated June
14, 1996
10.35 UPS Ground Incentive Program Contract Carrier Agreement between the
Company and UPS, dated February 13, 1995
10.36 Letter Agreement between the Company and UPS, dated August 23, 1995
10.37 UPS Consignee Billing Contract Courier Agreement between the Company
and UPS, dated September 23, 1995
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.38 Lease of New Englander Industrial Park between the Company and GBA
Realty Trust, dated August 1991
10.39 Lease and Agreement between the Company and GBA Realty Corp., dated
August 1, 1993
10.40 Lease Agreement between the Company and Suburban Grayson Atlanta
Partnership, dated August 1, 1986
10.41 Lease Agreement between the Company and Christmas Joint Venture,
dated July 1, 1994
10.42 Single Tenant Industrial Lease between the Company and Watson Land
Company, dated August 18, 1994
10.43 Agreement between the Company and Hollister Incorporated, as amended,
dated March 16, 1984
*11.1 Earnings Per Share Computations
*23.1 Consent of Arthur Andersen LLP
23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation
(included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* Filed with this Amendment No. 2.
FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of the Company is furnished at
the indicated page:
Report of Independent Public Accountants (Page S-1)
Schedule II--Valuation and Qualifying Accounts (Page S-2)
All other schedules not listed are omitted because of the absence of
conditions under which they are required.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of the time
it was declared effective; and (2) For the purpose of determining any
liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-1 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN BOSTON, MASSACHUSETTS, ON SEPTEMBER
18, 1996.
Suburban Ostomy Supply Co., Inc.
/s/ Herbert P. Gray
By: __________________________________
HERBERT P. GRAY
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Herbert P. Gray Chairman of the
- ------------------------------------ Board of Directors September 18,
HERBERT P. GRAY and Chief 1996
Executive Officer
/s/ Donald H. Benovitz Director, President
- ------------------------------------ and Chief September 18,
DONALD H. BENOVITZ Operating Officer 1996
/s/ Stephen N. Aschettino Vice President,
- ------------------------------------ Treasurer and September 18,
STEPHEN N. ASCHETTINO Clerk (principal 1996
accounting
officer)
Director
/s/ Martin J. Mannion* September 18,
- ------------------------------------ 1996
MARTIN J. MANNION
Director
/s/ Joseph F. Trustey* September 18,
- ------------------------------------ 1996
JOSEPH F. TRUSTEY
* under power of attorney
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Suburban Ostomy Supply Co., Inc.:
We have audited in accordance with generally accepted auditing standards the
1993, 1994 and 1995 consolidated financial statements of Suburban Ostomy
Supply Co., Inc. included in this Registration Statement and have issued our
report thereon dated June 21, 1996. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in item 16.b. of this Registration Statement is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. The schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements as
of September 3, 1994, September 2, 1995 and June 1, 1996 and for the years
ended August 28, 1993, September 3, 1994 and September 2, 1995 and the thirty-
nine weeks ended June 1, 1996, and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
June 21, 1996
S-1
<PAGE>
SUBURBAN OSTOMY AND SUBSIDIARY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM AUGUST 29, 1992 THROUGH JUNE 1, 1996
<TABLE>
<CAPTION>
ADDITIONS
--------------------
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND WRITE-OFFS END
OF PERIOD EXPENSES OTHER (1) OF BAD DEBT OF PERIOD
---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended August 28,
1993
Accounts receivable... $ -- $ 89,974 -- $ 89,974 $ --
======= ======== ======== ======== ========
Year ended September 3,
1994
Accounts receivable... $ -- $ 49,802 -- $ 24,802 $ 25,000
======= ======== ======== ======== ========
Year ended September 2,
1995
Accounts receivable... $25,000 $ 21,384 -- $ 21,384 $ 25,000
======= ======== ======== ======== ========
Thirty-nine weeks ended
June 1, 1996
Accounts receivable... $25,000 $167,518 $104,942 $122,460 $175,000
======= ======== ======== ======== ========
</TABLE>
- --------
(1) Represents accounts receivable allowance of St. Louis Ostomy acquired on
January 22, 1996.
S-2
<PAGE>
EXHIBIT INDEX
Exhibits:
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement
3.1 Restated Articles of Organization, as amended
3.2 Bylaws
5.1 Form of Opinion of Hutchins, Wheeler & Dittmar, A Professional
Corporation, as to the legality of the securities being registered
10.1 Stock Purchase and Redemption Agreement, among the Company, Summit,
BSC, the Management Stockholders and Melvin Aronson, dated July 3,
1995
10.2 Subordinated Debenture Purchase Agreement among the Company, Summit
Debt and Summit Investors, dated July 3, 1995
10.3 Shareholders' Agreement among the Company, Summit, BSC, the Management
Stockholders and Melvin Aronson, dated July 3, 1995
10.4 Registration Rights Agreement among the Company, Summit, BSC, the
Management Stockholders and Melvin Aronson, dated July 3, 1995
10.5 $6,615,000 12% Subordinated Debenture of the Company issued to Summit
Debt, dated July 3, 1995
10.6 $135,000 12% Subordinated Debenture of the Company issued to Summit
Investors, dated July 3, 1995
10.7 Suburban Ostomy Supply Co., Inc. Stock Option Plan
10.8 Stock Option Agreement with Herbert Grey, dated July 3, 1995
10.9 Stock Option Agreement with Donald Benovitz, dated July 3, 1995
10.10 Stock Option Agreement with Stephen N. Aschettino, dated July 3, 1995
10.11 Stock Option Agreement with John Manos, dated July 3, 1995
10.12 Employment Agreement with Herbert Gray, dated July 3, 1995
10.13 Employment Agreement with Donald Benovitz, dated July 3, 1995
10.14 Employment Agreement with Stephen N. Aschettino, dated July 3, 1995
10.15 Employment Agreement with Patrick Bohan, dated July 3, 1995
10.16 Employment Agreement with John Manos, dated July 3, 1995
10.17 $1,000,000 12% Non-Negotiable Subordinated Promissory Note of the
Company issued to Melvin Aronson, dated July 3, 1995
10.18 $1,000,000 12% Non-Negotiable Subordinated Promissory Note of the
Company issued to Herbert P. Gray, dated July 3, 1995
10.19 $375,000 12% Non-Negotiable Subordinated Promissory Note of the
Company issued to Donald Benovitz, dated July 3, 1995
10.20 $62,500 12% Non-Negotiable Subordinated Promissory Note of the Company
issued to Stephen N. Aschettino, dated July 3, 1995
10.21 $62,500 12% Non-Negotiable Subordinated Promissory Note of the Company
issued to Patrick Bohan, dated July 3, 1995
10.22 Credit Agreement between the Company and The First National Bank of
Boston, dated July 3, 1995
10.23 First Amendment to Credit Agreement among the Company, the Bank and
St. Louis Ostomy, dated January 22, 1996
10.24 Second Amendment to Credit Agreement among the Company, the Bank and
St. Louis Ostomy, dated June 14, 1996
10.25 Proposed terms and conditions of Amended Credit Facility from the Bank
10.26 Warrant to purchase shares of Common Stock issued to the Bank, dated
January 22, 1996
10.27 Stock Purchase Agreement relating to the Purchase of St. Louis Ostomy
by the Company, dated January 22, 1996
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.28 Non-Competition Agreement between the Company and Michael J. Quinn,
dated January 22, 1996
10.29 $1,235,000 10% Subordinated Promissory Note of the Company issued to
Michael J. Quinn, dated January 22, 1996
10.30 Employment Letter Agreement between the Company and Michael J. Quinn,
dated January 22, 1996
10.31 Stock Purchase Agreement relating to the Purchase of Patient-Care by
the Company, dated June 14, 1996
10.32 Escrow Agreement among the Company and the Stockholders of Patient-
Care, dated June 14, 1996
10.33 Non-Competition Agreement by Nate Spunt for the benefit of the
Company and Patient-Care, dated June 14, 1996
10.34 Employment Agreement between Patient-Care and John Somers, dated June
14, 1996
10.35 UPS Ground Incentive Program Contract Carrier Agreement between the
Company and UPS, dated February 13, 1995
10.36 Letter Agreement between the Company and UPS, dated August 23, 1995
10.37 UPS Consignee Billing Contract Courier Agreement between the Company
and UPS, dated September 23, 1995
10.38 Lease of New Englander Industrial Park between the Company and GBA
Realty Trust, dated August 1991
10.39 Lease and Agreement between the Company and GBA Realty Corp., dated
August 1, 1993
10.40 Lease Agreement between the Company and Suburban Grayson Atlanta
Partnership, dated August 1, 1986
10.41 Lease Agreement between the Company and Christmas Joint Venture,
dated July 1, 1994
10.42 Single Tenant Industrial Lease between the Company and Watson Land
Company, dated August 18, 1994
10.43 Agreement between the Company and Holister Incorporated, as amended,
dated March 16, 1984
*11.1 Earnings Per Share Computations
*23.1 Consent of Arthur Andersen LLP
23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation
(included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* Filed with this Amendment No. 2.
<PAGE>
3,900,000 SHARES
SUBURBAN OSTOMY SUPPLY CO., INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
September __, 1996
DEAN WITTER REYNOLDS INC.
BEAR STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY, L.L.C.
WHEAT FIRST BUTCHER SINGER
As Representatives of the several Underwriters
c/o Dean Witter Reynolds Inc.
2 World Trade Center
65th Floor
New York, New York 10048
Dear Sirs:
1. Introductory. Suburban Ostomy Supply Co., Inc., a Massachusetts
-------------
corporation (the "Company"), proposes to issue and sell, pursuant to the terms
of this Agreement, to the several Underwriters named in Schedule A hereto (the
"Underwriters" which term also shall include any underwriter substituted as
hereinafter provided in Section 11) an aggregate of 3,900,000 shares of Common
Stock (the "Common Stock") of the Company. The aggregate of 3,900,000 shares so
to be sold by the Company is herein called the "Firm Stock". The Company, Summit
Ventures III, L.P., Summit Investors II, L.P. and Summit Subordinated Debt, L.P.
(collectively the "Selling Shareholders") also propose to sell severally to the
Underwriters, on a pro rata basis, at the option of the Underwriters, an
aggregate of not more than 585,000 additional shares of Common Stock as provided
in Section 3 of this Agreement. The aggregate of 585,000 shares so proposed to
be sold is herein called the "Optional Stock". The Firm Stock and the Optional
Stock are collectively referred to herein as the "Stock." Dean Witter Reynolds
Inc., Bear Stearns & Co. Inc., William Blair & Company, L.L.C. and Wheat First
Butcher Singer are acting as representatives of the several Underwriters and in
such capacity are hereinafter referred to as the "Representatives".
Before the purchase and public offering of the Stock by the several
Underwriters, the Company and the Representatives, acting on behalf of the
several Underwriters, shall enter into an agreement substantially in the form of
Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the
form of an exchange of any standard form of written telecommunication between
the Company and the Representatives and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the Stock will
be governed by this Agreement, as supplemented by the Pricing Agreement. From
and after the date of the execution and delivery of the Pricing Agreement, this
Agreement shall be deemed to incorporate the Pricing Agreement.
<PAGE>
2. Representations and Warranties of the Company and the Selling
-------------------------------------------------------------
Shareholders.
-------------
(a) The Company represents and warrants to, and agrees with, the
several Underwriters, as of the date hereof and as of the date of the Pricing
Agreement (such later date being hereinafter referred to as the "Representation
Date"), that:
(i) A registration statement on Form S-1 (File No. 333-06621)
with respect to the Stock, a copy of which has heretofore been delivered to you,
has been carefully prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the published rules
and regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act, and has been filed with the
Commission under the Act; and the Company has so prepared and proposes so to
file prior to the effective date of such registration statement an amendment to
such registration statement including the final form of prospectus (which may
omit such information as permitted by Rule 430A of the Rules and Regulations).
Such registration statement as amended and the prospectus constituting a part
thereof (including in each case the information, if any, deemed to be a part
thereof pursuant to Rule 430A(b) or Rule 434 of the Rules and Regulations) are
hereinafter referred to as the "Registration Statement" and the "Prospectus",
respectively, except that if any revised prospectus shall be provided to the
Underwriters by the Company for use in connection with the offering of the Stock
which differs from the prospectus on file at the Commission at the time the
Registration Statement becomes effective (whether or not such prospectus is
required to be filed by the Company pursuant to Rule 424(b) of the Rules and
Regulations), the term "Prospectus" shall refer to such revised prospectus from
and after the time it is first provided to the Underwriters for such use. If the
Company elects to rely on Rule 434 under the Rules and Regulations, all
references to the Prospectus shall be deemed to include, without limitation, the
form of prospectus and the term sheet, taken together, provided to the
Underwriters by the Company in reliance on Rule 434 under Rules and Regulations
(the "Rule 434 Prospectus"). If the Company files a registration statement to
register a portion of the Securities and relies on Rule 462(b) for such
registration statement to become effective upon filing with the Commission (the
"Rule 462 Registration Statement"), then any reference to "Registration
Statement" herein shall be deemed to be to both the registration statement
referred to above (No. 333-06621) and the Rule 462 Registration Statement, as
each such registration statement may be amended pursuant to the Act.
(ii) When the Registration Statement becomes effective and as of
the Representation Date, the Registration Statement and the Prospectus will
conform in all material respects to the requirements of the Act and the Rules
and Regulations. At the time the Registration Statement becomes effective and at
the Representation Date, the Registration Statement will not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading. The
Prospectus, at the time the Registration Statement becomes effective and as of
the Representation Date (unless the term "Prospectus" refers to a prospectus
which has been provided to the Underwriters by the Company for use in connection
with the offering of the Stock which differs from the prospectus on file at the
Commission at the time the Registration Statement becomes effective, in which
case at the time it is first provided to the Underwriters for such use) and at
the Closing Date (as hereinafter defined), will not include an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing representations,
--------- --------
warranties and agreements shall not apply to information contained in or omitted
from the Registration Statement or the Prospectus in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
any Underwriter, directly or through the Representatives, specifically for use
in the preparation thereof.
(iii) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and except as disclosed in
the Prospectus, (A) neither the Company nor any of its subsidiaries has incurred
any liabilities or obligations (indirect, direct or contingent) or entered into
any oral or written agreements or other transactions not in the ordinary course
of business that, singly or in the aggregate, could reasonably be expected to be
material to the Company and its subsidiaries considered as a whole or that could
reasonably be expected to result in a material reduction in the earnings of the
Company and its subsidiaries considered as a whole, (B) neither the Company nor
any of its subsidiaries has sustained any loss or interference with its business
or properties from strike, fire, flood, windstorm, accident or other calamity
(whether or not covered
2
<PAGE>
by insurance) that, singly or in the aggregate, could reasonably be expected to
be material to the Company and its subsidiaries considered as a whole, (C) there
has been no material change in the indebtedness of the Company, no change in the
capital stock of the Company and no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock, and (D)
there has not been any Material Adverse Effect (as hereinafter defined).
Material Adverse Effect means any change that would, singly or in the aggregate,
result in a material adverse change in the condition (financial or otherwise),
business, prospects or results of operations of the Company and its subsidiaries
considered as a whole, whether or not arising in the ordinary course of
business.
(iv) The financial statements, together with the related notes
and schedules, set forth in the Prospectus and elsewhere in the Registration
Statement, fairly present, on the basis stated in the Registration Statement,
the financial position and the results of operations and changes in financial
position of the Company and its consolidated subsidiaries at the respective
dates or for the respective periods therein specified. Such financial statements
and related notes and schedules have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis except as may be
set forth in the Prospectus. The selected financial data set forth in the
Prospectus under the caption "Selected Consolidated Financial Data" fairly
presents, on the basis stated in, the information set forth therein. The pro
forma financial statements of the Company and the related notes thereto included
in the Registration Statement and the Prospectus have been prepared in
accordance with the Commission's rules and guidelines with respect to pro forma
financial statements and have been properly compiled on the bases described
therein, and the assumptions used in the preparation thereof are reasonable and
the adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein.
(v) Arthur Andersen LLP, who have expressed their opinions on
the audited financial statements and related schedules included in the
Registration Statement, are independent public accountants as required by the
Act and the Rules and Regulations.
(vi) The Company and each of its subsidiaries have been duly
organized and are validly existing and in good standing as corporations under
the laws of their respective jurisdictions of organization, with power and
corporate authority to own, lease and operate their properties and to conduct
their businesses as described in the Registration Statement and Prospectus; and
the Company is and each of its subsidiaries are duly qualified to do business
and in good standing as foreign corporations in all other jurisdictions where
their ownership or leasing of properties or the conduct of their businesses
requires such qualification, except where the failure to be so qualified would
not have a Material Adverse Effect.
(vii) The Company has authorized, issued and outstanding capital
stock as set forth under the heading "Capitalization" in the Prospectus (except
for subsequent issuances, if any, pursuant to reservations or agreements
referred to in the Prospectus); the issued and outstanding shares of Common
Stock (including the outstanding shares of the Stock) of the Company conform to
the description thereof in the Prospectus and have been duly authorized and
validly issued and are fully paid and nonassessable; the stockholders of the
Company have no preemptive rights with respect to any shares of capital stock of
the Company and all outstanding shares of capital stock of each corporate
subsidiary have been duly authorized and validly issued, and are fully paid and
nonassessable and are owned directly by the Company or by another subsidiary of
the Company free and clear of any liens, encumbrances, equities or claims.
(viii) The Stock to be issued and sold by the Company to the
Underwriters hereunder has been duly and validly authorized and, when issued and
delivered against payment therefor as provided herein and in the Pricing
Agreement, will be duly and validly issued and fully paid and nonassessable and
will conform to the description thereof in the Prospectus.
(ix) Except as disclosed in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any subsidiary is the
subject, that are required to be disclosed in the Registration Statement (other
than as described therein), or which, if determined adversely to the Company or
any subsidiary, would result in a Material Adverse Effect or which might
materially and adversely affect the consummation of this Agreement; and
3
<PAGE>
to the best of the Company's knowledge no such proceedings are threatened or
contemplated by governmental authorities or threatened by others.
(x) Neither the Company nor any of its subsidiaries is, or with
the giving of notice or passage of time or both would be, in breach or violation
of any of the terms or provisions of or in default under (A) any statute, rule
or regulation applicable to the Company or any of its subsidiaries, (B) any
indenture, contract, lease, mortgage, deed of trust, note or other agreement or
instrument to which the Company or such subsidiary is a party or by which it may
be bound, (C) its certificate of incorporation, by-laws or other organizational
documents, and (D) any order, decree or judgment of any court or governmental
agency or body having jurisdiction over the Company or any of its subsidiaries,
in each case (other than clause (C) of this Section 2(a)(x)), where such breach,
violation or default would result in a Material Adverse Effect. The performance
of this Agreement and the consummation of the transactions herein contemplated
will not, with the giving of notice or passage of time or both, result in a
breach or violation of any of the terms or provisions of or constitute a default
under (W) any statute, rule or regulation applicable to the Company or any of
its subsidiaries, (X) any indenture, contract, mortgage, lease, deed of trust,
note or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it is bound, (Y) the Company's or any such
subsidiary's certificate of incorporation, by-laws or other organizational
documents, or (Z) any order, decree judgment of any court or governmental agency
or body having jurisdiction over the Company or any of its subsidiaries or any
of their respective properties.
(xi) No labor dispute with the employees of the Company or any of
its subsidiaries exists or is imminent; and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its principal
suppliers, manufacturers or contractors which might be expected to result in a
Material Adverse Effect.
(xii) No consent, approval, authorization, order, registration
or qualification of or with any court or governmental agency or body is required
for the issuance and sale of the Stock by the Company or for the consummation by
the Company of the transactions contemplated by this Agreement, including,
without limitation, the use of the proceeds from the sale of the Stock to be
sold by the Company in the manner contemplated in the Prospectus under the
caption "Use of Proceeds," except such as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") or under the Act or the
securities or Blue Sky laws of any jurisdiction in connection with the purchase
and distribution of the Stock by the Underwriters.
(xiii) This Agreement and the Pricing Agreement have been duly
authorized, executed and delivered by the Company.
(xiv) The Company and its subsidiaries own or have obtained
valid licenses for all trademarks, trademark registrations, service marks,
service mark registrations, trade names and copyrights described in the
Prospectus as being owned, licensed or used by the Company or any of its
subsidiaries or that are necessary for the conduct of their respective
businesses as described in the Prospectus (collectively, "Intellectual
Property") and neither the Company nor any of its subsidiaries is aware of any
claim (or of any facts that would form a reasonable basis for any claim) to the
contrary or any challenge by any third party to the rights of the Company or any
of its subsidiaries with respect to any such Intellectual Property or to the
validity or scope of any such Intellectual Property and neither the Company nor
any of its subsidiaries has any claim against a third party with respect to the
infringement by such third party of any such Intellectual Property, which claims
or challenges, if adversely determined, would have a Material Adverse Effect.
(xv) The Company and its subsidiaries are in possession of and
operating in compliance with all such certificates, permits, licenses,
franchises, consents, approvals, authorizations, grants, easements, orders and
clearances as are necessary or required to own, lease or operate their
respective properties and to conduct their respective businesses in the manner
described in the Prospectus ("Licenses") and all such Licenses are valid and in
full force and effect except where the failure to possess such licenses would
not have a Material Adverse Effect. The Company and each of its subsidiaries are
in compliance in all material respects with their respective obligations under
such Licenses and neither the Company nor any or its subsidiaries has
4
<PAGE>
received any notice of proceeding that would allow, and no event has occurred
that allows, or after notice or lapse of time or both would allow, revocation,
modification, suspension or termination of any such License or a material
violation of any such laws or regulations. No such License contains a burdensome
restriction on the Company or any of its subsidiaries that is not adequately
disclosed in the Registration Statement and the Prospectus.
(xvi) The Company is not an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
(xvii) The Company and its subsidiaries have good and marketable
title to all properties (real and personal) owned by the Company and its
subsidiaries, free and clear of any mortgage, pledge, lien, security interest,
claim or encumbrance of any kind that may materially interfere with the use of
such properties or the conduct of the business of the Company and its
subsidiaries as a whole; and all material properties held under lease or
sublease by the Company or its subsidiaries are held under valid, subsisting and
enforceable leases or subleases with such exceptions as are not material and do
not interfere with the use made or proposed to be made of such properties by the
Company or its subsidiaries.
(xviii) The Company and its subsidiaries maintains accurate
books and records reflecting their respective assets and maintain internal
accounting controls which provide reasonable assurance that (A) transactions are
executed with management's authorization, (B) transactions are recorded as
necessary to permit preparation of financial statements and to maintain
accountability for assets, (C) access to assets is permitted only in accordance
with management's authorization and (D) the reported accountability of assets is
compared with existing assets at reasonable intervals.
(xix) The Company has complied, and will continue to comply,
with all provisions of Section 517.075 of the Florida Statutes (Chapter 92-198,
Laws of Florida) and the rules thereunder.
(xx) The Company and its subsidiaries have filed all federal,
state, local and foreign tax returns required to be filed, such returns are
complete and accurate in all material respects, and all taxes shown by such
returns or otherwise assessed that are due or payable have been paid, except
such taxes as are being contested in good faith and as to which adequate
reserves have been provided. The charges, accruals and reserves on the books of
the Company and its subsidiaries in respect of any tax liability for any year
not finally determined are adequate to meet any assessments or reassessments for
additional taxes; and there has been no tax deficiency asserted and, to the best
knowledge of the Company, no tax deficiency might be asserted or threatened
against the Company or any of its subsidiaries that could have a Material
Adverse Effect.
(xxi) Each "employee benefit plan" within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), in which
employees of the Company or any of its subsidiaries are eligible to participate
is in compliance in all material respects with the applicable provisions of
ERISA and the Internal Revenue Code of 1986, as amended. Neither the Company nor
any of its subsidiaries has any liability under Title IV of ERISA, nor does the
Company or any of its subsidiaries expect that any such liability will be
incurred, that could have a Material Adverse Effect.
(xxii) No transaction has occurred between or among the Company,
its subsidiaries and any of their respective officers, directors or affiliates
or, the best of the Company's knowledge, any affiliate of any such officer or
director, that is required to be described in the Registration Statement that is
not so described.
(xxiii) There are no statutes, regulations, contracts or other
documents that are required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the registration Statement that are
not described or filed as required. The contracts so described in the
Registration Statement and the Prospectus are in full force and effect and
neither the Company nor any of its subsidiaries nor, to the best knowledge of
the Company, any other party is in breach of or default under any such
contracts.
5
<PAGE>
(xxiv) Except as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the Company or
any of its subsidiaries any brokerage or finder's fee or any other fee,
commission or similar payment in connection with the Stock to be sold by the
Company.
(b) Any certificate signed by an officer of the Company and delivered
to the Representatives or counsel for the Underwriters shall be deemed a
representation and warranty of the Company to each Underwriter as to the matters
covered thereby.
(c) In the event the Selling Shareholders sell any Optional Stock
pursuant to this Agreement, the Selling Shareholders, acting severally and not
jointly, represent and warrant to, and agree with, the several Underwriters
that:
(i) Each Selling Shareholder has full right, power and authority
to enter into this Agreement. Each Selling Shareholder has duly executed and
delivered this Agreement.
(ii) Each Selling Shareholder has full right, power and authority
to sell, transfer, assign and deliver the Stock being sold by such Selling
Shareholder hereunder. Immediately prior to the delivery of the shares of Stock
being sold by such Selling Shareholder, such Selling Shareholder was the sole
registered owner of such shares of Stock and had good and valid title to such
shares of Stock, free and clear of all adverse claims as defined in Section 8-
302 of the Uniform Commercial Code and, upon registration of such shares of
Stock in the names of the Underwriters or their nominees, assuming that such
purchasers purchased such shares of Stock in good faith without notice of any
adverse claims as defined in Section 8-302 of the Uniform Commercial Code, such
purchasers will have acquired all the rights of such Selling Shareholder in such
shares of Stock free of any adverse claim, any lien in favor of the Company or
restrictions on transfer imposed by the Company.
(iii) The performance of this Agreement and the consummation of
the transactions herein contemplated will not, with the giving of notice or the
passage of time or both, result in a breach or violation of any of the terms or
provisions of or constitute a default under any statute, rule or regulation
applicable to such Selling Shareholder, or any indenture, mortgage, deed of
trust, note or other material contract, agreement or instrument to which such
Selling Shareholder is a party or by which it is bound, or any judgment, order
or decree of any court or governmental agency or body having jurisdiction over
such Selling Shareholder or any of its properties, or, if such Selling
Shareholder is a corporation, the certificate or articles of incorporation or
by-laws of such Selling Shareholder.
(iv) Without the prior written consent of Dean Witter Reynolds
Inc. on behalf of the Underwriters, each Selling Shareholder will not, during
the period commencing on the date hereof and ending 180 days after the date of
the final prospectus relating to the offering (the Prospectus"), (1) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer of dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (whether such shares or any
such securities are now owned by the undersigned or are hereafter acquired), or
(2) enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise.
(v) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by such Selling
Shareholder of the transactions contemplated by this Agreement, except such as
may be required by the NASD or under the Act or the securities or Blue Sky laws
of any jurisdiction in connection with the purchase and distribution of the
Stock by the Underwriters.
(vi) Such Selling Shareholder has not (A) taken, directly or
indirectly, any action designed to cause or result in, or that has constituted
or could reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the
6
<PAGE>
Stock or (B) since the filing of the Registration Statement (1) sold, bid for,
purchased or paid anyone any compensation for soliciting purchases of, the Stock
or (2) paid or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Company.
(vii) All information furnished or to be furnished to the
Company by or on behalf of each Selling Shareholder for use in connection with
the preparation of the Registration Statement and the Prospectus, insofar as it
relates to such Selling Shareholder, is or will be true and correct in all
respects and, with respect to the Registration Statement, does not and will not
contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, and, with respect to the Prospectus, does not and will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(viii) Nothing has come to such Selling Shareholder's attention
that has caused such Selling Shareholder to believe that (A) at the time the
Registration Statement becomes effective and at the Representation Date, it will
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading and (B) the Prospectus, at the time the Registration Statement
becomes effective and as of the Representation Date (unless the term
"Prospectus" refers to a prospectus which has been provided to the Underwriters
by the Company for use in connection with the offering of the Stock which
differs from the prospectus on file at the Commission at the time the
Registration Statement becomes effective, in which case at the time it is first
provided to the Underwriters for such use) and at the Closing Date, the
Prospectus will include any untrue statement of material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing representations, warranties and agreements in this subsection (viii)
are limited to the information in the Registration Statement set forth under the
caption "Principal Stockholders" that pertains to the Selling Shareholder (the
"Selling Shareholder Information") and shall not apply to information contained
in or omitted from the Registration Statement or the Prospectus in reliance
upon, and in conformity with, written information furnished to the Company by or
on behalf of any Underwriter, directly or through the Representatives,
specifically for use in the preparation thereof.
Each Selling Shareholder agrees that the obligations of such Selling
Shareholder hereunder shall not be terminated by operation of law, whether by
the death or incapacity of such Selling Shareholder, or any other event, that if
such Selling Shareholder should die or become incapacitated or any other event
occur, before the delivery of the Stock hereunder, certificates for the Stock to
be sold by such Selling Shareholder shall be delivered on behalf of such Selling
Shareholder in accordance with the terms and conditions of this Agreement.
Each Selling Shareholder further agrees that neither such Selling
Shareholder nor any of its officers, directors, or affiliates will (a) take,
directly or indirectly, prior to the termination of the underwriting syndicate
contemplated by this Agreement, any action designed to cause or to result in, or
that could reasonably be expected to constitute, the stabilization or
manipulation of the price of any securities of the Company to facilitate the
sale or resale of any of the shares of the Stock, (b) sell, bid for, purchase or
pay anyone any compensation for soliciting purchases of, the Stock or (c) pay to
or agree to pay any person any compensation for soliciting another to purchase
any other securities of the Company.
3. Purchase by, and Sale and Delivery to, Underwriters; Closing Date. On
------------------------------------------------------------------
the basis of the representations, warranties, covenants and agreements herein
contained, and subject to the terms and conditions herein set forth, the Company
agrees to sell to the Underwriters the Firm Stock, and subject to the terms and
conditions herein set forth, the Underwriters agree, severally and not jointly,
to purchase from the Company, at the price per share set forth in the Pricing
Agreement, the number of shares of Firm Stock set forth opposite their names in
Schedule A (except as otherwise provided in the Pricing Agreement), subject to
adjustment in accordance with Section 11 hereof.
7
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If the Company has elected not to rely upon Rule 430A under the Rules
and Regulations, the initial public offering price and the purchase price per
share to be paid by the several Underwriters for the Firm Stock each have been
determined and set forth in the Pricing Agreement, dated the date hereof, and an
amendment to the Registration Statement and the Prospectus will be filed before
the Registration Statement becomes effective.
If the Company has elected to rely upon Rule 430A under the Rules and
Regulations, the purchase price per share to be paid by the several Underwriters
for the Firm Stock shall be an amount equal to the initial public offering
price, less an amount per share to be determined by agreement between the
Representatives and the Company. The initial public offering price per share of
the Firm Stock shall be a fixed price to be determined by agreement between the
Representatives and the Company. The initial public offering price and the
purchase price, when so determined, shall be set forth in the Pricing Agreement.
In the event that such prices have not been agreed upon and the Pricing
Agreement has not been executed and delivered by all parties thereto by the
close of business on the fourteenth business day following the date of this
Agreement, this Agreement shall terminate forthwith, without liability of any
party to any other party, unless otherwise agreed to by the Company and the
Representatives.
(a) The Company will deliver the Firm Stock to the Representatives
for the respective accounts of the several Underwriters (in the form of
definitive certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or prior
to 12:00 Noon, New York Time, on the business day preceding the Closing Date or,
if no such direction is received, in the names of the respective Underwriters in
the amount set forth opposite each Underwriter's name on Schedule A hereto),
against payment of the purchase price therefor by certified or official bank
check or checks in same day funds, payable to the order of the Company, all at
the offices of Latham & Watkins, 855 Third Avenue, New York, New York. The time
and date of delivery and closing shall be at 10:00 A.M., on the third full
business day after the Registration Statement becomes effective (or, if the
Company has elected to rely upon Rule 430A, the third full business day after
execution of the Pricing Agreement); provided, however, that such date and time
--------- --------
may be accelerated or extended by agreement between the Company and the
Representatives or postponed pursuant to the provisions of Section 12 hereof.
The time and date of such payment and delivery are herein referred to as the
"Closing Date". The Company shall make the certificates for the Stock available
to the Representatives for examination on behalf of the Underwriters not later
than 3:00 P.M., New York Time, on the business day preceding the Closing Date.
(b) In addition, for the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Stock as contemplated by
the Prospectus, the Company and the Selling Shareholders hereby grant the
Underwriters an option to purchase, severally and not jointly, up to 585,000
shares in the aggregate of the Optional Stock. The purchase price per share to
be paid for the Optional Stock shall be the same price per share as for the Firm
Stock, less the amount of any dividend declared by the Company and payable on
any Optional Stock and as to which the record date has occurred after the date
of the Pricing Agreement. The option granted hereby may be exercised as to all
or any part of the Optional Stock at any time not more than 30 days subsequent
to the effective date of this Agreement. No Optional Stock shall be sold and
delivered unless the Firm Stock previously has been, or simultaneously is, sold
and delivered. The right to purchase the Optional Stock or any portion thereof
may be surrendered and terminated at any time upon notice by the Representatives
to the Company and the Selling Shareholders.
The option granted hereby may be exercised by the Representatives on
behalf of the Underwriters by giving written notice the "Option Notice" to the
Company setting forth the number of shares of the Optional Stock to be purchased
by them and the date and time for delivery of and payment for the Optional
Stock. Such date and time for delivery of and payment for the Optional Stock
(which may be the First Closing Date) is herein called the "Option Closing Date"
and shall not be later than ten days after written notice is given. The Company
shall have the option to sell to the Underwriters up to 100% but in no event
less than 50% of the Optional Stock requested by the Representatives in the
Option Notice. In the event the Company elects to sell less than 100% (but in no
event less than 50%) of the Optional Stock requested in the Option Notice, the
Selling Shareholders shall sell to the Underwriters the number of shares of
Optional Stock equal to the difference between the number of shares of
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<PAGE>
Optional Stock to be sold by the Company and the number of shares of Optional
Stock requested by the Representatives in the Option Notice. The Optional Stock
to be sold by the Selling Shareholders shall not exceed 50% of the Optional
Stock requested in the Option Notice. The Optional Stock to be sold by the
Selling Shareholders shall be allocated among the Selling Shareholders in
proportion to the number of shares of Common Stock owned by each. Optional Stock
shall be purchased for the account of each Underwriter in the same proportion as
the number of shares of Firm Stock set forth opposite such Underwriter's name in
Schedule A hereto bears to the total number of shares of Firm Stock (subject to
adjustment by the Representatives to eliminate odd lots). Upon exercise of the
option by the Representatives, the Company and, if applicable, the Selling
Shareholders agree to sell to the Underwriters the number of shares of Optional
Stock set forth in the written notice of exercise and the Underwriters agree,
severally and not jointly, subject to the terms and conditions herein set forth,
to purchase such shares of Optional Stock.
The Company, and, if applicable, the Selling Shareholders will deliver
the Optional Stock to the Representatives for the respective accounts of the
several Underwriters (in the form of definitive certificates, issued in such
names and in such denominations as the Representatives may direct by notice in
writing to the Company, and, if applicable, the Selling Shareholders given at or
prior to 12:00 Noon, New York Time, on the business day preceding the Option
Closing Date or, if no such direction is received, in the names of the
respective Underwriters), against payment of the purchase price therefor by
certified or official bank check or checks in same day funds, payable to the
order of the Company, and, if applicable, the Selling Shareholders at the
offices of Latham & Watkins, 855 Third Avenue, New York, New York. The Company,
and, if applicable, the Selling Shareholders shall make the certificates for the
Optional Stock available to the Representatives for examination on behalf of the
Underwriters not later than 3:00 P.M., New York Time, on the business day
preceding the Option Closing Date.
It is understood that Dean Witter Reynolds Inc., individually and not
as Representatives of the several Underwriters, may (but shall not be obligated
to) make payment to the Company and, if applicable, to the Selling Shareholders
on behalf of any Underwriter or Underwriters, for the Stock to be purchased by
such Underwriter or Underwriters. Any such payment by Dean Witter Reynolds Inc.
or other Representatives shall not relieve such Underwriter or Underwriters from
any of its or their other obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters propose to make an initial public offering of the Stock at the
initial public offering price. The Representative shall promptly advise the
Company of the making of the initial public offering.
4. Covenants and Agreements of the Company. The Company covenants and
----------------------------------------
agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective under the Act, will advise the Representatives
promptly as to the time at which the Registration Statement becomes effective,
will advise the Representatives promptly of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or of
the institution of any proceedings for that purpose, and will use its best
efforts to prevent the issuance of any such stop order and to obtain as soon as
possible the lifting thereof, if issued. If the Company elects to rely on Rule
434 under the Rules and Regulations, the Company will prepare a "term sheet"
that complies with the requirements of Rule 434 under the Rules and Regulations.
If Company elects not to rely on Rule 434, the Company will provide the
Underwriters with copies of the form of Prospectus, in such number as the
Underwriters may reasonably request, and file or transmit for filing with the
Commission such Prospectus in accordance with Rule 424(b) of the Rules and
Regulations by the close of business in New York on the business day immediately
succeeding the date of the Pricing Agreement. If the Company elects to rely on
Rule 434, the Company will provide the Underwriters with copies of the form of
Rule 434 Prospectus, in such number as the Underwriters may reasonably request,
and file or transmit for filing with the Commission the form of Rule 434
Prospectus complying with Rule 434(c)(2) of the Act in accordance with Rule
424(b) of the Act by the close of business in New York on the business day
immediately succeeding the date of the Pricing Agreement.
(b) The Company will advise the Representatives promptly of any
request by the Commission for any amendment of or supplement to the Registration
Statement or the Prospectus or for additional
9
<PAGE>
information, and will not at any time file any amendment to the Registration
Statement or supplement to the Prospectus which shall not previously have been
submitted to the Representatives a reasonable time prior to the proposed filings
thereof or to which the Representatives shall reasonably object in writing or
which is not in compliance with the Act and the Rules and Regulations.
(c) The Company will prepare and file with the Commission, promptly
upon the request of the Representatives, any amendments or supplements to the
Registration Statement or the Prospectus (including any revised prospectus which
the Company proposes for use by the Underwriters in connection with the offering
of the Stock which differs from the prospectus on file at the Commission at the
time the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424 of the Rules and
Regulations or any term sheet prepared in reliance on Rule 434 of the Rules and
Regulations) which in the opinion of the Representatives may be necessary to
enable the several Underwriters to continue the distribution of the Stock and
will use its best efforts to cause the same to become effective as promptly as
possible.
(d) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to be delivered
under the Act any event relating to or affecting the Company or any of its
subsidiaries occurs or has occurred as a result of which the Prospectus would
include an untrue statement of a material fact, or omit to state any material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary, at any time
to amend the Prospectus to comply with the Act, the Company will promptly notify
the Representatives thereof and will prepare an amended or supplemented
prospectus (in form and substance satisfactory to counsel to the Underwriters)
which will correct such statement or omission; and, in case any Underwriter is
required to deliver a prospectus relating to the Stock nine months or more after
the effective date of the Registration Statement, the Company upon the request
of the Representative and at the expense of such Underwriter will prepare
promptly such prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the Act.
(e) The Company will deliver to the Representatives, at or before the
Closing Date, signed copies of the Registration Statement and all amendments
thereto including all financial statements and exhibits thereto, and will
deliver to the Representatives such number of copies of the Registration
Statement, including such financial statements but without exhibits, and of all
amendments thereto, as the Representatives may reasonably request. The Company
will deliver or mail to or upon the order of the Representatives on the date of
the initial public offering, and thereafter from time to time during the period
when delivery of a prospectus relating to the Stock is required under the Act,
as many copies of the Prospectus, in final form or as thereafter amended or
supplemented as the Representatives may reasonably request; provided, however,
--------- --------
that the expense of the preparation and delivery of any prospectus required for
use nine months or more after the effective date of the Registration Statement
shall be borne by the Underwriters required to deliver such prospectus.
(f) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than 60 days after the close
of the period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the Act) which will be in reasonable detail (but
which need not be audited) and which will comply with Section 11(a) of the Act,
covering a period of at least twelve months beginning not later than the first
day of the Company's fiscal quarter next following the "effective date" (as
defined in Rule 158) of the Registration Statement.
(g) The Company will cooperate with the Representatives to enable the
Stock to be qualified for sale under the securities laws of such jurisdictions
as the Representatives may designate and at the request of the Representatives
will make such applications and furnish such information as may be required of
it as the issuer of the Stock for that purpose; provided, however, that the
Company shall not be required to qualify to do business or to file a general
consent to service of process in any such jurisdiction. The Company will, from
time to time, prepare and file such statements and reports as are or may be
required of it as the issuer of the Stock to continue such qualifications in
effect for so long a period as the Representatives may reasonably request for
the distribution of the Stock.
10
<PAGE>
(h) The Company will furnish to its shareholders annual reports
containing financial statements certified by independent public accountants and
shall also furnish quarterly summary financial information in reasonable detail
which may be unaudited. During the period of five years from the date hereof,
the Company will deliver to the Representatives and, upon request, to each of
the other Underwriters, copies of each annual report of the Company and each
other report furnished by the Company to its shareholders; and will deliver to
the Representatives, as soon as they are available, copies of any other reports
(financial or other) which the Company shall publish or otherwise make available
to any of its security holders as such, and as soon as they are available,
copies of any reports and financial statements furnished to or filed with the
Commission or any national securities exchange or the NASD.
(i) The Company will file with the Nasdaq National Market all
documents and notices required by the Nasdaq National Market of companies that
have issued securities that are traded in the over-the-counter market and
quotations for which are reported by Nasdaq National Market.
(j) The Company will use the net proceeds received by it from the
sale of the Stock in the manner specified in the Prospectus under "Use of
Proceeds".
(k) The Company will file with the Commission such reports on Form SR
as may be required pursuant to Rule 463 under the Act.
(l) During a period of 180 days from the date of the Pricing
Agreement, the Company will not, without prior written consent of Dean Witter
Reynolds Inc., directly or indirectly, sell, offer to sell, grant any option for
the sale of, or enter into any agreement to sell, any Common Stock or any
security convertible into Common Stock (except for Common Stock issued pursuant
to reservations, agreements or employee benefit plans disclosed in the
Registration Statement.
(m) At the time this Agreement is executed, the Company shall have
furnished to the Representatives a letter from each officer and director of the
Company and shareholders of the Company addressed to the Representatives, in
which each such person agrees that, during a period of 180 days from the date of
the Pricing Agreement, such person will not, without the prior written consent
of Dean Witter Reynolds Inc., directly or indirectly, (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer of dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (whether such shares or any such
securities are now owned by the undersigned or are hereafter acquired), or (2)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise.
5. Payment of Expenses. The Company will pay (directly or by
--------------------
reimbursement) all expenses incident to the performance of the obligations of
the Company and the Selling Shareholders under this Agreement, including but not
limited to all expenses and taxes incident to delivery of the Stock to the
Representatives, all expenses incident to the registration of the Stock under
the Act and the printing of copies of the Registration Statement, each
Preliminary Prospectus, the Prospectus, any amendments or supplements thereto
including any abbreviated terms sheet delivered by the Company pursuant to Rule
434 of the Rules and Regulations, the "Blue Sky" memorandum, the Agreement Among
Underwriters, Underwriters' Questionnaire and this Agreement and furnishing the
same to the Underwriters and dealers except as otherwise provided in Sections
4(d) and 4(e), the fees and disbursements of the Company's counsel and
accountants, all filing and printing fees and expenses (including legal fees and
disbursements of counsel for the Underwriters) incurred in connection with
qualification of the Stock for sale under the laws of such jurisdictions as the
Representatives may designate, all fees and expenses (including legal fees and
disbursements of counsel for the Underwriters) paid or incurred in connection
with filings made with the National Association of Securities Dealers, Inc. (the
"NASD"), the fees and expenses incurred in connection with the listing of the
Stock on Nasdaq National Market, the costs of preparing stock certificates, the
costs and fees
11
<PAGE>
of any registrar or transfer agent and all other costs and expenses incident to
the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section.
6. Indemnification and Contribution.
---------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter, each employee, officer, partner, director and agent of the
Underwriter, and each person, if any, who controls such Underwriter within the
meaning of the Act, against any losses, claims, damages, liabilities or expenses
(including the reasonable cost of investigating and defending against any claims
therefor and counsel fees incurred in connection therewith), joint or several,
as incurred, which may be based upon the Act, or any other federal or state
statute or at common law, arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), including the information deemed to be part of the
Registration Statement pursuant to Rule 430A(b) or Rule 434 of the Rules and
Regulations, if applicable, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Prospectus (or any amendment or
supplement thereto) or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, unless such statement
or omission was made in reliance upon, and in conformity with, written
information furnished to the Company by such Underwriter, directly or through
the Representatives, specifically for use in the preparation thereof; provided
--------
that the Company shall not be liable with respect to any claims made against any
Underwriter or any such employee, officer, partner, director or agent or any
such controlling person under this subsection unless such Underwriter or
employee, officer, partner, director or agent or controlling person shall have
notified the Company in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the claim shall
have been served upon such Underwriter or employee, officer, partner, director
or agent or controlling person (such notification by an Underwriter shall
suffice as notification on behalf of its officers, partners, directors,
employees, agents and controlling persons), but failure to notify the Company of
any such claim shall not relieve it from any liability which it may have to such
Underwriter or employee, officer, partner, director or agent or controlling
person otherwise than on account of the indemnity agreement contained in this
Section 6(a).
The Company shall be entitled to participate at its own expense in the
defense, or, if it so elects, to assume the defense for misstatements or
omissions in a Preliminary Prospectus of any suit brought to enforce any such
liability, but, if the Company elects to assume the defense, such defense shall
be conducted by counsel chosen by it and reasonably satisfactory to such
Underwriter or indemnified person as the case may be. In the event the Company
elects to assume the defense of any such suit and retain such counsel, the
Underwriter or Underwriters or other indemnified person or persons, defendant or
defendants in the suit, may retain additional counsel but shall bear the fees
and expenses of such counsel unless (i) the Company shall have specifically
authorized the retaining of such counsel or (ii) the parties to such suit
include such Underwriter or Underwriters other indemnified or person or persons,
and such Underwriter or Underwriters or other indemnified person or persons have
been advised by counsel that one or more legal defenses may be available to it
or them which may not be available to the Company, in which case the Company
shall not be entitled to assume the defense of such suit notwithstanding its
obligation to bear the fees and expenses of such counsel; provided that the
Company shall in no event be responsible for the fees and expenses of more than
one counsel for the Underwriters. The Company will not, without the prior
written consent, which shall not be unreasonably withheld, of each Underwriter,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not such Underwriter or other indemnified
party is a party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent (i) includes an unconditional release of such
Underwriter and each such other indemnified person or persons from all liability
arising out of such claim, action, suit or proceeding and (ii) does not include
a statement as to or as admission of fault, culpability or a failure to act by
or on behalf of any indemnified party. The Company agrees that a breach of the
preceding sentence shall cause irreparable harm to the Underwriters and that the
Underwriters shall be entitled to injunctive relief from any appropriate court
ordering specific performance of said provision. This indemnity agreement will
be in addition to any liability which the Company might otherwise have.
12
<PAGE>
(b) In the event the Selling Shareholders sell any Optional Stock
pursuant to this Agreement, each Selling Shareholder agrees to indemnify and
hold harmless each Underwriter, each employee, officer, partner, director and
agent of the Underwriter and each person, if any, who controls such Underwriter
with the meaning of the Act, against any losses, claims, damages, liabilities or
expenses (including, except as otherwise provided below, the reasonable cost of
investigating and defending against any claims therefor and counsel fees
incurred in connection therewith), joint or several, as incurred, which may be
based upon the Act, or any other statute or at common law, arising out of any
untrue statement or alleged untrue statement of a material fact contained in the
Selling Shareholder Information set forth in the Registration Statement (or any
amendment thereto), including the information deemed to be part of the
Registration Statement pursuant to Rule 430A(b) of the Rules and Regulations, if
applicable, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue statement of
a material fact contained in the Selling Shareholder Information set forth in
the Prospectus (or any amendment or supplement thereto) or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, unless such statement or omission was made in reliance
upon, and in conformity with, written information furnished to the Company by
such Underwriter, directly or through the Representatives, specifically for use
in the preparation thereof; provided, however, that such Selling Shareholder
shall not be liable with respect to any claims made against any Underwriter or
any such employee, officer, partner, director or agent or any such controlling
person under this subsection unless such Underwriter, or employee, officer,
partner, director or agent or controlling person shall have notified such
Selling Shareholder in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the claim shall
have been served upon such Underwriter or employee or agent or controlling
person (such notification by an Underwriter shall suffice as notification on
behalf of its officers, partners, directors, employees, agents or controlling
persons), but failure to notify such Selling Shareholder of such claims shall
not relieve such Selling Shareholder from any liability which such Selling
Shareholder may have to such Underwriter or employee or agent or controlling
person otherwise than on account of its indemnity agreement contained in this
Section 6(b); and provided, further, that each Selling Shareholder shall only be
liable under this paragraph for that proportion of any such losses, claims,
damages, liabilities or expenses which the number of shares of the Optional
Stock sold by such Selling Shareholder bears to the total number of shares of
Stock sold hereunder and in no event shall such liability exceed the net
proceeds received by such Selling Shareholder from the sale of the Stock
hereunder.
Each Selling Shareholder shall be entitled to participate at his own
expense in the defense, or, if he so elects, to assume the defense of any suit
brought to enforce any such liability, but, if such Selling Shareholder elects
to assume the defense, such defense shall be conducted by counsel chosen by such
Selling Shareholder and reasonably satisfactory to such Underwriter or
indemnified person, as the case may be. In the event that any Selling
Shareholder elects to assume the defense of any such suit and retain such
counsel, the Underwriter or Underwriters or other indemnified person or persons,
defendant or defendants in the suit, may retain additional counsel but shall
bear the fees and expenses of such counsel unless (i) such Selling Shareholder
shall have specifically authorized the retaining of such counsel or (ii) the
parties to such suit include such Underwriter or Underwriters or other
indemnified person or persons and such Selling Shareholder and such Underwriter
or Underwriters or other indemnified person or persons have been advised by
counsel that one or more legal defenses may be available to it or them which may
not be available to such Selling Shareholder, in which case such Selling
Shareholder shall not be entitled to assume the defense of such suit
notwithstanding its obligation to bear the fees and expenses of such counsel,
provided the Selling Shareholder shall not be responsible for the fees and
expenses of more than one such counsel. The Selling Shareholder against whom
indemnity may be sought shall not be liable to indemnify any person for any
settlement of such claim effected without such Selling Shareholder's consent
which shall not be unreasonably withheld. This indemnity agreement will be in
addition to any liability which such Selling Shareholder might otherwise have.
(c) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who have signed the
Registration Statement, each of its employees, officers, directors and agents
and each person, if any, who controls the Company within the meaning of the Act
against any losses, claims, damages, liabilities or expenses (including the
reasonable cost of investigating and defending against
13
<PAGE>
any claims therefor and counsel fees incurred in connection therewith), joint or
several, as incurred, which may be based upon the Act, or any other statute or
at common law, arising out of any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement (or any amendment
thereto), including the information deemed to be part of the Registration
Statement pursuant to Rule 430A(b) of the Rules and Regulations, if applicable,
or the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a material
fact contained in the Prospectus (or any amendment or supplement thereto) or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, but only insofar as any such statement or omission was
made in reliance upon, and in conformity with, written information furnished to
the Company by such Underwriter, directly or through the Representatives,
specifically for use in the preparation thereof; provided, however, that in
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no case is such Underwriter to be liable with respect to any claims made
against the Company or any person against whom the action is brought unless
the Company or such person shall have notified such Underwriter in writing
within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon
the Company or such person, but failure to notify such Underwriter of such
claim shall not relieve it from any liability which it may have to the
Company or such person otherwise than on account of its indemnity agreement
contained in this Section 6(c). Such Underwriter shall be entitled to
participate at its own expense in the defense, or, if it so elects, to
assume the defense of any suit brought to enforce any such liability, but,
if such Underwriter elects to assume the defense, such defense shall be
conducted by counsel chosen by it and reasonably satisfactory to the
Company or such person, as the case may be. In the event that any
Underwriter elects to assume the defense of any such suit and retain such
counsel, the Company, said employees, agents, officers and directors and
any other Underwriter or Underwriters or employee or employees or agent or
agents or controlling person or persons, defendant or defendants in the
suit, shall bear the fees and expenses of any additional counsel retained
by them, respectively. The Underwriter against whom indemnity may be
sought shall not be liable to indemnify any person for any settlement of
any such claim effected without such Underwriter's consent. This indemnity
agreement will be in addition to any liability which such Underwriter might
otherwise have.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsections (a), (b) or (c) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to herein, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), as incurred, in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other from the
offering of the Stock. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law, then each indemnifying
party shall contribute to such amount paid or payable by such indemnified party,
as incurred, in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Selling
Shareholders on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Selling Shareholders on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company and the Selling
Shareholders bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, Selling Shareholders or the Underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company,
Selling Shareholders and the Underwriters agree that it would not be just and
equitable if contribution were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to above. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or expenses (or actions in
respect thereof) referred to above shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such claim. Notwithstanding the provisions of
this subsection 6(c), no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the shares of
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the Stock underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. A Selling Shareholder shall be obligated to
contribute for losses, claims, damages, liabilities and expenses only in such
proportion as the shares of Optional Stock sold by such Selling Shareholder bear
to the total number of shares of Stock sold hereunder, and in no event shall
such contribution exceed the net proceeds received by such Selling Shareholder
from the sale of Stock hereunder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute are several in
proportion to their respective underwriting obligations and not joint.
7. Survival of Indemnities, Representations, Warranties, etc. The
----------------------------------------------------------
respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company, Selling Shareholders and the several
Underwriters, as set forth in this Agreement or made by them respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter, Selling Shareholders,
the Company or any of its officers or directors or any controlling person, and
shall survive delivery of and payment for the Stock.
8. Conditions of Underwriters' Obligations. The respective obligations
----------------------------------------
of the several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof, the Representation
Date and the Closing Date or the Option Closing Date, as the case may be, of the
representations and warranties made herein by the Company and the Selling
Shareholders, to the accuracy of the statements of the Company's officers or
directors in any certificate furnished pursuant to the provisions hereof, to
compliance at and as of such Closing Date by the Company and the Selling
Shareholders with their covenants and agreements herein contained and other
provisions hereof to be satisfied at or prior to such Closing Date, and to the
following additional conditions:
(a) The Registration Statement shall become effective not later than
3:00 P.M., New York City time, on the date hereof or, with the consent of the
Representatives, at a later time and date, not later, however, than 5:30 P.M.,
New York City time on the first business day following the date hereof, or at
such later date as may be approved by a majority in interest of the
Underwriters, and at such Closing Date (i) no stop order suspending the
effectiveness thereof shall have been issued and no proceedings for that purpose
shall have been initiated or, to the knowledge of the Company or the
Representatives, threatened by the Commission, and any request for additional
information on the part of the Commission (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
reasonable satisfaction of the Representatives, and (ii) there shall not have
come to the attention of the Representatives any facts that would cause them to
believe that the Prospectus, at the time it was required to be delivered to a
purchaser of the Stock, contained any untrue statement of a material fact or
omitted to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. If the Company has elected to rely upon Rule 430A of the Rules and
Regulations, the price of the Stock and any price related information previously
omitted from the effective Registration Statement pursuant to Rule 430A shall
have been transmitted to the Commission for filing pursuant to Rule 424(b) of
the Rules and Regulations within the prescribed time period, and before the
Closing Date the Company shall have provided evidence satisfactory to the
Representatives of such timely filing, or a post-effective amendment providing
such information shall have been promptly filed and declared effective in
accordance with the requirements of Rule 430A of the Rules and Regulations.
(b) At the time of execution of this Agreement, the Representatives
shall have received from Arthur Andersen LLP, a letter, dated the date of such
execution, in form and substance previously approved by the Representatives, and
to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the Act and
the Rules and Regulations.
(ii) In their opinion, the financial statements and supporting
schedule(s) examined by them and included in the Registration Statement comply
as to form in all material respects with the applicable accounting requirements
of the Act and the related published Rules and Regulations thereunder and, if
applicable, they have made a review in accordance with standards established by
the American Institute of Certified Public
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Accountants of the unaudited consolidated interim financial statements, selected
financial data, pro forma financial information, prospective financial
statements and/or condensed financial statements derived from audited financial
statements of the Company for the periods specified in such letter, as indicated
in their reports thereon, copies of which have been furnished to the
Representatives;
(iii) The unaudited selected financial information with respect
to the consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus agrees with the
corresponding amounts (after restatement where applicable) in the audited
consolidated financial statements for the five such fiscal years;
(iv) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards, consisting
of a reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries , inspection of the minute books
of the Company and its subsidiaries since the date of the latest audited
financial statements included or incorporated by reference in the Prospectus,
inquiries of officials of the Company and its subsidiaries responsible for
financial and accounting matters and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them to
believe that:
(A) the unaudited condensed consolidated statements of
income, consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder, or are
not in conformity with generally accepted accounting principles
applied on a basis substantially consistent with the basis for the
audited consolidated statements of income, consolidated balance sheets
and consolidated statements of cash flows included in the Prospectus ;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial statements
from which such data and items were derived, and any such unaudited
data and items were not determined on a basis substantially consistent
with the basis for the corresponding amounts in the audited
consolidated financial statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived the unaudited
condensed financial statements referred to in clause (A) and any
unaudited income statement data and balance sheet items included in
the Prospectus and referred to in clause (B) were not determined on a
basis substantially consistent with the basis for the audited
financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than three days prior to
the date of such letter, there has been any change in the consolidated
capital stock of the Company (other than issuances of capital stock
upon exercise of options, upon earn-outs of performance shares and
upon conversions of convertible securities, in each case which were
outstanding on the date of the latest balance sheet included in the
Prospectus) or any increase in the consolidated long-term debt of the
Company and consolidated
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<PAGE>
subsidiaries, any decrease in the consolidated net current assets, net
assets or other items specified by the Representatives, or any change
in any other items specified by the Representatives, in each case as
compared with amounts shown in the latest balance sheet included in
the Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (E) there was any decrease in consolidated net revenues
or operating profit or the total or per share amounts of consolidated
net income or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case
as compared with the comparable period of the preceding year and with
any other period of corresponding length specified by the
Representatives, except in each case for increases or decreases which
the Prospectus discloses have occurred or may occur or which are
described in such letter.
(v) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraphs (iii) and
(iv) above, they have carried out certain specified procedures, not constituting
an examination in accordance with generally accepted auditing standards, with
respect to certain amounts, percentages and financial information specified by
the Representatives which are derived from the general accounting records of the
Company and its subsidiaries , which appear in the Prospectus or in Part II of,
or in exhibits and schedules to, the Registration Statement specified by the
Representatives, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
(vi) On the basis of a reading of the unaudited consolidated
condensed pro forma financial statements included in the Registration Statement
and the Prospectus, carrying out certain specified procedures and inquiries of
certain officials of the Company and its consolidated subsidiaries who have
responsibility for financial and accounting matters, and proving the arithmetic
accuracy of the application of the pro forma adjustments to the historical
amounts in the unaudited consolidated condensed pro forma financial statements,
nothing came to their attention that caused them to believe that the unaudited
consolidated condensed pro forma financial statements do not comply as to form
in all material respects with the applicable accounting requirements of Rule 11-
02 of Regulation S-X or that the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of such statements.
(c) The Representatives shall have received from Arthur Andersen LLP
a letter, dated the Closing Date that such accountants reaffirm, as of such
Closing Date, and as through made on such Closing Date, the statements made in
the letter furnished by such accountants pursuant to paragraph (b) of this
Section 8, except that the specified date will be a date not more than three
business days prior to the Closing Date.
(d) The Representatives shall have received from Hutchins, Wheeler &
Dittmar, a professional corporation, counsel for the Company, an opinion, dated
the Closing Date, to the effect that:
(i) The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of Massachusetts and has the
corporate power and authority to own or lease its properties and conduct its
business as described in the Prospectus; and the Company is duly qualified as a
foreign corporation in good standing in all other jurisdictions where its
ownership or leasing of properties or the conduct of its business requires such
qualification, except where the failure to so qualify would not have a Material
Adverse Effect.
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(ii) The Company and its subsidiaries are in possession of and
operating in compliance with all Licenses and all such Licenses are valid and in
full force and effect except where the failure to possess such Licenses would
not have a Material Adverse Effect. The Company and each of its subsidiaries are
in compliance in all material respects with their respective obligations under
such Licenses and neither the Company nor any or its subsidiaries has received
any notice of proceeding that would allow, and no event has occurred that
allows, or after notice or lapse of time or both would allow, revocation,
modification, suspension or termination of any such License or a material
violation of any such laws or regulations. No such License contains a burdensome
restriction on the Company or any of its subsidiaries that is not adequately
disclosed in the Registration Statement and the Prospectus.
(iii) The Company has an authorized and outstanding capital
stock as set forth under the heading "Capitalization" in the Prospectus; all
outstanding shares of Common Stock (including the Stock) conform to the
description thereof in the Prospectus and have been duly authorized and validly
issued and are fully paid and nonassessable, and the stockholders of the Company
have no preemptive rights with respect to any shares of capital stock of the
Company.
(iv) To the best of such counsel's knowledge, there are no legal
or governmental proceedings pending other than those set forth under
"Business--Legal Matters" in the Prospectus to which the Company is a party or
of which any property of the Company is the subject, which individually or in
the aggregate are material; and to the best of such counsel's knowledge no such
proceedings are threatened by governmental authorities or others, if adversely
determined, would have a Material Adverse Effect.
(v) This Agreement and the Pricing Agreement have been duly
authorized, executed and delivered by the Company; and the performance of this
Agreement and the Pricing Agreement and the consummation of the transactions
herein and therein contemplated will not result in a breach or violation of any
of the terms or provisions of or constitute a default under any statute,
contract, indenture, mortgage, deed of trust, loan agreement, note, lease or
other agreement or instrument known to such counsel to which the Company is a
party or by which it is bound, the Company's Articles of Incorporation or By-
laws, or any order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or any of its
properties (except any state securities or "Blue Sky" laws as to which such
counsel expresses no opinion).
(vi) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company of
the transactions contemplated by this Agreement and the Pricing Agreement,
except such as may be required under the Act or as may be required under the
securities or Blue Sky laws of any jurisdiction or by the NASD in connection
with the purchase and distribution of the Stock by the Underwriters.
(vii) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order suspending
the effectiveness thereof has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the Act.
(viii) The Common Stock has been approved for listing on the
Nasdaq National Market. The Registration Statement on Form 8-A relating to the
Common Stock has become effective under the Securities Exchange Act of 1934, as
amended.
(ix) The Registration Statement and the Prospectus (other than
the financial statements and supporting schedules included therein, as to which
no opinions need be rendered), and each amendment or supplement thereto, as of
their respective effective or issue dates and as of the Closing Date complied as
to form in all material respects with the requirements of the Act and the Rules
and Regulations.
(x) The descriptions in the Registration Statement and
Prospectus of contracts and other documents are accurate in all material
respects and such descriptions fairly present in all material respects the
information required to be shown; and such counsel does not know of any legal or
governmental proceedings or of
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<PAGE>
any contracts or documents of a character required to be described in the
Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement or Prospectus which are not described and filed as
required.
(xi) The Company is not, and will not be as a result of the
consummation of the transactions contemplated by this Agreement, an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(xii) To such counsel's knowledge, the Registration Statement
(other than the financial statements and supporting schedules thereto as to
which no opinion need be rendered), at the time it became effective or at the
Representation Date, did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus, at the
Representation Date (unless the term "Prospectus" refers to a prospectus which
has been provided to the Underwriters by the Company for use in connection with
the offering of the Stock which differs from the prospectus on file at the
Commission at the time the Registration Statement became effective, in which
case at the time it was first provided to the Underwriters for such use) or at
the Closing Date, included any untrue statement of a material fact or omitted to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(xiii) St. Louis Ostomy, Inc. and Patient Care Medical Sales,
subsidiaries of the Company (the "Subsidiaries"), have each been duly
incorporated, are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation and have power and
authority (corporate and other) to own their respective properties and conduct
their respective businesses as described in the Prospectus, and each of such
Subsidiaries is duly qualified as a foreign corporation in good standing and in
all other jurisdictions where its ownership or leasing of properties or the
conduct of its business requires such qualification, except where the failure to
be so qualified would not have a Material Adverse Effect.
(xiv) All outstanding shares of capital stock of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and are owned by the Company free and clear of any liens,
encumbrances, equities and claims.
(e) The Representatives shall have received from Latham & Watkins,
counsel for the Underwriters, their opinion or opinions dated the Closing Date
with respect to the validity of the Stock, the Registration Statement, the
Prospectus and such other related matters as the Representative may require. In
giving such opinion, such counsel may rely, as to all matters governed by the
laws of jurisdictions other than the law of the State of New York and the
federal law of the United States, upon opinions of counsel satisfactory to the
Representatives. The Company shall have furnished to such counsel such documents
as they may request for the purpose of enabling them to pass upon such matters.
(f) The Representatives shall have received a certificate, dated such
Closing Date, of the Chief Executive Officer or the President and the chief
financial or accounting officer of the Company to the effect that: (i) no stop
order suspending the effectiveness of the Registration Statement has been
issued, and no proceedings for that purpose have been instituted or are pending
or contemplated under the Act; (ii) subsequent to the respective dates as of
which information is given in the Prospectus, neither the Company nor any of its
subsidiaries has incurred any liabilities or obligations, direct or contingent,
nor entered into any transactions, not in the ordinary course of business, which
in either case are material to the Company and its subsidiaries considered as a
whole, whether or not arising in the ordinary course of business, and there has
not been any Material Adverse Effect, or any change in the capital stock or
long-term debt of the Company and its subsidiaries considered as a whole; (iii)
the Company has complied with all agreements and satisfied all conditions on its
part to be performed or satisfied at or before the Closing Date; (iv) the
representations and warranties of the Company in this Agreement are true and
correct at and as of the Closing Date; and (v) between the execution of this
Agreement and the Closing Date, the business and operations conducted by the
Company and its subsidiaries have not sustained a loss by strike, fire, flood,
accident or other calamity (whether or not insured) of such a character as to
interfere materially with the
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conduct of the business and operations of the Company and its subsidiaries
considered as a whole. As used in this Section 8(f), the term "Prospectus" means
the Prospectus in the form first used to confirm sales of Stock.
(g) The Company and the Selling Shareholders shall have furnished to
the Representatives such additional certificates as the Representatives may have
reasonably requested as to the accuracy, at and as of the Closing Date, of the
representations and warranties made herein by it as to compliance at and as of
the Closing Date by it with its covenants and agreements herein contained and
other provisions hereof to be satisfied at or prior to the Closing Date and as
to other conditions to the obligations of the Underwriters hereunder.
(h) The Stock shall have been approved for listing on Nasdaq National
Market.
(i) In the event the Underwriters exercise the option granted in
Section 3(b) hereof to purchase all or any portion of the Optional Shares, the
representations and warranties of the Company and the Selling Shareholders
contained herein and the statements in any certificates furnished by the Company
and the Selling Shareholders hereunder shall be true and correct as of the
Option Closing Date, and you shall have received:
(i) A letter from Arthur Andersen LLP, in form and substance
satisfactory to you and dated the Option Closing Date, substantially the same in
scope and substance as the letter furnished to you pursuant to Section 8(b),
except that the specified date in the letter furnished pursuant to this Section
8(i)(i) shall be a date not more than five days prior to the Option Closing
Date.
(ii) A certificate, dated the Option Closing Date, of the Chief
Executive Officer or President and the chief financial or accounting officer of
the Company confirming that the certificate delivered at the First Closing Date
pursuant to Section 8(f) remains true as of the Option Closing Date.
(iii) The opinion of Hutchins, Wheeler & Dittmar, a Professional
Corporation, counsel for the Company, in form and substance satisfactory to
counsel for the Underwriters, dated the Option Closing Date, relating to the
Optional Stock and otherwise to the same effect as the opinion required by
Section 8.
(iv) In the event the Selling Shareholders sell any Optional
Stock pursuant to this Agreement, the opinion of Hutchins, Wheeler & Dittmar, a
Professional Corporation counsel for the Selling Shareholders, dated the Option
Closing Date to the effect that:
(1) Each Selling Shareholder has full right, power and
authority to enter into this Agreement.
(2) Each Selling Shareholder has full right, power and
authority to sell, transfer, assign and deliver the Stock being
sold by such Selling Shareholder hereunder. Immediately prior to
the delivery of the shares of Stock being sold by such Selling
Shareholder, such Selling Shareholder was the sole registered
owner of such shares of Stock and, upon registration of such
shares of Stock in the names of the Underwriters or their
nominees, assuming that such purchasers purchased such shares of
Stock in good faith without notice of any adverse claims as
defined in Section 8-302 of the Uniform Commercial Code, such
purchasers will have acquired all the rights of such Selling
Shareholder in such shares of Stock free of any adverse claim, or
to the best of such counsel's knowledge, any lien in favor of the
Company or restrictions on transfer imposed by the Company.
(3) The performance of this Agreement and the consummation
of the transactions herein contemplated will not, with the giving
of notice of passage of time or both, result in a breach or
violation of any of the terms or provisions of or constitute a
default under any statute, rule or regulation applicable to the
Selling Shareholder, or, to the best of such counsel's knowledge,
any indenture, mortgage, deed of trust, note
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agreement or other material agreement or instrument to which the
Selling Shareholder is a party or by which it is bound, or any
judgment, order or decree known to such counsel after due inquiry
of any court or governmental agency or body having jurisdiction
over the Selling Shareholder or any of their properties (except
any state securities or "Blue Sky" rules or regulations, as to
which we render no opinion) or, (a) if the Selling Shareholder is
a corporation, the certificate or articles of incorporation and
by-laws of the Selling Shareholder or (b) if the Selling
Shareholder is a partnership, the partnership agreement or
certificate of limited partnership of the Selling Shareholder.
(4) No consent, approval, authorization or order of any
court or governmental agency or body is required for the
consummation by any Selling Shareholder of the transactions
contemplated by this Agreement.
(5) Any transfer taxes which are required to be paid in
connection with the sale and delivery of the Stock to the
Underwriters hereunder have been paid and all laws imposing such
taxes have been fully complied with.
(v) In the event the Selling Shareholders sell any Optional
Stock pursuant to this Agreement, a certificate or certificates, dated such
Closing Date, by or on behalf of the Selling Shareholders to the effect that as
of the Option Closing Date its representations and warranties in this Agreement
are true and correct as if made on and as of the Option Closing Date, and that
they have performed all their obligations and satisfied all the conditions on
its part to be performed or satisfied at or prior to such Option Closing Date.
(vi) The opinion of Latham & Watkins, counsel for the
Underwriters, dated the Option Closing Date, relating to the Optional Stock and
otherwise to the same effect as the opinion required by Section 8(e).
If any of the conditions hereinabove provided for in this Section
shall not have been satisfied when and as required by this Agreement, this
Agreement may be terminated by the Representatives by notifying the Company of
such termination in writing or by telegram at or prior to the First Closing
Date, but the Representatives shall be entitled to waive any of such conditions.
9. Termination. This Agreement may be terminated by the Representatives
------------
by notice to the Company if at or prior to the First Closing Date or the Option
Closing Date, as the case may be, (i) trading in securities on the New York or
American Stock Exchanges shall have been suspended or minimum or maximum prices
shall have been established on either such exchange, or a banking moratorium
shall have been declared by New York or United States authorities; (ii) there
shall have been any adverse change in the financial markets in the United
States, Japan or Europe or any outbreak or escalation of hostilities between the
United States and any foreign power, or of any other insurrection or armed
conflict involving the United States that, in the judgment of the
Representatives, makes it impracticable or inadvisable to offer, sell or deliver
the Firm Stock or the Optional Stock as applicable, on the terms contemplated by
the Prospectus or this Agreement; (iii) there shall have been since the
execution of this Agreement or since the respective dates as of which
information is given in the Prospectus any Material Adverse Effect; (iv) there
shall have been any development involving the business or properties or
securities of the Company or any of its subsidiaries or the transactions
contemplated by this Agreement, which, in the judgment of the Representatives,
makes it impracticable or inadvisable to offer, sell or deliver the Firm Stock
or Option Stock, as applicable, on the terms contemplated by the Prospectus or
this Agreement or (v) if there shall be any litigation, pending or threatened,
which, in the judgment of the Representative, makes it impracticable or
inadvisable to offer or deliver the Stock on the terms contemplated by the
Prospectus or this Agreement. As used in this Section 9, the term "Prospectus"
means the Prospectus in the form first used to confirm sales of Stock.
10. Reimbursement of Underwriters. Notwithstanding any other provisions
------------------------------
hereof, if this Agreement shall be terminated by the Representatives under
Section 8, Section 9 or Section 12, the Company will bear and pay
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<PAGE>
the expenses specified in Section 5 hereof and, in addition to its obligations
pursuant to Section 6, hereof, the Company will reimburse the reasonable out-of-
pocket expenses of the several Underwriters (including reasonable fees and
disbursements of counsel for the Underwriters) incurred in connection with this
Agreement and the proposed purchase of the Stock, and promptly upon demand the
Company will pay such amounts to you as Representatives. In addition, the
provisions of Section 6 shall survive any such termination.
11. Default By Underwriters. If any Underwriter or Underwriters shall
------------------------
default in its or their obligations to purchase shares of Firm Stock hereunder
on the First Closing Date and the aggregate number of shares of Firm Stock which
such defaulting Underwriter or Underwriters agreed but failed to purchase does
not exceed 10% of the total number of shares which the Underwriters are
obligated to purchase at the First Closing Date, the other Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder, to
purchase the shares of Firm Stock which such defaulting Underwriter or
Underwriters agreed but failed to purchase. If any Underwriter or Underwriters
shall so default and the aggregate number of shares of Firm Stock with respect
to which such default or defaults occur is more than 10% of the total number of
shares underwritten and arrangements satisfactory to the Representative and the
Company for the purchase of such shares of Stock by other persons are not made
within 48 hours after such default, this Agreement shall terminate.
If the remaining Underwriters or substituted underwriters are required
hereby or agree to take up all or part of the shares of Firm Stock of a
defaulting Underwriter or Underwriters as provided in this Section 11, (i) the
Company shall have the right to postpone the Closing Date for a period of not
more than five full business days, in order that the Company may effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement or supplements to
the Prospectus which may thereby be made necessary, and (ii) the respective
numbers of shares of Firm Stock to be purchased by the remaining Underwriters or
substituted underwriters shall be taken as the basis of their underwriting
obligation for all purposes of this Agreement. Nothing herein contained shall
relieve any defaulting Underwriter of its liability to the Company or the
Underwriters for damages occasioned by its default hereunder. Any termination of
this Agreement pursuant to this Section 11 shall be without liability on the
part of any non-defaulting Underwriter or the Company, except for expenses to be
paid or reimbursed pursuant to Section 5 and except for the provisions of
Section 6.
12. Default By the Company. If the Company shall fail at the First
-----------------------
Closing Date to sell and deliver the number of shares of Firm Stock which it is
obligated to sell hereunder, then this Agreement shall terminate without any
liability on the part of any non-defaulting party.
No action taken pursuant to this Section shall relieve the Company so
defaulting from liability, if any, in respect of such default.
13. Notices. All communications hereunder shall be in writing and; (i) if
--------
sent to the Underwriters shall be mailed, delivered or telegraphed and confirmed
to you, as their Representatives c/o Dean Witter Reynolds Inc. at Two World
Trade Center, 65th Floor, Corporate Finance, New York, New York 10048, Attn:
Samuel H. Wolcott, III, except that notices given to an Underwriter pursuant to
Section 6 hereof shall be sent to such Underwriter at the address provided to
the Representative; (ii) if sent to the Company, shall be mailed, delivered or
telegraphed and confirmed c/o Herbert P. Gray, Suburban Ostomy Supply Co., Inc.,
75 October Hill Road, Holliston, MA 01746; (iii) if sent to the Selling
Shareholders, shall be mailed, delivered or telegraphed and confirmed c/o Summit
Ventures III, L.P., 600 Atlantic Avenue, Suite 2800, Boston, MA 02210.
14. Successors. This Agreement shall inure to the benefit of and be
-----------
binding upon the several Underwriters, the Company and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person other than the
persons mentioned in the preceding sentence any legal or equitable right, remedy
or claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations, warranties,
covenants, agreements and indemnities of the Company contained in this Agreement
22
<PAGE>
shall also be for the benefit of the person or persons, if any, who control any
Underwriter or Underwriters within the meaning of Section 15 of the Act, and the
indemnities of the several Underwriters shall also be for the benefit of each
director of the Company, each of its officers who has signed the Registration
Statement and the person or persons, if any, who control the Company within the
meaning of Section 15 of the Act.
15. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
---------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAWS. The Company hereby consents to personal jurisdiction in
the State of New York and voluntarily submits to the jurisdiction of the courts
of such state, including the federal district courts located in such state, in
any proceeding with respect to this Agreement.
16. Counterparts. This Agreement may be executed by one or more parties
-------------
hereto in any number of counterparts each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
17. Authority of the Representatives. In connection with this Agreement,
---------------------------------
Dean Witter Reynolds Inc. will act for and on behalf of the several
Underwriters, and any action taken under this Agreement by Dean Witter Reynolds
Inc., as a representative of the several Underwriters, will be binding on all
the Underwriters.
23
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter and your acceptance shall constitute a binding agreement
between us.
Very truly yours,
SUBURBAN OSTOMY SUPPLY CO., INC.
By:______________________________________
Name:
Title:
SUMMIT VENTURES III, L.P.
By: Summit Partners III, L.P.,
its General Partner
By: Stamps, Woodsum & Co. III
its General Partner
By:______________________________________
Name:
Title:
SUMMIT INVESTORS II, L.P.
By:______________________________________
Name:
Title:
SUMMIT SUBORDINATED DEBT FUND, L.P.
By: Summit Partners SD, L.P.,
its General Partner
By: Stamps, Woodsum & Co. III
its General Partner
By:______________________________________
Name:
Title:
Accepted and delivered,
as of the date first above written:
DEAN WITTER REYNOLDS INC.
BEAR STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY, L.L.C.
WHEAT FIRST BUTCHER SINGER
Acting on their own behalf and as
Representatives of the several
Underwriters referred to in the
foregoing Agreement.
By: DEAN WITTER REYNOLDS INC.
By_________________________________
Authorized Signature
24
<PAGE>
SCHEDULE A
NUMBER OF SHARES OF STOCK
NAME TO BE PURCHASED
TOTAL...........................................
_______________
<PAGE>
EXHIBIT A
3,900,000 SHARES
SUBURBAN OSTOMY SUPPLY CO., INC.
COMMON STOCK
PRICING AGREEMENT
-----------------
September ___, 1996
DEAN WITTER REYNOLDS INC.
BEAR STEARNS & CO., INC.
WILLIAM BLAIR & COMPANY, L.L.C.
WHEAT FIRST BUTCHER & SINGER
As Representatives of the several Underwriters
c/o Dean Witter Reynolds Inc.
2 World Trade Center
65th Floor
New York, New York 10048
Dear Sirs:
Reference is made to the Underwriting Agreement, dated September ____,
1996 (the "Underwriting Agreement"), relating to the purchase by the several
Underwriters named in Schedule A thereto, for whom Dean Witter Reynolds Inc. and
other Representatives are acting as representatives (the "Representatives"), of
the above shares of 3,900,000 (the "Common Stock") of Suburban Ostomy Supply
Co., Inc. (the "Company").
Pursuant to Section 3 of the Underwriting Agreement, the Company
agrees with each underwriter as follows:
1. The initial public offering price per share for the Stock,
determined as provided in Section 3, shall be $_______________.
The purchase price per share for the Stock to be paid by the several
Underwriters shall be $_______________.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
SUBURBAN OSTOMY SUPPLY CO., INC.
By: _____________________________________
Name:
Title:
Accepted and delivered,
as of the date first above written:
DEAN WITTER REYNOLDS INC.
BEAR, STEARNS & CO., INC.
WILLIAM BLAIR & COMPANY, L.L.C.
WHEAT FIRST BUTCHER SINGER
Acting on its own behalf and as
Representative of the several Under-
writers referred to in the foregoing
Agreement.
BY: DEAN WITTER REYNOLDS INC.
By:____________________________________
Authorized Signature
A-2
<PAGE>
EXHIBIT 11
EARNINGS PER SHARE COMPUTATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE
YEAR ENDED WEEKS ENDED
SEPTEMBER 2, JUNE 1,
1995 1996
------------ -----------
<S> <C> <C>
SUPPLEMENTAL PRO FORMA PRIMARY EPS:
Historical net income before provision for
income taxes............................. $ 4,551,710 $ 3,372,175
Provision for income taxes................ (1,820,684)(A) (1,446,010)
Reversal of interest expense and
amortization of deferred financing
charges, net of tax ..................... 223,550 1,120,778
----------- -----------
Net income................................ $ 2,954,576 $ 3,046,943
=========== ===========
Weighted average common shares outstand-
ing...................................... 6,200,000(B) 6,207,296
Common shares outstanding from assumed is-
suance of shares sufficient to fund the
Recapitalization (in 1995) as well as ac-
quisition debt (in 1996)................. 2,261,537(C) 3,900,000(C)
Weighted shares issued from assumed exer-
cise of:
Options................................... 607,335 600,491
Warrants.................................. 80,834 80,834
----------- -----------
Shares for EPS calculation................ 9,149,706 10,788,621
=========== ===========
SUPPLEMENTAL REPORTED EPS:
Net income................................ $ 0.32 $ 0.28
FULLY DILUTED EPS:
For the periods presented in this exhibit,
there is no dilution from Primary EPS
</TABLE>
(A) Prior to the Recapitalization, the Company elected to be taxed as a
Subchapter S corporation for federal income tax purposes. Supplemental pro
forma information has been computed as if the Company has been subject to
Federal income taxes and all applicable state corporate income taxes for
each period presented.
(B) For purposes of weighting the common shares, the Recapitalization is
assumed to have occurred on September 4, 1994.
(C) Common shares are assumed sold (at an assumed offering price of $13.00 per
share) at the beginning of the respective period to fund the
Recapitalization and acquisition indebtedness.
This exhibit should be reviewed in conjunction with Note 2 to the Consolidated
Financial Statements.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made a part of this
Registration Statement on Form S-1.
/s/ Arthur Andersen LLP
Boston, Massachusetts
September 18, 1996
