<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-06621
PROSPECTUS
3,900,000 SHARES
[SUBURBAN OSTOMY LOGO APPEARS HERE]
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. The initial public offering price has been determined by
agreement between the Company and the Representatives of the
Underwriters. See "Underwriting." The Shares have been 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.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
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)
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<S> <C> <C> <C>
PER SHARE $12.00 $0.84 $11.16
TOTAL(3) $46,800,000 $3,276,000 $43,524,000
- -------------------------------------------------
- -------------------------------------------------
</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 $53,820,000, $3,767,400 and $50,052,600, 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
October 15, 1996.
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DEAN WITTER REYNOLDS INC.
BEAR, STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY
WHEAT FIRST BUTCHER SINGER
October 9, 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.
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TABLE OF CONTENTS
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PAGE
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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>
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PAGE
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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........... 52
Index to Financial Statements.... F-1
</TABLE>
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UNTIL NOVEMBER 3, 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
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<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."
Nasdaq National Market Symbol... "SOSC"
</TABLE>
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(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.... 9,334 10,784 10,785 10,785
======= ======= ======= =======
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)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital............................ $ 8,562 $ 9,783 $10,255
Total assets............................... 26,808 33,522 33,522
Long-term debt............................. 31,419 35,884 900(10)
Redeemable preferred stock (2)............. 7,268 7,268 --
Total stockholders' (deficit) equity ...... (18,389) (18,389) 24,335
</TABLE>
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(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 the offering price of $12.00 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
the offering price of $12.00 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 the offering price of $12.00 per share and
the application of the net proceeds therefrom, as if it had occurred on
June 1, 1996.
(10) On an actual basis, after giving effect to the application of
approximately $42.7 million of net proceeds from the sale of the 3,900,000
shares of Common Stock offered hereby, the Company will have no
outstanding long-term indebtedness.
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 33.5% 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
$10.71 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 the initial
offering price of $12.00 per share, are estimated to be $42.7 million ($49.3
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 long-term 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 $13.1 million, or
$1.29 per share. This represents an immediate increase in pro forma net
tangible book value of $6.05 per share to existing stockholders and an
immediate dilution of $10.71 per share to new investors. The following table
illustrates the per share dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $12.00
Net tangible book value per share at June 1, 1996.......... $(4.76)
Increase in net tangible book value per share attributable
to new investors........................................... 6.05
------
Pro forma net tangible book value per share after the offer-
ing........................................................ 1.29
------
Dilution per share to new investors......................... $10.71
======
</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 46,800,000 100.0 12.00
---------- ----- ----------- -----
Total...................... 10,123,250 100.0% $46,961,607 100.0%
========== ===== =========== =====
</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 $0.03 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 net proceeds of approximately $42.7
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 $ 900(1)
Summit Notes and Management Notes(2)......... 9,250 9,250 --
St. Louis Note(3)............................ 1,235 1,235 --
Redeemable Preferred Stock, redeemable; $.01
par value, 66,500 shares authorized(4); 66,500
shares outstanding(5)......................... 7,268 7,268 --
Stockholders' equity:
Common Stock; no par value; 10,000,000 shares
authorized(4); 6,223,250 actual shares is-
sued and outstanding (10,123,250 Pro Forma
as Adjusted shares issued and outstand-
ing)(6)..................................... 162 162 42,886
Retained earnings.............................. (18,551) (18,551) (18,551)
------- ------- -------
Total stockholders' equity (deficit)......... (18,389) (18,389) 24,335
------- ------- -------
Total capitalization......................... $20,422 $24,887 $25,235
======= ======= =======
</TABLE>
- --------
(1) On an actual basis, after giving effect to the application of
approximately $42.7 million of net proceeds from the sale of the 3,900,000
shares of Common Stock offered hereby, the Company will have no
outstanding long-term indebtedness.
(2) In connection with the Recapitalization, the Company issued the Summit
Notes and the Management Notes.
(3) In connection with the St. Louis Ostomy acquisition, the Company issued
the St. Louis Note.
(4) Immediately prior to the consummation of this offering, the Company
amended 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."
(5) Represents an accretion in value of the Redeemable Preferred Stock of
$618,000 since the Recapitalization.
(6) 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.... 9,334 10,785
======= =======
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 the offering price of $12.00 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 $ -- $ 1,524
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 -- 18,453
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 $ -- $33,522
======== ====== ======= ======== ======= =======
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 (24,623) 900(d)
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 (34,984) 989
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 42,724 42,886
(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) 42,724 24,335
-------- ------ ------- -------- ------- -------
Total liabilities and
stockholders'
(deficit) equity..... $ 26,808 $4,083 $ 2,631 $ 33,522 $ -- $35,522
======== ====== ======= ======== ======= =======
</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)(e) 8,966 3,218 -- 12,184
Depreciation and
amortization.... 266 57 435 (e) 758 58 116 (e) 932
------- --------------- ------------- ------- ------- ----- -------
Operating
income.......... 4,777 1,450 323 6,550 469 (116) 6,903
Interest
expense......... 370 91 1,125 (f) 1,586 114 352 (f) 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
(h):
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
(i)............
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)(g) 30
Other expense
(income), net... -- (261)
------------------ -----------
Income before
income taxes.... 2,022 7,134
Pro Forma data
(h):
Provision for
income taxes... 809 2,984
------------------ -----------
Net income...... $1,213 $ 4,150
================== ===========
Net income
applicable to
common
stockholders
(i)............ $ 4,150
===========
Net income per
common share... $ .39
===========
Weighted average
common shares
outstanding.... 10,784(j)
===========
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 (K) ENDED MARCH 31, 1996
---------------------------- -------------------------
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)(e) 6,847 2,634 -- 9,481
Depreciation and
amortization.... 387 22 167 (e) 576 53 87 (e) 716
------- --------------- ------------- ------- ------- ----- -------
Operating
income.......... 5,198 477 270 5,945 131 (87) 5,989
Interest
expense......... 1,841 13 433 (f) 2,287 112 264 (f) 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(i)..
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)(g) 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(i).. $ 3,429
===========
Net income per
common share.... $ .32
===========
Weighted average
common shares
outstanding..... 10,785(j)
===========
</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............................ $ 46,800
Underwriting discounts and commissions....................... (3,276)
Estimated expenses of this offering.......................... (800)
--------
Net proceeds................................................. 42,724
Repayment of substantially all long-term debt, including
current portion, and Redeemable Preferred Stock and related
accrued interest and dividend accretion..................... (42,724)
--------
Net increase in cash and cash equivalents.................... $ --
========
</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 $189,000 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 $76,000
and $92,000 for the year ended September 2, 1995 and the thirty-nine weeks
ended June 1, 1996, respectively.
(d) On an actual basis, after giving effect to the application of
approximately $42.7 of net proceeds from the sale of the 3,900,000 shares
of Common Stock offered hereby, the Company will have no long-term
indebtednees.
(e) 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.
(f) 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%.
(g) 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.
(h) 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.
(i) See Note 2 to the Consolidated Financial Statements.
(j) 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 (684,213 shares
and 677,408 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 public offering price. See "Dilution" and
"Capitalization."
(k) The Company's results include the operations of St. Louis Ostomy from
January 22, 1996, the date of acquisition.
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 13% and 15% of net sales,
respectively. 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 1.8% 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.
39
<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 3,255,000 4,949,640
Donald H. Benovitz...... 124,000 20% .81 June 30, 2005 2,170,000 3,299,640
Stephen N. Aschettino... 155,000 25% .81 June 30, 2005 2,712,500 4,124,550
John Manos.............. 155,000 25% .81 June 30, 2005 2,712,500 4,124,550
</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 the initial offering price to the public of $12.00) multiplied
by the number of shares of Common Stock underlying the option. These
assumed annual rates of appreciation were used in compliance with the
rules of the Securities and Exchange Commission and are not intended to
forecast future price appreciation of the Common Stock or to take into
account the immediate increase in potential realizable value that will
occur. The actual value realized from the options could be higher or lower
than the values reported above, depending on the future appreciation or
depreciation of the Common Stock during the option period and the timing
of exercise of the options.
40
<PAGE>
Year End Option Table. The following table sets forth information regarding
exercise of options and the number and value of options held at September 2,
1995, by each of the officers named in the Summary Compensation Table above.
No options were exercised during fiscal 1995 by such executives.
AGGREGATE UNEXERCISED OPTIONS AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED
SHARES AT IN-THE-MONEY OPTIONS
ACQUIRED YEAR END (#) AT YEAR-END ($)(1)
ON VALUE -------------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Herbert P. Gray......... -- -- 6,211 179,789 69,501 2,011,838
Donald H. Benovitz...... -- -- 4,141 119,859 46,337 1,341,222
Stephen N. Aschettino... -- -- 5,176 149,824 57,919 1,676,530
Patrick Bohan........... -- -- -- -- -- --
John Manos.............. -- -- 5,176 149,824 57,919 1,676,530
</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 the
initial offering price to the public of $12.00) 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 September 1, 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
As of June 1, 1996, the Company's authorized capital stock consisted 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 Articles of Organization, as amended, 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
amended its Articles of Organization to authorize 1,000,000 shares of
preferred stock and increased 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 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
46
<PAGE>
repeal the foregoing 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 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........................................... 715,000
Bear, Stearns & Co. Inc. .......................................... 715,000
William Blair & Company, L.L.C..................................... 715,000
Wheat, First Securities, Inc....................................... 715,000
Alex. Brown & Sons Incorporated.................................... 90,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 90,000
Hambrecht & Quist Incorporated..................................... 90,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 90,000
Montgomery Securities.............................................. 90,000
NatWest Securities Limited......................................... 90,000
Robertson, Stephens & Company...................................... 90,000
Smith Barney Inc. ................................................. 90,000
Adams, Harkness & Hill, Inc. ...................................... 40,000
Advest, Inc. ...................................................... 40,000
J.C. Bradford & Co. ............................................... 40,000
Cleary Gull Reiland & McDevitt Inc. ............................... 40,000
Needham & Company, Inc. ........................................... 40,000
Pennsylvania Merchant Group Ltd. .................................. 40,000
Tucker Anthony Incorporated........................................ 40,000
Wessels, Arnhold & Henderson....................................... 40,000
---------
Total.......................................................... 3,900,000
=========
</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 $.48 per share. Such dealers may reallow a concession not to exceed
$.10 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.
50
<PAGE>
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."
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.
51
<PAGE>
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.
52
<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...... 9,334,213 10,784,704
=========== ===========
</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 the offering price of $12.00 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 (2,450,000) 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............... 9,334 10,785
======= =======
</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 1996 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 OF SUBURBAN OSTOMY APPEARS HERE]
3,900,000 SHARES
COMMON STOCK
PROSPECTUS
DEAN WITTER REYNOLDS INC.
BEAR, STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY
WHEAT FIRST BUTCHER SINGER
OCTOBER 9, 1996
