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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SUBURBAN OSTOMY SUPPLY CO., INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
MASSACHUSETTS 5047 04-2675674
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
75 OCTOBER HILL ROAD
HOLLISTON, MA 01746
(508) 429-1000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, no par value per share NASDAQ
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-Q or any
amendment to this Form 10-Q. [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the last practical date. As of May 31, 1997
there were 10,538,503 shares of the Registrant's Common Stock outstanding.
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PART I
ITEM 1. FINANCIAL STATEMENTS
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
MAY 31, 1997 AUGUST 31, 1996
---------------------------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,559 $ 1,995
Accounts receivable, less allowances
of $632 and $416 10,671 8,625
Merchandise inventory 6,932 6,918
Prepaid expenses and other current assets 324 667
Deferred income taxes 348 474
-------- --------
Total current assets 20,834 18,679
Fixed assets, net 1,668 1,113
Goodwill 17,396 13,039
Other long-term assets 452 298
-------- --------
Total assets $ 40,350 $ 33,129
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2<PAGE>
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SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
MAY 31, 1997 AUGUST 31, 1996
---------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
(DEFICIT)
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 409 $ 582
Accounts payable and accrued expenses 7,048 7,713
Accrued interest -- 381
Income taxes payable 199 175
-------- --------
Total current liabilities 7,656 8,851
-------- --------
Long-term Liabilities:
Long-term debt, less current maturities 9 24,455
Subordinated debt to related parties -- 6,750
Notes payable to officers -- 2,500
St. Louis Note payable, less current portion -- 1,112
Deferred income taxes 71 71
-------- --------
Total long-term liabilities 80 34,888
-------- --------
Redeemable Preferred Stock:
$.01 par value, $100 redemption value plus
10% cumulative return--Authorized -
1,000,000 shares, Issued and outstanding
0 shares at 05/31/97 and 66,500
shares at 8/31/96 -- 7,437
Stockholders' Equity (Deficit:)
Common Stock, no par value Authorized
40,000,000 shares; issued and
outstanding - 10,538,503 and
6,223,250 shares 47,188 162
Accumulated deficit (14,574) (18,209)
-------- --------
Total stockholders' equity (deficit) 32,614 (18,047)
Total liabilities and
stockholders' equity (deficit) $ 40,350 $ 33,129
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3<PAGE>
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SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- -----------------------------
MAY 31,1997 JUNE 1, 1996 MAY 31, 1997 JUNE 1, 1996
<S> <C> <C> <C> <C>
Net sales $23,022 $19,314 $67,791 $49,302
Cost of goods sold 17,075 14,690 51,272 37,475
------- ------- ------- -------
Gross margin 5,947 4,624 16,519 11,827
Operating expenses 3,442 2,675 9,149 6,289
Depreciation and amortization 259 192 691 339
Operating income 2,246 1,757 6,679 5,199
Interest income 72 27 257 119
Interest expense 9 721 434 1,841
Other (expense) income (49) 10 (149) (105)
Income before income taxes 2,260 1,073 6,353 3,372
Provision for income taxes 970 495 2,768 1,446
Net income 1,290 578 3,585 1,926
Accretion of Preferred Stock -- 175 101 507
Net income applicable to common ------- ------- ------- -------
stockholders $ 1,290 $ 403 $ 3,484 $ 1,419
Supplemental Pro Forma: ------- ------- ------- -------
Net income $ 1,290 $ 1,016 $ 3,846 $ 3,047
---- ---- ---- ----
Net income per share $.12 $.09 $.35 $.28
==== ==== ==== ====
Weighted average common shares ------- ------- ------- -------
outstanding 11,109 10,785 11,053 10,785
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4<PAGE>
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION> NINE MONTHS ENDED NINE MONTHS ENDED
MAY 31, 1997 JUNE 1, 1996
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES:
Net income $ 3,585 $ 1,926
Adjustments to reconcile net income to cash
from (used by) operating activities:
Depreciation and amortization 691 387
Net loss (gain) on sale of fixed assets 4 21
Change in assets and liabilities, net
of effects from acquisition of Peiser's
in 1997 and St. Louis Ostomy in 1996
Accounts receivable 858 (640)
Merchandise inventory 745 (964)
Prepaid expenses and other 384 (90)
Deferred income taxes 125 (92)
Accounts payable and accrued
expenses (2,140) (580)
-------- --------
Net cash from (used by) operating activities 4,252 (32)
CASH FLOWS USED BY INVESTING ACTIVITIES:
Purchase of fixed assets (64) (119)
Purchase of Peiser's Inc. (8,000) --
Purchase of St. Louis Ostomy -- (10,709)
Other assets and Goodwill (133) 317
-------- --------
Net cash used by investing activities (8,197) (10,511)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in notes receivable from officiers -- 130
Issuance of common stock, net of
issuance costs 47,026 19
Retirement of preferred stock (7,537) --
Repayments of long-term bank debt, net (24,495) 8,040
Repayments of subordinated debt (10,485) --
Capital contribution -- 99
-------- --------
Net cash from financing activities 4,509 8,288
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 564 (2,255)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,995 3,970
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,559 $ 1,715
========= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5<PAGE>
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SUBURBAN OSTOMY SUPPLY COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation of the
financial statements, primarily consisting of normal recurring adjustments,
have been included. Operating results for the nine months ended May 31,
1997 are not necessarily indicative of the results that may be expected for
the year ending August 30, 1997 or any other interim period.
These statements should be read in conjunction with the consolidated
financial statements, notes and other information included in the Company's
latest Form 10-K.
Certain reclassifications have been made to the 1996 consolidated
financial statements to conform to the 1997 presentation.
(2) SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
Supplemental pro forma net income per share for the three and nine month
periods ended May 31, 1997 and June 1, 1996 have been calculated, as if
as of September 3, 1995, the Company had sold the 3.9 million shares of
Common Stock sufficient to fund the July 3, 1995 Recapitalization and repay
indebtedness incurred to finance two acquisitions.
The weighted average number of shares is the actual weighted average number
of shares of Common Stock or equivalents thereof outstanding plus the 3.9
million shares of Common Stock that were sold in connection with the public
offering, assuming issuance occurred on September 3, 1995. For the period
subsequent to October 15, 1996, weighted average shares reflect actual
weighted average shares computed consistent with the treasury stock method.
6<PAGE>
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(2) SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE CON'T
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<CAPTION>
(in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
MAY 31, JUNE 1, MAY 31, JUNE 1,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Historical income before taxes $ 2,260 $ 1,073 $ 6,353 $ 3,372
Provision for income taxes (970) (495) (2,768) (1,446)
Reversal of interest charges
and amortization of deferred
financing costs relating to
debt treated as being
repaid, net of tax -- 438 261 1,121
------- ------- ------- -------
Supplemental pro forma net income $ 1,290 $ 1,016 $ 3,846 $ 3,047
======= ======= ======= =======
Supplemental pro forma net income per
share $ .12 $ .09 $ .35 $ .28
======= ======= ======= =======
Supplemental pro forma weighted average
shares outstanding 11,109 10,785 11,053 10,785
------- ------- ------- -------
</TABLE>
(3) RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128). This Statement establishes standards for computing and
presenting earnings per share and applies to entities with publicly traded
common stock or potential common stock. SFAS 128 is effective for
financial statements for both interim and annual periods ending after
December 15, 1997 and early adoption is not permitted. When adopted, the
statement will require restatement of prior years' earnings per share. The
Company will adopt this statement for its quarter ended February 28, 1998.
Assuming that SFAS 128 had been implemented, basic earnings per share would
have been $0.12 and $0.10 for the three month periods ended May 31, 1997
and June 1, 1996, respectively and $0.37 and $0.30 for the nine month
periods ended May 31, 1997 and June 1, 1996, respectively. Under this
Statement, diluted earnings per share would not have differed from the net
income per share disclosed on the income statement.
7<PAGE>
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(4) ACQUISITION OF PEISER'S INC.
On May 1, 1997, Suburban Ostomy acquired all the outstanding capital stock
of Peiser's Inc. ("the Acquisition") for an aggregate consideration of
$8 million, of which $1 million was paid in shares of Suburban Ostomy's
common stock and the remainder in cash. Peiser's is a medical supply
management company. The cost of the acquisition exceeded the estimated
fair market value of the net assets acquired by approximately $4.8 million
and has been accounted for as goodwill. Suburban Ostomy used the purchase
method to account for the transaction, and all financial statements
reflect Peiser's performance from May 1, 1997 through May 31, 1997.
8<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1997 (13 WEEKS) VERSUS THREE MONTHS
ENDED JUNE 1, 1996 (13 WEEKS)
On May 1, 1997, Suburban Ostomy acquired all of the outstanding stock
for Peiser's Inc. Suburban Ostomy used the purchase method to account for
the transaction and, all financial statements reflect Peiser's Inc.'s
performance from May 1, 1997 through May 31, 1997 (See Note 4).
Net sales increased by $3.7 million, or 19%, to $23.0 million for the
quarter ended May 31, 1997 from $19.3 million for the prior year period. The
number of customer orders filled increased 34% to approximately 155,800 orders
for the quarter ended May 31, 1997 versus approximately 116,600 for the prior
year period. Same store growth in gross sales was approximately 6% and was due
primarily to increased volume from national home health care chains and
managed care organizations. The average order size decreased to $152 for the
quarter ended May 31, 1997 versus $169 for the prior year period due primarily
to the addition of Peiser's patient-specific home health agency business, which
has a smaller average order size than Suburban Ostomy's business.
Gross margin increased by $1.3 million, or 29%, to $5.9 million for the
quarter ended May 31, 1997 from $4.6 million for the prior year period. Gross
margin increased to 25.8% versus 23.9% for the prior year period. The increase
in gross margin was due primarily to the additional volume of Peiser's Inc.,
which has a higher gross margin than Suburban Ostomy's historical business.
Operating expenses increased by $0.8 million, or 29%, to $3.4 million for
the quarter ended May 31, 1997 versus $2.7 million for the prior year period,
and as a percentage of net sales, increased to 15% versus 14% for the prior year
period. The increase in operating expenses as a percentage of net sales was
due primarily to a change in shipping policy and the addition of Peiser's Inc.,
which has historically had higher operating expenses than Suburban Ostomy.
Depreciation and amortization expense increased by $67,000, or 35%, to
$259,000 for the quarter ended May 31, 1997 versus $192,000 for the prior year
period due to the amortization of goodwill associated with previous
acquisitions.
Operating income increased by $489,000, or 28%, to $2.2 million for
the quarter ended May 31, 1997 versus $1.8 million for the prior year period.
Operating income increased as a percentage of net sales to 10% for the quarter
ended May 31, 1997 from 9% for the prior year period. The increase in
operating income as a percentage of net sales was primarily attributable to a
amortization of goodwill adjustment in May 1996.
Interest expense decreased by $712,000, or 98.8%, to $9,000 for the
quarter ended May 31, 1997 versus $721,000 for the prior year period. This
decrease was due primarily to the repayment of substantially all long-term
debt from the net proceeds of the initial public offering in October 1996.
Provision for income taxes was $970,000, an effective tax rate of 43% of
pre-tax income, for the quarter ended May 31, 1997 versus $495,000, or an
effective tax rate of 46%, for the quarter ended June 1, 1996. This decrease
is due to a third quarter tax adjustment in May 1996.
9<PAGE>
<PAGE>
NINE MONTHS ENDED MAY 31, 1997 (39 WEEKS) VERSUS NINE MONTHS
ENDED JUNE 1, 1996 (39 WEEKS)
On May 1, 1997, Suburban Ostomy acquired all of the outstanding stock
for Peiser's Inc. Suburban Ostomy used the purchase method to account for
the transaction and all financial statements reflect Peiser's Inc.'s
performance from May 1, 1997 through May 31, 1997 (See note 4).
Net sales increased by $18.5 million, or 38%, to $67.8 million for the nine
months ended May 31, 1997 from $49.3 million for the prior year period. The
number of customer orders filled increased 38% to approximately 409,500 orders
for the nine months ended May 31, 1997 versus approximately 295,900 for the
prior year period. Same store growth in net sales was approximately 9% and was
primarily attributable to increased volume from national home health care chains
and managed care organizations. The average order size decreased slightly to
$170 for the nine months ended May 31, 1997 versus $171 for the same period
ended June 1, 1996.
Gross margin increased by $4.7 million, or 40%, to $16.5 million for
the nine months ended May 31, 1997 from $11.8 million for the prior year period.
Gross margin increased to 24.4% versus 24.0% for the prior year period. The
increase in gross margin was primarily attributable to Peiser's higher gross
margin.
Operating expenses increased by $2.9 million, or 45%, to $9.1 million
for the nine months ended May 31, 1997 versus $6.3 million for the prior year
period, and as a percentage of net sales, increased to 14% versus 13% for the
prior year period. The increase in operating expenses was due primarily to the
addition of Peiser's Inc., which historically has had higher operating expenses
than experienced at Suburban Ostomy.
Depreciation and amortization expense increased by $352,000, or 104%,
to $691,000 for the nine months ended May 31, 1997 versus $339,000 for the prior
year period due to the amortization of goodwill associated with previous
acquisitions.
Operating income increased by $1.5 million, or 28%, to $6.7 million
for the nine months ended May 31, 1997 versus $5.2 million for the prior year
period. Operating income decreased as a percentage of net sales to 10% for the
nine months ended May 31, 1997 from 11% for the prior year period. The decrease
in operating income as a percentage of net sales was due primarily to the
amortization of goodwill.
Interest expense decreased by $1,407,000, or 76%, to $434,000 for the
nine months ended May 31, 1997 versus $1,841,000 for the prior year period.
Interest expense decreased as a percentage of net sales to 1% for the nine
months ended May 31, 1997 versus 4% for the prior year period. This decrease
in interest expense as a percentage of net sales was due primarily to the
repayment of substantially all long-term debt from the net proceeds of the
initial public offering in October 1996.
Provision for income taxes was $2.8 million, an effective tax rate of 44%
of pre-tax income, for the nine months ended May 31, 1997 versus $1.4 million,
or an effective tax rate of 43%, for the nine months ended June 1, 1996.
10<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Until its recent public offering, the Company financed its operations
primarily through cash flow from operations and from bank borrowings secured by
Company assets. In October 1996 the Company completed an initial public
offering of shares of its common stock. Pursuant to the offering the Company
sold 4,192,500 shares of its common stock, raising proceeds of approximately
$46,000,000 net of approximately $773,000 in offering costs. The Company used
$42,472,000 of the proceeds to pay down virtually all of its long term debt and
redeem all of the Company's preferred stock. The remaining proceeds, along with
cash from operations, is currently being invested in short-term investments.
With the offering on October 10, 1996, the Company's long-term liquidity needs
consist of working capital and capital required to fund future acquisitions. The
Company believes that the net proceeds from its recent public offering, together
with funds generated from its operations and borrowings available under the
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 financing.
The above contains forward-looking statements that are subject to risks and
uncertainties inherent in the Company's business. The Company's actual results
could differ materially from those anticipated in those forward-looking
statements as a result of certain factors, including those set forth in
documents filed with the Securities and Exchange Commission including the
prospectus dated October 9, 1996, related to the Company's recently completed
initial public offering, and the recently filed Form 10-K.
11<PAGE>
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a current report on 8-K with the Securities
and Exchange Commission on May 16, 1997.
12<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
July 11, 1997
/s/ Donald H. Benovitz
By:________________________________________________________
Donald H. Benovitz
President and Director
July 11, 1997
/s/ Stephen N. Aschettino
By:_________________________________________________________
Stephen N. Aschettino
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
13<PAGE>
<TABLE> <S> <C>
<PAGE>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-30-1997
<PERIOD-END> MAY-31-1997
<CASH> 2,559
<SECURITIES> 0
<RECEIVABLES> 10,671
<ALLOWANCES> 632
<INVENTORY> 6,932
<CURRENT-ASSETS> 20,834
<PP&E> 2,836
<DEPRECIATION> 1,168
<TOTAL-ASSETS> 40,350
<CURRENT-LIABILITIES> 7,656
<BONDS> 0
0
0
<COMMON> 47,188
<OTHER-SE> (14,574)
<TOTAL-LIABILITY-AND-EQUITY> 40,350
<SALES> 67,791
<TOTAL-REVENUES> 67,791
<CGS> 51,272
<TOTAL-COSTS> 9,149
<OTHER-EXPENSES> 691
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 434
<INCOME-PRETAX> 6,353
<INCOME-TAX> 2,768
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,585
<EPS-PRIMARY> .35
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