<PAGE>
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 March 1, 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 March 1, 1997
there were 10,417,135 shares of the Registrant's Common Stock outstanding.
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
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<CAPTION>
MARCH 1, 1997 AUGUST 31, 1996
---------------------------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 7,177 $ 1,995
Accounts receivable, less allowances
of $479 and $416 8,146 8,625
Merchandise inventory 7,804 6,918
Prepaid expenses and other
current assets 389 667
Deferred income taxes 348 474
-------- --------
Total current assets 23,864 18,679
Fixed assets, net 990 1,113
Goodwill 12,909 13,039
Other long-term assets 316 298
-------- --------
Total assets $ 38,079 $ 33,129
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Current maturities of long-term debt $ 431 $ 582
Accounts payable and accrued expenses 6,925 7,713
Accrued interest -- 381
Income taxes payable 474 175
-------- --------
Total current liabilities 7,830 8,851
-------- --------
Long-term Liabilities:
Long-term debt, less current maturities 11 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 82 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 03/01/97 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 - 10,416,350
and 6,223,250 shares 46,180 162
Accumulated deficit (16,013) (18,209)
-------- --------
Total stockholders' equity (deficit) 30,167 (18,047)
Total liabilities and
stockholders' equity (deficit) $ 38,079 $ 33,129
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- -----------------------------
MARCH 1,1997 MARCH 2, 1996 MARCH 1, 1997 MARCH 2, 1996
<S> <C> <C> <C> <C>
Net sales $22,806 $16,457 $44,769 $29,988
Cost of goods sold 17,353 12,589 34,197 22,785
------- ------- ------- -------
Gross margin 5,453 3,868 10,572 7,203
Operating expenses 2,910 1,977 5,707 3,614
Depreciation and amortization 219 92 432 147
Operating income 2,324 1,799 4,433 3,442
Interest income 112 40 185 92
Interest expense 10 603 425 1,120
Other expense 73 50 100 115
Income before income taxes 2,353 1,186 4,093 2,299
Provision for income taxes 1,028 496 1,797 951
Net income 1,325 690 2,296 1,348
Accretion of Preferred Stock -- 167 101 333
Net income applicable to common ------- ------- ------- -------
stockholders $ 1,325 $ 523 $ 2,195 $ 1,015
======= ======= ======= =======
Supplemental Pro Forma ------- ------- ------- -------
Net income $ 1,325 $ 1,057 $ 2,556 $ 2,031
======= ======= ======= =======
---- ---- ---- ----
Net income per share $.12 $.10 $.23 $.19
==== ==== ==== ====
Weighted average common shares ------- ------- ------- -------
outstanding 11,079 10,785 10,999 10,785
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 1, 1997 MARCH 2, 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES:
Net income $ 2,296 $ 1,348
Adjustments to reconcile net income to cash
from (used by) operating activities:
Depreciation and amortization 432 147
Net loss (gain) on sale of fixed assets 4 134
Change in assets and liabilities, net
of effects from acquisition of
St. Louis Ostomy in 1996
Accounts receivable 479 (890)
Merchandise inventory (886) (941)
Prepaid expenses and other 278 (36)
Deferred income taxes 126 --
Accounts payable and accrued
expenses (870) 303
Other Assets -- 314
-------- --------
Net cash from (used by) operating activities 1,859 (969)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (39) (60)
Purchase of St. Louis Ostomy -- (10,709)
Other assets and Goodwill (162) --
-------- --------
Net cash from investing activities (201) (10,769)
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES:
Issuance of common stock, net of
issuance costs 46,018 6
Retirement of preferred stock (7,537) --
Repayments of long-term bank debt, net (24,472) 7,850
Repayments of subordinated debt (10,485) --
Capital contribution -- 98
-------- --------
Net cash from (used by) financing activities 3,524 7,954
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,182 (2,436)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,995 3,970
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,177 $ 1,534
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
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 six months ended March 1,
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.
(2) SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
Supplemental pro forma net income per share for the three and six month
periods ended March 1, 1997 and March 2, 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.
<TABLE>
<CAPTION>
(in 000's, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
MARCH 1, MARCH 2, MARCH 1, MARCH 2,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Historical income before taxes $ 2,353 $ 1,186 $ 4,093 $ 2,299
Provision for income taxes (1,028) (496) (1,797)
(951)
Reversal of interest charges
and amortization of deferred
financing costs relating to
debt treated as being
repaid, net of tax -- 367 260 683
------- ------- ------- -------
Supplemental pro forma net income $ 1,325 $ 1,057 $ 2,556 $ 2,031
======= ======= ======= =======
Supplemental pro forma net income per
share $ .12 $ .10 $ .23 $ .19
======= ======= ======= =======
Supplemental pro forma weighted average
shares outstanding 11,079 10,785 10,999 10,785
------- ------- ------- -------
</TABLE>
5
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(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 $0.13 and $0.10 for the three month periods ended March 1, 1997
and March 2, 1996, respectively and $0.25 and $0.20 for the six month
periods ended March 1, 1997 and March 2, 1996, respectively. Under this
Statement, diluted earnings per share would not have differed from the net
income per share disclosed on the income statement.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 1, 1997 (13 WEEKS) VERSUS THREE MONTHS
ENDED MARCH 2, 1996 (13 WEEKS)
Net sales increased by $6.3 million, or 39%, to $22.8 million for the
quarter ended March 1, 1997 from $16.5 million for the prior year period. The
number of customer orders filled increased 30% to approximately 128,300 orders
for the quarter ended March 1, 1997 versus approximately 98,900 for the prior
year period. Same store growth in gross sales was approximately 10% and was
primarily attributable to increased volume from national home health care chains
and managed care organizations. The average order size increased to $182 for the
quarter ended March 1, 1997 versus $171 for the same period ended March 2, 1996.
Gross margin increased by $1.6 million, or 41%, to $5.5 million for the
quarter ended March 1, 1997 from $3.9 million for the prior year period. Gross
margin increased to 23.9% versus 23.5% over the same period. The increase in
gross margin was primarily attributable to increased prices of products sold by
the Company's acquisitions to attain consistent pricing company wide.
Operating expenses increased by $0.9 million, or 47%, to $2.9 million for
the quarter ended March 1, 1997 versus $2.0 million for the prior year period,
and as a percentage of net sales, increased to 13% versus 12% for the prior year
period. The increase in operating expenses as a percentage of net sales was
primarily attributable to increased costs due to a change in shipping policy.
Depreciation and amortization expense increased by $127,000, or 138%,
to $219,000 for the quarter ended March 1, 1997 versus $92,000 for the prior
year period due to the amortization of goodwill associated with previous
acquisitions.
Operating income increased by $525,000, or 29%, to $2.3 million for
the quarter ended March 1, 1997 versus $1.8 million for the prior year period.
Operating income decreased as a percentage of net sales to 10% for the quarter
ended March 1, 1997 from 11% for the prior year period. The decrease in
operating income as a percentage of net sales was primarily attributable to
increased operating expenses and the amortization of goodwill.
Interest expense decreased by $593,000, or 98.3%, to $10,000 for the
quarter ended March 1, 1997 versus $603,000 for the prior year period. Interest
expense also decreased as a percentage of net sales for the quarter ended March
1, 1997. This decrease in interest expense was primarily due to the repayment
of substantially all long-term debt with the net proceeds of the public offering
in October 1996.
Provision for income taxes was $1,028,000, an effective tax rate of 44% of
pre-tax income, for the quarter ended March 1, 1997 versus $496,000, or an
effective tax rate of 42%, for the quarter ended March 2, 1996, primarily due to
non-deductible goodwill amortization.
SIX MONTHS ENDED MARCH 1, 1997 (26 WEEKS) VERSUS SIX MONTHS
ENDED MARCH 2, 1996 (26 WEEKS)
Net sales increased by $14.8 million, or 49%, to $44.8 million for the six
months ended March 1, 1997 from $30.0 million for the prior year period. The
number of customer orders filled increased 41% to approximately 253,800 orders
for the six months ended March 1, 1997 versus approximately 179,000 for the
prior year period. Same store growth in net sales was approximately 10% and was
primarily attributable to increased volume from national home health care chains
and managed care organizations. The average order size increased to $181 for the
six months ended March 1, 1997 versus $172 for the same period ended March 2,
1996.
Gross margin increased by $3.4 million, or 47%, to $10.6 million for
the six months ended March 1, 1997 from $7.2 million for the prior year period.
Gross margin decreased to 23.6% versus 24.0% 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 incentives and in the acquisitioned business.
7
<PAGE>
Operating expenses increased by $2.1 million, or 58%, to $5.7 million
for the six months ended March 1, 1997 versus $3.6 million for the prior year
period, and as a percentage of net sales, increased to 13% versus 12% for the
prior year period. The increase in operating expenses was due to the support
required for higher sales volume. The increase in operating expenses as a
percentage of net sales was primarily attributable to increased costs due to a
change in shipping policy.
Depreciation and amortization expense increased by $285,000, or 194%,
to $432,000 for the six months ended March 1, 1997 versus $147,000 for the prior
year period due to the amortization of goodwill associated with previous
acquisitions.
Operating income increased by $1.0 million, or 29%, to $4.4 million
for the six months ended March 1, 1997 versus $3.4 million for the prior year
period. Operating income decreased as a percentage of net sales to 10% for the
six months ended March 1, 1997 from 11% for the prior year period. The decrease
in operating income as a percentage of net sales was primarily attributable to
decreased gross margin and the amortization of goodwill.
Interest expense decreased by $695,000, or 62%, to $425,000 for the
six months ended March 1, 1997 versus $1,120,000 for the prior year period.
Interest expense decreased as a percentage of net sales to 1% for the six months
ended March 1, 1997 versus 4% for the prior year period. This decrease in
interest expense as a percentage of net sales was primarily due to the repayment
of substantially all long-term debt with the net proceeds of the public offering
in October 1996.
Provision for income taxes was $1.8 million, an effective tax rate of
44% of pre-tax income, for the six months ended March 1, 1997 versus $951,000,
or an effective tax rate of 41%, for the six months ended March 2, 1996,
primarily due to non-deductible goodwill amortization.
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.
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.
8
<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.
The Company has filed suit in St. Louis, Missouri against former
employees of St. Louis Ostomy Distributors ("St. Louis Ostomy"), a wholly-owned
subsidiary of the Company, alleging misappropriation of St. Louis Ostomy's
proprietary and confidential information. The Company is seeking equitable
relief and damages. Discovery has recently begun in the litigation and, thus,
no evaluation of the likely outcome of such litigation can be made at this time.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting in lieu of Annual Meeting of Stockholders
held on February 19, 1997, the following matters were submitted to a vote of the
Stockholders: (i) the election of Joseph F. Trustey as Director for a three year
term and (ii) an amendment to the Company's Bylaws changing the date on which
the Annual Meeting of Stockholders of the Company will be held each year to the
second Wednesday in February.
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
None.
9
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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.
April 14, 1997
/s/ Donald H. Benovitz
By:________________________________________________________
Donald H. Benovitz
President and Director
April 14, 1997
/s/ Stephen N. Aschettino
By:_________________________________________________________
Stephen N. Aschettino
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
10
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-30-1997
<PERIOD-END> MAR-01-1997
<CASH> 7,177
<SECURITIES> 0
<RECEIVABLES> 8,625
<ALLOWANCES> 479
<INVENTORY> 7,804
<CURRENT-ASSETS> 23,864
<PP&E> 2,069
<DEPRECIATION> 1,079
<TOTAL-ASSETS> 38,079
<CURRENT-LIABILITIES> 7,830
<BONDS> 0
0
0
<COMMON> 46,180
<OTHER-SE> (16,013)
<TOTAL-LIABILITY-AND-EQUITY> 38,079
<SALES> 44,769
<TOTAL-REVENUES> 44,769
<CGS> 34,197
<TOTAL-COSTS> 5,707
<OTHER-EXPENSES> 432
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