<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 quarter ended November 29, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SUBURBAN OSTOMY SUPPLY CO., INC.
MASSACHUSETTS 5047 04-2675674
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No)
75 OCTOBER HILL ROAD
HOLLISTON, MA 01746
(508) 429-1000
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 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 December 31, 1997
there were 10,538,622 shares of the Registrant's Common Stock outstanding.
<PAGE>
<PAGE> PART I
ITEM 1. FINANCIAL STATEMENTS
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
NOVEMBER 29, 1997 AUGUST 30, 1997
_________________ _______________
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,202 $ 2,270
Accounts receivable, less allowances
of $729 and $638 12,748 12,207
Merchandise inventory 8,140 6,611
Prepaid expenses and other current assets 518 332
Deferred income taxes 516 464
______ ______
Total current assets 24,124 21,884
Fixed assets, net 1,883 1,651
Goodwill 19,166 17,312
Other long-term assets 139 277
______ ______
Total assets $45,312 $41,124
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ -- $ 16
Accounts payable and accrued expenses 8,692 7,608
______ ______
Total current liabilities 8,692 7,624
Long-term Liabilities:
Long-term debt, less current portion -- 7
Bank line of credit 2,000 --
Deferred income taxes 35 21
_____ ______
2,035 28
Stockholders' Equity:
Common Stock, no par; 40,000,000 shares
authorized; issued and outstanding -
10,538,622 and 10,538,503 shares 47,188 47,188
Accumulated deficit (12,603) (13,716)
______ ______
Total stockholders' equity 34,585 33,472
______ ______
Total liabilities and stockholders' equity $45,312 $41,124
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2<PAGE>
<PAGE> SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 29, 1997 NOVEMBER 30, 1996
_________________ _________________
<S> <C> <C>
Net sales $27,490 $21,963
Cost of goods sold 19,853 16,845
______ ______
Gross margin 7,637 5,118
Operating expenses 5,160 2,797
Depreciation and amortization 359 213
______ ______
Operating income 2,118 2,108
Interest income 50 73
Interest expense (64) (415)
Other (expense) income (22) (26)
______ ______
Income before income taxes 2,082 1,740
Provision for income taxes 969 769
______ ______
Net income 1,113 971
Accretion of Preferred Stock -- 101
Net income applicable to common ______ ______
stockholders $ 1,113 $ 870
====== ======
Net income per share $ 0.10
======
Weighted average common shares
outstanding 11,189
__________________________________
Supplemental Pro Forma (see Note 2):
Net income n/a $ 1,231
======
Net income per share n/a $.11
====
Weighted average common shares
outstanding 10,919
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3<PAGE>
<PAGE>
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION> THREE MONTHS ENDED
NOVEMBER 29, NOVEMBER 30,
1997 1996
____________ ___________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,113 $ 971
Adjustments to reconcile net income to cash
from operating activities:
Depreciation and amortization 359 213
Changes in assets and liabilities, net
of effects from acquisition of Care Management
Accounts receivable 647 841
Merchandise inventory (850) (266)
Prepaid expenses and other (108) 170
Accounts payable and accrued expenses 134 (390)
_____ _____
Net cash from operating activities 1,295 1,539
CASH FLOWS (USED BY) FROM INVESTING ACTIVITIES:
Purchase of fixed assets (133) (13)
Purchase of Care Management,
net of cash acquired (3,134) --
Other assets and goodwill (73) 49
______ _____
Net cash used by investing activities (3,340) 36
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under line of credit 2,000 --
Issuance of common stock, net of
issuance costs -- 46,016
Retirement of preferred stock -- (7,538)
Repayments of long-term bank debt, net (23) (24,449)
Repayments of subordinated debt -- (10,485)
______ ______
Net cash from financing activities 1,977 3,544
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (68) 5,119
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,270 1,995
______ ______
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,202 $ 7,114
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4<PAGE>
<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 prin-
ciples for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation of the fi-
nancial statements, primarily consisting of normal recurring adjustments,
have been included. Operating results for the three months ended November
29, 1997 are not necessarily indicative of the results that may be ex-
pected for the year ending August 29, 1998 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 1997
consolidated financial statements to conform to the 1998 presentation.
(2) SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
Supplemental pro forma net income per share for the three months ended
November 30, 1996 has 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.
QUARTER ENDED
NOVEMBER 30, 1996
(in thousands, except per share amounts) _________________
Historical income before taxes $1,740
Provision for income taxes (769)
Reversal of interest charges and amorti-
zation of deferred financing costs relating
to debt treated as being repaid, net of tax 260
_____
Supplemental pro forma net income $1,231
======
Supplemental pro forma net income per
share $ .11
======
Supplemental pro forma weighted average
shares outstanding 10,919
5<PAGE>
<PAGE>
SUBURBAN OSTOMY SUPPLY COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 adopt-
ed, the statement will require restatement of prior years' earnings per
share. The Company will adopt this statement for its quarter ended Feb-
ruary 28, 1998. Assuming that SFAS 128 had been implemented, basic
earnings per share would have been $0.11 and $0.12 for the three month
periods ended November 29, 1997 and November 30, 1996, respectively.
Under this Statement, diluted earnings per share would not have differed
from the net income per share disclosed on the income statement.
(4) ACQUISITION OF CARE MANAGEMENT
On October 10, 1997, Suburban Ostomy acquired all the outstanding
capital stock of Care Management, a medical supply management company,
for an aggregate consideration of approximately $3.1 million in cash.
The cost of the acquisition exceeded the estimated fair market value of
the net assets acquired by approximately $1.9 million, which has been
included on the Consolidated Balance Sheet under goodwill. The Company
has accounted for the transaction as a purchase and the Consolidated
Income Statement includes Care Management's results from October 10,
1997 through November 29, 1997.
(5) SUBSEQUENT EVENT
On December 17, 1997, Invacare of Ohio announced a tender offer for all
the outstanding common stock of Suburban Ostomy. The offer of $11.75 per
common share has been agreed to by management and a majority of Company
stockholders. The effective date of the purchase is expected to be
January 31, 1998, at which time Suburban Ostomy will become a wholly
owned subsidiary of Invacare.
6<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ACQUISITION
On October 10, 1997, Suburban Ostomy acquired all of the outstanding
stock of Care Management for approximately $3.1 million in cash. The trans-
action was accounted for as a purchase, and the consolidated income statements
include the results of Care Management's operations from October 10, 1997
(See Note 4).
RESULTS OF OPERATIONS
Quarter ended November 29, 1997 versus November 30, 1996
Net sales increased by $5.5 million, or 25%, to $27.5 million for the
quarter ended November 29, 1997 versus $22.0 million for the prior year
period due primarily to incremental volume from Peiser's (acquired on May 1,
1997) and Care Management. The number of customer orders filled increased
35,640 to approximately 161,140 orders for the quarter ended November 29,
1997 versus approximately 125,500 for the prior year period. The average
order size decreased to $176 for the quarter ended November 29, 1997 versus
$180 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 $2.5 million, or 49%, to $7.6 million for the
quarter ended November 29, 1997 versus $5.1 million for the prior year period.
Gross margin increased to 27.8% versus 23.3% for the prior year period. The
increase in gross margin was due primarily to the additional volume from
Peiser's and Care Management. The increase in gross margin as a percentage of
sales was due primarily to Peiser's home health agency business, which has
higher gross margins than Suburban's historical business.
Operating expenses increased by $2.4 million, or 84%, to $5.2 million for
the quarter ended November 29, 1997 versus $2.8 million for the prior year
period, and as a percentage of net sales, increased to 18.8% versus 12.7% for
the prior period. The increase in operating expenses as a percentage of net
sales was due primarily to the the recent acquisitions of Peiser's and Care
Management, which have traditionally had higher operating costs.
Depreciation and amortization expense increased by $146,000, or 68.5%, to
$359,000 for the quarter ended November 29, 1997 versus $213,000 for the prior
year period due primarily to an increase in the amortization of goodwill
associated with acquisitions.
Operating income remained constant at $2.1 million for the quarters ended
November 29, 1997 and November 30, 1996. However, as a percentage of net
sales, operating income decreased to 8% for the quarter ended November 29,
1997 versus 10% for the prior year period due primarily to the higher
operating costs at the two recent acquisitions.
7<PAGE>
<PAGE>
Interest expense decreased by $351,000, or 85%, to $64,000 for the quarter
ended November 29, 1997 versus $415,000 for the prior year period due primarily
to the repayment of substantially all long-term debt from the proceeds of the
initial public offering in October 1996.
The provision for income taxes was $969,000, an effective tax rate of
46.5% of pre-tax income, for the quarter ended November 29, 1997 versus
$769,000, or an effective tax rate of 44.2%, for the quarter ended November
30, 1996. The increase is due primarily to higher state tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Borrowing capacity under the Company's Credit Facility (the "Credit Facility")
is $30 million, and borrowings bear interest at either its lender'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 November 29, 1997, the Company was in compliance with such covenants. The
Company borrowed $3 million on October 10, 1997 for the purpose of acquiring
Care Management (see Note 4). There was $2 million outstanding under the Credit
Facility at November 29, 1997.
The Company's long-term liquidity needs consist of working capital and capital
required to fund future acquisitions. The Company believes that its cash flow
from operations and its Credit Facility will be sufficient to fund its
operations and possible acquisitions through fiscal 1998.
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1996.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties, including without limitation the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the Company; (ii) the Compnay's plans and
results of operations will be affected by the Company's ability to manage its
growth; and (iii) other risks and uncertainties indicated from time to time in
the Company's filings with the Securities and Exchange Commission.
SUBSEQUENT EVENT
On December 17, 1997, Invacare of Ohio announced a tender offer for all the
outstanding common stock of Suburban Ostomy. The offer of $11.75 per share has
been agreed to by management and a majority of stockholders. The effective date
of the purchase is expected to be January 31, 1998, at which time Suburban
Ostomy would become a wholly-owned subsidiary of Invacare (see Note 5).
8<PAGE>
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is party to certain claims and litigation in the ordinary
course of business. The Company is not involved in any legal proceed-
ing 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
None
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.
January 9, 1998
/s/ Donald H. Benovitz
By:________________________________
Donald H. Benovitz
President and Director
January 9, 1998
/s/ Stephen N. Aschettino
By:________________________________
Stephen N. Aschettino
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
9<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SUBURBAN OSTOMY SUPPLY CO
FINANCIAL DATA SCHEDULE
FOR QUARTER ENDED NOVEMBER 29, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-END> NOV-29-1997
<CASH> 2,202
<SECURITIES> 0
<RECEIVABLES> 13,477
<ALLOWANCES> 729
<INVENTORY> 8,140
<CURRENT-ASSETS> 24,124
<PP&E> 3,355
<DEPRECIATION> 1,472
<TOTAL-ASSETS> 45,312
<CURRENT-LIABILITIES> 8,692
<BONDS> 0
0
0
<COMMON> 47,188
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 45,312
<SALES> 27,490
<TOTAL-REVENUES> 27,490
<CGS> 19,853
<TOTAL-COSTS> 5,519
<OTHER-EXPENSES> 22
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 2,082
<INCOME-TAX> 969
<INCOME-CONTINUING> 1,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,113
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
