SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------------------------
Form 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest
Event Reported): May 1, 1997
SUBURBAN OSTOMY SUPPLY CO., INC.
(Exact name of registrant as specified in its charger)
MASSACHUSETTS 0-28850 04-2675674
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation or organization) Number) Identification No.)
75 October Hill Road
Holliston, Massachusetts 01746 (508) 429-1000
(Address of principal executive (Zip Code) (Registrant's telephone
offices) number, including area
code)
Item 2. Acquisition.
On May 1, 1997, pursuant to that certain Stock Purchase Agreement
(the "Purchase Agreement"), dated May 1, 1997, relating to the Purchase by
Suburban Ostomy Supply Co., Inc. ("Suburban") of Peiser's, Inc. ("Peiser's"),
Suburban acquired all of the outstanding capital stock of Peiser's (the
"Acquisition") from Barry D. Derman, the President and former sole stockholder
of Peiser's, for an aggregate consideration of $8 million, of which $1 million
was paid in shares of Suburban's common stock and approximately $3.2 million was
used to repay outstanding indebtedness of Peiser's at the time of the closing of
the Acquisition. In connection with the Acquisition, Barry D. Derman was elected
to Suburban's Board of Directors and, pursuant to an Employment Agreement with
Peiser's, remains the President and a director of Peiser's, along with Donald H.
Benovitz, President, and Stephen N. Aschettino, Chief Financial Officer, of
Suburban. The cash consideration for the Acquisition was funded solely with cash
from Suburban's cash accounts, with no additional borrowing by Suburban.
In accordance with an Escrow Agreement executed pursuant to the
Purchase Agreement, 66,667 shares, or sixty percent (60%) of common stock
consideration (with an aggregate value of $600,000), were placed in an escrow
account to serve as an indemnity to Suburban in the event of a breach by
Peiser's or Mr. Derman of certain provisions of the Purchase Agreement. The
remaining shares of Company common stock in the escrow account will be released
to the former sole stockholder of Peiser's on April 30, 1999.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
Audited Financial Statements of Peiser's, Inc. as of and for
the year ended December 31, 1996, together with Report of
Independent Public Accountants.
(b) Pro Forma Financial Information
Unaudited Pro Forma Combined Statements of Income for the year
ended August 31, 1996
Unaudited Pro Forma Combined Statements of Income for the nine
months ended May 31, 1997
(c) Exhibits.
The following exhibit is included herein:
Reg S-K
Exhibit No. Description Exhibit No.
10 Stock Purchase Agreement, 1
dated May 1, 1997, relating
to the Purchase by Suburban
Ostomy Supply Co., Inc. of
Peiser's, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
SUBURBAN OSTOMY SUPPLY CO., INC.
By:/s/ Herbert P. Gray
Name: Herbert P. Gray
Title: Chairman and Chief Executive Officer
Dated: July 15, 1997
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Peiser's, Inc.:
We have audited the accompanying balance sheet of Peiser's, Inc. (an Illinois
corporation) as of December 31, 1996, and the related statements of income,
changes in stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Peiser's, Inc. as of December
31, 1996. and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
Boston, Massachusetts
April 4, 1997
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
CURRENT ASSETS $ 27,590
Cash and cash equivalents 2,525,456
Accounts receivable, net of allowance for doubtful
accounts of $118,973 795,771
Merchandise inventory 40,902
Total current assets 3,389,719
FIXED ASSETS, AT COST:
Equipment and fixtures 1,033,358
Leasehold improvements 561,786
1,595,144
Less - Accumulated depreciation 821,505
Total fixed assets, net 773,639
OTHER ASSETS 43,282
Total assets $ 4,206,640
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABIITIES:
Current portion of long-term bank debt $ 244,963
Revolving line of credit 672,000
Notes payable to stockholders 105,000
Accounts payable 544,831
Accrued expenses, including payroll and related items 608,341
Total current liabilities 2,175,135
LONG-TERM BANK DEBT 253,333
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value -
Authorized - 1,000,000 shares
Issued - 10,000 shares 10,000
Retained earings 2,038,170
Additional minimum liability for defined benefit plans (225,998)
Treasury stock at cost - 100 shares (44,000)
Treasury stockholders' equity 1,778,172
Total liabilities and stockholders' equity $4,206,640
The accompanying notes are an integral part of these financial statements
PEISER'S, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
NET SALES $ 17,479,641
COST OF GOODS SOLD 8,895,468
Gross profit 8,584,173
OPERATING EXPENSES 8,289,491
Operating income 294,682
INTEREST EXPENSE, NET 124,952
OTHER INCOME 32,514
Net Income $ 202,244
The accompanying notes are an integral part of these financial statements.
PEISER'S, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
Additional
Common Minimum
Stock Liability Total
No Par Retained for Defined Treasury Stockholders'
Value Earnings Benefit Plan Stock Equity
BALANCE, $ 10,000 $ 2,012,371 $ (225,998) $ - $ 1,796,373
DECEMBER 31,
1995
Repurchase of - - - (44,000) (44,000)
common stock
Net income - 202,244 - - 202,244
Dividends paid to
stockholders - (176,445) - - (176,445)
BALANCE, $ 10,000 $ 2,038,170 $ (225,998) $ (44,000) $ 1,778,172
DECEMBER 31,
1996
The accompanying notes are an integral part of these financial statements.
PEISER'S, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 202,244
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 263,447
Provision for bad debt losses 20,575
Gain on sale of fixed assets (15,000)
Change in current assets and liabilities-
Accounts receivable 386,617
Merchandise inventory 31,186
Prepaid expenses and other 15,063
Accounts payable (69,765)
Accrued expenses (208,427)
Net cash provided by operating activities 625,940
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (82,827)
Proceeds from sale of fixed assets 15,000
Net cash used in investing activities (67,827)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of revolving line of credit (407,000)
Proceeds from issuance of long-term debt 400,000
Principal repayments of long-term debt (355,354)
Principal repayments of notes payable to stockholders (4,000)
Dividends paid to stockholders (176,445)
Net cash used in financing activities (542,799)
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,314
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,276
CASH AND CASH EQUIVALENTS, END OF YEAR $ 27,590
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest $ 127,409
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Stock repurchased under a note payable to stockholder $ 44,000
The accompanying notes are an integral part of these financial statements.
PEISER'S, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General
Peiser's, Inc. (the Company) is a wholesale distributor of
home health care products, primarily
incontinence and wound care supplies. The Company is locate
in Broadview, Illinois and
services primarily homebound patients in Illinois.
(b) Revenue Recognition
Revenue from product sales is recognized at the time of
shipment.
(c) Cash and Cash Equivalents
For the accompanying statement of cash flows, the Company
considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
(d) 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.
(e) Fixed Assets
The cost of property and equipment is depreciated and
amortized over the estimated useful lives of the related
assets, as follows:
Equipment, computers and fixtures 3-7 years Straight-line
Leasehold improvements Term of lease Straight-line
(f) Income Taxes
The Company has elected, under the S corporation rules of the
Internal Revenue Code (the Code), not to be taxed as a
corporation, and the stockholders have consented to include
their pro rata shares of the Company's income in their
individual income tax returns. Accordingly, the accompanying
statement of income does not include any provision for income
taxes.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(g) 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.
PEISER'S, INC,
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(h) Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and
cash equivalents, accounts receivable, accounts payable,
revolving line of credit, long-term bank debt and notes
payable to stockholders. 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 fair values of the Company's
outstanding revolving line of credit, long-term bank debt and
notes payable to stockholders approximate their carrying
values due to the interest rate charade fluctuating with
market rates or the interest rate approximating the Company's
incremental borrowing rate for debt with similar terms and
remaining maturities.
(2) REVOLVING LINE OF CREDIT AND LONG-TERM BANK DEBT
Bank debt consists of the following at December 31, 1996:
Revolving credit agreement with a bank up to $1.6 million, with interest charges
based on the bank's prime rate plus .25% per annum (8.5% at December 31, 1996),
payable monthly. The debt provides for certain financial covenants and is
collateralized by substantially all of the Company's assets. Borrowings under
this credit agreement become due on June 30, 1997
$ 672,000
$400,000 secured note payable to a bank. dated March 7, 1996,
bearing interest at 8.15% per annum. due in monthly installments of
$6,667 plus accrued interest through March 2001
333,333
$618,611 secured note payable to a bank. dated February 8. 1995.
bearing interest at the bank's prime rate plus .25% per annum, due
in monthly installments of $20,620 plus accrued interest through
August 1997 164,963
1,170,296
Less-Current portion 916,963
$ 253,333
PEISER'S, INC,
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(2) REVOLVING LINE OF CREDIT AND LONG-TERM BANK DEBT (Continued)
At December 31, 1996, the Company's revolving line of credit and
long-term bank debt are scheduled to mature as follows:
Year Amount
1997 $ 916,963
1998 80,000
1999 80,000
2000 80,000
2001 13,333
$1,170,296
(3) NOTES PAYABLE TO STOCKHOLDERS
In April 1992, a stockholder of the Company advanced $70,000 to the
Company in return for a promissory note bearing interest at 7% per
annum. The note was originally due in December 1992, however, it has
been rewritten annually in order to amend the principal amount and the
maturity date. At December 31, 1996, the balance outstanding under this
unsecured note was $61.000. On January 2, 1997, the note was rewritten
for this amount and assigned a maturity date of December 31, 1997.
Interest expense relating to this note was $4,385 for 1996.
In July 1996, the Company repurchased 100 shares of common stock under
a stock purchase agreement. A $44,000 non-interest-bearing note was
issued to a stockholder of the Company as consideration for the shares.
The Company pledged these shares as collateral for the promissory note.
(4) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing plan that covers all full-time
employees meeting certain eligibility requirements. Under the terms of
the plan, participants are allowed to make pre-tax contributions of 1%
or more of their compensation through salary deferral arrangements,
subject to certain limits under Section 401(k) of the Code. The plan
also provides for discretionary employer contributions up to 50% of an
employee's annual contribution, not to exceed 4% of an employees annual
salary. Contributions made by the Company amounted to $41,881 for 1996.
The Company also has a noncontributory, defined benefit pension plan
that covers substantially all of the Company's employees. On January 1,
1995, the Company's board of directors froze the benefits of the plan
PEISER'S, INC,
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
as of December 31, 1994, and further provided that no participant
would accrue additional benefits under the plan. except as may
otherwise be required by the Code. Pension expense was $58,525 in 1996.
(4) EMPLOYEE BENEFIT PLANS
The components of net periodic pension cost for 1996 are as follows:
Service cost (benefits earned during the period) $ 39,856
Interest cost on projected benefit obligations 43,364
Actual return on plan assets (160,013)
Net amortization and deferral 135,318
Net periodic pension cost $ 58,525
The following table sets forth the pension plan's funded status and the
amount recognized in the Company's balance sheet as of December 31,
1996:
Actuarial present value of accumulated plan benefits-
Vested $ 931,606
Nonvested 66,887
Accumulated benefit obligations 998,493
Effect of projected future compensation increases -
Projected benefit obligation $ 998,493
Plan assets at fair value $ 713,970
Less - Projected benefit obligation $ 998,493
Unfunded projected benefit obligation (284,523)
Unrecognized net gain (166,830)
Unrecognized net transition liability 392,828
Additional minimum liability (225,998)
Accrued pension cost $ (284,523)
The discount rate used in determining the projected benefit obligation was 4.75%
at December 31, 1996. The expected long-term rate of return on plan assets used
was 7.5%.
PEISER'S, INC,
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(5) COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company leases certain office and warehouse facilities under operating
leases that expire over the next three years. Approximate future minimum
payments under these noncancelable operating leases at December 31, 1996 are as
follows:
Year Amount
1997 $173,037
1998 112,000
1999 55,000
$ 380,037
The office lease mentioned above is with a stockholder of the Company. Total
rent expense charged to 1996 operations was $213.876, of which approximately
$109,200 was related to the operating lease with the stockholder. The Company
believes that the rent paid to the stockholder approximates fair value.
(b) Legal Matters
The Company is, from time to time, involved in various legal proceedings and
claims normally incident to its business. The Company, based on the advice of
legal counsel, does not believe that the results of any pending or threatened
proceedings or claims or any amounts that it may be required to pay by reason
thereof will have a material adverse effect on the financial condition or
results of operations of the Company.
(6) SUBSEQUENT EVENTS
In January 1997, the Company paid off the $44,000 non-interest-bearing note
issued to a stockholder of the Company and repurchased an additional 4,900
shares of common stock under a stock purchase agreement. The Company paid
$1,156,000 in cash and issued a $1,000,000 promissory note to a stockholder of
the Company as consideration for the repurchased shares. The note bears interest
at the higher of 10% per annum or the prime rate, adjusted on a monthly basis
during the term of the note, and matures on January 1, 2004. The note is
collateralized by substantially all of the Company's assets, including the
shares of common stock being purchased.
In connection with the stock purchase agreement, the Company signed a $1.2
million installment note with a bank. The note bears interest at the bank's
prime rate plus .25% per annum and matures on January 2, 2002. The monthly
installments of $20,000 plus accrued interest commenced in January 1997. The
debt provides for certain financial covenants and is collateralized by
substantially all of the Company's assets.
In March 1997, the Company signed a $500,000 promissory note with a bank due on
June 30, 1997. The proceeds from this note. along with $500.000 drawn upon the
Company's revolving line of credit, were utilized to
PEISER'S, INC,
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
repay the $1 million promissory note issued to a stockholder of the Company in
January 1997. The $500,000 promissory note bears interest at the bank's prime
rate plus .5% per annum, payable monthly. The debt provides for certain
financial covenants and is collateralized by substantially all of the Company's
assets.
In March 1997, the remaining stockholder of the Company personally guaranteed up
to $2.2 million of the indebtedness outstanding with a bank.
In March 1997, the Company reached an agreement with Suburban Ostomy Supply Co.,
Inc. (Suburban), whereby Suburban will acquire all of the outstanding shares of
common stock of the Company in exchange for cash and shares of common stock of
Suburban. Under the terms of the agreement, the cash proceeds will be used to
repay the Company's indebtedness as of the closing date, including all of the
bank debt referred to above.
SUBURBAN OSTOMY SUPPLY CO., INC.
PRO FORMA COMBINED STATEMENTS OF INCOME
For the year ended August 31, 1996
(Dollars in thousands)
(unaudited)
Suburban
Peiser's Inc. Ostomy Adjustments Consolidated
Net Sales $17,105 $72,558 $0 $89,663
Cost of goods sold 8,627 55,398 0 64,025
Gross margin 8,478 17,160 0 25,638
Operating expenses 7,823 9,689 0 17,512
Depreciation and amortization 194 562 191 947
Operating income 461 6,909 (191) 7,179
Interest income 0 179 0 179
Interest expense (136) (2,653) 136 (2,653)
Other (expense) income 29 (53) 0 (24)
Income before income taxes 354 4,382 (55) 4,681
Provision for income taxes 0 1,944 201 2,145
Net income 354 2,438 (256) 2,536
Accretion of Preferred Stock -- 676 0 676
Net income applicable to
common stockholders $ 354 $ 1,762 $ (256) $ 1,860
Supplemental Pro Forms Net Income - 4,000 (256) 3.744
Weighted average common shares outstanding - 10,785
Earnings Per Share - $ .37
The accompanying notes are an integral part of these financial statements.
SUBURBAN OSTOMY SUPPLY CO., INC.
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED MAY 31, 1997
(Dollars in thousands)
(unaudited)
Suburban
Peiser's Inc. Ostomy Adjustments Consolidated
Net Sales $13,559 $66,262 $0 $79,821
Cost of goods sold 6,883 50,505 0 57,388
Gross margin 6,676 15,757 0 22,433
Operating expenses 5,580 8,533 0 14,113
Depreciation and amortization 187 654 127(a) 968
Operating income 909 6,570 (127) 7,352
Interest income 0 257 (181)(b) 76
Interest expense (122) (434) 122(d) (434)
Other (expense) income (39) (149) 0 (188)
Income before income taxes 748 6,244 (186) 6,806
Provision for income taxes 53 2,721 232 3,006
Net income 695 3,523 (418) 3,800
Accretion of Preferred Stock -- 101 0 101
Net income applicable to
common stockholders
$ 695 $ 3,422 $ 418 $ 3,699
Supplemental Pro Forma Net Income - 3.846 4.641
Weighted average common shares outstanding - 11,053
Earnings Per Share - $ .35
The accompanying notes are an integral part of these financial statements.
Basis of Accompanying Unaudited Pro Forma Combined Statements of Income
The unaudited pro forma combined statements of income combine give effect to the
Acquisition. The pro forma combined statements of income combine the
historical statements of income of the Company and Peier's, Inc. for the
year ended August 31, 1996 and the nine months ended May 31, 1997. The
unaudited pro forma combined statements of income do not purport to be
indicative of the results which would actually have been reported if the
acqusition had been effected at those dates or which may be reported in the
future. These unaudited pro forma combined statements of income should be
read in conjunction with the accompanying notes and the respective historical
financial statements and related notes contained in the Company's Annual Report
on Form 10-K for the fiscal year ended August 31, 1996 and the Peiser's, Inc.
audited financial statements for December 31, 1996 included in this Form 8-K/A.
Notes to Unaudited Pro Forma Combined Statements of Income
A. The pro forma adjustment of $191 in 1996 and $127 in 1997 for the
amortization of goodwill over a 25 year period.
B. The pro forma adjustment of $136 in 1996 and $122 in 1997 to reduce
interest expense to reflect the repayment of certain obligations of
Peiser's, Inc. by the Company.
C. The pro forma adjustment of $181 in 1997 to reflect the lower interest
income the Company would have received if the acquisition happened
as of beginning of the fiscal year.
D. The pro forma adjustment of $201 in 1996 and $232 in 1997 to provision
of taxes to reflect Peiser's, Inc. change in tax status from a S Corp.
to a C Corp., and for adjustments to interest income and expense.
E. Pro Forma combined net income per common equivalent shares and the pro
forma combined weighted average common and common equivalent shares
outstanding includes the shares of common stock of the Company issued
pursuant to the Acquisition.