UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996.
[ ] 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)
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
(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-K or any
ammendment to this Form 10-K. [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, 1996,
10,415,750 shares of the Registrants Common Stock, no par were outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1996 AUGUST 31, 1996
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ASSETS (unaudited) (audited)
Current Assets
Cash and cash equivalents $ 7,113,532 $ 1,994,731
Accounts receivable, less allowances
of $427,000 at 11/30/96 and $415,963
at 8/31/96 7,783,987 8,624,795
Merchandise inventory 7,184,128 6,917,753
Prepaid expenses and other current assets 496,833 666,719
Deferred income taxes 474,378 474,378
------------ ------------
Total current assets 23,052,858 18,678,376
Total fixed assets, net 1,048,187 1,113,486
Goodwill 12,904,657 13,039,243
Other long-term assets 249,268 298,451
------------ ------------
Total assets $ 37,254,970 $ 33,129,556
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Current maturities of long-term debt $ 451,305 $ 581,990
Accounts payable and accrued expenses 7,296,353 7,713,494
Accrued interest 14,146 380,846
Income taxes payable 569,409 175,028
------------ ------------
Total current liabilities 8,331,213 8,851,358
------------ ------------
Long-term Liabilities:
Long-term debt, less current
maturities 13,040 24,455,192
Subordinated debt to related parties -- 6,750,000
Notes payable to officers -- 2,500,000
St. Louis Note payable, less current
portion -- 1,111,500
Deferred income taxes 71,322 71,322
------------ ------------
Total long-term liabilities 84,362 34,888,014
------------ ------------
Redeemable Preferred Stock:
$.01 par value, $100 redemption value plus
10% cumulative return--Authorized -
1,000,000 shares, Issued and outstanding
--0 shares at 11/30/96 and 66,500
shares at 8/31/96 -- 7,436,913
Stockholders' Equity (Deficit:)
Common Stock, no par value
Authorized-40,000,000 shares
Issued and outstanding-10,415,750 and
6,223,250 shares 46,177,321 161,607
Accumulated deficit (17,337,926) (18,208,336)
------------ ------------
Total stockholders' equity (deficit) 28,839,395 (18,046,729)
Total liabilities and stockholders' ------------ ------------
equity (deficit) $ 37,254,970 $ 33,129,556
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
NOVEMBER 30, DECEMBER 2,
1996 1995
Net sales $21,962,844 $13,531,052
Cost of goods sold 16,844,477 10,195,725
------------ -----------
Gross margin 5,118,367 3,335,327
Operating expenses 2,797,105 1,637,146
Depreciation and amortization 213,041 54,739
------------ -----------
Operating income 2,108,221 1,643,442
Interest income 73,729 52,017
Interest expense 414,852 517,482
Other expense 26,444 64,663
------------ -----------
Income before income taxes 1,740,654 1,113,314
Provision for income taxes 769,431 455,482
------------ -----------
Net income 971,223 657,832
Accretion of Preferred Stock 100,813 166,250
Net income applicable to common ------------ ------------
stockholders $ 870,410 $ 491,582
============ ============
Supplemental Pro Forma
------------ ------------
Net income $ 1,231,468 $ 973,736
============ ============
----- -----
Net income per share $.11 $.09
===== =====
Weighted average common shares ------------ ------------
outstanding 10,919,296 10,784,978
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
SUBURBAN OSTOMY SUPPLY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
NOVEMBER 30, DECEMBER 2,
1996 1995
----------- -----------
Cash flows used by operating activities:
Net income $ 971,223 $ 657,832
Adjustments to reconcile net income
to cash from (used by) operating
activities:
Depreciation and amortization 213,041 54,739
Net loss (gain) on sale of fixed assets 340 (22,174)
Change in assets and liabilities, net of
effects from acquisition of St. Louis
Ostomy
Accounts receivable 840,808 (447,216)
Merchandise inventory (266,375) (898,455)
Prepaid expenses and other 169,886 (33,337)
Accounts payable and accrued
expenses (389,460) 255,319
----------- -----------
Net cash from (used by) operating activities 1,539,463 (433,292)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (13,496) 13,282
Decrease in other assets 49,183 270,292
----------- -----------
Net cash from investing activities 35,687 283,574
----------- -----------
Cash flows from (used by) financing activities:
Issuance of common stock, net of
issuance costs 46,015,714 6,250
Retirement of preferred stock (7,537,726) --
Repayments of long-term bank debt, net (24,449,337) (2,005,000)
Repayments of subordinated debt (10,485,000) --
----------- -----------
Net cash from (used by) financing activities 3,543,651 (1,998,750)
----------- -----------
Net increase (decrease) in cash and cash
equivalents 5,118,801 (2,148,468)
Cash and cash equivalents, beginning of period 1,994,731 3,970,113
----------- -----------
Cash and cash equivalents, end of period $ 7,113,532 $ 1,821,645
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
SUBURBAN OSTOMY SUPPLY COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996
(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 three months ended November
30, 1996 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) PUBLIC OFFERING
On October 10, 1996, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1 filed under the
Securities Act of 1933, as amended. The Registration Statement related to
the public offering of 3,900,000 shares of Common Stock. On October 10,
1996 the Company entered into an Underwriting Agreement with Dean Witter
Reynolds Inc. (Underwriter) to purchase from the Company the shares of
Common Stock at the public offering price of $12.00 per share, less an
underwriting discount of $.84 per share. On October 15, 1996, the Company
received net proceeds of the public offering in the amount of $43,524,000
exclusive of approximately $773,000 in expenses incurred in connection with
the offering. On October 21, 1996, the Underwriter elected to purchase an
additional 292,500 shares, for which the Company received net proceeds of
$3,264,300. The sales of common stock increased the outstanding number of
shares to 10,415,750. Of the total $46,015,714 net proceeds, $42,472,063
was used to pay down certain of the Company's indebtedness and preferred
stock.
(3) SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
As discussed in Note 2, the Company repaid 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 three months periods
ended November 30, 1996 and December 2, 1995 have been calculated, as of as
if September 3, 1995, the Company had sold the 3,900,000 shares of Common
Stock sufficient to fund the July 3, 1995 Recapitalization and repay
indebtedness incurred to finance the acquisitions of St. Louis Ostomy and
Patient-Care.
The weighted average number of shares is the actual weighted average number
of shares of Common Stock or equivalents thereof outstanding plus the
3,900,000 shares of Common Stock that were sold in connection with the
public offering, assuming issuance occurred on September 3, 1995.
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SUBURBAN OSTOMY SUPPLY COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996
(2) SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE (CONTINUED)
Supplemental pro forma net income per share has been calculated as follows
(in thousands):
THREE MONTHS THREE MONTHS
ENDED ENDED
NOVEMBER 30, 1996 DECEMBER 2, 1995
Historical income before taxes $ 1,741 $ 1,113
Provision for income taxes (769) (455)
Reversal of interest charges
and amortization of deferred
financing costs relating to
debt treated as being
repaid, net of tax 259 316
------- -------
Supplemental pro forma net income $ 1,231 $ 974
======= =======
Supplemental pro forma net income per
share $ .11 $ .09
======= =======
Supplemental pro forma weighted
average shares outstanding 10,919 10,785
======= =======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three months ended November 30, 1996 (13 weeks) versus three months ended
December 2, 1995 (13 weeks)
Net sales increased by $8.5 million, or 63%, to $22.0 million for the
quarter ended November 30, 1996 from $13.5 million for the prior year period.
The number of customer orders filled increased 55% to approximately 125,500
orders for the quarter ended November 30, 1996 versus approximately 80,500 for
the prior year period. Same store growth in net sales was approximately 11% and
was primarily attributable to increased volume from national home health care
chains and managed care organizations. The average order size increased to $180
for the quarter ended November 30, 1996 versus $173 for the same period ended
December 2, 1995.
Gross margin increased by $1.8 million, or 54%, to $5.1 million for
the quarter ended November 30, 1996 from $3.3 million for the prior year period.
Gross margin decreased to 23% versus 25% 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 the acquisitions of St. Louis Ostomy and
Patient-Care.
Operating expenses increased by $1.2 million, or 75%, to $2.8 million
for the quarter ended November 30, 1996 versus $1.6 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 of a
change in shipping policy.
Depreciation and amortization expense increased by $158,000, or 287%,
to $213,000 for the quarter ended November 30, 1996 versus $55,000 for the prior
year period due to the amortization of goodwill associated with the acquisitions
of St. Louis Ostomy and Patient-Care.
Operating income increased by $0.5 million, or 28%, to $2.1 million
for the quarter ended November 30, 1996 versus $1.6 million for the prior year
period. Operating income decreased as a percentage of net sales to 10% for the
quarter ended November 30, 1996 from 12% 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 St. Louis Ostomy's and Patient-
Care's goodwill.
Interest expense decreased by $102,000, or 20%, to $415,000 for the
quarter ended November 30, 1996 versus $517,000 for the prior year period.
Interest expense decreased as a percentage of net sales to 2% for the quarter
ended November 30, 1996 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 all long-term debt with the net proceeds of the public offering in October
1996.
Provision for income taxes was $769,000, an effective tax rate of 44%
of pre-tax income, for the quarter ended November 30, 1996 versus $455,000, or
an effective tax rate of 41%, for the quarter ended December 2, 1995, 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.
7
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
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 - None
ITEM 5. OTHER INFORMATION
INITIAL PUBLIC OFFERING
In October, 1996 the Company completed an initial public offering of
shares of its common stock. Pursuant to the offering, the Company issued and
sold 4,192,500 shares of its common stock raising proceeds of approximately
$46,000,000 net of approximately $773,000 in offering costs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
9
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 13, 1997 By: /s/ HERBERT P. GRAY
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Herbert P. Gray
Chief Executive Officer and Director
January 13, 1997 By: /s/ DONALD H. BENOVITZ
----------------------------------------
Donald H. Benovitz
President and Director
January 13, 1997 By: /s/ STEPHEN N. ASCHETTINO
-----------------------------------------
Stephen N. Aschettino
Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
January 13, 1997 By: /s/ MARTIN J. MANNION
-----------------------------------------
Martin J. Mannion
Director
January 13, 1997 By: /s/ JOSEPH F. TRUSTEY
-----------------------------------------
Joseph F. Trustey
Director
10