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 September 29, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 0-30832
MEDGENESIS INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1515691
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5182 WEST 76TH STREET
EDINA, MN 55439
(Address of principal executive offices)
(952) 979-3600
Registrant's telephone number, including area code
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 __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value - 4,500,000 shares outstanding as of November 13,
2000
<PAGE>
INDEX
MEDGENESIS INC.
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets - September 29, 2000 and June 30, 2000
Condensed Statements of Operations - Three months ended September
29, 2000 and October 1, 1999
Condensed Statements of Cash Flows - Three months ended September
29, 2000 and October 1, 1999
Notes to Consolidated Financial Statements - September 29, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
--------------------------
Items 2,3,4 and 5 required under Part II have been omitted since all items are
not applicable or answers are negative.
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
27 Financial Data Schedule
b.) Reports on Form 8-K
None
SIGNATURES
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDGENESIS INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 29, 2000 JUNE 30,
(UNAUDITED) 2000
------------------ ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 236 $ --
Available for sale securities 248 --
Trade accounts receivable - net 4,234 4,727
Inventories (Note 6) 4,557 3,723
Prepaid expenses 671 521
Other current assets 307 237
------------ ------------
Current assets 10,253 9,208
------------ ------------
Property, plant and equipment - net 3,490 3,447
Available for sale securities -- 727
Intangible assets - net 655 706
Loan to related party-non current 575 --
------------ ------------
Total assets $ 14,973 $ 14,088
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,630 $ 1,495
Due to Chronimed 7 682
Other current liabilities 1,565 1,227
------------ ------------
Current liabilities 4,202 3,404
------------ ------------
Deferred taxes 216 216
------------ ------------
Total liabilities 4,418 3,620
------------ ------------
Common stock, issued and outstanding shares
-- 4,500 45 45
Discount to par value (44) (44)
Accumulated other comprehensive income 79 456
Retained earnings 10,475 10,011
------------ ------------
Total liabilities and stockholders' equity $ 14,973 $ 14,088
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
<PAGE>
MEDGENESIS INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 29, October 1,
2000 1999
------------ ------------
<S> <C> <C>
Net revenue $ 9,068 $ 8,014
Cost of revenues 5,068 4,880
------------ ------------
Gross profit 4,000 3,134
Operating expenses:
Selling, general, and administrative expenses 3,028 2,171
Research and development 327 249
------------ ------------
Operating income 645 714
Gain on sale of securities 103 --
Interest income 13 --
------------ ------------
Income before taxes 761 714
Income tax expense 297 280
------------ ------------
Net Income $ 464 $ 434
============ ============
Pro forma net income per share:
Pro forma Basic and Diluted earnings per share $ 0.11
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
<PAGE>
MEDGENESIS INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
September 29, October 1,
2000 1999
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $ 1,230 $ 1,908
Investing activities:
Acquisitions, net of cash acquired -- (171)
Purchases of meters and instruments (353) (464)
Purchases of property plant and equipment (271) (159)
Loan to related party (575) --
Proceeds from the sale of securities 205 --
------------ ------------
Net cash used in investing activities (994) (794)
Financing activities:
Net cash provided to Chronimed -- (1,114)
------------ ------------
Net cash used in financing activities -- (1,114)
Net increase in cash and cash equivalents 236 --
Cash and cash equivalents, beginning of year -- --
------------ ------------
Cash and cash equivalents, end of period $ 236 $ --
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
<PAGE>
MEDgenesis Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Prior to June 30, 2000, MEDgenesis operated as the diagnostic products
division of Chronimed Inc., and not as a separate company or subsidiary. The
accompanying financial statements for periods through June 30, 2000 reflect
assets, liabilities, revenues and expenses that were directly related to the
diagnostic products division plus an allocation of certain facilities expenses
and general and administrative costs for senior management, information systems,
accounting, investor relations, insurance, and legal and corporate services,
which were incurred at a corporate level within Chronimed. These costs were
allocated between the continuing Chronimed business and MEDgenesis based on
revenues, personnel, occupied space, and estimates of usage or time spent to
provide services, as deemed appropriate by Chronimed's management to equitably
allocate the full cost of doing business to the respective entities. Allocations
and estimates were based on assumptions that Chronimed management believed were
reasonable and present fairly the costs and expenses of MEDgenesis during those
periods.
Chronimed managed its cash and financing activities at the corporate
level. As a result, cash and cash equivalents, corporate investments, debt and
related interest income and expense were not allocated to the Company in the
financial statements for periods through June 30, 2000. The Company's net cash
flows as well as changes in the assets and liabilities not allocated to
MEDgenesis are reflected in the Statement of Cash Flows as "Net cash provided to
Chronimed".
The accompanying unaudited, condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for interim financial statements and, therefore, do not include all
information and footnote disclosures normally included in audited financial
statements. The Company is responsible for the unaudited financial statements
included in this report. These financial statements reflect all adjustments,
consisting of only normal recurring adjustments which, in the opinion of
management, are necessary to fairly present the financial position of MEDgenesis
as of September 29, 2000, and the results of operations and cash flows for the
three months ended September 29, 2000 and October 1, 1999. The results of
operations for the three months ended September 29, 2000 are not necessarily
indicative of the results to be expected for the fiscal year ending December 29,
2000. For more complete financial information, these financial statements, and
the notes thereto, should be read in conjunction with the audited financial
statements for the year ended June 30, 2000, included in the Company's Form 10
(Amendment No. 4) registration statement filed with the Securities and Exchange
Commission.
2. SPIN-OFF OR SALE
The Company's parent, Chronimed, Inc., intends to divest the Company's
business through a tax-free dividend to shareholders or a sale of the business.
On November 13, 2000 the SEC gave final approval of the Company's Form 10
registration statement, as Chronimed continues to pursue a spin-off of the
business. Concurrently, Chronimed is engaged in negotiations to sell the
business. No definitive agreement has been reached, and there can be no
assurance an agreement acceptable to Chronimed will be negotiated. Upon
completion of the negotiations, Chronimed will decide which of the two strategic
options to pursue.
<PAGE>
3. CHANGE IN FISCAL YEAR
As a division of Chronimed, the Company had historically used a
four-week, four-week, five-week (4-4-5) quarterly accounting cycle with the
fiscal year ending on the Friday closest to June 30. In fiscal 2000, the first
quarter ended on October 1, 1999, and the fiscal year ended on June 30, 2000.
MEDgenesis has elected to adopt a 4-4-5 quarterly accounting cycle with
the fiscal year ending on the Friday closest to December 31. The Company's first
fiscal year following the spin-off will be a stub period from July 1 to December
29, 2000. The fiscal year 2001 will end on December 28, 2001.
4. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid cash investments with
maturities of three months or less at the date of acquisition to be cash
equivalents. At September 29, 2000, the Company's cash equivalents consisted of
money market funds.
5. AVAILABLE FOR SALE SECURITIES
In fiscal 1999, the diagnostics products division of Chronimed invested
$450,000 to acquire 300,000 shares of the common stock of Cell Robotics
International, Inc. (CRII) as part of an exclusive distribution and accessory
manufacturing agreement for the Lasette Laser Lancing Device. During fiscal
2000, the Company amended the agreement to be a nonexclusive distributor and
accessory manufacturer. Subsequently the Company decided to begin divesting
itself of the CRII common stock and realized a net gain of $540,000 on sales of
120,000 shares during fiscal 2000. Pursuant to the terms of the Distribution
Agreement, MEDgenesis agreed to compensate Chronimed for the net proceeds
($205,000) from the sale of Cell Robotics stock initiated in June, 2000 but not
completed until July 2000. The gain on these sales was reported on the books of
MEDgenesis in the quarter ended September 29, 2000.
Available-for-sale securities as of September 29 and June 30, 2000
consist entirely of these CRII equity securities. Management determines the
appropriate classification of securities at the time of purchase and reevaluates
such designation as of each balance sheet date. The Company considers the net
unrealized gain on this investment of $79,000 and $456,000 at September 29 and
June 30, 2000, respectively, to be temporary and as such has been recorded as
other comprehensive income.
6. INVENTORIES
Inventories are recorded at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
Balances at:
----------------------------------
September 29, 2000 June 30, 2000
------------------ -------------
Raw materials $ 1,293 $ 1,027
Work-in-process 568 220
Finished goods 2,756 2,516
Less: Reserve for obsolescence (60) (40)
------------ ------------
$ 4,557 $ 3,723
============ ============
<PAGE>
7. BANK LINE OF CREDIT AGREEMENT
On July 10, 2000, MEDgenesis entered into a line of credit agreement
with US Bank, N.A. under which the Company may borrow against a borrowing base
that is based on MEDgenesis' trade receivables and inventory balances, up to a
maximum of $5 million. As of September 29, 2000 Medgenesis had no outstanding
loans under this agreement.
The original terms of the agreement included a covenant requiring
MEDgenesis to maintain a tangible net worth (as defined by the credit agreement)
in excess of $10 million, an amount that was set before MEDgenesis' opening
balance sheet was finalized. In fact, MEDgenesis' beginning tangible net worth
at July 1, 2000 was lower than this amount, as was the balance at September 29,
2000, resulting in a technical default of the credit agreement. On November 13,
2000 US Bank N.A. agreed to lower the tangible net worth reqiurement to $9
million, thus curing the technical default.
8. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
September 29, October 1,
2000 1999
------------ ------------
<S> <C> <C>
Net earnings $ 464 $ 434
Unrealized gain (loss) on available for sale securities (377) (66)
------------ ------------
Comprehensive income $ 87 $ 368
============ ============
</TABLE>
9. RETAINED EARNINGS
Prior to June 30, 2000, MEDgenesis operated as a division within
Chronimed and not as a separate company or subsidiary. Retained earnings at June
30, 2000 were therefore computed as the difference between the total assets and
the sum of liabilities, common stock, discount to par value, and accumulated
other comprehensive income, which represents the accumulated net income of
MEDgenesis since inception adjusted by the net cash provided to or received from
Chronimed.
Since June 30, 2000 MEDgenesis has operated as a subsidiary of
Chronimed, and its net income since that date has been reflected as an addition
to the June 30, 2000 retained earnings balance.
10. LICENSE ASSIGNMENT FEE
On August 31, 2000, Chronimed, MEDgenesis, and Hypoguard Ltd. executed
an agreement by which Hypoguard consented to Chronimed's assignment of the
February, 1993 Patent and Know-How License agreement between Hypoguard and
Chronimed by which Chronimed licensed the rights to manufacture, distribute, and
sell Supreme blood glucose system test strips to MEDgenesis, in consideration
of a payment of $475,000. This amount was recorded as a selling, general, and
administrative expense on the books of MEDgenesis during the fiscal quarter
ended September 29, 2000.
<PAGE>
11. COMPUTATION OF EARNINGS PER SHARE
If the spin-off is completed, MEDgenesis' shares will be distributed to
Chronimed's shareholders as of a record date yet to be determined by Chronimed's
Board of Directors, on a one-for-three basis. Accordingly, the number of
MEDgenesis' pro forma weighted average common shares outstanding for both Basic
and Diluted earnings per share calculations was computed by determining the
number of Chronimed's weighted average shares outstanding, and dividing the
result by three. Basic earnings per share was computed by dividing net income by
the MEDgenesis' equivalent weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential dilution
that could occur if the income were divided by the weighted-average number of
common shares and potentially dilutive common shares from outstanding stock
options and warrants. Potential dilutive common shares were calculated using the
treasury stock method and represent incremental shares issuable upon exercise of
Chronimed's outstanding options and warrants. Earnings per share data for the
quarter ended October 1, 1999 is not shown because it is not meaningful.
The following table sets forth the computation of basic and diluted net
income per share.
Dollars and Shares in Thousands
First Quarter Ended September 29, 2000
<TABLE>
<CAPTION>
EQUIVALENT
CHRONIMED SHARES MEDGENESIS SHARES
---------------- -----------------
<S> <C> <C>
Numerator - Net income (loss) for basic and diluted
net income per share: $ 464
Denominator:
Denominator for basic net income
per share--weighted-average shares 12,147 4,049
Effect of dilutive securities:
Employee stock options 2 1
Denominator for diluted net income
per share--weighted-average shares and assumed
conversions 12,149 4,050
Basic net income (loss) per share: $ 0.11
=======
Diluted net income (loss) per share: $ 0.11
=======
</TABLE>
12. Related Party Transactions
DISTRIBUTION AND SPIN-OFF AGREEMENT
As part of the proposed spin-off transaction, MEDgenesis and Chronimed
entered into a Distribution and Spin-off Agreement, which dictates the terms and
conditions by which, among other things, Chronimed transferred the assets and
liabilities of its diagnostic products division to MEDgenesis. The Distribution
Agreement established all of the steps to be taken by the Company and Chronimed,
jointly and individually, to effectuate the proposed spin-off. It contains
numerous covenants and indemnifications, including agreements allocating all
actual and potential tax liabilities.
Pursuant to this agreement, at June 30, 2000 MEDgenesis recorded a
liability under the caption of "Due to Chronimed" of $682,000, representing
compensation for increased working capital ($415,000) and asset purchases
($62,000) incurred between March 31 and June 30, 2000, as well as the proceeds
to be received from the sale of available for sale securities occurring in July,
2000 ($205,000). As equity at June 30, 2000 was computed as the difference
between assets and liabilities, these amounts due to Chronimed resulted in
reduced equity, and were not included in the results of operations.
<PAGE>
TRANSITION SERVICES AGREEMENT
The Company has entered into a transition services agreement with
Chronimed for a period of up to six months beginning July 1, 2000. Under the
agreement, Chronimed will provide certain services requested by the Company. The
fee for these services is based on rates similar to those being allocated to the
Company prior to July 1, 2000. The transition services to be provided under this
agreement include accounting, legal, and information systems. Payments made to
Chronimed for transition services in the quarter ended September 29, 2000
totaled $108,000.
OFFICER LOAN
In July 2000, the Company loaned to Chairman and CEO Maurice Taylor
$674,900 in retirement of a personal loan Mr. Taylor had with US Bank, and which
had been guaranteed by Chronimed. Mr. Taylor has given the Company a promissory
note payable on December 31, 2001, with interest accruing at the US Bank's prime
lending rate plus 1/2%. The US Bank's prime lending rate at the time of the loan
was 9.5%. Payments of accrued interest and $25,000 in principal are due
quarterly beginning in October 2000. Mr. Taylor has given the Company a mortgage
on his residence and a salary pledge agreement to secure repayment.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this section, all references to "we," "our," and "us" refer to
MEDgenesis.
FUTURE UNCERTAINTIES
This discussion contains forward-looking statements within the meaning of
the federal securities laws that involve material risks and uncertainties. Many
possible events or factors could affect our future financial results and
performance, such that our actual results and performance may differ materially.
As such, no forward-looking statement can be guaranteed. Differences in
operating results may arise as a result of a number of factors, including,
without limitation, seasonality, adverse changes in the competitive and economic
conditions in domestic and international markets, actions of our major
distributors, manufacturing and production delays or difficulties, adverse
actions or delays in product reviews by the United States Food and Drug
Administration ("FDA"), and the lower acceptance of our new products than
forecast. Forward-looking statements typically are identified by the use of
terms such as "may", "will", "should", "might", "expect", "anticipate",
"estimate" and similar words, although some forward-looking statements are
expressed differently. The risks described in this report and in other reports
and registration statements filed with the Securities and Exchange Commission
from time to time should be carefully considered. The following should be read
in conjunction with the unaudited condensed financial statements and notes
thereto included elsewhere in this Form 10-Q.
OVERVIEW
We develop, manufacture and market rapid diagnostic products for
point-of-care detection. These products provide simple, accurate and
cost-effective diagnoses for acute and chronic medical conditions. Products are
sold though distributors worldwide to professionals for use in physicians'
offices and long-term care facilities, and to consumers through organizations
that provide private label, store brand products.
RESULTS OF OPERATIONS
(All amounts are shown in thousands of dollars)
NET REVENUE - MEDgenesis manufactures and sells blood glucose test strips and
urine test strips, and performs contract manufacturing services from
time-to-time to leverage excess capacity. We also purchase and resell blood
glucose test strips, lancets, and infusion sets under exclusive and
non-exclusive distribution and licensing agreements with various manufacturers.
In addition, we purchase and distribute blood glucose meters that work
exclusively with the test strips we either manufacture or purchase and resell.
Sales of manufactured products declined from $5,207 in the quarter ended
October 1, 1999 to $4,574 in the quarter ended September 29, 2000, a decrease of
12%. This decline is due to declining sales of our Supreme and Select GT blood
glucose test strips, which are older products in a very mature stage of their
product life cycle. The steepest part of the decline occurred in the first two
quarters of fiscal 1999; since that time sales have stabilized considerably. We
expect these products to continue to slowly decline over time, as we replace
them in the field with newer products such as the Assure and other meter systems
to be introduced in fiscal 2001. Urine test strip sales increased during this
same period from $360 to $668, or 86%, as the DiaScreen(R) 10-Way strip
continues to gain market momentum. Contract manufacturing activities increased
317% to $264 due to a few one-time manufacturing projects undertaken in the
quarter ended September 29, 2000.
Sales of distributed products increased from $3,035 to $4,835, or 59%,
primarily due to a 213% increase in sales of the Assure test strip. Assure sales
continue to show strong growth, as we place more meters into new accounts and
use it to help manage the end of the Supreme product's life cycle, replacing
Supreme meters where needed to maintain business. Lancet and infusion set sales
have increased 17% and 29%, respectively, exceeding the pace of our overall
growth in test strip sales.
GROSS PROFIT - Gross profit increased from $3,134 to $4,000 as a result of the
sales increase, improved product margins, and lower meter depreciation expense.
Margins on manufactured products increased 1.6% due to improved manufacturing
productivity. Margins on distributed products increased 3.2%, due to
volume-based price concessions received from the Assure supplier, a shift in the
mix of lancet products to a more profitable line, and the discontinuation of a
low margin contract with a distributor of infusion sets. Despite these margin
increases, overall, product margins declined 2.1% due to the increased
proportion of lower margin distributed products versus higher margin
manufactured products (52% distributed products in the quarter ended September
29, 2000 compared to 38% in the prior year period). We expect that the
distributed product proportion will continue to grow until we can
<PAGE>
introduce more new manufactured products or begin manufacturing of products that
are now distributed. This implies that margins will continue to decline as the
sales mix becomes more distributed.
Depreciation of blood glucose meters in the quarter ended September 29, 2000
compared to the quarter ended October 1, 1999 declined $530, a 61% decrease, as
a result of a 49% drop in the amount of meters capitalized in the twelve months
prior to each period.
RESEARCH AND DEVELOPMENT EXPENSE - R&D expenses increased from $249 (3.1% of
sales) in the first quarter of last year to $327 (3.6%) in this year's first
quarter, for a 31% increase. This increase was due to the cost of clinical
trials for products under development and the hiring of a new Vice President of
Regulatory Affairs (22 percentage points of the increase), and the creation of a
dedicated regulatory department (9 percentage points).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - S,G&A expenses increased from
$2,171 (27.1% of sales) in the first quarter of last year to $3,028 (33.4% of
sales) in this year's first quarter, an increase of 39%. Much of this increase
can be directly attributed to one-time costs associated with the transition from
a division of Chronimed to a separate entity. These costs include a $475 payment
to Hypoguard to facilitate the assignment of a technology license from Chronimed
to MEDgenesis, $108 of expenses incurred under the Transition Services Agreement
with Chronimed, and $35k of expenses related to SEC registration and other
spin-off related activities. Legal expenses related to the Bayer lawsuit in the
quarter ended September 29, 2000 were $220, up $97 over the prior year.
Executive salaries, bonus, taxes, and benefits in the first quarter increased
$108 over the prior year's first quarter, as the new entity now has its own
dedicated executive team versus an allocation of a portion of such expenses from
Chronimed in the past. Advertising, promotion, and trade show expenses increased
$80 due in part to an effort to create recognition of our new name. We have also
created a dedicated Business Development effort in order to identify and obtain
new technologies and products. This effort represents an additional increase of
$85 over the prior year's spending level. Offsetting these increases was a $151
reduction of Information Services costs due to the outsourcing of these
services, and a slow ramp-up of these costs during the implementation phase.
When the implementation phase of the outsourcing is completed, we expect to
continue realize significant savings, although we do not expect the savings to
be as large in future quarters.
OPERATING INCOME -Operating income declined from $714 in the quarter ended
October 1, 1999 to $645 in the quarter ended September 29, 2000, a 10% decrease,
as a result of higher expenses more than offsetting increased margins, as
explained above. Exclusive of the one-time transition related expenses (the $475
license assignment fee, the $108 of Chronimed transition services, and the $35
spin-off costs noted above), operating income for the quarter ended September
29, 2000 was $1,263, 14% of sales and a 77% increase over the prior year period.
Readers are cautioned that this performance is not necessarily indicative of
future performance, as MEDgenesis is still in a transition period and expects to
incur additional transition related expenses, as well as other expenses of a
stand alone entity that were not incurred in the quarter ended September 29,
2000.
OTHER INCOME - Other income consists of a $103 gain on sale of available for
sale securities in the quarter ended September 29, 2000
INTEREST INCOME - Interest income in the quarter ended September 29, 2000
consists of interest received on money market investments and from a loan to a
related party, net of interest expense on draws from our line of credit and the
loan commitment fee. The money market rates during this period averaged
approximately 6.5%, while the interest on the related party loan was 10%.
Interest expense related to the line of credit was computed at 9.5% of the
borrowed balance, and 0.25% of the unused portion of the loan.
INCOME TAXES - The Company's income tax rate was approximately 39% in each of
the quarters ended September 29, 2000 and October 1, 1999. This rate is expected
to continue through the stub period ending December 29, 2000.
NET INCOME - Net income increased $28, or 7%, from $434 in the first quarter of
fiscal 1999 to $464 in the quarter ended September 29, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 29, 2000 we had cash and cash equivalents of $236 compared
to no cash at June 30, 2000. The cash balance of $236 comes after funding a
related party loan of $675 and after making a license transfer fee
<PAGE>
payment of $475. The increase in cash is due to increased sales and profit
margins, the accelerated collection of trade receivables resulting from granting
a major customer discounted terms for prompt payment, and increased accounts
payable.
The principal requirements for cash are for working capital, capital
equipment and facility expansion, the placement of meters and instrumentation
with customers in advance of the follow-on revenue stream generated by test
sales, and repayment of our outstanding line of credit (if any). These cash
requirements are expected to be funded by the results of operations and our
existing bank line of credit. We also intend to search for acquisition and
technology licensing candidates. As such, we may need to incur additional debt,
or sell additional equity, to successfully complete these acquisitions. Cash
requirements fluctuate as a result of numerous factors, such as the timing of
delivery and payment of large shipments of distributed products, competition,
technological developments, the time and expenditures required to obtain
governmental approval of our products, and new product launches. Based on the
current cash position and the current assessment of future operating results, we
believe that the existing sources of liquidity should be adequate to meet
operating needs for the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Available for sale securities at September 29, 2000 and June 30, 2000,
consisted of equity securities of Cell Robotics International, Inc., with whom
the Company had a distribution and development agreement for the Lasette Laser
Lancing Device. The Company considers any net unrealized gain or loss on these
investments to be temporary and reflects such gains or losses as a component of
shareholders' equity.
The Company did not invest in any other market risk sensitive instruments
in during the quarter ended September 29, 2000. The Company had and has no
exposure to market risk with regard to changes in interest rates. The Company
has not used derivative financial instruments for any purposes, including
hedging foreign currency risk or mitigating interest rate risk.
PART II. OTHER INFORMATION
Items 2,3,4 and 5 required under Part II have been omitted since they are
not applicable or the answers are negative.
ITEM 1. LEGAL PROCEEDINGS
On June 30, 2000, Hypoguard Ltd. commenced a CPR Part 8 action against
Chronimed in Commercial Court, Queens Bench Division London (2000 Claim No.
737). The action was related to Chronimed's request that Hypoguard consent to
Chronimed's assignment of the parties' 1993 Patent and Know-How License
Agreement to MEDgenesis. Hypoguard's action was injunctive in nature and
Hypoguard claimed that Chronimed had no contractual or legal right to assign the
parties' Patent License Agreement to a third party without Hypoguard's consent.
Hypoguard sought four elements of relief, including a judicial declaration that
Hypoguard's consent was necessary for any assignment, an injunction against any
Chronimed assignment without such consent, recovery of attorney's fees and
expenses, and any other equitable relief the Court deemed appropriate. The
action did not assert or seek monetary damages.
On August 30, 2000, Chronimed and MEDgenesis entered an agreement
settling the dispute. The Amendment and Assignment: Patent and Know-How License
Agreement modifies the 1993 Patent License, contains Hypoguard's consent to
assignment of the modified 1993 Patent License to MEDgenesis, provides for
payment of a transfer fee to Hypoguard in consideration of its consent to
assignment, and requires dismissal of the Hypoguard injunction action. Pursuant
to the August 30, 2000 settlement, Hypoguard requested and the Court ordered
dismissal of the action. The Court's dismissal order was entered on September 8,
2000. MEDgenesis paid the transfer fee to Hypoguard pursuant to MEDgenesis'
general indemnification of Chronimed under the July 1, 2000 Distribution and
Spin-off Agreement between MEDgenesis and Chronimed. The MEDgenesis
indemnification requires it to indemnify Chronimed for costs generally
associated with or arising out of the operation of MEDgenesis, and specifically
for costs related to litigation involving the business of MEDgenesis.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
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 thereunto duly authorized.
MEDGENESIS INC.
---------------
(REGISTRANT)
November 16, 2000 /s/ Maurice R. Taylor, II
---------------------- -----------------------------------------
Date Maurice R. Taylor, II
Chairman of the Board and
Chief Executive Officer
November 16, 2000 /s/ Richard B. Thon
---------------------- -----------------------------------------
Date Richard B. Thon
Chief Financial Officer and
Treasurer
