FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 No. 1-13690
PolyMedica Industries, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3033368
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
11 State Street, Woburn, Massachusetts 01801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 933-2020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)of the Act:
Common Stock, $.01 par value per share
(Title of class)
Preferred Stock Purchase Rights
(Title of class)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of the registrant's class of Common
Stock as of November 13, 1996 was 8,555,369 which includes 163,659 shares held
in treasury.
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POLYMEDICA INDUSTRIES, INC.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets at
September 30, 1996 and March 31, 1996 3
Consolidated Statements of Operations
for the three and six months
ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows
for the six months ended
September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
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PART I - FINANCIAL INFORMATION
Item 1. Uaudited Financial Statements
POLYMEDICA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
Sept. 30, March 31,
1996 1996
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,768 $ 23,302
Accounts receivable -- trade (net of
allowance for doubtful accounts of
$434 and $82 as of September 30
and March 31, 1996) 5,401 2,558
Inventories 4,409 4,163
Prepaid expenses and other
current assets 731 416
Total current assets 23,309 30,439
Property, plant, and equipment, net 6,171 6,273
Intangible assets, net 42,313 35,500
Other assets, net 351 361
Total assets $ 72,144 $ 72,573
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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POLYMEDICA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
Sept. 30, March 31,
1996 1996
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,570 $ 1,288
Accrued expenses 2,229 3,605
Notes payable 625 --
Total current liabilities 4,424 4,893
Senior debt (net of unamortized discount
of $556 and $600 as of
Sept. 30 and March 31, 1996) 24,444 24,400
Notes payable - long term 625 --
Total liabilities 29,493 29,293
Commitments
Stockholders' equity:
Preferred stock $.01 par value;
2,000,000 shares authorized, none
issued or outstanding -- --
Common stock, $.01 par value, 20,000,000
shares authorized, 8,555,369 and
8,112,635 shares issued as of Sept. 30
and March 31, 1996 86 81
Less treasury stock, at cost, 173,578 and
and 159,905 shares as of Sept. 30
and March 31, 1996 (1,166) (1,036)
Additional paid-in capital 53,248 54,917
Accumulated deficit (9,007) (10,105)
Notes receivable from officers (322) (415)
Currency translation adjustment (188) (162)
Total stockholders' equity 42,651 43,280
Total liabilities and
stockholders' equity $ 72,144 $ 72,573
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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POLYMEDICA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended Six Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
Revenues:
Net product sales $ 7,063 $ 6,921 $11,888 $12,504
Royalties, exclusivity,
development and license
fees 40 72 208 293
Total revenues 7,103 6,993 12,096 12,797
Cost of product sales 2,691 2,729 4,518 4,839
Total revenues, less cost of
product sales 4,412 4,264 7,578 7,958
Operating expenses:
Selling, general, and
administrative 3,122 2,546 5,269 4,751
Research and development 197 196 317 390
3,319 2,742 5,586 5,141
Income from operations 1,093 1,522 1,992 2,817
Other income and expense:
Investment income 228 186 510 387
Interest expense (689) (666) (1,370) (1,332)
(461) (480) (860) (945)
Income from continuing
operations before income taxes 632 1,042 1,132 1,872
Provision for income taxes 19 30 34 50
Income from continuing operations 613 1,012 1,098 1,822
Loss from discontinued operations -- (207) -- (441)
Net income $ 613 $ 805 $ 1,098 $ 1,381
Net income (loss) per common share:
Continuing operations $ .07 $ .14 $ .13 $ .25
Discontinued operations -- (.03) -- (.06)
Net income $ .07 $ .11 $ .13 $ .19
Weighted average number of
common shares outstanding 8,361 7,320 8,421 7,211
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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POLYMEDICA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
Sept. 30, Sept. 30,
1996 1995
Cash flows from operating activities:
Net income $ 1,098 $ 1,381
Loss from discontinued operations -- 441
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 1,389 1,349
Gain on disposal of fixed assets -- (6)
Provision for bad debts 33 18
Provision for sales allowances 444 562
Provision for inventory obsolescence 33 63
Changes in assets and liabilities:
Accounts receivable--trade (1,518) (2,094)
Inventories 37 (457)
Prepaid expenses and other current assets (197) (158)
Other assets (1) 10
Accounts payable -- trade (813) (761)
Accrued expenses (1,096) (316)
Total adjustments (1,689) (1,790)
Net cash flows from continuing
operations (591) 32
Net cash flows used for
discontinued operations -- (396)
Net cash flows from operating
activities (591) (364)
Cash flows from investing activities:
Acquisition, net of cash acquired (6,648) --
Spinoff of CardioTech (3,830) --
Purchase of property, plant, and equipment (329) (914)
Proceeds from sale of equipment -- 123
Net cash flows from investing
activities (10,807) (791)
Cash flows from financing activities:
Proceeds from issuance of common stock 848 78
Purchase of common stock -- (173)
Net cash flows from financing
activities 848 (95)
Net decrease in cash and cash
equivalents (10,550) (1,250)
Effect of exchange rate changes
on cash 16 (8)
Cash and cash equivalents at
beginning of period 23,302 14,006
Cash and cash equivalents at
end of period $12,768 $12,748
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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POLYMEDICA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and include, in the
opinion of management, all adjustments, consisting of normal, recurring
adjustments, necessary for a fair presentation of interim period results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that its disclosures are adequate to make the
information presented not misleading. The results for the interim periods
presented are not necessarily indicative of results to be expected for the full
fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain 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 revenue and expenses during the reported
period. Actual results could differ from those estimates.
The financial statements and the notes included herein should be read in
conjunction with the financial statements and notes for the fiscal year ended
March 31, 1996 and with the section entitled "Factors Affecting Future Operating
Results" included in the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1996, as well as the section of the same title set forth
herein.
2. Inventories consist of the following:
(In thousands)
Sept. 30, March 31,
1996 1996
Raw materials $ 1,808 $ 1,465
Work in process 709 902
Finished goods 1,892 1,796
$ 4,409 $ 4,163
3. In connection with the spinoff of CardioTech International, Inc.
("CardioTech"), for the three and six months ended September 30, 1995,
CardioTech's operations are accounted for as discontinued operations in the
Company's statement of operations, and accordingly, its operations are
segregated in the accompanying consolidated statements of operations for that
period. Net sales, operating costs and expenses, and other income and expense
have been reclassified for amounts associated with CardioTech's discontinued
operations. CardioTech's net revenues were not material for all periods
presented.
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4. On August 30, 1996, the Company acquired all of the outstanding stock of
Liberty Medical Supply, Inc. for an aggregate purchase price of $9.36 million
(including $363,000 of related expenses) in a transaction accounted for under
the purchase method of accounting. Accordingly, the net assets and operations of
Liberty Medical have been included in the Company's financial statements since
the date of acquisition. The purchase price was comprised of (i) $6.75 million
in cash, (ii) two-year 7% subordinated promissory notes in the aggregate amount
of $1.25 million and (iii) 200,000 shares of the Company's common stock. In the
event that Liberty Medical's performance in any of the calendar years ending
December 31, 1997, 1998, and 1999 exceeds certain projections for that year,
certain of the stockholders of Liberty Medical will be entitled to receive up to
an aggregate of $1 million over the three year period. Liberty Medical is a
leading mail-order marketer and distributor of diabetes-related products to the
home market.
The purchase price was assigned to the net assets acquired based on their
fair value at the date of acquisition, and the excess of the purchase price over
the fair value of the assets acquired was recorded as attributable to a customer
list ($1.82 million, to be amortized over seven years) and goodwill ($5.92
million, to be amortized over twenty years).
If the acquisition had taken place at the beginning of the year ending
March 31, 1997, giving effect to adjustments for amortization of intangible
assets, interest income and interest expense, the Company's pro forma revenues,
net income and net income per share for the six months ended September 30, 1996
would have been $17.27 million, $1.32 million, and $.15, respectively. If the
acquisition had taken place at the beginning of the year ended March 31, 1996,
the Company's pro forma revenues, net income and net income per share for the
six months ended September 30, 1995 would have been $17.88 million, $1.20
million, and $.16, respectively.
5. In October 1996, PolyMedica Pharmaceuticals (U.S.A.), Inc. received a
waiver from John Hancock Mutual Life Insurance Company of a certain fiscal 1997
financial covenant with which it was not in compliance as of September 30, 1996.
6. In connection with the acquisition of Liberty Medical and the adjustment
provisions in the Hancock warrant, the exercise price of the Hancock warrant was
adjusted to $5.18 per share of common stock for the 543,464 shares exercisable
under the warrant.
7. Certain amounts in the prior period financial statements have been
reclassified to conform with the current year presentation.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
With the recent acquisition of Liberty Medical Supply, Inc. the Company is
now transitioning from a manufacturer of wound care products and distributor of
consumer healthcare products to an integrated developer, manufacturer and
marketer of medical products. The Company offers a number of products which are
based on proprietary technologies that deliver performance which the Company
believes to be superior to that of competitive products. PolyMedica operates its
businesses in the Medical Products, Consumer Healthcare and Ethical
Pharmaceuticals Groups.
The Company generates revenues from sales of medical devices and products,
consisting of reimbursable diabetes-related products, consumer healthcare
products, wound dressings and prescription and non-prescription pharmaceutical
products. In addition, it generates revenues from royalties, exclusivity,
development and license fees on certain of its products.
The Company sells its products through a combination of mail-order,
wholesalers, retail chains and national distributors. Diabetes-related products
are sold directly to consumers through a mail-order network. Consumer healthcare
and over-the-counter pharmaceutical products are sold through a network of more
than 100 independent sales representatives and national wholesalers such as
McKesson Drug Company, Bergen Brunswig Corporation and FoxMeyer Corporation, and
to retailers including CVS HC Inc., Jack Eckerd Co., OSCO (American Drug Stores
Inc.) and Rite-Aid Corp. Advanced wound dressings are sold through established
exclusive relationships with Bristol-Myers Squibb, Mylan Laboratories Inc.,
Perstorp AB, Hisamitsu Pharmaceutical Co., Inc., Kuraray Co. Ltd. and others for
use by institutional customers, such as hospitals, nursing homes and other
healthcare providers, for patients with chronic wounds. The Company promotes
sales of its products through local print media, national advertising in
consumer and professional publications, on television and at professional and
trade group meetings, as well as through retail advertising.
Although certain of the Company's products are seasonal in nature, the
Company does not believe its net product sales, in the aggregate, are generally
subject to material seasonal fluctuations. Thermometer sales to consumers are
higher during the winter cold and flu season. The Company's non-prescription
urological products show higher retail sales during the warmer months, as do
Patch Kits for People(TM), the Company's over-the-counter wound care line, which
are primarily used in connection with outdoor sports activities during the
summer and fall seasons.
The Company has recently recruited and hired an experienced Vice President
of Marketing to bring sophisticated marketing techniques to its consumer
business through the application of market research and a focus on those
products with the greatest potential. This is an expansion of the Company's
marketing and distribution focus. PolyMedica's goal is to provide superior wound
management in each major Medicare reimbursement category and to use its
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competitive edge as an efficient, vertically-integrated manufacturer of wound
care products to offer high technology, low-cost wound dressings directly to
wholesalers, distributors and buying groups already in its healthcare
distribution network.
The Company operates from manufacturing, distribution, and research and
development facilities located in Massachusetts, Florida, Colorado and the
United Kingdom. Virtually all of the Company's product sales are denominated in
U.S. dollars. The Company produces proprietary polyurethane materials from which
it manufactures advanced wound dressings. The Company's research and development
activities are principally funded from ongoing operations and consist of the
design, development and manufacture of polyurethane-based medical products
derived from proprietary technology and manufacturing processes.
Integral to the Company's growth strategy is the acquisition of new
products and businesses. The Company has successfully integrated six
acquisitions since 1990.
Period to period comparisons of changes in net product sales are not
necessarily indicative of results to be expected for any future period.
Acquisition of Liberty Medical Supply, Inc.
On August 30, 1996, the Company acquired all of the outstanding stock of
Liberty Medical Supply, Inc. for an aggregate purchase price of $9.36 million
(including $363,000 of related expenses) in a transaction accounted for under
the purchase method of accounting. Accordingly, the net assets and operations of
Liberty Medical have been included in the Company's financial statements since
the date of acquisition. The purchase price was comprised of (i) $6.75 million
in cash, (ii) two-year 7% subordinated promissory notes in the aggregate amount
of $1.25 million and (iii) 200,000 shares of the Company's common stock. In the
event that Liberty Medical's performance in any of the calendar years ending
December 31, 1997, 1998, and 1999 exceeds certain projections for that year,
certain of the stockholders of Liberty Medical will be entitled to receive up to
an aggregate of $1 million over the three year period.
Liberty Medical, headquartered in Palm City, Florida, was founded in 1989
and is a leading mail-order marketer and distributor of reimbursable
diabetes-related products to the home market. Liberty Medical is a participating
Medicare provider which accepts payments directly from Medicare, typically 80%
of a product's purchase price, before any amounts are billed to the patient
and/or the patient's medi-gap insurer. The benefits to a patient range from
automatic shipment of supplies to the elimination of preparing paperwork or
using personal resources while waiting for reimbursement. Liberty Medical ships
to more than 20,000 customers in the U.S., making it one of the largest diabetic
suppliers in the country. Its products address a market estimated to include 1.5
million insulin-dependent patients, of which it is estimated that 125,000
patients currently receive supplies through mail-order companies similar to
Liberty. Based upon an estimated $720 annual reimbursement level for each
patient, the Company believes that Liberty Medical participates in an
approximately $1 billion market.
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In addition to the above market, the Company believes that there is
significant growth potential for Liberty Medical's products by expanding the
market to include non-insulin dependent diabetics. There are current proposals
in Congress to include non-insulin dependent diabetics under Medicare following
a Congressional Budget Office study indicating that improving diabetes coverage
would reduce Medicare expenditures.
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
The Company's net income was $613,000, or $.07 per share, for the three
months ended September 30, 1996. This performance compares to net income of
$805,000, or $.11 per share, for the three months ended September 30, 1995. In
the three months ended September 30, 1995, income from continuing operations was
$1.01 million, offset by a loss from discontinued operations of $207,000 in
connection with the spinoff of CardioTech International, Inc.
Net product sales in the Medical Products Group decreased by 3.9% to $1.48
million in the three months ended September 30, 1996 as compared with $1.54
million in the three months ended September 30, 1995. Included in this group are
sales of diabetes-related products from Liberty Medical and the Company's
advanced wound dressings to the chronic market through national distributors.
This net decrease was primarily due to a reduction in professional wound care
sales offset by $900,000 of first time sales of diabetes-related products.
The Company is beginning to implement an enhanced promotional program to
allow Liberty Medical to take advantage of its buying efficiencies and customer
service to grow its customer base. The Company is using working capital to
purchase additional advertising to inform insulin-dependent diabetes patients on
Medicare about the benefits of becoming a Liberty Medical customer.
To help protect the Company from the effect of future changes in Medicare
reimbursement levels, the Company plans to introduce the SPYRO line family of
wound dressings, which includes all reimbursement categories. Currently ongoing
telemarketing research conducted by the Company will permit it to best apply its
resources to promote these dressings. In addition, the Company is test marketing
LASERSITE, a high margin niche wound dressing product for cosmetic facial laser
resurfacing.
The Company has recently signed an agreement with Perstorp AB ("Perstorp"),
pursuant to which Perstorp will become the exclusive pan-European distributor of
SPYROSORB. Previously, the Company reacquired all rights to distribute SPYROSORB
wound dressings to the professional health care market in the U.K. and Europe
effective January 1, 1997. This action gave the Company control over the
marketing and distribution of SPYROSORB and enables the Company to take
advantage of this wound dressing's position as a tariffied product, which is
fully reimbursable in the U.K.
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The decrease in wound dressing sales is due in part to changes in Medicare
reimbursement methodology for chronic wounds and a resulting switch by
healthcare providers to more frequent and less costly dressing changes using low
technology textile dressings and in part to reduced purchases by Bristol-Myers
Squibb, as discussed below. The overall decrease in total unit volume of wound
dressings was partially offset by an approximate 20% increase in average selling
price of all dressing sizes, stated on a 4" x 4" equivalent basis, due to a
change in the product mix.
The Company has renegotiated its Supply Requirements and Licensing
Agreement with Bristol-Myers Squibb. Under the amended terms of the contract,
the Company has acquired the rights to MITRAFLEX in the U.S., which gives it
greater control over future marketing and sales initiatives. Bristol-Myers
Squibb has retained U.S. exclusivity to distribute MITRAFLEX in the U.S. through
December 31, 1996 and is not required to make additional purchases thereafter.
In the three months ended September 30, 1996 net product sales to Bristol-Myers
Squibb decreased by 46.6% when compared to the three months ended September 30,
1995 as reimbursement and managed care influences affected the entire chronic
wound care market.
The Company expects the uneven ordering patterns for FLEXZAN from its U.S.
distributor will continue for the remainder of calendar 1996. The Company
believes that the changes in ordering patterns are due to inventory level
adjustments at that distributor and ongoing changes in the reimbursement and
managed care marketplaces.
Net product sales in the Consumer Healthcare Group increased by 10.1% to
$2.75 million in the three months ended September 30, 1996 as compared with
$2.49 million in the three months ended September 30, 1995. Included in this
group are sales to the over-the-counter market of: (i) medical devices including
thermometry, home healthcare kits and skin care; (ii) wound dressings sold in
burn, abrasion and blister kits and (iii) urological remedies, including
AZO-STANDARD and AZO-CRANBERRY. This division manufactures and distributes
nearly 100 products through a network of more than 36,000 retail stores.
Approximately half of the increase in net product sales in the three months
ended September 30, 1996 is due to increased shipments of SPYROFLEX wound
dressings sold in abrasion, blister and burn kits.
To support this growth, the Company market tested SPYROFLEX in spring and
summer 1996 for introduction into the estimated $450 million retail market in
order to gain distribution and prepare for a product launch. The Company used
national television spots on ESPN and ESPNII and major print media, such as
Sports Illustrated. With enhanced market research conducted by the Vice
President of Marketing, the Company expects to apply future resources to build
upon consumer awareness of how minor burns, abrasions, blisters and lacerations
can be treated by advanced wound dressings.
Major customers in this group include the top 20 pharmacy chains, major
supermarkets and mass merchandisers. AZO-STANDARD is the leading product in its
category of urinary-tract analgesics. This growth has attracted Johnson &
Johnson to become a category developer with its version of AZO-STANDARD, which
should expand the market segment. In addition, the Company expects to market a
urinary tract infection test strip suitable for use in the home.
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Net product sales in the Ethical Pharmaceuticals Group decreased by 1.7% to
$2.83 million in the three months ended September 30, 1996 as compared with
$2.88 million in the three months ended September 30, 1995. Included in this
group are branded products used for the treatment of urinary tract infections.
Royalty, exclusivity, development and license fees from continuing
operations decreased by 44.6% to $40,000 in the three months ended September 30,
1996 as compared with $72,000 in the three months ended September 30, 1995. This
decrease is due to reduced royalties in the U.S. from sales of MITRAFLEX.
As a percentage of net product sales, overall gross margins were 61.9% in
the three months ended September 30, 1996, which compares to 60.6% reported in
the three months ended September 30, 1995. Gross margins increased primarily due
to the Company's ability to find lower cost products and suppliers of materials
needed to manufacture its products.
Selling, general, and administration expenses ("SG&A expenses") increased
by 22.6% in the three months ended September 30, 1996 to $3.12 million as
compared with $2.55 million (exclusive of CardioTech expenses) in the three
months ended September 30, 1995. Included in SG&A expenses were depreciation and
amortization, wages, benefit costs, and outside professional services totaling
$1.38 million in the three months ended September 30, 1996, or 44.1% of SG&A
expenses, as compared with $1.12 million, or 43.9% of SG&A expenses in the three
months ended September 30, 1995.
Research and development expenses were $197,000 in the three months ended
September 30, 1996, as compared with $196,000 in the three months ended
September 30, 1995.
Investment income increased by 22.3% to $228,000 in the three months ended
September 30, 1996, as compared with $186,000 in the six months ended September
30, 1995, as the Company earned interest on larger average cash balances, at
higher overall interest rates. Interest expense was $689,000 in the six months
ended September 30, 1996, as compared with $666,000 in the six months ended
September 30, 1995, as the Company accrued interest expense in both periods on
$25 million of Guaranteed Senior Secured Notes due January 31, 2003 (the
"Hancock Notes") to the John Hancock Mutual Life Insurance Company ("Hancock").
The interest rate on the Hancock Notes increased from 10.65% to 10.90% as a
result of a January 1, 1996 amendment.
Six Months Ended September 30, 1996 Compared to Six Months Ended
September 30, 1995
The Company's net income was $1.10 million, or $.13 per share, for the six
months ended September 30, 1996. This performance compares to net income of
$1.38 million, or $.19 per share, for the six months ended September 30, 1995.
In the six months ended September 30, 1995, income from continuing operations
was $1.82 million, offset by a loss from discontinued operations of $441,000 in
connection with the spinoff of CardioTech.
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Net product sales in the Medical Products Group decreased by 31.2% to $2.22
million in the six months ended September 30, 1996 as compared with $3.22
million in the six months ended September 30, 1995. This net decrease was
primarily due to a reduction in professional wound care sales offset by $900,000
of first time sales of diabetes-related products. The decrease in wound dressing
sales is due to reasons described above. The overall decrease in total unit
volume of wound dressings was partially offset by an approximate 5% increase in
average selling price of all dressing sizes, stated on a 4" x 4" equivalent
basis, due to a change in the product mix.
Net product sales in the Consumer Healthcare Group increased by 16.9% to
$4.96 million in the six months ended September 30, 1996 as compared with $4.24
million in the six months ended September 30, 1995. This increase is principally
due to higher shipments of AZO-STANDARD in the six months ended September 30,
1996.
Net product sales in the Ethical Pharmaceuticals Group decreased by 6.5% to
$4.71 million in the six months ended September 30, 1996 as compared with $5.04
million in the six months ended September 30, 1995.
Royalty, exclusivity, development and license fees decreased by 29.2% to
$208,000 in the six months ended September 30, 1996 as compared with $293,000 in
the six months ended September 30, 1995. This decrease is due to reduced
royalties in the U.S. from sales of MITRAFLEX, partially offset by license fees
from Kuraray Co. Ltd. of Japan in the six months ended September 30, 1996.
As a percentage of net product sales, overall gross margins were 62.0% in
the six months ended September 30, 1996, which compares to 61.3% reported in the
six months ended September 30, 1995. Gross margins increased primarily due to
the Company's ability to source lower cost products and suppliers of materials
needed to manufacture its products.
SG&A expenses increased by 10.9% in the six months ended September 30, 1996
to $5.27 million as compared with $4.75 million (exclusive of CardioTech
expenses) in the six months ended September 30, 1995. Included in SG&A expenses
were depreciation and amortization, wages, benefit costs, and outside
professional services totaling $2.38 million in the six months ended September
30, 1996, or 45.2%, of SG&A expenses, as compared with $2.21 million or 46.5% of
SG&A expenses in the six months ended September 30, 1995. SG&A expenses in the
six months ended September 30, 1996 include costs related to Liberty Medical
operations.
As a result of the CardioTech spinoff, the Company estimates that
approximately $500,000 of related costs have been saved during the six months
ended September 30, 1996. The Company expects its marketing costs to increase in
the future as a result of the marketing initiatives described above.
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Research and development expenses decreased by 18.9% to $317,000 in the six
months ended September 30, 1996, as compared with $391,000 in the six months
ended September 30, 1995.
Investment income increased by 31.7% to $510,000 in the six months ended
September 30, 1996, as compared with $387,000 in the six months ended September
30, 1995, as the Company earned interest on larger average cash balances, at
higher overall interest rates. Interest expense was $1.37 million in the six
months ended September 30, 1996, as compared with $1.33 million in the six
months ended September 30, 1995, as the Company accrued interest expense in both
periods on the Hancock Notes.
Liquidity and Capital Resources
Since its inception, the Company has raised $53.46 million in gross equity
capital, of which $7.16 million was from venture capital financings before the
Company's initial public offering, $39.00 million from its March 1992 initial
public offering, $4.55 million from a November 1995 public offering of common
stock, and $2.75 million from the sale of its common stock, pursuant to
Regulation S promulgated under the Securities Act of 1933. In January 1993, the
Company sold to Hancock $25 million of 10.65% Guaranteed Senior Secured Notes
due January 31, 2003.
As of September 30, 1996, working capital was $18.89 million, including
cash and cash equivalents of $12.77 million.
In connection with the acquisition of Liberty Medical and the adjustment
provisions in the Hancock warrant, the exercise price of the Hancock warrant was
adjusted to $5.18 per share of common stock for the 543,464 shares exercisable
under the warrant.
In October 1996, PolyMedica Pharmaceuticals (U.S.A.), Inc. received a
waiver from Hancock of a certain fiscal 1997 financial covenant with which it
was not in compliance as of September 30, 1996.
The Company expects that its current working capital and funds generated
from future operations will be adequate to meet its liquidity and capital
requirements for current operations. In the event that the Company undertakes to
make acquisitions of complementary businesses or products, the Company may
require substantial additional funding beyond currently available working
capital and funds generated from operations. Currently, the Company is
conducting an active search for the strategic acquisition of complementary
businesses or products. The Company has no present commitments or agreements
with respect to any such acquisition.
15
<PAGE>
Factors Affecting Future Operating Results
The future operating results of the Company remain difficult to predict.
The Company continues to face many risks and uncertainties which could affect
its operating results, including without limitation, those described below.
Reliance on Distributors; Limited Direct Marketing Experience. The Company
has a limited direct marketing and sales organization and relies on its current
distributors, including primarily Bristol-Myers Squibb and Mylan Laboratories
Inc., to sell its wound care products in the institutional marketplace. The
Company has a limited direct sales force which it may need to broaden for
certain of its products. There can be no assurance that the Company will
establish such a direct sales force or that any such sales force that may be
established will be able to successfully market and distribute the Company's
products or to offset any decline in sales to its existing distributors. The
Company's ability to sell its new products will depend in part on its ability to
enter into marketing and distribution agreements with pharmaceutical, medical
device, personal care and other distributors in the United States and other
countries. If the Company enters into any such agreements, there can be no
assurance that the Company's third party distributors will be able to market the
products effectively.
Acquisitions of Other Businesses. As part of its growth strategy, the
Company currently intends to expand through the acquisition of other businesses,
as well as internal growth and strategic business alliances with other
companies. The Company regularly reviews potential acquisitions and business
alliances, some of which may be material. The acquisition of other businesses is
integral to the Company's business strategy; however, there can be no assurance
that the Company will successfully acquire any businesses, or that such acquired
businesses, if any, will be profitable. The Company does not currently have any
commitments or agreements with respect to the acquisition of any businesses or
products.
Competition and Technological Change. The Company is engaged in rapidly
evolving and highly competitive fields. The Company competes with numerous
companies in the healthcare industry, including Bristol-Myers Squibb which is
also the exclusive distributor of the Company's MITRAFLEX product in the United
States. Competition from medical device manufacturers, pharmaceutical companies
and other competitors is intense and expected to increase. Many of these
companies have substantially greater capital resources, research and development
staffs and facilities, and greater experience in obtaining regulatory approvals
and in marketing and distribution of products, than the Company. Academic
institutions, hospitals, governmental agencies and other public and private
research organizations are also conducting research and seeking patent
protection and may develop competing products on their own or through joint
ventures. There can be no assurance that the Company's competitors will not
succeed in developing technologies and products that are more effective than any
that are being developed or sold by the Company.
Patents and Trade Secrets. The Company's success will depend, in part, on
its ability to obtain patents, maintain trade secrets protection and operate
16
<PAGE>
without infringing on the proprietary rights of third parties. The Company is
the owner of five, and the co-owner of one, issued patents in the United States
and has filed applications for additional patents in the United States and
abroad. There can be no assurance that any pending patent applications will
result in issued patents. In addition, there can be no assurance that any issued
patents will provide the Company with significant protection against
competitors. Moreover, there can be no assurance that any patents issued to or
licensed by the Company will not be infringed upon or designed around by others.
The Company also relies on unpatented proprietary technology, and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information, techniques or processes, that such
technology will not be disclosed or that the Company can meaningfully protect
its rights to such unpatented proprietary technology. There can be no assurance
that the Company's non-disclosure agreements will provide meaningful protection
for the Company's trade secrets or other proprietary know-how. In the absence of
patent protection, the Company's business may be adversely affected by
competitors who independently develop substantially equivalent technology.
Moreover, there can be no assurance that the patents held by others might
not have an adverse effect on some of the Company's products or require that the
Company obtain licenses to continue to test, manufacture or market the affected
product, and, if so, there can be no assurance that such licenses will be
available on acceptable terms, if at all.
Product Liability. The testing, marketing and sale of wound care products
and other medical and consumer products entail an inherent risk that product
liability claims will be asserted against the Company or its third party
distributors. A product liability claim or a product recall could have a
material adverse effect on the business or financial condition of the Company.
Certain manufacturers of materials and/or implantable devices have been
subjected to significant claims for damages allegedly resulting from their
products. The Company currently maintains product liability insurance coverage
which it believes to be adequate for its present purposes, but there can be no
assurance that in the future the Company will be able to maintain such coverage
on acceptable terms or that current insurance or insurance subsequently obtained
will provide adequate coverage against any or all potential claims.
Healthcare Reimbursement. Political, economic and regulatory influences are
resulting in fundamental changes in the healthcare industry in the United
States. The Company anticipates that Congress and state legislatures will
continue to review and assess alternative healthcare delivery systems and
payment methods and that public debate of these issues will likely continue in
the future. Sales of the Company's products will depend to some extent on the
availability of reimbursement to certain of the Company's customers by third
party payors such as government and private insurance plans. No assurance can be
given that such reimbursement will be available.
Government Regulation. The production and marketing of the Company's
products and its ongoing research and development activities are subject to
regulation by numerous governmental authorities in the United States, the United
17
<PAGE>
Kingdom and other countries, and may become subject to the regulations of
additional countries. The rigorous preclinical and clinical testing requirements
and regulatory approval process required to introduce new products can take a
number of years and require the expenditure of substantial resources. The
Company has limited experience in conducting and managing preclinical testing
and relies on third parties to conduct clinical testing necessary to obtain
government approvals. Delays in obtaining regulatory approvals would adversely
affect the marketing of products developed by the Company and the Company's
ability to receive product revenues or royalties. In addition, the Company
cannot predict the extent to which government regulations or changes thereto
might have an adverse effect on the production and marketing of the Company's
existing or future products. A number of the Company's products under
development will require clearance by the Food and Drug Administration ("FDA")
in the United States. Although the Company believes each of these products, if
successfully developed, will obtain FDA clearance, no assurance can be made that
each will obtain such clearance, or that the process of clearance will be
without undue delay or expense.
18
<PAGE>
PART II - OTHER INFORMATION
PolyMedica Industries, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on September 12,
1996, the following proposals were adopted by the vote specified below:
Proposal Broker
For Against Abstain Non votes(1)
Election of Directors:
Richard H. Bard 5,958,565 1,323,251(2)
Thomas S. Soltys, Jr. 6,945,055 336,761(2)
Amendment to 1990 Stock
Option Plan increasing
by 400,000 the number
of shares available for
issuance under the Plan 2,066,310 1,568,932 263,215 3,383,359
Amendment to 1992 Directors'
Stock Option Plan increasing
by 137,000 the number of
shares available for issuance
under the Plan 2,074,972 1,558,992 264,493 3,383,359
Ratification of
Coopers & Lybrand L.L.P.
as independent public
accountants 7,016,817 26,864 238,135 0
- ----------------------
(1) Votes counted for quorum purposes, as to which the broker or other nominee
holder was not authorized by the beneficial owner to cast a vote on this
particular proposal but was authorized to cast (and did cast) a vote on at least
one other proposal.
(2) Represents votes "withheld" from each respective director.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) There was one report on Form 8-K filed during the three months
ended September 30, 1996.
20
<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.
PolyMedica Industries, Inc.
(registrant)
/s/ Steven J. Lee
Steven J. Lee
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Eric G. Walters
Eric G. Walters
Chief Financial Officer, Treasurer,
and Clerk (Principal Financial and
Accounting Officer)
Dated: November 13, 1996
21
<PAGE>
Exhibit Index
PolyMedica Industries, Inc.
Exhibit Description Page
4.12 - Letter Agreement amending the Note and Warrant Agreement dated
August 2, 1996.
4.13 - Letter Agreement amending the Note and Warrant Agreement dated
October 30, 1996.
22
<PAGE>
POLYMEDICA INDUSTRIES, INC.
POLYMEDICA PHARMACEUTICALS (U.S.A.), INC.
POLYMEDICA PHARMACEUTICALS (PUERTO RICO), INC.
11 State Street
Woburn, Massachusetts 01801
August 2, 1996 Exhibit 4.12
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
John Hancock Place
P. O. Box 111
Boston, Massachusetts 02117
Ladies and Gentlemen:
POLYMEDICA INDUSTRIES, INC., a Massachusetts corporation (the "Parent"),
and POLYMEDICA PHARMACEUTICALS (U.S.A.), INC., a Massachusetts corporation and a
Wholly-Owned Subsidiary of the Parent (the "Company"), and POLYMEDICA
PHARMACEUTICALS (PUERTO RICO), INC., a Massachusetts corporation and a
Wholly-Owned Subsidiary of the Company ("PPR") (the Company and PPR are
sometimes collectively referred to as the "Borrowers" and each as a "Borrower"),
agree with you as follows:
1. Definitions. Reference is hereby made to that certain Note and Warrant
Agreement dated January 26, 1993, as amended and supplemented by nine letter
agreements dated April 27, 1993, June 15, 1993, March 29, 1994, June 17, 1994,
June 30, 1994, October 27, 1994, June 26, 1995, October 18, 1995, January 1,
1996, and June 19, 1996 (the "Note and Warrant Agreement"). Capitalized terms
used herein without definition have the meanings ascribed to them in the Note
and Warrant Agreement.
2. Amendment of Section 4.2(n) (ii) of the Warrants. In consideration of
the representations, warranties and agreements of the Parent and the Borrowers
set forth herein, you agree that section 4.2(n) (ii) of each of the Warrants is
hereby amended by deleting the figure "2,500,000" appearing therein and
inserting the figure "3,000,000" in place thereof.
3. Waiver of Default under Section 14.7 of the Note and Warrant Agreement.
The Parent and the Borrowers hereby request that you waive any Default or Event
of Default arising solely from the failure of the Company to comply with the
provisions of section 14.7 (b) of the Note and Warrant Agreement for the
1
<PAGE>
period of four (4) consecutive quarterly accounting periods ended June 30, 1996.
In consideration of the representations, warranties and agreements of the Parent
and the Borrowers set forth herein, you, by your signature below, hereby grant
such waiver, solely with respect to such period four (4) consecutive quarterly
accounting periods.
4. No Default, Representations and Warranties, etc.
(a) The Parent and the Borrowers represent and warrant that the
representations and warranties contained in the Note and Warrant Agreement and
the other Operative Agreements are correct on and as of the date hereof as if
made on such date (except to the extent affected by the consummation of
transactions permitted by the Note and Warrant Agreement) and that no Default or
Event of Default exists.
(b) The Parent and the Borrowers each ratify and confirm the Note and
Warrant Agreement and each of the other Operative Agreements to which each is a
party and agree that each such agreement, document and instrument is in full
force and effect, that its obligations thereunder and under this Letter
Agreement are its legal, valid and binding obligations enforceable against it in
accordance with the terms thereof and hereof and that it has no defense, whether
legal or equitable, setoff or counterclaim to the payment and performance of
such obligations.
(c) The Parent and the Borrowers agree that (i) if any default shall be
made in the performance or observance of any covenant, agreement of condition
contained in this Letter Agreement or in any agreement, document or instrument
executed in connection herewith or pursuant hereto or (ii) if any representation
or warranty made by the Parent or the Borrowers herein or therein shall prove to
have been false or incorrect on the date as of which made, the same shall
constitute an Event of Default under the Note and Warrant Agreement and the
other Operative Agreements and, in such event, you and each other holder of any
of the Notes shall have all rights and remedies provided by law and/or provided
or referred to in the Note and Warrant Agreement and the other Operative
Agreements. The Parent and the Borrowers further agree that this Letter
Agreement is an Operative Agreement and all references in the Note and Warrant
Agreement and in any other of the other Operative Agreements referred to therein
shall include this Letter Agreement.
5. Payment of Transaction Costs. Concurrently with the execution of this
Letter Agreement, the Parent and the Borrowers shall pay all reasonable fees and
disbursements incurred by you at or prior to such time, including, without
limitation, the reasonable fees, expenses and disbursements of your special
counsel.
2
<PAGE>
6. Governing Law. This Letter Agreement, including the validity hereof and
the rights and obligations of the parties hereunder, shall be construed in
accordance with and governed by the domestic substantive laws of The
Commonwealth of Massachusetts without giving effect to any choice of law or
conflicts of law provision or rule that would cause the application of the
domestic substantive laws of any other jurisdiction.
7. Miscellaneous. The headings in this Letter Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof. This
Letter Agreement embodies the entire agreement and understanding among the
parties hereto and supersedes all prior agreements and understandings relating
to the subject matter hereof. In case any provision in this Letter Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby. This Letter Agreement may be executed in any number of
counterparts and by the parties hereto on separate counterparts but all such
counterparts shall together constitute but one and the same instrument.
(The remainder of this page is left blank intentionally)
3
<PAGE>
If you are in agreement with the foregoing, please sign the form of
agreement on the accompanying counterpart hereof, whereupon this Letter
Agreement shall become a binding agreement under seal among the parties hereto.
Please then return one of such counterparts to the Company.
Very truly yours,
POLYMEDICA INDUSTRIES, INC.
By: /s/ Steven James Lee
Steven James Lee
Chairman and Chief Executive Officer
POLYMEDICA PHARMACEUTICALS
(U.S.A.), INC.
By: /s/ Steven James Lee
Steven James Lee
Chief Executive Officer
POLYMEDICA PHARMACEUTICALS
(PUERTO RICO), INC.
By: /s/ Steven James Lee
Steven James Lee
Chief Executive Officer
The terms and provisions of the foregoing Letter Agreement are hereby
acknowledged and agreed to.
POLYMEDICA SECURITIES, INC. POLYMEDICA PHARMACEUTICALS
SECURITIES, INC.
By: /s/ Steven James Lee By: /s/ Steven James Lee
Steven James Lee Steven James Lee
President President
The foregoing is hereby accepted and agreed to:
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By: /s/ D. Dana Donovan
D. Dana Donovan
Senior Investment Officer
4
<PAGE>
POLYMEDICA INDUSTRIES, INC.
POLYMEDICA PHARMACEUTICALS (U.S.A.), INC.
POLYMEDICA PHARMACEUTICALS (PUERTO RICO), INC.
11 State Street
Woburn, Massachusetts 01801
October 30, 1996 Exhibit 4.13
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
John Hancock Place
P. O. Box 111
Boston, Massachusetts 02117
Ladies and Gentlemen:
POLYMEDICA INDUSTRIES, INC., a Massachusetts corporation (the "Parent"),
and POLYMEDICA PHARMACEUTICALS (U.S.A.), INC., a Massachusetts corporation and a
Wholly-Owned Subsidiary of the Parent (the "Company"), and POLYMEDICA
PHARMACEUTICALS (PUERTO RICO), INC., a Massachusetts corporation and a
Wholly-Owned Subsidiary of the Company ("PPR") (the Company and PPR are
sometimes collectively referred to as the "Borrowers" and each as a "Borrower"),
agree with you as follows:
1. Definitions. Reference is hereby made to that certain Note and Warrant
Agreement dated January 26, 1993, as amended and supplemented by eleven letter
agreements dated April 27, 1993, June 15, 1993, March 29, 1994, June 17, 1994,
June 30, 1994, October 27, 1994, June 26, 1995, October 18, 1995, January 1,
1996, June 19, 1996, and August 2, 1996 (the "Note and Warrant Agreement").
Capitalized terms used herein without definition have the meanings ascribed to
them in the Note and Warrant Agreement.
2. Waiver of Default under Section 14.7 of the Note and Warrant Agreement.
The Parent and the Borrowers hereby request that you waive any Default or Event
of Default arising solely from the failure of the Company to comply with the
provisions of section 14.7 (b) of the Note and Warrant Agreement for the period
of four (4) consecutive quarterly accounting periods ended September 30, 1996.
In consideration of the representations, warranties and agreements of the Parent
and the Borrowers set forth herein, you, by your signature below, hereby grant
such waiver, solely with respect to such period four (4) consecutive quarterly
accounting periods.
1
<PAGE>
3. No Default, Representations and Warranties, etc.
(a) The Parent and the Borrowers represent and warrant that the
representations and warranties contained in the Note and Warrant Agreement and
the other Operative Agreements are correct on and as of the date hereof as if
made on such date (except to the extent affected by the consummation of
transactions permitted by the Note and Warrant Agreement) and that no Default or
Event of Default exists.
(b) The Parent and the Borrowers each ratify and confirm the Note and
Warrant Agreement and each of the other Operative Agreements to which each is a
party and agree that each such agreement, document and instrument is in full
force and effect, that its obligations thereunder and under this Letter
Agreement are its legal, valid and binding obligations enforceable against it in
accordance with the terms thereof and hereof and that it has no defense, whether
legal or equitable, setoff or counterclaim to the payment and performance of
such obligations.
(c) The Parent and the Borrowers agree that (i) if any default shall be
made in the performance or observance of any covenant, agreement of condition
contained in this Letter Agreement or in any agreement, document or instrument
executed in connection herewith or pursuant hereto or (ii) if any representation
or warranty made by the Parent or the Borrowers herein or therein shall prove to
have been false or incorrect on the date as of which made, the same shall
constitute an Event of Default under the Note and Warrant Agreement and the
other Operative Agreements and, in such event, you and each other holder of any
of the Notes shall have all rights and remedies provided by law and/or provided
or referred to in the Note and Warrant Agreement and the other Operative
Agreements. The Parent and the Borrowers further agree that this Letter
Agreement is an Operative Agreement and all references in the Note and Warrant
Agreement and in any other of the other Operative Agreements referred to therein
shall include this Letter Agreement.
4. Payment of Transaction Costs. Concurrently with the execution of this
Letter Agreement, the Parent and the Borrowers shall pay all reasonable fees and
disbursements incurred by you at or prior to such time, including, without
limitation, the reasonable fees, expenses and disbursements of your special
counsel.
2
<PAGE>
5. Governing Law. This Letter Agreement, including the validity hereof and
the rights and obligations of the parties hereunder, shall be construed in
accordance with and governed by the domestic substantive laws of The
Commonwealth of Massachusetts without giving effect to any choice of law or
conflicts of law provision or rule that would cause the application of the
domestic substantive laws of any other jurisdiction.
6. Miscellaneous. The headings in this Letter Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof. This
Letter Agreement embodies the entire agreement and understanding among the
parties hereto and supersedes all prior agreements and understandings relating
to the subject matter hereof. In case any provision in this Letter Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby. This Letter Agreement may be executed in any number of
counterparts and by the parties hereto on separate counterparts but all such
counterparts shall together constitute but one and the same instrument.
(The remainder of this page is left blank intentionally)
3
<PAGE>
If you are in agreement with the foregoing, please sign the form of
agreement on the accompanying counterpart hereof, whereupon this Letter
Agreement shall become a binding agreement under seal among the parties hereto.
Please then return one of such counterparts to the Company.
Very truly yours,
POLYMEDICA INDUSTRIES, INC.
By: /s/ Steven James Lee
Steven James Lee
Chairman and Chief Executive Officer
POLYMEDICA PHARMACEUTICALS
(U.S.A.), INC.
By: /s/ Steven James Lee
Steven James Lee
Chief Executive Officer
POLYMEDICA PHARMACEUTICALS
(PUERTO RICO), INC.
By: /s/ Steven James Lee
Steven James Lee
Chief Executive Officer
The terms and provisions of the foregoing Letter Agreement are hereby
acknowledged and agreed to.
POLYMEDICA SECURITIES, INC. POLYMEDICA PHARMACEUTICALS
SECURITIES, INC.
By: /s/ Steven James Lee By: /s/ Steven James Lee
Steven James Lee Steven James Lee
President President
The foregoing is hereby accepted and agreed to:
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By: /s/ D. Dana Donovan
D. Dana Donovan
Senior Investment Officer
4
<PAGE>
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