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 December 31, 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 February 12, 1997 was 8,555,614 which includes 172,559 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
December 31, 1996 and March 31, 1996 3
Consolidated Statements of Operations
for the three and nine months
ended December 31, 1996 and 1995 5
Consolidated Statements of Cash Flows
for the nine months ended
December 31, 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 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
POLYMEDICA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Dec. 31, March 31,
1996 1996
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $14,720 $23,302
Accounts receivable -- trade (net of
allowance for doubtful accounts of
$571 and $82 as of December 31
and March 31, 1996, respectively) 4,377 2,558
Inventories 4,703 4,163
Prepaid expenses and other
current assets 880 416
-------- --------
Total current assets 24,680 30,439
Property, plant, and equipment, net 5,954 6,273
Intangible assets, net 41,795 35,500
Other assets, net 621 361
-------- --------
Total assets $73,050 $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)
Dec. 31, March 31,
1996 1996
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 1,333 $ 1,288
Accrued expenses 3,004 3,605
Notes payable 625 --
-------- ---------
Total current liabilities 4,962 4,893
Senior debt (net of unamortized discount of $556
and $600 as of December 31 and
March 31, 1996, respectively) 24,466 24,400
Notes payable - long term 625 --
-------- ----------
Total liabilities 30,053 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
issued as of December 31 and March 31, 1996,
respectively 86 81
Treasury stock, at cost, (172,559 and 159,905
shares as of December 31 and March 31, 1996,
respectively) (1,115) (1,036)
Additional paid-in capital 53,200 54,917
Accumulated deficit (8,596) (10,105)
Notes receivable from officers (322) (415)
Currency translation adjustment (256) (162)
------- -------
Total stockholders' equity 42,997 43,280
------ ------
Total liabilities and stockholders'
equity $73,050 $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 Nine Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1996 1995 1996 1995
Revenues:
Net product sales $ 8,662 $ 6,336 $20,550 $18,840
Royalties, exclusivity,
development and
license fees 349 51 557 344
------- ------- ------- -------
Total revenues 9,011 6,387 21,107 19,184
Cost of product sales 4,328 2,594 8,846 7,433
------ ------ ------ -------
Total revenues, less cost of
product sales 4,683 3,793 12,261 11,751
Operating expenses:
Selling, general, and
administrative 3,529 2,135 8,798 6,886
Research and development 207 175 524 565
------- ------- ------- -------
3,736 2,310 9,322 7,451
------ ------ ------- -------
Income from operations 947 1,483 2,939 4,300
Other income and expense:
Investment income 179 233 690 620
Interest expense (703) (665) (2,073) (1,997)
------ ------ ------ ------
(524) (432) (1,383) (1,377)
------ ------ ------ ------
Income before income taxes 423 1,051 1,556 2,923
Provision for income taxes 12 5 46 55
------- -------- ------- ------
Income from continuing operations 411 1,046 1,510 2,868
Loss from discontinued operations -- (303) -- (743)
Net income $ 411 $ 743 $ 1,510 $ 2,125
====== ====== ====== ======
Income (loss) per share of common
stock
Continuing operations $ .05 $ .14 $ .18 $ .39
Discontinued operations -- (.04) -- (.10)
------ ------ ------- -------
Net income $ .05 $ .10 $ .18 $ .29
Weighted average number of common
shares outstanding 8,567 7,569 8,469 7,330
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)
Nine Months Ended
Dec. 31, Dec. 31,
1996 1995
--------- ---------
Cash flows from operating activities:
Net income $ 1,510 $ 2,125
Loss from discontinued operations -- 743
Adjustments to reconcile net
income to net cash flows from
operating activities:
Depreciation and amortization 2,238 2,018
Gain on disposal of fixed assets -- (6)
Provision for bad debts 222 37
Provision for sales allowances 620 719
Provision for inventory obsolescence 64 63
Changes in assets and liabilities:
Accounts receivable--trade (848) (1,156)
Inventories (246) 140
Prepaid expenses and other
current assets (287) (119)
Other assets (49) (2)
Accounts payable -- trade (1,065) (1,037)
Accrued expenses (334) 513
------- -------
Total adjustments 315 1,170
------- -------
Net cash flows from
continuing operations 1,825 4,038
------- -------
Net cash flows used for
discontinued operations -- (693)
------- -------
Net cash flows from operating
activities 1,825 3,345
------- -------
Cash flows from investing activities:
Acquisition, net of cash acquired (6,713) --
Spinoff of CardioTech (3,830) --
Purchase of property, plant, and equipment (465) (1,392)
Direct-response advertising (304) --
Proceeds from sale of equipment -- 123
------- -------
Net cash flows from investing
activities (11,312) (1,269)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock 889 3,869
Purchase of common stock (38) (173)
------- -------
Net cash flows from financing
activities 851 3,696
------- -------
Net (decrease) increase in cash
and cash equivalents (8,636) 5,772
------- -------
Effect of exchange rate changes
on cash 54 (17)
Cash and cash equivalents at
beginning of period 23,302 14,006
------- -------
Cash and cash equivalents at
end of period $14,720 $19,761
======= =======
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)
Dec. 31, March 31,
1996 1996
---------- ---------
Raw materials $ 1,858 $ 1,465
Work in process 788 902
Finished goods 2,057 1,796
------ -----
$ 4,703 $ 4,163
===== =====
3. In connection with the spinoff of CardioTech International, Inc.
("CardioTech"), for the three and nine months ended December 31, 1996,
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
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associated with CardioTech's discontinued operations. CardioTech's net
revenues were not material for all periods presented.
4. Advertising, promotional, and other marketing costs are charged to
earnings in the period in which they are incurred. Costs whose benefit is
expected to assist future sales are expensed as the related materials are used.
Direct-response advertising costs are capitalized and amortized on a declining
basis over a seven year period, which matches the expected future stream of
revenues generated from new customers as a result of this advertising. At
December 31, 1996, $304,000 of direct-response advertising was reported as
assets and $21,000 was expensed.
5. In January 1997, PolyMedica Industries, Inc. and PolyMedica
Pharmaceuticals (U.S.A.), Inc. each received a waiver from John Hancock Mutual
Life Insurance Company ("Hancock") of certain fiscal 1997 financial covenants
set forth in the Note and Warrant Agreement with Hancock with which they were
not in compliance as of December 31, 1996.
6. 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 August 1996 acquisition of Liberty Medical Supply, Inc.,
PolyMedica Industries, Inc. ("PolyMedica" or the "Company") has grown to become
an integrated developer, manufacturer and marketer of more than 200 medical
products. The Company markets certain products which are based on proprietary
technologies that deliver performance which the Company believes to be superior
to that of competitive products. In addition, PolyMedica distributes other well
known medical products, particularly in the field of diabetes. The Company
divides its businesses into 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 the
Company's over-the-counter wound care products, which are primarily used to
treat and prevent injuries associated with outdoor sports activities during the
summer and fall seasons.
The Company has recently recruited and hired an experienced Vice
President of Marketing to train a team to bring sophisticated marketing
techniques to its consumer business. This will include market research and a
subsequent focus on those products with the greatest potential. This is an
expansion of the Company's marketing and distribution capability. PolyMedica's
goal is to provide superior wound management in each major Medicare
reimbursement category and to use its competitive edge as an efficient,
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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.
The Company's growth strategy is to continue to develop its existing
businesses as well as target acquisition opportunities 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.
This Quarterly Report on Form 10-Q contains forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to risks and uncertainties, which
could cause actual results to differ materially from those anticipated. Such
risks and uncertainties include, but are not limited to, fluctuations in
customer demand, intensity of competition from other health care product
vendors, timing and acceptance of new product introductions, general economic
conditions and regulatory changes, as well as other especially relevant risks
detailed in the Company's filings with the Securities and Exchange Commission,
including the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996 and its Quarterly Reports on Form 10-Q for the periods ended June
30, 1996 and September 30, 1996. The Company assumes no obligation to update the
information contained in this report. See "Factors Affecting Future Operating
Results" set forth herein.
Results of Operations
Three Months Ended December 31, 1996 Compared to Three Months Ended December 31,
1995
The Company generated record quarterly revenues of $9.01 million in the
three months ended December 31, 1996, a 41.1% increase over the $6.39 million
reported in the three months ended December 31, 1995.
The Company's net income was $411,000, or $.05 per share, for the three
months ended December 31, 1996. This performance compares to net income of
$743,000, or $.10 per share, for the three months ended December 31, 1995. As
further described below, this decrease in net income reflects marketing research
costs by a new senior level marketing team to better position products,
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a significantly increased media advertising campaign in the diabetic market, and
a different mix of margin in overall product sales. In the three months ended
December 31, 1995, income from continuing operations was $1.05 million, offset
by a loss of $303,000 from the now discontinued operations of CardioTech
International, Inc. ("CardioTech") in connection with CardioTech's spinoff from
the Company.
Net product sales in the Medical Products Group increased by 95.9% to
$3.86 million in the three months ended December 31, 1996 as compared with $1.97
million in the three months ended December 31, 1995. Included in this group are
sales of diabetes-related products from Liberty Medical (acquired by the Company
on August 30, 1996), as well as the Company's advanced wound dressings to the
chronic wound care market through national distributors. This net increase was
primarily due to a full quarter's sales of diabetes-related products partially
offset by a reduction in professional wound care sales in the three months ended
December 31, 1996. During the quarter, the Company continued its enhanced
promotional program to allow Liberty Medical to take advantage of its buying
efficiencies and customer service to grow its customer base.
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. The overall decrease in total unit volume of wound dressings was
partially offset by an approximate 8% 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 expects the uneven ordering patterns for its FLEXZAN(R)
wound care product from its U.S. distributor will continue for the remainder of
fiscal 1997. 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 23.4%
to $3.38 million in the three months ended December 31, 1996 as compared with
$2.74 million in the three months ended December 31, 1995. Included in this
division are sales to the over-the-counter market of: (i) medical devices
including thermometry, home healthcare kits and skin care; (ii) urological
remedies, including AZO-STANDARD(R) and AZO-CRANBERRY(R); and (iii) wound
dressings sold in burn, abrasion and blister kits. This group manufactures and
distributes nearly 100 products through a network of more than 36,000 retail
stores. More than half of the increase in net product sales in the three months
ended December 31, 1996 is due to increased shipments of thermometry products
and AZO-STANDARD.
Major customers of the Consumer Healthcare Group include the top 20
pharmacy chains, major supermarkets and mass merchandisers. AZO-STANDARD is the
leading product in the category of urinary-tract analgesics. The growth in this
product category has attracted Johnson & Johnson to become a category developer
with its version of AZO-STANDARD, which should expand the market segment.
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Net product sales in the Ethical Pharmaceuticals Group decreased by
12.5% to $1.43 million in the three months ended December 31, 1996 as compared
with $1.63 million in the three months ended December 31, 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 increased by more than 500% to $349,000 in the three months ended
December 31, 1996 as compared with $51,000 in the three months ended December
31, 1995. This increase is primarily due to fees earned from Perstorp AB in
connection with the establishment of Perstorp as the exclusive pan-European
distributor of SPYROSORB(R).
As a percentage of net product sales, overall gross margins were 50.0%
in the three months ended December 31, 1996, which compares to 59.1% reported in
the three months ended December 31, 1995. Gross margins in the three months
ended December 31, 1996 decreased primarily due to the inclusion of significant
sales of diabetes-related products, whose gross margins are lower than the
Company average for other products.
Selling, general, and administration expenses ("SG&A expenses")
increased by 65.3% in the three months ended December 31, 1996 to $3.53 million
as compared with $2.14 million (exclusive of CardioTech expenses) in the three
months ended December 31, 1995. Included in SG&A expenses were depreciation and
amortization, wages, benefit costs, and outside professional services totaling
$1.92 million in the three months ended December 31, 1996, or 54.4% of SG&A
expenses, as compared with $1.04 million, or 48.6% of SG&A expenses in the three
months ended December 31, 1995. SG&A expenses in the three months ended December
31, 1996 included costs related to Liberty Medical operations and for market
research for its consumer products.
Research and development expenses increased by 18.3% to $207,000 in the
three months ended December 31, 1996, as compared with $175,000 in the three
months ended December 31, 1995.
Investment income decreased by 23.2% to $179,000 in the three months
ended December 31, 1996, as compared with $233,000 in the three months ended
December 31, 1995, as the Company earned interest on lower average cash balances
in the three months ended December 31, 1996. Interest expense was $703,000 in
the three months ended December 31, 1996, as compared $665,000 in the three
months ended December 31, 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.
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Nine Months Ended December 31, 1996 Compared to Nine Months Ended December 31,
1995
The Company generated record revenues of $21.1 million in the nine
months ended December 31, 1996, a 10.0% increase over the $19.2 million reported
in the nine months ended December 31, 1995.
The Company's net income was $1.51 million, or $.18 per share, for the
nine months ended December 31, 1996. This performance compares to net income of
$2.13 million, or $.29 per share, for the nine months ended December 31, 1995.
This decrease in net income is due to the reasons described above. In the nine
months ended December 31, 1995, income from continuing operations was $2.87
million, offset by a loss of $743,000 from the now discontinued operations of
CardioTech in connection with CardioTech's spinoff from the Company.
Net product sales in the Medical Products Group increased by 17.0% to
$6.08 million in the nine months ended December 31, 1996 as compared with $5.19
million in the nine months ended December 31, 1995. This net increase was
primarily due to first time sales of diabetes-related products offset by a
reduction in professional wound care sales. The decrease in wound dressing sales
is due to the reasons described above. The overall decrease in total unit volume
of wound dressings was partially offset by an approximate 8% 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 18.7%
to $8.33 million in the nine months ended December 31, 1996 as compared with
$7.02 million in the nine months ended December 31, 1995. Most of the increase
in net product sales in the nine months ended December 31, 1996 is due to
increased shipments of thermometry products and AZO-STANDARD.
Net product sales in the Ethical Pharmaceuticals Group decreased by
7.3% to $6.14 million in the nine months ended December 31, 1996 as compared
with $6.63 million in the nine months ended December 31, 1995.
Royalty, exclusivity, development and license fees increased by 61.9%
to $557,000 in the nine months ended December 31, 1996 as compared with $344,000
in the nine months ended December 31, 1995. This increase is principally due to
the reasons described above.
As a percentage of net product sales, overall gross margins were 57.0%
in the nine months ended December 31, 1996, which compares to 60.5% reported in
the nine months ended December 31, 1995. The decrease in gross margins is due to
the reasons stated above.
SG&A expenses increased by 27.8% in the nine months ended December 31,
1996 to $8.80 million as compared with $6.89 million (exclusive of CardioTech
expenses) in the nine months ended December 31, 1995. Included in SG&A expenses
were depreciation and amortization, wages, benefit costs, and outside
professional services totaling $4.34 million in the nine months ended December
31, 1996, or 49.3% of SG&A expenses, as compared with $3.25 million or 47.2% of
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SG&A expenses in the nine months ended December 31, 1995. SG&A expenses in the
three months ended December 31, 1996 include costs related to Liberty Medical
operations and for market research for its consumer products. The Company
expects its marketing costs to increase in the future as a result of the
marketing initiatives described above.
Research and development expenses decreased by 7.3% to $524,000 in the
nine months ended December 31, 1996, as compared with $565,000 in the nine
months ended December 31, 1995.
Investment income increased by 11.3% to $690,000 in the nine months
ended December 31, 1996, as compared with $620,000 in the nine months ended
December 31, 1995, as the Company earned interest on larger average cash
balances. Interest expense was $2.07 million in the nine months ended December
31, 1996, as compared $2.00 million in the nine months ended December 31, 1995,
as the Company accrued and paid 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 December 31, 1996, working capital was $19.72 million, including
cash and cash equivalents of $14.72 million.
In January 1997, certain officers of the Company purchased in the
aggregate 100,000 shares of the Company's common stock on the open market. The
purchases were funded by notes made by the officers to the Company.
In January 1997, PolyMedica Industries, Inc. and PolyMedica
Pharmaceuticals (U.S.A.), Inc. each received a waiver from Hancock of certain
fiscal 1997 financial covenants set forth in the Note and Warrant Agreement with
Hancock with which they were not in compliance as of December 31, 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.
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Factors Affecting Future Operating Results
The Company continues to face many risks and uncertainties which could
affect its operating results, including without limitation, those described
below as well as those set forth in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1996.
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(R) 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
without infringing on the proprietary
- 15 -
<PAGE>
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
Kingdom and other countries, and may become subject
- 16 -
<PAGE>
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.
- 17 -
<PAGE>
PART II - OTHER INFORMATION
PolyMedica Industries, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) There were no reports on Form 8-K filed during the three months
ended December 31, 1996.
- 18 -
<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
President, Chief Executive Officer,
and Director (Principal Executive
Officer)
/s/ Eric G. Walters
Eric G. Walters
Chief Financial Officer, Treasurer,
and Clerk (Principal Financial and
Accounting Officer)
Dated: February 12, 1997
- 19 -
<PAGE>
Exhibit Index
PolyMedica Industries, Inc.
Exhibit Description
4.14 - Letter Agreement amending the Note and Warrant Agreement dated
January 23, 1997
10.81 - Form of Promissory Note made in favor of the Company by certain
officers of the Company
27 - Financial Data Schedule
- 20 -
EXHIBIT 4.14
POLYMEDICA INDUSTRIES, INC.
POLYMEDICA PHARMACEUTICALS (U.S.A.), INC.
POLYMEDICA PHARMACEUTICALS (PUERTO RICO), INC.
11 State Street
Woburn, Massachusetts 01801
January 23, 1997
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 twelve
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, August 2, 1996 and October 30, 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 sections 14.7 (a) and (b) of the Note and Warrant
Agreement for the period of four (4) consecutive quarterly accounting periods
ended December 31, 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.
- 21 -
<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, set off 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.
- 22 -
<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)
- 23 -
<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
- 24 -
EXHIBIT 10.81
Form of
PROMISSORY NOTE
January 24, 1997
$ Woburn, Massachusetts
FOR VALUE RECEIVED, (the "Maker"), promises to pay to PolyMedica
Industries, Inc. ("PolyMedica"), or order, at its principal offices or at such
other place as the holder of this Note may designate, the principal sum of $
, without interest, on the earlier of January 31, 2002, or the
date of termination of Maker's employment by PolyMedica or any affiliate or
successor entity. Principal shall be paid solely in shares of Common Stock of
PolyMedica equal in number to the lesser of (I) shares or (ii) such number of
shares as, at the time of payment, have a fair market value equal to the
principal amount hereof, provided, nevertheless, that if the fair market value
of such payment is less than the principal amount hereof, the difference, up to
but not to exceed 20% of the principal amount hereof, shall be paid in cash.
Appropriate adjustment shall be made to reflect any stock dividend, stock split
or the like. If prior to the date of such payment a majority of the outstanding
shares of Common Stock of PolyMedica have been acquired by any entity, payment
of this Note shall be made in the consideration received for the PolyMedica
shares sold or exchanged in such acquisition.
This Note shall become immediately due and payable without notice or
demand upon the occurrence at any time of any of the following events of default
(individually, "an Event of Default" and collectively, "Events of Default"):
(1) the insolvency of the Maker, or the appointment of a receiver
or custodian for the Maker or any part of the Maker's property
if such appointment is not terminated or dismissed within
thirty (30) days; or
(2) the institution by or against the Maker or any indorser or
guarantor of this Note of any proceedings under the United
States Bankruptcy Code or any other federal or state
bankruptcy, reorganization, receivership, insolvency or other
similar law affecting the rights of creditors generally or the
making by the Maker or any indorser or guarantor of this Note
of a composition or an assignment or trust mortgage for the
benefit of creditors.
- 25 -
<PAGE>
Upon the occurrence of an Event of Default, the holder shall have then,
or at any time thereafter, all of the rights and remedies afforded by the
Uniform Commercial Code as from time to time in effect in the Commonwealth of
Massachusetts or afforded by other applicable law.
Every amount overdue under this Note shall bear interest from and after
the date on which such amount first became overdue at an annual rate which is
two (2) percentage points above the prime rate per year of the Bank of Boston.
Such interest on overdue amounts under this Note shall be payable in cash on
demand and shall accrue and be compounded monthly until the obligation of the
Maker with respect to the payment of such interest has been discharged (whether
before or after judgment).
The Maker agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, incurred by the holder in enforcing the obligations
of the Maker under this Note.
No delay or omission on the part of the holder in exercising any right
under this Note shall operate as a waiver of such right or of any other right of
such holder, nor shall any delay, omission or waiver on any one occasion be
deemed a bar to or waiver of the same or any other right on any future occasion.
The Maker and every indorser or guarantor of this Note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any extension or postponement of the time of payment
or any other indulgence, to any substitution, exchange or release of collateral,
and to the addition or release of any other party or person primarily or
secondarily liable.
This Note may be prepaid in whole at any time.
None of the terms or provisions of this Note may be excluded, modified
or amended except by a written instrument duly executed on behalf of the holder
expressly referring to this Note and setting forth the provision so excluded,
modified or amended.
All rights and obligations hereunder shall be governed by the laws of
the Commonwealth of Massachusetts, and this Note is executed as an instrument
under seal.
-------------------------------
-2-
- 26 -
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